Capital Power reports solid second quarter 2019 results and announces a 7.3% dividend increase for its common shares
Company is on track to achieve results at the top end of annual financial target range
EDMONTON, Alberta – Capital Power Corporation (TSX: CPX) today released financial results for the quarter ended June 30, 2019.
Second Quarter Highlights
- Increased the common share dividend by 7.3% to $1.92 per year representing the sixth consecutive annual increase
- Acquired the Goreway facility, an 875-megawatt natural gas facility in Ontario that is contracted until 2029
- Raised $625 million in gross proceeds from a private placement debt financing and common and preferred share offerings
- Accelerated plans to increase natural gas capability at the Genesee facility and transform Genesee 2 and 1 to 100% dual-fuel optionality by mid-2020 and spring 2021, respectively
- Increased equity interest in C2CNT that is focused on transforming captured carbon into leading-edge products
- Net cash flows from operating activities were 5% higher and adjusted funds from operations were 12% higher than the comparable quarter in 2018
“I am pleased to announce that the Board of Directors has approved a 7.3% per common share dividend increase effective with the third quarter 2019 dividend payment, which is consistent with our 7% annual dividend growth guidance to 2021,” said Brian Vaasjo, President and CEO of Capital Power. “Our dividend growth is supported by adjusted funds from operations (AFFO) per share growth and our payout ratio target of 45% to 55%.”
Net cash flows from operating activities were $114 million in the second quarter of 2019 compared with $109 million in the second quarter of 2018. Adjusted funds from operations were $85 million in the second quarter of 2019, compared to $76 million in the second quarter of 2018.
Net income attributable to shareholders in the second quarter of 2019 was $108 million and basic earnings per share was $0.93 per share, compared with net income attributable to shareholders of $68 million, and basic earnings per share of $0.55, in the comparable period of 2018. Normalized earnings attributable to common shareholders in the second quarter of 2019, after adjusting for non-recurring items and fair value adjustments, were $15 million or $0.14 per share compared with $21 million or $0.20 per share in the second quarter of 2018.
Net cash flows from operating activities were $400 million for the six months ended June 30, 2019 compared with $252 million for the six months ended June 30, 2018. Adjusted funds from operations were $202 million for the six months of 2019, compared to $161 million in the comparable six month period last year.
For the six months ended June 30, 2019, net income attributable to shareholders was $169 million and basic earnings per share was $1.42 per share compared with $109 million and $0.85 per share for the six months ended June 30, 2018. For the six months ended June 30, 2019, normalized earnings attributable to common shareholders were $45 million, or $0.44 per share, compared with $50 million, or $0.48 per share in the first six months of 2018.
“One of the highlights in the second quarter was the acquisition of Goreway Power Station, a contracted natural gas facility operating in the Ontario power market”, said Mr. Vaasjo. “The Goreway facility is an excellent strategic fit to our growth plans given its size, excellent operating history, location, and remaining contract term to 2029. Combined with our other Ontario natural gas assets, we have nearly 1,200 megawatts of capacity that will provide operating and market synergies over time. With its strategic location in the Greater Toronto Area load centre and the flexibility it can provide, the Goreway facility is an important asset in Ontario’s electric system with a high probability of re-contracting.”
“In June, we announced plans to accelerate natural gas capability at the Genesee facility. Genesee 2 is expected to have 100% dual-fuel capability to burn up to 100% natural gas or coal, or a mix of the two by mid-2020 followed by Genesee 1 in the spring of 2021. Having the dual-fuel flexibility at Genesee allows us to reduce emissions while also optimizing the fuel mix to maximize economic returns. Implementation of the dual-fuel capability will complete the first step of our sustainability strategy, the next few of which will include: constructing all new natural gas generation units to be carbon capture and/or hydrogen-ready; reducing our CO2 emissions by 10% and our emission intensity by 65%, by 2030 from 2005 levels in spite of increasing our generation by 145%; and continuing to invest in carbon capture and utilization technology such as C2CNT to eventually decarbonize our natural gas fleet,” stated Mr. Vaasjo.
