Capital Power reports strong third quarter 2020 results highlighted by 10-year contract extension for Decatur Energy
Continued growth in contracted renewables with new solar projects in the U.S.
EDMONTON, Alberta – Capital Power Corporation (TSX: CPX) today released financial results for the quarter ended September 30, 2020.
- Generated net cash flows from operating activities of $258 million and adjusted funds from operations (AFFO) of $221 million in the third quarter of 2020
- Generated net income of $106 million and adjusted EBITDA of $284 million in the third quarter of 2020
- Executed a 10-year contract extension for Decatur Energy through to 2032
- Executed 20-year contracts for three solar development projects in North Carolina that will add 160 megawatts in 2022
“Capital Power delivered financial and operational results in the third quarter of 2020 that were in line with management’s expectations thanks to the efforts of our employees who work at our facilities and those who continue to work remotely during the COVID-19 pandemic,” said Brian Vaasjo, President and CEO of Capital Power. “Third quarter results benefitted from excellent operating performance across the entire fleet with average facility availability of 98% and a solid contribution from our trading desk that captured an average realized Alberta power price of $59 per megawatt hour (MWh) in the third quarter that was 34% higher than the average spot price of $44 per MWh. Based on our forecast for the remainder of the year, we are on track to generate AFFO near the midpoint and adjusted EBITDA above the midpoint of our $500 million to $550 million and $935 million to $985 million annual guidance ranges for 2020, respectively.”
“One of the highlights in the third quarter was the 10-year contract extension for Decatur Energy out to 2032. With our upgrades to the combustion turbines since its acquisition in 2017, the expected financial contributions from the contract extension will add significant value both in the remaining years of the existing contract and beyond the current contract expiry in 2022. The contract extension also validates our acquisition strategy of acquiring mid-life contracted gas assets that have a positive outlook for re-contracting and have value beyond the current contract term,” added Mr. Vaasjo.
“In October, we signed 20-year power purchase agreements for three solar development projects in North Carolina totaling 160 megawatts of capacity,” continued Mr. Vaasjo. “With the Whitla Wind 2 and 3 and Strathmore Solar projects in advanced development in Alberta, we will be adding approximately 350 megawatts of renewable capacity to our fleet by the end of 2022 representing another step toward our goal of being net carbon neutral before 2050. With their 20-year contract terms, the North Carolina solar projects will also strengthen our contracted cash flows while increasing the average remaining contract life of our contracted assets.”
|Operational and Financial Highlights 1
|Three months ended
|Nine months ended
|(millions of dollars except per share and operational amounts)||2020||2019||2020||2019|
|Electricity generation (Gigawatt hours)||6,327||6,808||17,361||18,090|
|Generation facility availability||98%||96%||94%||95%|
|Revenues and other income 3||$453||$517||$1,421||$1,280|
|Adjusted EBITDA 2, 3||$284||$284||$735||$677|
|Net income (loss) 3||$106||$(228)||$129||$(62)|
|Net income (loss) attributable to shareholders of the Company 3||$108||$(226)||$133||$(57)|
|Basic earnings (loss) per share 3||$0.89||$(2.25)||$0.87||$(0.90)|
|Diluted earnings (loss) per share 3||$0.89||$(2.25)||$0.87||$(0.90)|
|Normalized earnings attributable to common shareholders 2,3||$69||$64||$115||$109|
|Normalized earnings per share 2, 3||$0.66||$0.60||$1.09||$1.05|
|Net cash flows from operating activities||$258||$209||$452||$519|
|Adjusted funds from operations 2||$221||$225||$436||$427|
|Adjusted funds from operations per share 2||$2.10||$2.11||$4.14||$4.11|
|Purchase of property, plant and equipment and other assets||$50||$193||$236||$523|
|Dividends per common share, declared||$0.5125||$0.4800||$1.4725||$1.3750|
- 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 nine months ended September 30, 2020.
- Earnings before net finance expense, income tax expense, depreciation and amortization, impairments, foreign exchange gains or losses, finance expense and depreciation expense from 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, AFFO and AFFO 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 September 30, 2020 and 2019 of $115 million and $135 million, respectively, and for the nine months ended September 30, 2020 and 2019 of $369 million (including the $13 million write-off of capital costs related to the discontinuation of the Genesee 4 and 5 project and $3 million related to the termination of East Windsor steam contract) and $355 million, respectively. Forecasted depreciation and amortization for the remainder of 2020 is $119 million.
Wind facility long-term service agreement extensions and Whitla Wind 2 and 3 turbine supply
In late April 2020, the Company signed agreements with Vestas setting the terms for 10-year long-term service agreement (LTSA) extensions for the maintenance of nine of the Company’s wind facilities and the supply of turbines for the 97 megawatts (MW) of capacity of Whitla Wind 2 with commercial operations expected in 2021. The agreement for the supply of turbines for Whitla Wind 2 contained an option to supply turbines for Whitla Wind 3, which the Company exercised in the second quarter of 2020.
