Strategic growth initiatives strengthen 2017 adjusted funds from operations by 12% with recently announced acquisitions of 1,089 megawatts of contracted power facilities
EDMONTON, Alberta – Capital Power Corporation (Capital Power, or the Company) (TSX: CPX) today released financial results for the quarter ended March 31, 2017.
Net income attributable to shareholders in the first quarter of 2017 was $50 million and basic earnings per share attributable to common shareholders was $0.44 per share, compared with a net loss of $6 million, or a basic loss per share of $0.11, in the comparable period of 2016. Normalized earnings attributable to common shareholders in the first quarter of 2017, after adjusting for one-time items and fair value adjustments, were $33 million or $0.34 per share compared with $32 million or $0.33 per share in the first quarter of 2016.
Net cash flows from operating activities were $99 million in the first quarter of 2017 compared with $131 million in the first quarter of 2016. Adjusted funds from operations were $91 million in the first quarter of 2017, compared to $93 million in the first quarter of 2016.
“Capital Power’s financial results for the first quarter of 2017 were in line with management’s expectations,” said Brian Vaasjo, President and CEO of Capital Power. “First quarter results benefitted from strong operating and financial performance from our contracted facilities in Alberta, Ontario and British Columbia and the recognition of coal compensation from the Province of Alberta.”
“Execution of the Company’s growth strategy in the first quarter was outstanding,” continued Mr. Vaasjo. “The recent acquisition of two thermal power facilities in Ontario and the expected acquisition of the Decatur Energy Center in the United States in June of this year provide significant geographical diversification while strengthening the contracted cash flow profile to support our 7% annual dividend growth guidance for 2017 and 2018. Based on our outlook for the balance of 2017 including the expected contributions from the Decatur Energy Center, we are raising our annual adjusted funds from operations target range to $340 to $385 million, and are on track to achieve the mid-point of this range.”
Operational and Financial Highlights 1
Three months ended
|(millions of dollars except per share and operational amounts)||2017||2016|
|Electricity generation (excluding Sundance C power pruchase arrangement (Sundance PPA)) (Gigawatt hours)||3,962||3,898|
|Generation facility availability (excluding Sundance PPA)||97%||97%|
|Net income (loss)||$47||$(8)|
|Net income (loss) attributable to shareholders of the Company||$50||$(6)|
|Basic earnings (loss) per share||$0.44||$(0.11)|
|Diluted earnings (loss) per share||$0.43||$(0.11)|
|Normalized earnings attributable to common shareholders2||$33||$32|
|Normalized earnings per share2||$0.34||$0.33|
|Net cash flows from operating activities||$99||$131|
|Adjusted funds from operations2,3||$91||$93|
|Purchase of property, plant and equipment and other assets||$85||$31|
|Dividends per common share, declared||$0.3900||$0.3650|
1 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 three months ended March 31, 2017.
2 Earnings before net finance expense, income tax expense, depreciation and amortization, impairments, foreign exchange gains or losses, finance expense from its joint venture interest, and gains or losses on disposals (adjusted EBITDA), normalized earnings attributable to common shareholders, normalized earnings per share and adjusted 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.
3 Commencing with the Company’s March 31, 2017 quarter-end, the Company uses adjusted funds from operations as a measure of the Company’s ability to generate cash from its current operating activities to fund growth capital expenditures, debt repayments and common share dividends to the Company’s shareholders.
Amendment of Genesee Coal Mine Joint Venture Agreement
On March 28, 2017, the Company announced that it entered into an agreement (the Amending Agreement) to amend its Genesee Mine Joint Venture Agreement with Prairie Mines & Royalty ULC (PMRU), a subsidiary of Westmoreland Coal Company, to accelerate the repayment of amounts it would otherwise have owed to PMRU during the term of the agreement and eliminate all future payments to PMRU relating to existing capital assets at the Genesee Coal Mine (Coal Mine). Capital Power will continue to pay PMRU contracted mining fees for PMRU’s ongoing operation of the Coal Mine.
By accelerating the $70 million repayment of capital expenditures to PMRU, the transaction will reduce Capital Power’s cost of coal for the Genesee facility, and enhance the Company’s net income, adjusted EBITDA, net cash flows from operating activities and adjusted funds from operations. These cost reductions were anticipated to take place and have been included in the adjusted funds from operations guidance that was provided as part of the Company’s year-end disclosure on February 17, 2017. As a result of the transaction, net cash flows from operating activities are expected to increase by $14 million for 2017. The operations and management of the Coal Mine are unchanged as a result of the Amending Agreement and the Company will continue to control the Coal Mine and treat it as a subsidiary.
