Results are highlighted by strong cash flow generation in the quarter
EDMONTON, Alberta, Oct. 29, 2018 (GLOBE NEWSWIRE) — Capital Power Corporation (TSX: CPX) today released financial results for the quarter ended September 30, 2018.
Third Quarter Highlights
- Announced the acquisition of Arlington Valley, a 580 megawatt contracted natural gas facility in Arizona
- Achieved excellent operating performance with 98% facility availability
- Generated net cash flows from operating activities of $65 million and adjusted funds from operations of $156 million
- Purchased and cancelled 0.5 million common shares under the Normal Course Issuer Bid
“One of the highlights in the quarter was the announced acquisition of Arlington Valley, a contracted natural gas facility operating in the attractive Desert Southwest (DSW) power market,” said Brian Vaasjo, President and CEO of Capital Power. “As I stated at the time, this transaction contributes immediately to our adjusted funds from operations and earnings and provides geographic diversification outside of Alberta while providing a platform for potential further growth in the DSW market. Arlington Valley is a low risk, cash generating investment that provides stable contracted cash flows until 2025 and has a high probability of re-contracting as confirmed by third-party market assessments.”
Net cash flows from operating activities were $65 million in the third quarter of 2018 compared with $120 million in the third quarter of 2017. Adjusted funds from operations (AFFO) were $156 million in the third quarter of 2018, compared to $135 million in the third quarter of 2017.
Net income attributable to shareholders in the third quarter of 2018 was $20 million and basic earnings per share was $0.10 per share, compared with net loss attributable to shareholders of $5 million, and basic loss per share of $0.13, in the comparable period of 2017. Normalized earnings attributable to common shareholders in the third quarter of 2018, after adjusting for non-recurring items and fair value adjustments, were $36 million or $0.35 per share compared with $29 million or $0.28 per share in the third quarter of 2017.
Net cash flows from operating activities were $317 million for the nine months ended September 30, 2018 compared with $297 million for the nine months ended September 30, 2017. Adjusted funds from operations were $317 million for the nine months of 2018, compared to $267 million in the comparable nine month period last year.
For the nine months ended September 30, 2018, net income attributable to shareholders was $133 million and basic earnings per share was $0.99 per share compared with $154 million and $1.30 per share for the nine months ended September 30, 2017. For the nine months ended September 30, 2018, normalized earnings attributable to common shareholders were $90 million, or $0.87 per share, compared with $88 million, or $0.88 per share, in the first nine months of 2017.
“Capital Power’s financial results for the third quarter of 2018 exceeded management’s expectations,” said Mr. Vaasjo. “Our third quarter results benefitted from strong operating performance with average facility availability of 98 per cent and higher Alberta power prices that averaged $55 per megawatt hour (MWh) compared to $25 per MWh a year ago. The Company generated a strong quarter of adjusted funds from operations of $156 million in the third quarter and $317 million in the first nine months of 2018. Based on our outlook for the fourth quarter of the year, we continue to be on track to achieve AFFO above the midpoint of the $360 million to $400 million target range for 2018.”
The Company continued to be active with its Normal Course Issuer Bid (NCIB) by purchasing and cancelling 0.5 million common shares at an average exercise price of $25.34 per share for a total cost of $13 million in the third quarter. In the first nine months of 2018, the Company purchased and cancelled 2.2 million common shares at an average exercise price of $24.77 per share for a total cost of $55 million. Under its TSX approved NCIB, the Company can purchase and cancel up to 9.3 million common shares during the one-year period ending February 20, 2019.
| Operational and Financial Highlights 1
|Three months ended
|Nine months ended
|(millions of dollars except per share and operational amounts)||2018||2017||2018||2017|
|Electricity generation (Gigawatt hours)||5,213||4,720||14,823||12,356|
|Generation facility availability||98||%||97||%||96||%||96||%|
|Revenues and other income||$||389||$||346||$||1,059||$||885|
|Adjusted EBITDA 2||$||138||$||158||$||533||$||397|
|Net income (loss)||$||19||$||(7||)||$||128||$||147|
|Net income (loss) attributable to shareholders of the Company||$||20||$||(5||)||$||133||$||154|
|Basic earnings (loss) per share||$||0.10||$||(0.13||)||$||0.99||$||1.30|
|Diluted earnings (loss) per share||$||0.10||$||(0.13||)||$||0.99||$||1.29|
|Normalized earnings attributable to common shareholders 2||$||36||$||29||$||90||$||88|
|Normalized earnings per share 2||$||0.35||$||0.28||$||0.87||$||0.88|
|Net cash flows from operating activities||$||65||$||120||$||317||$||297|
|Adjusted funds from operations 2, 3||$||156||$||135||$||317||$||267|
|Adjusted funds from operations per share 2||$||1.52||$||1.30||$||3.07||$||2.68|
|Purchase of property, plant and equipment and other assets||$||135||$||28||$||241||$||176|
|Dividends per common share, declared||$||0.4475||$||0.4175||$||1.2825||$||1.1975|
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 nine months ended September 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.