Our 2018 Corporate Sustainability Report, Responsible Energy for Tomorrow, was released today and outlines our sustainability targets, highlights our company-wide environmental, economic, social and safety performance and describes our management approach to delivering low-carbon energy.
“Capital Power’s financial results in the second quarter of 2019 were in line with management’s expectations,” said Mr. Vaasjo. “We had scheduled maintenance outages at Genesee 1, Shepard Energy Centre, Clover Bar Energy Centre, and numerous U.S. facilities in the second quarter that contributed to an average facility availability of 92%. The Company generated adjusted funds from operations (AFFO) of $85 million in the second quarter and $202 million in the first half of 2019. Based on our forecast for the remainder of the year, we are on track to achieve AFFO at the top end of the $485 million to $535 million annual guidance range for 2019.”
|Operational and Financial Highlights 1
|Three months ended June 30||Six months ended June 30|
|(millions of dollars except per share and operational amounts)||2019||2018||2019||2018|
|Electricity generation (Gigawatt hours)||5,500||4,584||11,282||9,610|
|Generation facility availability||92%||93%||94%||95%|
|Revenues and other income 3||$366||$369||$763||$682|
|Adjusted EBITDA 2, 3||$191||$207||$393||$386|
|Net income 3, 4, 5||$106||$66||$166||$105|
|Net income attributable to shareholders of the Company 3||$108||$68||$169||$109|
|Basic earnings per share 3||$0.93||$0.55||$1.42||$0.85|
|Diluted earnings per share 3||$0.92||$0.55||$1.41||$0.85|
|Normalized earnings attributable to common shareholders 2,3||$15||$21||$45||$50|
|Normalized earnings per share 2, 3||$0.14||$0.20||$0.44||$0.48|
|Net cash flows from operating activities||$114||$109||$400||$252|
|Adjusted funds from operations 2||$85||$76||$202||$161|
|Adjusted funds from operations per share 2||$0.82||$0.74||$1.97||$1.55|
|Purchase of property, plant and equipment and other assets||$279||$66||$330||$106|
|Dividends per common share, declared||$0.4475||$0.4175||$0.8950||$0.8350|
- The operational and financial highlights in this press release should be read in conjunction with Management’s Discussion and Analysis and the unaudited condensed interim consolidated financial statements for the six months ended June 30, 2019.
- Earnings before net finance expense, income tax expense, depreciation and amortization, impairments, foreign exchange gains or losses, finance expense and depreciation expense from its joint venture interests, gains or losses on disposals and unrealized changes in fair value of commodity derivatives and emissions credits (adjusted EBITDA), normalized earnings attributable to common shareholders, normalized earnings per share, adjusted funds from operations and adjusted funds from operations per share are non-GAAP financial measures and do not have standardized meanings under GAAP and are, therefore, unlikely to be comparable to similar measures used by other enterprises. See Non-GAAP Financial Measures.
- Prior quarter amounts have been restated to reflect the IAS 8 accounting policy changes resulting from the transition to IFRS 16 – Leases.
- Includes depreciation and amortization for the three months ended June 30, 2019 and 2018 of $122 million and $83 million respectively, and for the six months ended June 30, 2019 and 2018 of $220 million and $167 million respectively. Forecasted depreciation and amortization for the three months ended September 30, 2019 and December 31, 2019 are $137 million and $119 million respectively.
- On June 28, 2019, as a result of the Alberta Government’s Bill 3 – Job Creation Tax Cut Act, the Alberta corporate income tax rate was reduced from 12% to 8% over 4 years. Accordingly, the 2019 statutory tax rate is 26.5% and will decrease further to 25% for the 2020 year, to 24% for the 2021 year, and to 23% for the 2022 year. Due to this tax rate decrease, the Canadian deferred tax assets and liabilities were re-measured, resulting in the recognition of a deferred income tax recovery of $51 million within net income.
Accelerated plan for Genesee natural gas capability
On June 18, 2019, the Company announced that it is proceeding with a project that will maximize the flexibility to utilize natural gas as fuel at Genesee, which previously burned primarily coal. The financial impact of this transformation is highly dependant on carbon cost and natural gas price assumptions and is estimated to increase adjusted funds from operations by approximately $10 million in 2020 and $20 million in 2021.
