EDMONTON, Alberta – Capital Power Corporation (Capital Power, or the Company) (TSX: CPX) today released financial results for the fourth quarter and year ended December 31, 2015.
Funds from operations were $125 million in the fourth quarter of 2015, an increase of 23% from $102 million in the fourth quarter of 2014. Normalized earnings attributable to common shareholders in the fourth quarter of 2015 were $41 million, or $0.42 per share, compared with $17 million, or $0.20 per share, in the comparable period of 2014. Net income attributable to shareholders in the fourth quarter of 2015 was $35 million and basic earnings per share (attributable to common shareholders) were $0.29 compared with net income attributable to shareholders of $39 million and basic earnings per share of $0.40 (attributable to common shareholders) in the comparable period of 2014.
For the year ended December 31, 2015, funds from operations totaled $400 million compared with $362 million for the year ended December 31, 2014. Normalized earnings attributable to common shareholders were $111 million or $1.15 per share compared with $59 million or $0.72 per share for 2014. Net income attributable to shareholders in 2015 was $90 million and basic earnings per share (attributable to common shareholders) were $0.70 compared with net income attributable to shareholders of $46 million and basic earnings per share (attributable to common shareholders) of $0.28 in 2014.
“Capital Power’s fourth quarter 2015 results exceeded our expectations and were driven by excellent operational performance and strong Alberta commercial portfolio results,” said Brian Vaasjo, President and CEO of Capital Power. “We achieved an average plant availability of 99% in the fourth quarter and generated our highest electricity output in the past two years. Despite Alberta power prices averaging $21 per megawatt-hour (MWh) in the fourth quarter, our trading desk captured a realized average price of $55 per MWh through our hedging program. Overall, we generated funds from operations of $125 million in the fourth quarter, a 23% increase from the same period a year ago.”
“Despite the weak economic environment and regulatory uncertainty in Alberta, Capital Power continued to deliver on its corporate priorities in 2015,” said Mr. Vaasjo. “We achieved our annual operating and financial targets with average plant availability of 95% and generated funds from operations of $400 million that was in the upper end of our $365 to $415 million target range. We continued to strengthen our contracted cash flow profile by adding 505 megawatts of owned generation capacity to our fleet last year from three new facilities utilizing natural gas, wind and solar generation.”
“For 2016, we look forward to working with the Alberta government to discuss fair compensation for the proposed accelerated closure of coal-fired generating units by 2030, and develop implementation plans for their Climate Leadership Plan announced last November,” continued Mr. Vaasjo. “The timely, fair and appropriate outcomes of these issues for our investors would provide the basis for continuing to invest in Alberta, including the proposed Genesee 4 and 5 project.” The deadline to provide full notice to proceed to the turbine manufacturer for Genesee 4 and 5 has been extended by up to 90 days from the previous March 1, 2016 deadline.
|Operational and Financial Highlights 1
|Three months ended
|Year ended December 31|
|(millions of dollars except per share and operational amounts)||2015||2014||2015||2014|
|Electricity generation (excluding acquired Sundance power purchase arrangement (PPA)) (GWh)||3,929||3,204||14,567||12,376|
|Generation plant availability (excluding acquired Sundance PPA) (%)||99%||94%||95%||95%|
|Adjusted EBITDA 2||$121||$141||$461||$423|
|Net income attributable to shareholders of the Company||$35||$39||$90||$46|
|Basic and diluted earnings per share||$0.29||$0.40||$0.70||$0.28|
|Normalized earnings attributable to common shareholders 2||$41||$17||$111||$ 59|
|Normalized earnings per share 2||$0.42||$0.20||$1.15||$0.72|
|Net cash flows from operating activities||$115||$107||$420||$391|
|Funds from operations 2||$125||$102||$400||$362|
|Purchase of property, plant and equipment and other assets||$17||$57||$140||$220|
|Dividends per common share, declared||$0.3650||$0.3400||$1.4100||$1.3100|
1. The operational and financial highlights in this press release should be read in conjunction with Management’s Discussion and Analysis and the audited Consolidated Financial Statements for the year ended December 31, 2015.
2. Earnings before finance expense, income tax expense, depreciation and amortization, impairments, foreign exchange losses, income from joint venture, and gains on disposals (adjusted EBITDA), normalized earnings attributable to common shareholders, normalized earnings per share and funds from operations 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.