Coal for the Genesee facility is supplied by the adjacent Coal Mine under a long-term, cost of service supply agreement. Prior to the Amending Agreement, Capital Power paid PMRU a fee to cover PMRU’s depreciation expense and certain other costs, as well as provide a variable rate of return to PMRU. These fees paid to PMRU were included as part of Capital Power’s cost of coal for operating the Genesee facility, and will be eliminated with the Amending Agreement.
The cost savings for Capital Power will be magnified through 2030 with the phase-out of coal units under the Alberta Climate Leadership Plan, which would accelerate the amounts in respect of depreciation that would have been paid to PMRU due to the shortened asset lives.
Appointments to the Board of Directors
Effective April 3, 2017, Keith Trent and Katharine Stevenson were appointed to the Capital Power Board of Directors.
Acquisition of Decatur Energy and $183 million subscription receipt offering
On April 12, 2017, the Company announced that it entered into an agreement to acquire all of the ownership interests in Decatur Power Holdings, LLC, which owns the Decatur Energy Center (Decatur Energy) from an affiliate of LS Power Equity Partners III for US$441 million, subject to working capital and other closing adjustments (the Decatur Energy Acquisition). Decatur Energy is a 795 megawatt (MW) natural gas-fired combined cycle power generation plant located in Decatur, Alabama that operates under a tolling agreement.
Decatur Energy sells capacity and energy to a regional entity under a long-term contract which has an original term of 10 years and expires December 31, 2022. Decatur Energy is well-positioned, given anticipated market conditions, as well as significant remaining useful life, to be re-contracted or to pursue other commercial alternatives at the end of the current long-term contract, including the ability to sell power into the Pennsylvania, New Jersey, and Maryland interconnection market starting in 2023.
Financing of the Decatur Energy Acquisition will consist of a combination of debt and equity. The Company entered into an agreement with a syndicate of underwriters to issue 7,375,000 subscription receipts (the Subscription Receipts), on a bought deal basis, at an issue price of $24.75 per Subscription Receipt (the Offering Price), for total gross proceeds of approximately $183 million (the Public Offering). The net proceeds from the Public Offering will be used to partially finance the Decatur Energy Acquisition. Closing of the Public Offering occurred on April 24, 2017 and the over-allotment option associated with the Public Offering was not exercised and is no longer exercisable.
Each Subscription Receipt will entitle the holder thereof to receive, without payment of additional consideration or further action, upon closing of the Decatur Energy Acquisition, one common share of Capital Power. In addition, while the Subscription Receipts remain outstanding, holders will be entitled to receive cash payments (Dividend Equivalent Payments) per Subscription Receipt equal to dividends declared by Capital Power on each common share. Such Dividend Equivalent Payments will have the same record date as the related common share dividend and will be paid to holders of Subscription Receipts concurrently with the payment date of each such dividend.
The balance of the purchase price is expected to be financed through debt utilizing a temporary expansion of Capital Power’s credit facilities followed by permanent financing with an issuance of long-term debt expected later in 2017.
The Decatur Energy Acquisition supports the Company’s growth strategy and increases the Company’s geographical diversification. During the first full year of operations, the Decatur Energy Acquisition is expected to increase adjusted funds from operations by $43 million and increase adjusted EBITDA by $60 million. The transaction is expected to close in June 2017, subject to regulatory approvals and satisfaction of closing conditions.
Acquisition of thermal facilities
On February 21, 2017, the Company announced that it entered into an agreement to acquire the thermal power business of Veresen Inc. Under the terms of the agreement, Capital Power will acquire 284 MW of generation from two natural gas-fired power assets in Ontario consisting of the 84 MW East Windsor Cogeneration Centre (East Windsor) and a 50% interest in the 400 MW York Energy Centre (York Energy), and will operate both facilities. The transaction also includes 10 MW of zero-emissions waste heat generation from two facilities (5 MW each) located at Westcoast Energy’s BC Gas Pipeline compressor stations in Savona and 150 Mile House, British Columbia.
On April 13, 2017, the Company announced that it had completed the acquisition of the two natural gas-fired power facilities in Ontario. The purchase price for the natural gas-fired facilities consisted of (i) $235 million in total cash consideration, including working capital and other closing adjustments of $11 million, and (ii) the assumption of $253 million of project level debt (proportionate basis). Given the close proximity of the transaction close date to the release of the Company’s first quarter results, information required to finalize the working capital adjustments is outstanding and as a result the purchase price is subject to change. As well, the initial purchase price allocation is not available to be disclosed at this time and will be prepared during the second quarter and disclosed in the Company’s filings for the three and six months ending June 30, 2017.
The acquisition of these facilities, including the two natural-gas fired facilities in Ontario and the two waste heat facilities in British Columbia, supports the Company’s growth strategy and is consistent with the Company’s technology and operating focus. During the first full year of operations, this acquisition is expected to increase adjusted funds from operations by $24 million and increase adjusted EBITDA by $55 million.