Acquisition of Arlington Valley
On September 6, 2018, the Company announced it has entered into an agreement to acquire 100% of the ownership interests in Arlington Valley, LLC, which owns the Arlington Valley facility (Arlington facility), a 580 megawatt (MW) combined cycle natural gas generation facility, from funds managed by Oaktree Capital Management, L.P. and its co-investors for a total of $396 million (US$300 million), subject to working capital and other closing adjustments. Capital Power will finance the transaction using its credit facilities followed by permanent debt financing. The transaction is expected to close in the fourth quarter of 2018, subject to regulatory approvals and other customary closing conditions.
The Arlington facility sells capacity and electricity to an investment grade load serving utility (credit ratings of A2/A- from Moody’s and S&P, respectively) under tolling agreements through 2025. The Arlington facility is adjacent to the Palo Verde hub allowing for additional capacity and energy to be sold into the DSW or the California Independent System Operator (CAISO) wholesale markets during the months outside the summer tolling months.
The acquisition of the Arlington facility supports the Company’s US growth strategy and fully meets the Company’s investment criteria. Arlington facility is a well-positioned asset in the attractive DSW power market with growing demand and a low investment risk environment. In addition to meeting the Company’s expected return criteria, the investment contributes to the Company’s dividend growth strategy through immediate AFFO accretion supported by contracted cash flows to the end of 2025 with a high probability of re-contracting as confirmed through third-party market assessments.
The Arlington facility is expected to generate approximately US$62 million of adjusted EBITDA and US$44 million of AFFO in 2019 during the last year of its current toll. Subsequently, adjusted EBITDA averages US$35 million per year (ranging from US$32 million to US$38 million) and US$16 million of AFFO during the 6-year period from 2020 to 2025. Based on the expected financing, the 5-year average accretion for AFFO is expected to be $0.22 per share reflecting a 6% increase. The average accretion to earnings is expected to be $0.03 per share in the first 5 years, representing a 2% increase.
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.
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 is expected to enable increased natural gas co-firing as early as 2020 and allows for full conversion 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.
Analyst conference call and webcast
Capital Power will be hosting a conference call and live webcast with analysts on October 29, 2018 at 9:00 am (MDT) to discuss the third 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.
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|
|Revenues and other income||389||363||307||261||346||201||338||280|
|Energy purchases and fuel, other raw
materials and operating charges, staff
costs and employee benefits
expense, and other administrative expense
|Adjusted EBITDA from joint ventures 1||10||12||18||18||10||14||13||12|
|Depreciation and amortization||(74||)||(74||)||(75||)||(72||)||(74||)||(65||)||(60||)||(53||)|
|Losses on termination of power
|Foreign exchange (loss) gain||(2||)||3||3||(4||)||21||9||2||(4||)|
|Net finance expense||(28||)||(29||)||(33||)||(32||)||(31||)||(25||)||(20||)||(24||)|
|Finance expense and depreciation
expense from joint ventures 1
|Income tax (expense) recovery||(8||)||(47||)||(19||)||(46||)||8||94||(15||)||(14||)|
|Net income (loss)||19||68||41||(13||)||(7||)||107||47||26|
|Net income (loss) attributable to:|
|Shareholders of the Company||20||70||43||(10||)||(5||)||109||50||28|
|Net income (loss)||19||68||41||(13||)||(7||)||107||47||26|
1 Total income from joint ventures as per the Company’s consolidated statements of income (loss).
Adjusted funds from operations and adjusted funds from operations per share
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. Commencing with the Company’s March 31, 2018 quarter-end, the Company made several adjustments to its adjusted funds from operations measure to better reflect the purpose of the measure. These changes included the following:
- The reduction for sustaining capital expenditures historically included costs associated with the Company’s Genesee performance standard project. These costs have been considered further and given that the intent of this project is to improve efficiency of the facility, management considers these costs to be growth in nature, and hence they should not be considered sustaining capital expenditures that would be deducted in the adjusted funds from operations measure.
- In prior periods, there has been an addback included for Part VI.1 preferred dividend tax impacts which effectively contemplated the associated tax deduction related to preferred share dividends that reduced current tax payable. Upon further consideration, since that deduction offsets the cash tax payable related to Part VI.1 preferred dividend taxes, the cash effects of the preferred dividend tax impacts should offset. The remaining impact to adjusted funds from operations should therefore be the current income tax expense without any adjustment pertaining to preferred dividend tax impacts.
- Historically, the impacts of tax equity financing structures on adjusted funds from operations have been insignificant. With the commencement of commercial operations of Bloom Wind in 2017, management has revisited the flow of these operations through the adjusted funds from operations metric. Similar to the treatment of joint venture interests, the treatment of assets under tax equity financing structures has been adjusted to reflect the Company’s share of the adjusted funds from operations of these assets within consolidated adjusted funds from operations. To give effect to this change, the deduction for net finance expense now excludes non-cash implicit interest expense pertaining to tax equity financing structures. However, a deduction is made to remove the tax equity project investors’ respective shares of the adjusted funds from operations of the assets under tax equity financing structures, as determined by their shares of the distributable cash of the respective operations.