Medium-term note exchange
On December 17, 2015, CPLP noteholders of issued and outstanding 4.85% medium-term notes due February 21, 2019 (“Series 3”) and 5.276% medium-term notes due November 16, 2020 (“Series 1”) (collectively, the “CPLP Notes”) voted to exchange the CPLP Notes for an equal principal amount of newly issued medium-term notes of Capital Power (Note Exchange Transaction). The newly issued notes have terms and conditions that are the same as those attached to the CPLP Notes. The Note Exchange Transaction was successfully completed on December 18, 2015 and is expected to simplify the organizational structure, reduce reporting obligations, and result in efficiencies for CPLP while providing noteholders with better liquidity over time and structural enhancement. Effective January 1, 2016, as a result of the Note Exchange Transaction, CPLP is no longer a reporting issuer.
Preferred Shares (Series 1) conversion privilege and dividend rate notice
On December 1, 2015, Capital Power notified registered shareholders of the Company’s Cumulative 5-Year Rate Reset Preference Shares, Series 1 (Series 1 Shares) of the conversion privilege and dividend rate notice. Series 1 shareholders had the right to elect to convert any or all of their Series 1 Shares into an equal number of Cumulative Floating Rate Preference Shares, Series 2 (Series 2 Shares). Following the conversion deadline on December 16, 2015, approximately 930,800 Series 1 Shares were tendered for conversion, which was less than the one million shares required for conversion into Series 2 Shares. Accordingly, there were no Series 2 Shares issued as at December 31, 2015. Effective December 31, 2015, the Annual Fixed Dividend Rate for the Series 1 Shares for the next five year period was reset from 4.60% to 3.06%.
Beaufort Solar begins commercial operation
On December 22, 2015, Capital Power’s 15 MW Beaufort Solar facility was commissioned and commenced operating under a 15 year power purchase agreement with Duke Energy Progress LLC. The Company constructed the facility and then entered into a sale and leaseback agreement with an A-rated U.S. financial institution for proceeds of $46 million (US$35 million) and a lease term of 10 years with an option for extension at the end of the lease term. The lease is classified as a finance lease for accounting purposes. As a result, the gain on the sale of the facility of $5 million (US$4 million) was recognized as deferred revenue on the Company’s Consolidated Statements of Financial Position and will be amortized over the term of the lease.
On July 27, 2015, the Company announced that its Board of Directors approved a 7.4% increase in the annual dividend for holders of its common shares, from $1.36 per common share to $1.46 per common share. This increased common share dividend commenced with the third quarter 2015 quarterly dividend payment paid on October 30, 2015 to shareholders of record at the close of business on September 30, 2015.
Changes to Alberta’s emissions regulations and the announcement of the Alberta Climate Leadership Plan
On June 25, 2015, the Alberta government announced changes to Alberta’s regulations governing carbon emissions and a comprehensive review of Alberta’s climate change policy. The changes to the Specified Gas Emitters Regulation (SGER) will increase the required reduction in emissions intensity from 12% to 15% in 2016 and 20% in 2017, and increase the cost of contributions to the Climate Change and Emissions Management Fund from $15 per tonne of greenhouse gases to $20 per tonne in 2016 and $30 per tonne in 2017.
On August 14, 2015, a five member panel, appointed by the Alberta Minister of Environment and Parks, was announced with a mandate to provide recommendations to the Alberta government on how to address climate change in Alberta. Capital Power actively participated in the consultation process that led to the Alberta Climate Leadership Plan (CLP) that was announced on November 22, 2015.
The CLP provides guidance in three primary areas that affect the Company: changes to the compliance requirements for coal emissions, procurement of target renewable generation, and the accelerated retirement of Alberta coal-fired generation. The CLP recommends that the existing SGER be replaced in 2018 with the CCR. Under the CCR, electricity generators will pay $30 per tonne of greenhouse gas emissions above an electricity sector performance standard, which has yet to be determined. Coal emissions from coal-fired generating plants will be zero by 2030, subject to release of final CLP legislation and ensuring Alberta electric system reliability. It is expected that two-thirds of the phased out coal-fired generation will be replaced by renewable generation. The Company’s Genesee 1 and Genesee 2 units and its 50% interests in the Genesee 3 and Keephills 3 units are all affected by this recommendation of the CLP. The Alberta government has committed to treat workers, communities and affected companies fairly, and avoid stranding capital. The CLP recommends that Renewable Energy Credits (REC’s) be offered through a competitive process to the developers of renewables projects. The CLP maintains Alberta’s deregulated market structure with new generation outside the renewable procurement process to continue to be built based on price signals from the energy only market.
