Capital Power reports strong second quarter 2018 results and announces a 7% dividend increase for its common shares
Company remains on track to achieve results above the midpoint of the annual financial target range
EDMONTON, Alberta – Capital Power Corporation (TSX: CPX) today released financial results for the quarter ended June 30, 2018.
Second Quarter Highlights
- Quarterly dividend increased to $0.4475 ($1.79 annualized) per common share, our 5th consecutive annual increase
- Net cash flows from operating activities of $109 million, up 40% over last year and adjusted funds from operations of $76 million, up 73% over last year
- Purchased and cancelled 1.0 million common shares under the Normal Course Issuer Bid
- Secured additional natural gas delivery capacity for the Genesee site to enable increased natural gas co-firing capacity and allow for future coal to gas conversion
“I am pleased to announce that the Board of Directors has approved a 7% per common share dividend increase effective with the third quarter 2018 dividend payment, which is consistent with our 7% annual dividend growth guidance to 2020,” 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 $109 million in the second quarter of 2018 compared with $78 million in the second quarter of 2017. Adjusted funds from operations were $76 million in the second quarter of 2018, compared to $44 million in the second quarter of 2017.
Net income attributable to shareholders in the second quarter of 2018 was $70 million and basic earnings per share was $0.57 per share, compared with net income attributable to shareholders of $109 million, and basic earnings per share of $1.03, in the comparable period of 2017. Normalized earnings attributable to common shareholders in the second quarter of 2018, after adjusting for non-recurring items and fair value adjustments, were $23 million or $0.22 per share compared with $26 million or $0.27 per share in the second quarter of 2017.
Net cash flows from operating activities were $252 million for the six months ended June 30, 2018 compared with $177 million for the six months ended June 30, 2017. Adjusted funds from operations were $161 million for the six months of 2018, compared to $132 million in the comparable six month period last year.
For the six months ended June 30, 2018, net income attributable to shareholders was $113 million and basic earnings per share was $0.89 per share compared with $159 million and $1.47 per share for the six months ended June 30, 2017. For the six months ended June 30, 2018, normalized earnings attributable to common shareholders were $54 million, or $0.52 per share, compared with $59 million, or $0.61 per share, in the first six months of 2017.
“Capital Power’s financial results for the second quarter of 2018 exceeded management’s expectations,” said Mr. Vaasjo. “With low natural gas prices combined with strong Alberta power prices, we continued to optimize the use of gas-fired generation in our gas and coal facilities. The second quarter results included re-negotiated commercial terms of the tax-equity agreement for Bloom Wind that was triggered from the change in U.S. tax laws. The re-negotiated terms resulted in a one-time, non-cash $44 million increase to Adjusted EBITDA. Excluding the Bloom Wind re-negotiation impacts and mark-to-market adjustments, Adjusted EBITDA was $157 million, an increase of 26% from the prior year.”
“The average Alberta spot price of $56 per megawatt hour (MWh) in the second quarter of 2018 confirms that the Alberta power market has recovered,” continued Mr. Vaasjo. “The positive outlook for the Alberta power market is also reflected by forward prices in the mid-$50/MWh for 2019. With our unhedged baseload position and nearly 500 megawatts of peaking natural gas and wind facilities, Capital Power is well-positioned to benefit from higher power prices and price volatility. Our expectation for adjusted funds from operations in 2018 continues to be above the midpoint of the $360 million to $400 million guidance range.”
On June 29, 2018, the Alberta Electric System Operator (AESO) published the final draft of its Comprehensive Market Design (CMD Final) outlining the proposed design and details for Alberta’s capacity market.
“Overall, CMD Final builds on previous iterations and is consistent with our view of a properly designed capacity market,” said Mr. Vaasjo. “It provides an opportunity for existing and new assets to earn a return on and of capital. Under this market design, Capital Power is well-positioned to maintain its competitive position in the Alberta market.”
The Company continued to be active with its Normal Course Issuer Bid (NCIB) by purchasing and cancelling 1.0 million common shares for a total cost of $25 million in the second quarter. In the first half of 2018, the Company purchased and cancelled 1.7 million shares for a total cost of $42 million. Under its TSX approved NCIB, the Company can purchase and cancel up to 9.3 million common shares during the one-year period ending February 20, 2019.
Capital Power continues to make progress on its renewables growth strategy. In June 2018, the Company added the 77.5 megawatt Green Hills Wind project, located in the state of Missouri, to its United States growth pipeline. Capital Power has approximately 1,200 megawatts of potential wind development opportunities located throughout the United States. The Company actively participates in competitive bidding opportunities to acquire contracted wind assets as well as sourcing contracts for its existing development opportunities.
The Company is also well-positioned to participate in Alberta’s Renewable Electricity Program competition. Capital Power currently has three contracted wind projects under advanced development or construction that will add 450 megawatts of renewables generation to its fleet within the next two years. In addition, the Company’s Halkirk 2 wind project was approved by the Alberta Utilities Commission during the second quarter of 2018.