The acquisition of the two waste heat facilities remains subject to the satisfaction of closing conditions, the work for which is ongoing as at April 28, 2017.
Analyst conference call and webcast
Capital Power will be hosting a conference call and live webcast with analysts on May 1, 2017 at 9:00 am (MDT) to discuss the first quarter 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) adjusted EBITDA, (ii) adjusted 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 (loss), adjusted funds from operations to net cash flows from operating activities and normalized earnings attributable to common shareholders to net income (loss) attributable to shareholders of the Company are disclosed below and are discussed further in the Company’s Management’s Discussion and Analysis, prepared as of April 28, 2017, for the three months ended March 31, 2017 which is available under the Company’s profile on SEDAR atwww.SEDAR.com.
Capital Power uses adjusted EBITDA to measure the operating performance of facilities and categories of facilities from period to period. Management believes that a measure of facility operating performance is more meaningful if results not related to facility operations such as impairments, foreign exchange gains or losses and gains or losses on disposals are excluded from the adjusted EBITDA measure.
A reconciliation of adjusted EBITDA to net income is as follows:
|(unaudited, $ millions)||Three months ended |
|Mar 31 2017||Dec 31 2016||Sep 30 2016||Jun 30 2016||Mar 31 2016||Dec 31 2015||Sep 30 2015||Jun 30 2015|
|Revenues and other income||338||280||374||226||334||337||466||81|
|Energy purchases and fuel, other raw materials and operating charges, staff costs and employee benefits expense, and other administrative expense||(208)||(148)||(232)||(127)||(225)||(216)||(318)||(36)|
|Adjusted EBITDA from joint venture 1||13||12||6||9||11||13||6||2|
|Depreciation and amortization||(60)||(53)||(53)||(54)||(56)||(56)||(53)||(55)|
|Loss on termination of power purchase arrangement||–||(20)||–||–||(53)||–||–||–|
|Foreign exchange gain (loss)||2||(4)||3||(1)||8||–||(8)||1|
|Net finance expense||(20)||(24)||(21)||(19)||(22)||(27)||(25)||(24)|
|Finance expense from joint venture 1||(3)||(3)||(3)||(4)||(3)||(3)||(2)||(1)|
|Income tax expense||(15)||(14)||(4)||(10)||(2)||(14)||(16)||(16)|
|Net income (loss)||47||26||64||20||(8)||34||50||(48)|
|Net income (loss) attributable to:|
|Shareholders of the Company||50||28||66||23||(6)||35||49||(34)|
|Net income (loss)||47||26||64||20||(8)||34||50||(48)|
1 Total income from joint venture as per the Company’s consolidated statements of income (loss).
Adjusted funds from operations
Adjusted funds from operations represents net cash flows from operating activities adjusted to include net finance expenses and current income tax expenses and exclude changes in operating working capital and distributions received from the Company’s joint venture interest. Net finance expenses and current income tax expenses are included as the timing of cash receipts and payments of interest and income taxes and the resulting cash basis amounts are not comparable from period to period. Changes in operating working capital are excluded from funds from operations as the timing of cash receipts and payments also affects the period-to-period comparability. Distributions received from the Company’s joint venture interest are excluded as the distribution is calculated after the effect of joint venture debt payments, which are not considered an operating activity. Adjusted funds from operations also exclude the impact of fair value changes in certain unsettled derivative financial instruments that are charged or credited to the Company’s bank margin account held with a specific exchange counterparty. The Company includes interest and current income tax expenses excluding Part VI.1 tax recorded during the period rather than interest and income taxes paid. Adjusted funds from operations is reduced by sustaining capital expenditures and preferred share dividends and adjusted to include the Company’s share of the adjusted funds from operations of its joint venture interest and cash from coal compensation that will be received annually.
A reconciliation of net cash flows from operating activities to adjusted funds from operations is as follows:
|(unaudited, $ millions)||
Three months ended
|Net cash flows from operating activities per condensed interim consolidated statements of cash flows||99||131|
|Add (deduct) items included in calculation of net cash flows from operating activities per condensed interim consolidated statements of cash flows:|
|Change in fair value of derivatives reflected as cash settlement||2||–|
|Distribution received from joint venture||(8)||(14)|
|Miscellaneous financing charges paid 1||2||1|
|Change in non-cash operating working capital||2||(19)|
|Net finance expense 2||(18)||(22)|
|Current income tax expense||(2)||(5)|
|Decrease in current income tax payable due to Part VI.1 tax||2||5|
|Sustaining capital expenditures 3||(4)||(6)|
|Preferred share dividends paid||(8)||(5)|
|Adjusted funds from operations from joint venture||10||9|
|Adjusted funds from operations||91||93|
1 Included in other items of non-cash adjustments to reconcile net income to net cash flows from operating activities.
2 Excludes unrealized changes on interest rate derivative contracts and amortization and accretion charges.
3 Includes sustaining capital expenditures net of joint venture contributions of $2 million for each of the three months ended March 31, 2017 and 2016, respectively.