Capital Power expects that the increase in the Company’s compliance costs under the CCR will be mitigated by higher wholesale power prices from owner’s passing through the compliance costs and the use of its inventory of low-cost carbon offset credits. The projected incremental impact of the CCR, between 2018 and 2020, is an average annual increase of approximately $20 million in adjusted EBITDA. From 2021 to 2029, the projected annual impact to adjusted EBITDA is a decrease of approximately $100 million, due to increased compliance costs of the CCR due to the depletion of the Company’s carbon offset inventory and the expiry of the Genesee 1 and Genesee 2 PPA’s. Under the terms of those PPAs, any carbon offset costs as a result of a change in legislation (like the CCR) are and will be borne by the PPA holder, the Balancing Pool, until 2020. Thereafter, the full CCR cost for Genesee 1 and Genesee 2 will be borne by Capital Power. Although unrelated to the CCR, the decrease in adjusted EBITDA is expected to be more than offset by the sale of electricity from Genesee 1 and Genesee 2 into the Alberta wholesale market at prices which are expected to exceed the contracted price under the PPA. The contracted prices under the PPA are projected to be approximately $37 per MWh in 2020. These projections do not take into account the compensation to be received from the Alberta government for the accelerated closure of Alberta’s coal-fired power plants and assume no actions by Capital Power to further reduce greenhouse gas emissions.
There are numerous uncertainties associated with the CLP. Most significantly, it represents a proposed framework that has not been substantively enacted in legislation and therefore the final legal form and substance of the CLP is unknown. The Alberta government has indicated that an independent facilitator and the Alberta Electric System Operator (AESO) will work with owners of coal-fired power generation to address compensation and develop a transition plan. The Company will work closely with the government, the facilitator and the AESO, and strive to ensure successful implementation of government policies for the electricity sector and our investors. While the Company will employ its best efforts, there can be no assurance that the legislated process to replace coal-fired generation with renewables will not disrupt the effective functioning of Alberta merchant power market and there can be no assurance that the Company will be appropriately and sufficiently compensated for the potential early retirement of its coal assets.
K2 Wind begins commercial operation
On May 29, 2015, Capital Power, Samsung Renewable Energy Inc. and Pattern Energy Group LP announced that K2 Wind was fully operational and capable of generating 270 MW of electricity for the province of Ontario and would operate under a 20-year power purchase agreement with the Independent Electricity System Operator. Capital Power owns 90 MW or 33.3% of the capacity of this facility. Capital Power’s share of final construction costs was $297 million, including both debt and equity financed components.
Secondary offering of Capital Power shares by EPCOR
On April 2, 2015, EPCOR exchanged all of its exchangeable common limited partnership units in CPLP for common shares of Capital Power on a one-for-one basis and sold 9.450 million of such common shares to the public pursuant to a secondary offering at $23.85 per common share. Capital Power did not receive any of the proceeds from EPCOR’s sale of common shares. After giving effect to the exchange and the secondary offering, EPCOR owns approximately 9.1% of the common shares of Capital Power and no special voting shares of Capital Power or limited partnership units of CPLP. EPCOR has advised that it plans to eventually sell all or a substantial portion of its remaining interest in Capital Power, subject to market conditions, based on its requirements for capital and other circumstances that may arise in the future. In connection with the offering, the Registration Rights Agreement between Capital Power and EPCOR was terminated. Thus, the Company will no longer be obligated to assist EPCOR in making a secondary offering and any future sales of common shares by EPCOR will be completed by other means. As a result of EPCOR ceasing to hold special voting shares and EPCOR’s ownership interest in Capital Power decreasing to below 10%, EPCOR no longer has the right, separately as a holder of special voting shares, to nominate and appoint any directors to Capital Power’s Board of Directors.
