Capital Power reports solid first quarter 2020 results and reiterates its 2020 financial guidance
EDMONTON, Alberta – Capital Power Corporation (TSX: CPX) today released financial results for the quarter ended March 31, 2020.
Highlights
- Implemented business continuity and risk mitigation plans in response to the COVID-19 pandemic to ensure the continued safety and health of our employees and communities while delivering reliable power
- Completed the 150-megawatt Cardinal Point Wind project on-schedule and on budget in the facility’s U.S. dollar functional currency
- Successfully executed numerous planned outages
- Acquired 101-megawatt Buckthorn Wind in Texas
- Subsequent to the end of the first quarter, signed an agreement setting the terms for 10-year Long-Term Service Agreement (LTSA) extensions for the maintenance of nine Vestas-equipped wind facilities, as well as a turbine supply agreement for Whitla Wind 2
- Generated net cash flows from operating activities of $103 million and adjusted funds from operations of $118 million in the first quarter of 2020
- Purchased and cancelled 0.5 million common shares under the Normal Course Issuer Bid
Net cash flows from operating activities were $103 million in the first quarter of 2020 compared to $196 million in the first quarter of 2019. Adjusted funds from operations (AFFO) were $118 million in the first quarter of 2020 compared to $117 million in the first quarter of 2019. AFFO per share was $1.12 in the first quarter of 2020 compared to $1.15 in the first quarter of 2019.
Net income attributable to shareholders in the first quarter of 2020 was $2 million and basic loss per share was $0.11 per share, compared with net income attributable to shareholders of $61 million and basic earnings per share of $0.49 in the comparable period of 2019. Normalized earnings attributable to common shareholders in the first quarter of 2020, after adjusting for non-recurring items and fair value adjustments, were $28 million or $0.27 per share, compared with $30 million or $0.29 per share in the first quarter of 2019.
“First and foremost, to those serving on the front lines of this pandemic: our healthcare professionals, first responders, infrastructure experts, and other essential workers who are keeping us healthy and safe, we send you our gratitude and appreciation each and every day,” said Brian Vaasjo, President and CEO of Capital Power. “And to all of our operators, critical staff and those working from home – thank you for your commitment to health and safety, and your dedication to supporting our electricity grids with responsible power. Your hard work and perseverance are helping our communities and critical services continue to operate.”
“The COVID-19 pandemic has highlighted that electricity is essential to keeping our communities and critical services operating,” said Mr. Vaasjo. “As an owner and operator of generating facilities, we are committed to prioritizing the health and safety of our staff and reducing the risks to our operations, while continuing to provide this service.”
“Our first quarter financial results were generally in line with management’s expectations,” continued Mr. Vaasjo. “While the long-term impacts from COVID-19 and lower crude oil prices are unknown, we’ve seen a minimal impact on our cash flow generation given the high availability and strong operating performance of our facilities combined with a highly contracted and diversified portfolio of generation assets. During the quarter, we also successfully executed numerous planned maintenance and enhancement outages.”
In 2020, approximately 50% of Capital Power’s adjusted EBITDA is expected to be generated outside of Alberta under long-term contractual arrangements with investment grade counterparties. The remaining 50% of adjusted EBITDA is generated in Alberta where approximately 60% of adjusted EBITDA is under contracts with largely investment grade counterparties. The balance of the output from our Alberta facilities is sold into the Alberta merchant market.
“The COVID-19 pandemic is driving reduced demand for electricity including here in Alberta, which has put downward pressure on electricity prices for the balance of 2020. Our merchant exposure in 2020 is over 90% hedged which will contribute to stable cash flows for the remainder of the year,” said Mr. Vaasjo. “Based on our forecast, we are on track to be near the midpoint of our 2020 AFFO target range and on track with our dividend growth guidance while continuing to monitor the impacts from the COVID-19 pandemic.”
“In April, we continued to mitigate operational and construction risk by signing an agreement with Vestas for 10-year extensions on a series of LTSAs that cover a wider scope of services for all of our Vestas-equipped wind facilities while reducing costs by an estimated 26% compared to current service and maintenance agreements. We also signed a turbine supply agreement for the 97 megawatts of capacity of Whitla Wind 2 with commercial operations expected in 2021,” added Mr. Vaasjo.