Operational and Financial Highlights 1
|Three months ended
|Six months ended
|(millions of dollars except per share and operational amounts)||2018||2017||2018||2017|
|Electricity generation (Gigawatt hours)||4,584||3,674||9,610||7,636|
|Generation facility availability||93%||94%||95%||96%|
|Revenues and other income||$363||$201||$670||$539|
|Net income attributable to shareholders of the Company||$70||$109||$113||$159|
|Basic earnings per share||$0.57||$1.03||$0.89||$1.47|
|Diluted earnings per share||$0.57||$1.03||$0.89||$1.47|
|Normalized earnings attributable to common shareholders 2||$23||$26||$54||$59|
|Normalized earnings per share 2||$0.22||$0.27||$0.52||$0.61|
|Net cash flows from operating activities||$109||$78||$252||$177|
|Adjusted funds from operations 2, 3||$76||$44||$161||$132|
|Adjusted funds from operations per share 2||$0.74||$0.45||$1.55||$1.36|
|Purchase of property, plant and equipment and other assets||$66||$63||$106||$148|
|Dividends per common share, declared||$0.4175||$0.3900||$0.8350||$0.7800|
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 six months ended June 30, 2018.
2. 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, and gains or losses on disposals (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.
3. Commencing with the Company’s March 31, 2018 quarter-end, the reported adjusted funds from operations measure was refined to better reflect the purpose of the measure (see Non-GAAP Financial Measures). The applicable comparable periods have been adjusted to conform to the current period’s presentation.
Genesee contracted physical natural gas capacity
During the second quarter, Capital Power secured additional physical natural gas delivery capacity for the Genesee site. This capacity enables increased natural gas co-firing in 2019 and allows for full conversion of the facility to natural gas as early as 2020.
Genesee royalty rate agreement
During the second quarter, Capital Power entered into an agreement with Genesee Royalty Limited Partnership establishing a fixed royalty rate structure in place of the previous structure which was based on coal regulations from the 1980’s. The new structure provides improved royalty cost certainty in the future.
Investment in C2CNT
In May 2018, Capital Power acquired a 5% equity interest in C2CNT, a company that developed and is now testing at scale an innovative technology that captures and transforms carbon dioxide (CO2) into a useful and high-value product called carbon nanotubes, for total consideration of $3.2 million (US$2.5 million). This technology will take CO2 from many sources including emissions from thermal power generation and other industrial processes and convert it into a carbon-based product that can be used in various industries. This investment in C2CNT supports Capital Power’s pursuit of innovative and leading-edge technology and approaches that have the potential to reduce greenhouse gases. Included with the acquisition is an option that may be elected prior to March 1, 2020 to increase the Company’s equity interest in C2CNT by an additional 20%.
Bloom Wind tax equity agreement amendment
As part of the enactment of the U.S. Tax Cuts and Jobs Act of 2017 in the fourth quarter of 2017, and the resulting reduction in the U.S. Federal corporate tax rate (effective January 1, 2018), a change in tax law provision was triggered in the tax equity agreement for Bloom Wind. As a result, in May of 2018, the Company re-negotiated certain commercial terms within the tax equity agreement for Bloom Wind. The re-negotiated terms of the Bloom Wind tax equity agreement resulted in an interest rate increase on the tax equity financing balance. As well, a one-time reduction to the tax equity financing balance by $44 million (US $33 million) was recorded relating to additional tax benefits used by the tax equity partner. The overall impact of the re-negotiated terms of the tax-equity agreement resulted in a one-time, non-cash increase in net income after tax of $15 million (US $11 million). Under the re-negotiated tax equity agreement and considering the reduction in the U.S. Federal corporate tax rate, the Company has maintained its original expected returns for the project.
Completion of contracts for Cardinal Point Wind
On April 30, 2018, Capital Power announced that the construction of Cardinal Point Wind will proceed once all applicable regulatory approvals are received. Cardinal Point Wind is a 150 MW facility to be constructed in the McDonough and Warren Counties, Illinois, and is anticipated to cost between $289 million and $301 million (US$236 million to US$246 million). Commercial operation of the facility is expected in March of 2020. 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. Under the contract, Capital Power will swap the market revenue of the facility’s generation for a fixed price payment over a 12-year term. In addition, the Cardinal Point Wind project has secured 15-year, fixed-price Renewable Energy Credit (REC) contracts with three Illinois utilities. The REC and output contracts will secure long-term predictable revenues, allowing Cardinal Point Wind to secure renewable energy tax equity financing and provide Capital Power the opportunity to complete its third wind development project in the growing U.S. renewables market.
Consistent with the Company’s ongoing commitment to sustainability, during the second quarter of 2018, the Company named Senior Vice President, Kate Chisholm, its Chief Legal and Sustainability Officer, and sustainability was added to the Board of Directors’ mandate.
On July 27, 2018, the Company’s Board of Directors approved an increase of 7% in the annual dividend for holders of its common shares, from $1.67 per common share to $1.79 per common share. This increased common dividend will commence with the third quarter 2018 quarterly dividend payment on October 31, 2018 to shareholders of record at the close of business on September 28, 2018.
Analyst conference call and webcast
Capital Power will be hosting a conference call and live webcast with analysts on July 30, 2018 at 8:00 am (MDT) to discuss the second 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, and gains or losses on disposals (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 expected results in relation to the 2018 AFFO guidance range and expectations pertaining to the construction cost and commercial operations date for Cardinal Point Wind.
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) 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) 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, 2017, prepared as of February 15, 2018, 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.
Click here to view the management’s discussion and analysis and consolidated financial statements (pdf)