This exchange and secondary offering by EPCOR and the medium-term note exchange discussed above will allow the Company to simplify the organization structure and reporting, and reduce costs associated with CPLP, including audit, legal, board, management and filing expenses.
Approval of normal course issuer bid and suspension of Dividend Re-investment Plan
On March 25, 2015, Capital Power’s normal course issuer bid (NCIB) to purchase and cancel up to 5 million of its outstanding common shares during the one-year period from April 7, 2015 to April 6, 2016 was approved by the Toronto Stock Exchange (TSX). On November 27, 2015 the TSX approved an amendment to Capital Power’s NCIB to purchase and cancel up to an additional 3,369,838 shares. Up to December 31, 2015, the Company purchased and cancelled approximately 6 million common shares totalling $121 million. Effective with the June 30, 2015 dividend, Capital Power suspended its Dividend Re-investment Plan (DRIP) for its common shares until further notice. Shareholders participating in the DRIP began receiving cash dividends as of the July 31, 2015 payment date.
Shepard begins commercial operation
On March 11, 2015, Capital Power and ENMAX announced that Shepard was fully operational and capable of generating over 800 MW of electricity to the Alberta grid. Capital Power became a 50% owner of this natural gas facility in 2012 and its final construction costs are expected to be $848 million which includes a performance bonus paid to the turbine manufacturer. The commercial arrangements with ENMAX include a 20-year tolling agreement where 75% of the Company’s owned capacity is contracted from 2015 to 2017 and 50% thereafter to 2035.
Capital Power and the Board of Directors announced the appointments of Bryan DeNeve to the executive position of Senior Vice President, Finance and Chief Financial Officer and Stuart Lee to the executive position of Senior Vice President Corporate Development and Commercial Services effective May 1, 2015. Mr. DeNeve and Mr. Lee formerly held the positions of Senior Vice President Corporate Development and Commercial Services and Senior Vice President, Finance and Chief Financial Officer, respectively.
The Company announced the appointment of Mark Zimmerman to the position of Senior Vice President, Corporate Development and Commercial Services effective November 2, 2015, to replace Mr. Lee who resigned from Capital Power effective August 31, 2015.
Analyst Conference Call and Webcast
Capital Power will be hosting a conference call and live webcast with analysts on February 19, 2016 at 12:00 noon (ET) to discuss the fourth quarter results. The conference call dial-in numbers are:
(604) 681-8564 (Vancouver)
(403) 532-5601 (Calgary)
(416) 623-0333 (Toronto)
(514) 687-4017 (Montreal)
(855) 353-9183 (toll-free from Canada and USA)
Participant access code for the call: 21543#
A replay of the conference call will be available following the call at: (855) 201-2300 (toll-free) and entering conference reference number 1192649# followed by participant code 21543#. The replay will be available until May 19, 2016.
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) adjusted EBITDA, (ii) funds from operations, (iii) normalized earnings attributable to common shareholders, and (iv) 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. Reconciliations of adjusted EBITDA to net income, funds from operations to net cash flows from operating activities and normalized earnings attributable to common shareholders to net income attributable to shareholders of the Company are contained in the Company’s Management’s Discussion and Analysis, prepared as of February 18, 2016, for the year ended December 31, 2015 which is available under the Company’s profile on SEDAR at www.SEDAR.com.
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 expectations regarding: (i) impact to adjusted EBITDA as a result of the CLP, (ii) compensation to be received by the Company from the Government of Alberta in respect of the proposed early retirement of coal facilities and (iii) the structure and stability of Alberta’s merchant power market.
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 and other energy prices, (ii) performance, (iii) business prospects and opportunities including expected growth and capital projects, (iv) status and impact of policy, legislation and regulation, and (v) 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 and tax legislation, (iv) power plant availability and performance including maintenance of equipment, (v) ability to fund current and future capital and working capital needs, (vi) acquisitions and developments including timing and costs of regulatory approvals and construction, (vii) changes in market prices and availability of fuel, and (viii) changes in general economic and competitive conditions. See Risks and Risk Management in the Company’s Management’s Discussion and Analysis, prepared as of February 18, 2016, for further discussion of these and other risks.
Click here to view the management’s discussion and analysis and consolidated financial statements.