Comparative figures have been restated to reflect the above refinements to the adjusted funds from operations metric.
Adjusted funds from operations 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 adjusted 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 interests are excluded as the distributions are calculated after the effect of joint venture debt payments, which are not considered operating activities. Adjusted funds from operations is reduced by the tax equity financing project investors’ shares of adjusted funds from operations associated with assets under tax equity financing structures to ensure that only the Company’s share is reflected in the overall metric. Adjusted funds from operations 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. 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 interests and cash from coal compensation that will be received annually.
Commencing with the quarter ended March 31, 2018, the Company began presenting adjusted funds from operations per share. This metric is determined by applying adjusted funds from operations to the weighted average number of common shares used in the calculation of basic, diluted and normalized earnings per share.
A reconciliation of net cash flows from operating activities to adjusted funds from operations is as follows:
|(unaudited, $ millions)||Three months ended
|Nine months ended
|Net cash flows from operating activities per condensed interim
consolidated statements of cash flows
|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||4||6||(16||)||6|
|Distributions received from joint ventures||(5||)||(8||)||(24||)||(22||)|
|Miscellaneous financing charges paid 1||1||2||4||4|
|Income taxes paid||1||2||2||2|
|Change in non-cash operating working capital||68||(10||)||62||–|
|Net finance expense 2||(23||)||(26||)||(72||)||(65||)|
|Current income tax expense||(6||)||(4||)||(15||)||(11||)|
|Sustaining capital expenditures 3||(13||)||(12||)||(54||)||(46||)|
|Preferred share dividends paid||(10||)||(9||)||(30||)||(25||)|
|Cash received from coal compensation||50||50||50||50|
|Remove tax equity interests’ respective shares of adjusted funds from
|Adjusted funds from operations from joint ventures||5||6||28||26|
|Adjusted funds from operations||156||135||317||267|
|Weighted average number of common shares outstanding (millions)||102.4||104.1||103.2||99.5|
|Adjusted funds from operations per share ($)||1.52||1.30||3.07||2.68|
1 Included in other cash items on the condensed interim consolidated statements of cash flows to reconcile net income to net cash flows from operating activities.
2 Excludes unrealized changes on interest rate derivative contracts, amortization, accretion charges and non-cash implicit interest on tax equity investment structures.
3 Includes sustaining capital expenditures net of partner contributions of $1 million and $6 million for the three and nine months ended September 30, 2018, respectively, compared with $3 million and $7 million for the three and nine months ended September 30, 2017, 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
|Three months ended|
|Basic earnings (loss) per share ($)||0.10||0.57||0.32||(0.20||)||(0.13||)||1.03||0.44||0.21|
|Net income (loss) attributable to
shareholders of the Company per
condensed interim consolidated
statements of income (loss)
|Preferred share dividends including
Part VI.1 tax
|Earnings (loss) attributable to common
|Unrealized changes in fair value of
|Non-cash tax equity adjustment (see
|Income tax adjustment||–||(2||)||2||–||–||–||–||–|
|Realized foreign exchange loss (gain)
on settlement of foreign currency
|Unrealized foreign exchange (gain)
loss on revaluation of U.S. dollar
|Realized foreign exchange gain on
revaluation of U.S. dollar
|Recognition of U.S. deferred tax
assets related to non-capital losses
|Losses on termination of the
Sundance power purchase
|Provision for Line Loss Rule
|U.S. tax reform rate decrease||–||–||–||31||–||–||–||–|
|Deferred income tax reduction related
to temporary difference on
investment in subsidiary
|Success fee received related to
|Release of tax liability on foreign
|Normalized earnings attributable to
|Weighted average number of common
shares outstanding (millions)
|Normalized earnings per share ($)||0.35||0.22||0.30||0.24||0.28||0.27||0.34||0.27|
1 Includes impacts of the interest rate non-hedge held by one of the Company’s joint ventures and recorded within income from joint ventures on the Company’s statements of income.
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 the expected results in relation to the 2018 AFFO guidance range, expectations pertaining to the construction cost and commercial operations date for Cardinal Point Wind and expectations pertaining to the acquisition of Arlington Valley (see Significant Events). Such expectations around the Arlington Valley acquisition include: (i) impacts of the acquisition on adjusted funds from operations, adjusted funds from operations per share and adjusted EBITDA, (ii) financing plans for the acquisition, (iii) timing of close for the acquisition, and (iv) re-contracting of the Arlington Valley 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, other energy and carbon prices, (ii) anticipated facility 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, 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, (viii) ability to realize the anticipated benefits of the Arlington Valley 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 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.
For more information, please contact:
Media Relations: Investor Relations:
Tricia Johnston Randy Mah
(780) 392-5817 (780) 392-5305 or (866) 896-4636 (toll-free)