“With our strong balance sheet and $900 million of available capacity on our $1.0 billion of committed credit facilities that mature in 2024, we continue to have the financial strength to weather this unprecedented time,” said Bryan DeNeve, Senior Vice-President Finance and CFO of Capital Power. “With the majority of our planned outages now completed, we will be generating positive net cash flows for the remainder of the year and currently do not anticipate the need to access the capital markets other than to potentially refinance the $250 million debt maturing in November. The stability of our cash flow is underpinned by having the majority contracted with largely investment grade counterparties, with an average contract term remaining of 10 years.”
| Operational and Financial Highlights 1 (unaudited) | Three months ended March 31 | |
| (millions of dollars except per share and operational amounts) | 2020 | 2019 |
| Electricity generation (Gigawatt hours) | 5,562 | 5,782 |
| Generation facility availability | 91% | 96% |
| Revenues and other income | $533 | $397 |
| Adjusted EBITDA 2 | $234 | $202 |
| Net income 3 | $- | $60 |
| Net income attributable to shareholders of the Company | $2 | $61 |
| Basic (loss) earnings per share | $(0.11) | $0.49 |
| Diluted (loss) earnings per share | $(0.11) | $0.49 |
| Normalized earnings attributable to common shareholders 2 | $28 | $30 |
| Normalized earnings per share 2 | $0.27 | $0.29 |
| Net cash flows from operating activities | $103 | $196 |
| Adjusted funds from operations 2 | $118 | $117 |
| Adjusted funds from operations per share 2 | $1.12 | $1.15 |
| Purchase of property, plant and equipment and other assets | $99 | $51 |
| Dividends per common share, declared | $0.4800 | $0.4475 |
- 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, 2020.
- 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.
- Includes depreciation and amortization for the three months ended March 31, 2020 and 2019 of $133 million (including the $13 million write-off of capital costs related to the discontinuation of the Genesee 4 and 5 project) and $98 million respectively. Forecasted depreciation and amortization for the remainder of 2020 is $118 million, $117 million and $118 million for the second through fourth quarters, respectively.
Significant Events
Cardinal Point Wind begins commercial operations
On March 16, 2020, Cardinal Point Wind, a 150 megawatt (MW) facility in the McDonough and Warren Counties, Illinois, began commercial operations. Subsequently, the Company received approximately $221 million (US$157 million) in tax equity financing on March 26, 2020, net of issue costs of $3 million (US$2 million) associated with the financing, from two U.S. financial institutions in exchange for Class A interests of a subsidiary of the Company. The construction of the facility was completed on-schedule and within its projected total cost of US$236 million to US$246 million.
Capital Power will operate Cardinal Point Wind under a 12-year fixed price contract with an investment grade U.S. financial institution covering 85% of the facility’s output. The expected adjusted EBITDA and AFFO in the first full year of operations is $56 million (US$40 million) and $6 million (US$4 million), respectively.
Discontinuation of the Genesee 4 and 5 project
During the first quarter of 2020, the Company and its partner on the Genesee 4 and 5 project determined that they would no longer be pursuing the project. Discussions are ongoing between the Company and its partner around the logistics of exiting the series of agreements previously entered into. As a result of this decision, the Company has determined that $13 million of capital expenditures incurred by the Company were purely related to the development of Genesee 4 and 5. The Company has therefore recorded a write-off of these capital costs during the first quarter of 2020 within depreciation and amortization.
Subsequent Events
Signed agreements for the extension of wind facility LTSAs and Whitla Wind 2 turbine supply
In late April 2020, the Company signed agreements with Vestas setting the terms for 10-year LTSA extensions for the maintenance of nine of the Company’s wind facilities and the supply of turbines for the 97 MW of capacity of Whitla Wind 2 with commercial operations expected in 2021.
The agreement for the 10-year extension on the series of LTSAs with Vestas covers a wider scope of services for all of our Vestas-equipped wind facilities while reducing costs by an estimated 26% compared to current service and maintenance agreements. Once individual facility LTSAs have been finalized later in the year and each of the new LTSAs become effective, the Company expects to realize ongoing annual savings on the Company’s wind facilities covered under the agreement, which would increase adjusted EBITDA and AFFO by approximately $8 million and $6 million per year, respectively. The new LTSAs are expected to take effect between 2021 and 2023.