Normalized earnings attributable to common shareholders and normalized earnings per share
The Company uses normalized earnings attributable to common shareholders and normalized earnings per share to measure performance by period on a comparable basis. Normalized earnings per share is based on earnings (loss) used in the calculation of basic earnings (loss) per share according to GAAP and adjusted for items that are not reflective of performance in the period such as unrealized fair value changes, impairment charges, unusual tax adjustments, gains and losses on disposal of assets or unusual contracts, and foreign exchange gain or loss on the revaluation of U.S. dollar denominated debt. The adjustments, shown net of tax, consist of unrealized fair value changes on financial instruments that are not necessarily indicative of future actual realized gains or losses, non-recurring gains or losses, or gains or losses reflecting corporate structure decisions.
|(unaudited, $ millions except per share amounts and number of common shares)||Three months ended |
|||Mar 31 2017||Dec 31 2016||Sep 30 2016||Jun 30 2016||Mar 31 2016||Dec 31 2015||Sep 30 2015||Jun 30 2015|
|Basic earnings (loss) per share ($)||0.44||0.21||0.63||0.19||(0.11)||0.29||0.44||(0.39)|
|Net income (loss) attributable to shareholders of the Company per condensed interim consolidated statements of income (loss)||50||28||66||23||(6)||35||49||(34)|
|Preferred share dividends including Part VI.1 tax||(8)||(8)||(5)||(5)||(5)||(6)||(5)||(6)|
|Earnings (loss) attributable to common shareholders||42||20||61||18||(11)||29||44||(40)|
|Unrealized changes in fair value of derivatives||(7)||(8)||(22)||10||5||11||(19)||33|
|Unrealized foreign exchange (gain) loss on revaluation of U.S. dollar denominated debt||(1)||3||1||1||(8)||1||6||(2)|
|(Release) recognition of tax liability on foreign domiciled investment||(1)||–||–||–||–||–||–||1|
|Loss on de-recognition of the Sundance C power purchase arrangement (Sundance PPA)||–||–||–||–||46||–||–||–|
|Change in unrecognized tax benefits||–||–||(27)||–||–||–||–||–|
|Income tax expense related to increase in deferred tax liabilities caused by change in Alberta statutory corporate income tax rate||–||–||–||–||–||–||–||19|
|Settlement of Sundance power purchase arrangement legal action||–||15||–||–||–||–||–||–|
|Deferred income tax (reduction) expense related to temporary difference on investment in subsidiary||–||(1)||13||–||–||–||–||–|
|Impairment loss on Southport goodwill||–||–||4||–||–||–||–||–|
|Success fee received related to development project||–||(3)||–||–||–||–||–||–|
|Impact of change in non-controlling interest percentage on adjustments of previous quarters||–||–||–||–||–||–||–||(1)|
|Normalized earnings attributable to common shareholders||33||26||30||29||32||41||33||10|
|Weighted average number of common shares outstanding (millions)||96.3||96.1||96.1||96.1||96.4||98.7||100.9||102.1|
|Normalized earnings per share ($)||0.34||0.27||0.31||0.30||0.33||0.42||0.33||0.10|
Normalized earnings per share reflects the period-over-period change in normalized earnings attributable to common shareholders, the changes from period to period in the weighted average number of common shares outstanding and the changes from period to period in net income attributable to non-controlling interests.
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) expectations pertaining to the amendment of the Genesee Coal Mine Joint Venture Agreement regarding reduction to Capital Power’s cost of coal and expected enhancements to the Company’s net income, adjusted EBITDA, net cash flows from operating activities and adjusted funds from operations, (ii) expectations pertaining to the acquisition of thermal facilities regarding financial impacts including expected accretion in adjusted funds from operations, enhancements to the Company’s EBITDA, and the closing of the purchase of the waste-heat facilities, and (iii) expectations pertaining to the acquisition of Decatur Energy and the subscription receipt offering including: financing plans for the acquisition, closing of the acquisition and share issuance pertaining to the subscription receipt offering and the receipt of all regulatory approvals, financial impacts including expected accretion in adjusted funds from operations, enhancements to the Company’s EBITDA, and re-contracting of the facility.
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) anticipated facility performance, (iii) business prospects and opportunities including expected growth and capital projects, (iv) status of and impact of policy, legislation and regulations, 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, market structure and tax legislation, (iv) facility 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 for the year ended December 31, 2016, prepared as of February 17, 2017, 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.