Capital Power reports fourth quarter and year-end 2016 results

EDMONTON, AB--(Marketwired - February 21, 2017) - Capital Power Corporation (Capital Power, or the Company) (TSX: CPX) today released financial results for the fourth quarter and year ended December 31, 2016.

Net income attributable to shareholders in the fourth quarter of 2016 was $28 million and basic earnings per share attributable to common shareholders was $0.21 per share, compared with $35 million, or $0.29 per share, in the comparable period of 2015. Normalized earnings attributable to common shareholders in the fourth quarter of 2016, after adjusting for one-time items and fair value adjustments, were $26 million or $0.27 per share compared with $41 million or $0.42 per share in the fourth quarter of 2015.

Net cash flows from operating activities were $69 million in the fourth quarter of 2016 compared with $114 million in the fourth quarter of 2015. Funds from operations (FFO) were $75 million in the fourth quarter of 2016, compared to $125 million in the fourth quarter of 2015.

For the year ended December 31, 2016, net income attributable to shareholders was $111 million and basic earnings per share attributable to common shareholders was $0.91 per share compared with $90 million and $0.70 for the year ended December 31, 2015. For the year ended December 31, 2016, normalized earnings attributable to common shareholders were $117 million, or $1.22 per share, compared with $111 million, or $1.15 per share in 2015.

Net cash flows from operating activities were $375 million for the year ended December 31, 2016 compared with $419 million for the year ended December 31, 2015. FFO totaled $384 million in 2016 compared with $400 million in 2015.

"In 2016, Capital Power met its annual operating and financial targets, while continuing to deliver on its corporate priorities," said Brian Vaasjo, President and CEO of Capital Power. "We achieved these objectives despite challenging market and economic conditions that contributed to record-low spot power prices and unprecedented changes to the Alberta power market."

"Our facilities produced an average availability of 94% and we generated FFO of $384 million, which was consistent with our $380 to $430 million target range," continued Mr. Vaasjo. "Our FFO results reflected the one-time $20 million Sundance PPA settlement payment in the fourth quarter of 2016 to the Alberta Balancing Pool."

"We arrived at a satisfactory agreement with the Government of Alberta on fair compensation for the early retirement of our coal assets and settled the Sundance PPA dispute issue. The resolution of these two issues has removed the largest uncertainties the Company has ever faced. We can now move forward with confidence, knowing that developing generation opportunities in Alberta will continue to be predicated on market and economic signals."

"For 2017, we continue to focus on increasing our contracted cash flows to support a sustainable and growing dividend to our shareholders," added Mr. Vaasjo. "The completion of our Bloom Wind project in the third quarter and the commencement of annual coal compensation payments of $52 million per year, will add to our contracted cash flows and with a strong balance sheet and financial flexibility to fund growth, Capital Power is well-positioned to add both renewable and thermal assets in Canada and the United States."

Significant events

Project equity financing and completion of contract for output for Bloom Wind

Bloom Wind is a 178 megawatt (MW) facility in southwestern Kansas consisting of 54 3.3 MW turbines and is anticipated to cost $358 million (US$272 million). Construction of Bloom Wind commenced during the third quarter of 2016. Commercial operation of the facility is expected in the third quarter of 2017. Capital Power will operate Bloom Wind under a 10-year fixed price contract with Allianz Risk Transfer (rated AA- stable by Standard & Poor's), a subsidiary of Allianz SE, the worldwide insurance and asset management group, covering 100% of the project's output. Under the contract, which was executed on April 21, 2016, Capital Power will swap the market revenue of the project's generation for a fixed annual payment for a 10-year term. The agreement will secure long-term predictable revenues and mitigate generation volume uncertainty related to wind resources, allowing Bloom Wind to secure renewable energy tax equity financing and provide Capital Power the opportunity to complete its first wind development project in the growing U.S. renewables market.