Acquisition of Buckthorn Wind
On April 1, 2020, the Company acquired a 100% ownership interest in Buckthorn Wind, a 101 MW wind facility, from co-sellers John Laing Investments and Clearway Renew LLC, a subsidiary of Clearway Energy Group LLC. The purchase price consisted of (i) $84 million (US$60 million) in total cash consideration, including working capital and other closing adjustments, (ii) the assumption of tax equity debt of $96 million (US$68 million) and (iii) contingent consideration valued at nil. Contingent consideration, to a maximum of US$8 million, would become payable in the future if the economic performance of Buckthorn Wind exceeds an agreed upon threshold. The Company does not expect Buckthorn Wind to exceed this threshold and considers the likelihood of contingent consideration payment to be low, resulting in no value being ascribed to the contingent consideration in the purchase price allocation.
Buckthorn Wind is located in Erath County, approximately 60 miles south of Dallas, Texas and began commercial operations in January 2018. It operates in the liquid Electric Reliability Council of Texas (ERCOT) North region between most of the wind generation in ERCOT-West and the Dallas load center. The ERCOT North region has strong fundamentals with a high likelihood of baseload generation retirements and is one of the fastest growing regions in the United States.
Buckthorn Wind has a 15-year weighted average contract life remaining with two offtake arrangements including one with JPMorgan Chase Bank involving a 20-year contract for differences (CfD) for 55% of the generation output, and a 13-year financial hedge for the remaining 45% of the output. The long-term contracts strengthen the Company’s contracted cash flow profile while expanding our renewables portfolio.
Buckthorn Wind has a tax equity investor (TEI) where the TEI receives the majority of the cash flows prior to the date on which the TEI reaches the agreed upon target rate of return (the flip date). The flip date is expected to occur in the late 2020s. Prior to the flip date, the Company expects average annual adjusted EBITDA and AFFO to be approximately $18 million (US$14 million) and $1 million (US$1 million), respectively. After the flip date during the CfD, the average annual adjusted EBITDA and AFFO are expected to be approximately $9 million (US$8 million) and $6 million (US$5 million), respectively.
Analyst conference call and webcast
Capital Power will be hosting a conference call and live webcast with analysts on May 4, 2020 at 9:00 am (MT) 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) 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
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) status of the Company’s 2020 AFFO and dividend growth guidance, (ii) expectations around financing requirements, (iii) expectations around the geographic split and contracted proportion of adjusted EBITDA for 2020, (iv) forecasted depreciation for the remainder of 2020, (v) expectations pertaining to the financial impacts of Cardinal Point Wind in its first full year of operations, including the impacts to adjusted EBITDA and adjusted funds from operations, (vi) expectations around the Vestas agreements including cost reductions, impacts on adjusted EBITDA and AFFO and timing of finalizing facility LTSAs as well as the years they will become effective (vii) expected timing of commencement of commercial operations of Whitla Wind 2, (viii) expectations around the likelihood of meeting the threshold and paying out contingent consideration related to Buckthorn Wind, (ix) expectations pertaining to the financial impacts of the acquisition of Buckthorn Wind, including the impacts to adjusted EBITDA and adjusted funds from operations, and (x) the expected timing of when the Buckthorn Wind tax equity investor reaches the agreed upon target rate of return.
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 including its review of purchased businesses and assets. The material factors and assumptions used to develop these forward-looking statements relate to: (i) electricity, other energy and carbon prices, (ii) performance, (iii) business prospects (including potential re-contracting opportunities) and opportunities including expected growth and capital projects, (iv) status of and impact of policy, legislation and regulations, (v) effective tax rates, (vi) foreign exchange rates, (vii) anticipated performance of Buckthorn Wind, and (viii) anticipated performance of Cardinal Point Wind.
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, wind capacity factor and performance including maintenance expenditures, (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, (xi) ability to realize the anticipated benefits of the Buckthorn Wind acquisition, (xii) limitations inherent in the Company’s review of acquired assets, and (xiii) changes in general economic and competitive conditions. See Risks and Risk Management in the Company’s Management’s Discussion and Analysis for both the three months ended March 31, 2020, prepared as of May 1, 2020 and for the year ended December 31, 2019, prepared as of February 21, 2020, 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.
About Capital Power
Capital Power (TSX: CPX) is a growth-oriented North American power producer headquartered in Edmonton, Alberta. The company develops, acquires, owns, and operates power generation facilities using a variety of energy sources. Including the acquisition of the Buckthorn Wind facility which closed in April 2020, Capital Power owns over 6,400 megawatts (MW) of power generation capacity at 28 facilities across North America. Approximately 100 MW of owned generation capacity is in advanced development in Alberta.