The total cost of the project to completely transform Genesee 1 and 2 to dual-fuel capability and up to 40% gas capability for Genesee 3 is estimated at $50 million with expenditures of $18 million, $19 million, and $13 million in 2019 to 2021, respectively. The project involves adding new gas pipeline infrastructure within the Genesee site and modifications to the Genesee 1 and 2 boilers. The rated capacity of the units will remain the same.
After the units have been transformed to 100% dual-fuel capability, the units can utilize up to 100% natural gas or coal, or a mix of the two. The amount of coal used at any given time, versus natural gas, will be driven by several factors including natural gas and coal prices and carbon costs.
Based on Genesee 1 and 2 at 100% dual-fuel capability and Genesee 3 at 40% natural gas capability, annual greenhouse gas emissions (GHGs) are expected to be reduced by approximately 20 to 33%, assuming operation of the units is between 50 to 100% of hours on natural gas.
The coal operations at the Genesee facility are currently planned to continue up to December 2029, at which time regulatory requirements will require the Company to discontinue the use of coal. The Genesee facility will continue as a 100% natural gas-fired facility after that time. The Genesee units are already the most efficient coal generating units in Alberta and best performing from an emissions intensity perspective. Under the Genesee Performance Standard program, which commenced in 2016, a 10% improvement in efficiency and performance of the units is targeted by 2021, which improvements will benefit both natural gas and coal operations.
$325 million private placement debt financing
On June 12, 2019, the Company issued $325 million of private placement senior notes which consist of three tranches with 10, 12 and 15-year terms. The 10-year tranche has a principal amount of $210 million that matures in June 2029 with a coupon rate of 4.56%. The 12-year tranche has a $65 million principal amount and matures in June 2031 with a coupon rate of 4.72%. The 15-year tranche has a $50 million principal amount and matures in June 2034 with a coupon rate of 4.96%. The net proceeds from the transaction will primarily be used for refinancing of existing bank indebtedness and for other general corporate purposes.
Acquisition of the Goreway Power Station
On June 4, 2019, the Company completed the acquisition of 100% of the ownership interests in Goreway Power Station Holdings Inc., which owns the Goreway Power Station (Goreway). Goreway is an 875 MW natural gas combined cycle generation facility located in Brampton, Ontario. The purchase price consisted of (i) $410 million of total cash consideration, including preliminary working capital and other closing adjustments of $23 million, and (ii) the assumption of $590 million of project level debt.
Financing of the Goreway acquisition consisted of a combination of debt from the Company’s existing credit facilities and equity offerings as described below.
Goreway has a 20-year Accelerated Clean Energy Supply Contract expiring in June 2029 with the Ontario Independent Electricity System Operator (credit ratings of A (high)/Aa3 from DBRS and Moody’s, respectively). Goreway is strategically located in the Greater Toronto Area load centre making it an important asset in Ontario’s electric system and, in combination with the Company’s other Ontario natural gas assets, will provide operating and market synergies over time. The acquisition of Goreway supports the Company’s growth strategy and fully meets the Company’s investment criteria. In addition, the investment contributes to the Company’s dividend growth strategy through immediate AFFO accretion supported by contracted cash flows through mid-2029.
Goreway is expected to generate approximately $124 million of adjusted EBITDA and $50 million of AFFO in 2020. For the 2020-2023 period, average annual adjusted EBITDA and AFFO are estimated to be $127 million and $56 million, respectively. The acquisition of Goreway is forecasted to be $0.27 accretive to AFFO per share in 2020 representing growth of approximately 6%.
Preferred share offering
On May 16, 2019, the Company issued 6 million Cumulative Minimum Rate Reset Preference Shares, Series 11 (Series 11 Shares) at a price of $25.00 per share for gross proceeds of $150 million less issue costs of $4 million. The preferred shares will pay fixed cumulative dividends of $1.4375 per share per annum, yielding 5.75% per annum, payable on the last business day of March, June, September and December of each year, as and when declared by the Board of Directors of Capital Power, for the initial period ending June 30, 2024. The dividend rate will be reset on June 30, 2024 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield and 4.15%, provided that, in any event, such rate shall not be less than 5.75%. The Series 11 Shares are redeemable by Capital Power, at its option on June 30, 2024 and every five years thereafter at a value of $25.00 per share.
