EDMONTON, Alberta – Capital Power Corporation (“Capital Power” or “the Company”) (TSX: CPX) announced today it has entered into an agreement to divest its 50% share of the Keephills 3 generation unit (“K3”) to TransAlta Corporation (“TransAlta”), and to acquire TransAlta’s 50% share of the Genesee 3 generation unit (“G3”). K3 and G3 are the only supercritical coal facilities in Alberta, with a net capacity of 463 megawatts (“MW”) and 466 MW, respectively. Currently both generating units are owned and operated under 50/50 Joint Venture Agreements between Capital Power and TransAlta. Upon close, G3 will be fully owned and operated by Capital Power and K3 will be fully owned and operated by TransAlta. The net cost of the transaction to Capital Power is $10 million. The transaction is expected to close in the fourth quarter of 2019 subject to regulatory approvals and other customary closing conditions.
“The transaction is aligned with Capital Power’s strategic plan to continue to deliver responsible energy for tomorrow.” said Brian Vaasjo, President and CEO of Capital Power. “As a result of the transaction, Capital Power will gain full control of the Genesee site, providing strategic freedom and latitude to make decisions that further optimize value for the industry-leading Genesee units. Furthermore, the transaction will streamline costs and processes that are commercial in nature and results in a reduction of regulatory compliance risk.”
While the transaction is expected to be neutral to Adjusted Funds From Operations (“AFFO”) over the medium term, the Company expects to record a net pre-tax loss in the range of $200 million to $250 million. The expected non-cash, pre-tax loss relates to the derecognition of K3, which has a disproportionately higher net book value than G3, partially offset by the accelerated recognition of deferred government grant revenue that the Company is receiving over time from the province of Alberta for the 2029 phase-out of coal-fired generation. The accelerated recognition of this deferred revenue is tied to the net book value of the assets and is therefore being accelerated to align with the lower cost base of G3. The Off-coal Agreement is not impacted by the transaction and as a result, compensation will continue to be collected over time and the Company’s ongoing obligations pertaining to the Off-coal Agreement are unchanged.
Non-GAAP Financial Measures
The Company uses AFFO 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. AFFO represents net cash flows from operating activities adjusted to include net finance expense and current income tax expense and exclude changes in operating working capital and distributions received from the Company’s joint venture interests. Net finance expense and current income tax expense 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 AFFO as the timing of cash receipts and payments also affects the period-to-period comparability. Distributions received from the Company’s joint venture interests are excluded as the distributions are calculated after the effect of joint venture debt payments, which are not considered operating activities. AFFO is reduced by the tax equity financing project investors’ shares of AFFO associated with assets under tax equity financing structures to ensure that only the Company’s share is reflected in the overall metric. AFFO also excludes 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. AFFO is reduced by sustaining capital expenditures and preferred share dividends and adjusted to include the Company’s share of the AFFO of its joint venture interests and cash from coal compensation that will be received annually. AFFO per share is determined by applying AFFO to the weighted average number of common shares used in the calculation of basic, diluted and normalized earnings per share.
This term is not a defined financial measure according to GAAP and does not have a standardized meaning prescribed by GAAP and, therefore, is unlikely to be comparable to similar measures used by other enterprises. AFFO should not be considered an alternative to net cash flows from operating activities, calculated in accordance with GAAP. Rather, this measure is provided to complement the nearest GAAP measure in the analysis of the Company’s results of operations from management’s perspective.
See Non-GAAP measures in the Company’s second quarter 2019, and year-end 2018 Management’s Discussion and Analysis for further discussion of this metric and reconciliations of AFFO to net cash flows from operating activities.
Certain information in this news release is forward-looking within the meaning of Canadian securities law as it relates to anticipated financial and operating performance, events or strategies. The forward-looking information or statements 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 around the swap of interests in G3 and K3 includes expectations regarding: (i) transaction close timing, (ii) AFFO impacts of the transaction, and (iii) the expected accounting loss on the transaction.
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 assessment of the swap transaction. The material factors and assumptions used to develop these forward-looking statements relate to: (i) electricity and other energy prices, (ii) anticipated performance of the G3 and K3 facilities, (iii) status of and impact of policy, legislation and regulations, and (iv) 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 the Alberta market, (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 and performance including maintenance of equipment, (v) changes in market prices and availability of fuel, and (vi) changes in general economic and competitive conditions. See Risks and Risk Management in the Company’s 2018 Management’s Discussion and Analysis 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 nearly 6,000 megawatts (MW) of power generation capacity at 26 facilities across North America. Approximately 900 MW of owned generation capacity is in advanced development in Alberta and Illinois.