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. The new LTSAs were executed in October 2020 and will take effect between 2021 and 2023. The Company expects to realize ongoing annual savings on the Company’s wind facilities covered under these LTSAs, which would increase adjusted EBITDA and AFFO by approximately $8 million and $6 million per year, respectively. Additionally, the LTSA extensions include provisions intended to identify and encourage potential indigenous training, employment and economic opportunities at Canadian facilities.
Extension of Decatur Energy tolling agreement
In August 2020, the Company executed a 10-year tolling agreement extension through December 2032 for Decatur Energy with the current counterparty. Decatur Energy is a natural gas-fired combined cycle facility located in Decatur, Alabama that began commercial operations in 2002. Decatur Energy sells capacity and energy to a regional entity with an A-rated credit rating under a tolling agreement with an original term of 10 years that was to expire in December 2022.
Since the acquisition in June 2017, Capital Power has been upgrading Decatur Energy’s combustion turbines to increase capacity, improve the facility’s heat rate and fuel efficiency and maintain reliability. To date, two of three combustion turbines have been upgraded adding approximately 60 megawatts of additional capacity. The third combustion turbine is expected to be upgraded in 2021 adding approximately 30 MW.
Under the terms of the extension, Decatur Energy will receive payments for 34 MW of additional capacity immediately and will receive capacity payments on up to an additional 79 MW upon execution of an updated interconnection agreement that is expected to be finalized in 2021.
Strathmore Solar project proceeding
On July 30, 2020, the Company announced that, subject to successful permitting and regulatory approvals, it is moving forward with the Strathmore Solar project, in Strathmore Alberta, which will add 40.5 MW in early 2022. This will be the Company’s first solar project in Canada and will have an expected capital cost in the range of $50 million to $55 million.
Strathmore Solar will generate carbon credits that can be used to hedge against Capital Power’s carbon compliance costs from its Alberta thermal generation facilities. The Company expects a portion of the output from Strathmore Solar to be sold under renewable offtake contracts and is actively pursuing contracting opportunities. The Company expects average annual adjusted EBITDA and AFFO to be approximately $5 million and $5 million, respectively, over the first five years of the project.
On July 30, 2020, Capital Power and the Board of Directors announced the following executive position appointments effective immediately:
- Kate Chisholm, Senior Vice President Planning and Stakeholder Relations and Chief Sustainability Officer,
- Bryan DeNeve, Senior Vice President Business Development and Commercial Services,
- Sandra Haskins, Senior Vice President Finance and Chief Financial Officer,
- Chris Kopecky, Senior Vice President and Chief Legal Officer, and
- Jacquie Pylypiuk, Senior Vice President People, Culture and Technology.
Darcy Trufyn continues to serve as the Senior Vice President Operations, Engineering and Construction. Mark Zimmerman, who previously served as the Senior Vice President, Corporate Development and Commercial Services, stepped down from his role effective July 30, 2020.
Reinstatement of Dividend Reinvestment Plan
On July 30, 2020, the Company reinstated its Dividend Reinvestment Plan (the Plan) which was previously suspended on June 30, 2015 (the suspension). Eligible shareholders may elect to participate in the Plan commencing with the Company’s third quarter 2020 cash dividend. The reinstated Plan will provide eligible shareholders with an alternative to receiving their quarterly cash dividends. Under the Plan, eligible shareholders may elect to efficiently and cost-effectively accumulate additional shares in the Company by reinvesting their quarterly cash dividends on the applicable dividend payment date in new shares issued from treasury. The new shares will be issued at a discount of 3% to the average closing price on the Toronto Stock Exchange for the ten trading days immediately preceding the applicable Dividend Payment Date. Participation in the Plan is optional. Those shareholders who do not enroll in the Plan will still be entitled to receive their quarterly cash dividends. Shareholders that were enrolled in the Plan upon suspension, and remain enrolled with the Plan administrator, will automatically resume participation in the Plan.
On July 29, 2020, the Company’s Board of Directors approved an increase of 6.8% in the annual dividend for holders of its common shares, from $1.92 per common share to $2.05 per common share. This increased common share dividend will commence with the third quarter 2020 quarterly dividend payment on October 30, 2020 to shareholders of record at the close of business on September 30, 2020.
Whitla Wind 3 project proceeding
In June 2020, the Company announced that, subject to successful permitting and receipt of regulatory approvals, it is moving forward with the third phase of the Whitla Wind facility which will add 54 MW in late 2021. Capital Power will leverage its construction experience from Whitla Wind 1, to deliver Whitla Wind 3 with an expected capital cost of $92 million.
Whitla Wind 3 will generate carbon credits that can be used to hedge against Capital Power’s carbon compliance costs from its Alberta thermal generation facilities. Both construction activities and discussions around renewable offtake contracts for Whitla Wind 3 are expected to occur concurrently with those of Whitla Wind 2 and the Company is in active discussions with commercial and industrial customers for renewable offtake contracts for Whitla Wind 2 and 3.