Holders of the Series 11 Shares will have the right to convert all or any part of their shares into Cumulative Floating Rate Preference Shares, Series 12 (Series 12 Shares), subject to certain conditions, on June 30, 2024 and every five years thereafter. Holders of the Series 12 Shares will be entitled to receive a cumulative quarterly floating dividend at a rate equal to the sum of the then 90-day Government of Canada Treasury Bill yield plus 4.15%, as and when declared by the Board of Directors of Capital Power. The Series 12 Shares would be redeemable by Capital Power, at its option, on June 30, 2029 and June 30 of every fifth year thereafter at a value of $25.00 per share. The Series 12 Shares would also be redeemable by Capital Power, at its option, on any date after June 30, 2024 excluding June 30 of every fifth year, at a value of $25.50 per share.
Common share offering
In May of 2019, the Company completed a public offering of 4,945,000 subscription receipts (Subscription Receipts), on a bought deal basis, at an issue price of $30.30 per Subscription Receipt (the Offering Price), for total gross proceeds of $150 million less issue costs of $6 million (inclusive of the full exercise of a 645,000 over-allotment option). On June 4, 2019, upon closing of the Goreway acquisition, each Subscription Receipt was converted for one common share of the Company.
Capital Power increases its equity interest in C2CNT; testing of carbon nanotubes in concrete proceeding
In May 2019, Capital Power committed to increase its equity interest in C2CNT from 5% to 9% by March of 2020. C2CNT has developed an innovative technology that captures and transforms carbon dioxide into a useful and high-value product called carbon nanotubes (CNTs) which can be used as an additive to substantially increase the strength of materials such as concrete, steel and aluminum. Carbon dioxide emissions are avoided by reducing the amount of material required in addition to the carbon dioxide utilized in the production of CNTs.
Capital Power also has the right to provide notice to exercise two tranches of options in 2020 for an additional 31% equity interest in C2CNT. If exercised, Capital Power’s equity ownership of C2CNT would increase to a total of 40%.
The investment supports Capital Power’s pursuit of innovative and leading-edge technology to reduce greenhouse gases. The carbon conversion technology, led by Dr. Stuart Licht, head of the C2CNT team and professor of chemistry at George Washington University, is currently being tested at demonstration scale at the Alberta Carbon Conversion Technology Centre located at the Shepard Energy Centre in Calgary that Capital Power co-owns with ENMAX.
Lehigh Hanson (Lehigh), a subsidiary of HeidelbergCement A.G., a worldwide construction materials company, has agreed to conduct testing for the utilization of CNTs in concrete at their cost. The testing is expected in the fall of 2019 followed by limited marketing of the CNTs in concrete product in the first half of 2020. Lehigh has also made a modest financial contribution to C2CNT development.
Additional information on C2CNT is available on Capital Power’s website at: www.capitalpower.com/sustainability/innovation
Appointments to the Board of Directors
Effective April 26, 2019, Robert Phillips was appointed to the Capital Power Board of Directors.
Effective March 1, 2019, Jane Peverett was appointed to the Capital Power Board of Directors.
Heat rate call option at Arlington Valley
During the first quarter of 2019, the Company entered into a heat rate call option agreement (HRCO) with an investment grade counterparty covering the periods outside of Arlington Valley’s existing summer tolling agreements. The HRCO commenced on April 1, 2019 and terminates December 31, 2025, covering (i) April and November-December 2019 and (ii) January-May and October-December 2020-2025. Pursuant to the HRCO the counterparty has the right to call the plant in exchange for fixed monthly premiums plus reimbursements for fuel at an indexed price, variable operating and maintenance expense and start charges. Adjusted EBITDA and AFFO from the Arlington Valley facility during the period covered by the HRCO is expected to be consistent with the guidance provided at the time the acquisition was announced.
On July 26, 2019, the Company’s Board of Directors approved an increase of 7.3% in the annual dividend for holders of its common shares, from $1.79 per common share to $1.92 per common share. This increased common dividend will commence with the third quarter 2019 quarterly dividend payment on October 31, 2019 to shareholders of record at the close of business on September 30, 2019.
Analyst conference call and webcast
Capital Power will be hosting a conference call with analysts on July 29, 2019 at 9:00 a.m. MDT (11:00 a.m. EDT) to discuss the second quarter operating and financial results. The conference call dial-in numbers are:
(604) 638-5340 (Vancouver)
(403) 351-0324 (Calgary)
(416) 915-3239 (Toronto)
(514) 375-0364 (Montreal)
(800) 319-4610 (toll-free from Canada and USA)
Interested parties may also access the live webcast on the Company’s website at www.capitalpower.com with an archive of the webcast available following the conclusion of the analyst conference call.
Non-GAAP Financial Measures
The Company uses (i) earnings before net finance expense, income tax expense, depreciation and amortization, impairments, foreign exchange gains or losses, finance expense and depreciation expense from its joint venture interests, gains or losses on disposals and unrealized changes in fair value of commodity derivatives and emission credits (adjusted EBITDA), (ii) adjusted funds from operations, (iii) adjusted funds from operations per share (iv) normalized earnings attributable to common shareholders, and (v) normalized earnings per share as financial performance measures.
These terms are not defined financial measures according to GAAP and do not have standardized meanings prescribed by GAAP and, therefore, are unlikely to be comparable to similar measures used by other enterprises. These measures should not be considered alternatives to net income, net income attributable to shareholders of the Company, net cash flows from operating activities or other measures of financial performance calculated in accordance with GAAP. Rather, these measures are provided to complement GAAP measures in the analysis of the Company’s results of operations from management’s perspective.
Forward-looking information or statements included in this press release are provided to inform the Company’s shareholders and potential investors about management’s assessment of Capital Power’s future plans and operations. This information may not be appropriate for other purposes. The forward-looking information in this press release is generally identified by words such as will, anticipate, believe, plan, intend, target, and expect or similar words that suggest future outcomes.
Material forward-looking information in this press release includes disclosures regarding: (i) expected expenditures and impacts related to the Genesee dual-fuel project including expected AFFO increases, (ii) expected benefits, including AFFO and AFFO per share increases, related to the acquisition of Goreway, (iii) expected impacts on adjusted EBITDA and AFFO from Arlington Valley driven by the HRCO signed in the year, (iv) expected AFFO performance compared to guidance for 2019 and (v) forecasted depreciation and amortization for the remainder of 2019.
These statements are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate. The material factors and assumptions used to develop these forward-looking statements relate to: (i) electricity, other energy and carbon prices, (ii) performance, (iii) status of and impact of policy, legislation and regulations, and (iv) effective tax rates.
Whether actual results, performance or achievements will conform to the Company’s expectations and predictions is subject to a number of known and unknown risks and uncertainties which could cause actual results and experience to differ materially from the Company’s expectations. Such material risks and uncertainties are: (i) changes in electricity prices in markets in which the Company operates, (ii) changes in energy commodity market prices and use of derivatives, (iii) regulatory and political environments including changes to environmental, financial reporting, market structure and tax legislation, (iv) generation facility availability and performance including maintenance of equipment, (v) ability to fund current and future capital and working capital needs, (vi) changes in market prices and availability of fuel, (vii) ability to realize the anticipated benefits of the Goreway acquisition, (viii) limitations inherent in the Company’s review of acquired assets, and (ix) changes in general economic and competitive conditions. See Risks and Risk Management in the Company’s Management’s Discussion and Analysis for the year ended December 31, 2018, prepared as of February 15, 2019, for further discussion of these and other risks.
Readers are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the specified approval date. The Company does not undertake or accept any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements to reflect any change in the Company’s expectations or any change in events, conditions or circumstances on which any such statement is based, except as required by law.
View our management’s discussion and analysis and consolidated financial statements (PDF).