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 financing of $103 million (US$73 million) and (iii) contingent consideration valued at nil. Contingent consideration, to a maximum of US$8 million, would become payable in the future if certain market outcomes lead to Buckthorn Wind exceeding agreed upon thresholds. At this time, the Company 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.
Cardinal Point Wind begins commercial operations
On March 16, 2020, Cardinal Point Wind, a 150 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 as final costs are incurred during the remainder of 2020, is expected to be 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 are $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. Arbitration has commenced between the Company and its partner around the costs of exiting the series of agreements previously entered into. As a result of the decision to no longer pursue the project, 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.
20-year contracts for three new solar development projects in North Carolina
In October 2020, the Company executed 20-year power purchase agreements with Duke Energy Carolinas for three solar development projects located in North Carolina totaling 160 MW. The solar projects consist of Hornet Solar (75 MW), Hunter’s Cove Solar (50 MW), and Bear Branch Solar (35 MW) (collectively, the “solar projects”). Construction of the solar projects is expected to begin in late 2021 or early 2022 with commercial operations expected in the fourth quarter of 2022 and with expected capital costs of $118 million (US$90 million), $82 million (US$62 million) and $60 million (US$46 million) for the three projects, respectively. Capital Power expects to finance the solar projects using debt and tax equity.
With their 20-year contract terms, the North Carolina solar projects will strengthen our contracted cash flows while increasing the average remaining contract life of our contracted assets. The investment is expected to meet Capital Power’s after-tax hurdle rate with the average accretion expected to be neutral to AFFO in the first five years. The solar projects are expected to generate approximately $23 million (US$17 million) of adjusted EBITDA and $5 million (US$4 million) of AFFO annually on average in the first five years.
$350 million medium-term note offering and early redemption of $251 million medium-term notes
On October 1, 2020 the Company closed a public offering of unsecured medium-term notes in the aggregate principal amount of $350 million (the Offering). The notes have a coupon rate of 3.147% and mature on October 1, 2032. The net proceeds of the Offering have been and will be used to repay, redeem or refinance existing indebtedness, including indebtedness under outstanding debt securities or credit facilities, or for general corporate purposes. Included in such repayments is the redemption, on October 9, 2020, of all of the Company’s outstanding 5.276% medium-term notes, due November 16, 2020, in the aggregate principal amount of $251 million. The redemption price was an aggregate amount of $258 million, including applicable early redemption premiums, as well as accrued and unpaid interest to and including the day immediately preceding the redemption date.
Analyst conference call and webcast
Capital Power will be hosting a conference call and live webcast with analysts on November 2, 2020 at 9:00 am (MT) to discuss the third quarter financial results. The conference call dial-in number is:
(855) 327-6838 (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 joint venture interests, gains or losses on disposals and unrealized changes in fair value of commodity derivatives and emission credits (adjusted EBITDA), (ii) AFFO, (iii) AFFO 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) status of the Company’s 2020 AFFO and adjusted EBITDA guidance, (ii) forecasted depreciation for the remainder of 2020, (iii) expected timing of commencement of commercial operations of Whitla Wind 2 and 3 and expected capital costs of Whitla Wind 3, (iv) expectations around the Vestas agreements including cost reductions and impacts on adjusted EBITDA and AFFO, (v) the timing of completion of the Decatur Energy combustion turbine upgrades, (vi) expectations around the likelihood of meeting the threshold and paying out contingent consideration related to Buckthorn Wind, (vii) expectations pertaining to the financial impacts of the acquisition of Buckthorn Wind, including the impacts to adjusted EBITDA and AFFO, (viii) the expected timing of when the Buckthorn Wind tax equity investor reaches the agreed upon target rate of return, (ix) expectations pertaining to the financial impacts of Cardinal Point Wind in its first full year of operations, including the impacts to adjusted EBITDA and AFFO, (x) expectations pertaining to Strathmore Solar including timing and costs of construction, expectations around potential contracting and financial impacts including impacts to adjusted EBITDA and AFFO, and (xi) expectations pertaining to the North Carolina solar projects including timing of construction and commercial operations, project costs and impacts on adjusted EBITDA and AFFO.
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) operating and asset development 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 and (vi) foreign exchange 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, 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, (viii) ability to realize the anticipated benefits of the Buckthorn Wind acquisition, (ix) limitations inherent in the Company’s review of acquired assets, and (x) changes in general economic and competitive conditions. See Risks and Risk Management in the Company’s Management’s Discussion and Analysis for both the nine months ended September 30, 2020, prepared as of October 30, 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. Capital Power owns approximately 6,500 MW of power generation capacity at 28 facilities across North America. Approximately 350 MW of owned generation capacity is in advanced development in Alberta and North Carolina.
Full 2020 Q3 Report (includes Management’s Discussion and Analysis and Consolidated Financial Statements)