On December 13, 2016, the Company reached an agreement with Goldman Sachs Alternative Energy Group (Project Investor) to fund an expected 65 to 70 percent of Bloom Wind costs through equity contributions in exchange for Class A shares of a subsidiary of the Company. These equity contributions are expected to begin upon the completion of the project and satisfaction of all conditions precedent, which is currently anticipated to occur in the third quarter of 2017. The Project Investor is entitled to the majority of income and tax benefits from the project until the Project Investor achieves an agreed upon target rate of return. Subsequent to this date, the structure "flips" and the Company is entitled to the majority of income, cash flows and tax benefits, while the Project Investor's equity investment will be accounted for as a non-controlling interest. Prior to the Project Investor achieving their target rate of return, their interest will be accounted for as tax equity financing within loans and borrowings.

Termination of the Sundance PPA

On March 24, 2016, Capital Power notified the Balancing Pool of the Company's decision to terminate its role as Buyer of the Sundance PPA. The Company recorded a pre-tax non-cash loss of $53 million ($46 million post-tax) with respect to the de-recognition of the Sundance PPA intangible asset. Effective March 24, 2016, the Company also de-designated certain energy cash flow hedges related to forecasted transactions no longer expected to occur as a result of the Sundance PPA termination, which resulted in the reclassification of unrealized gains of $5 million ($4 million post-tax) from other comprehensive income (loss) to net income. No hedge ineffectiveness resulted from the de-designation of the cash flow hedges.

During the third quarter of 2016, the Government of Alberta commenced legal action that sought to retroactively amend and restate certain power purchase arrangements, including the Sundance PPA, and prevent the Balancing Pool from accepting Capital Power's termination of its role as Buyer of the Sundance PPA. On November 24, 2016, the Government of Alberta agreed to discontinue its legal action against Capital Power and to arrange for the Balancing Pool to accept Capital Power's termination of its role as a Buyer of the Sundance PPA in accordance with the terms of the Sundance PPA. In consideration of these actions, Capital Power and its syndicate partners agreed to pay the Balancing Pool $39 million, of which Capital Power's portion is $20 million ($15 million post-tax).

Off-coal agreement

On November 24, 2016, the Company announced it had reached an agreement with the Government of Alberta related to the transition away from coal-fired generation in Alberta by 2030. As compensation for the capital that the Company invested in coal generating assets that will be stranded effective December 31, 2030, Capital Power will receive cash payments from the Province of Alberta of $52 million annually for 14 years, commencing July 31, 2017 through to July 31, 2030, for a total of $734 million. Capital Power has agreed to continue to participate in the Alberta electricity market, support the local communities surrounding the coal facilities through 2030, and fulfill its pension and other commitments to employees. This settlement also recognizes the potential for extending the economic lives of certain assets through conversion to natural gas.

Alberta electricity market design

On November 23, 2016, the Government of Alberta announced the transition of Alberta's electricity market from an energy-only market to a capacity market, for which the framework is expected to be in place by 2021. The Government of Alberta has committed to ensuring that existing investments will be treated fairly, and that the new market framework will continue to promote a level playing field between existing and potential new capacity. Design and implementation activities will be undertaken in 2017 and 2018, with the Alberta Electric System Operator (AESO) currently targeting having the first capacity auction in 2019 for delivery in 2021.

Canadian federal regulation of natural gas generation

On November 21, 2016, the Government of Canada announced its plan to phase-out traditional coal-fired electricity by 2030, and to establish emission standards for natural gas-fired turbines, including new boilers, existing boilers, and existing coal boilers converted to natural gas. Under the proposal, coal boilers that are converted to natural gas would be subject to an interim emissions standard that would apply for the earlier of 15 years, or 2045, after which time the units would be required to meet the emissions standards for new generation.

The implementation of the phase-out and finalization of the natural gas regulations will be the subject of industry consultations expected to commence in 2017. At this time, it is expected that publication of the natural gas regulation in Canada Gazette Part I will be in late 2017, with final publication in Canada Gazette Part II in late 2018.

Updates to Alberta's Climate Leadership Plan

In late September 2016, the Government of Alberta initiated formal consultations regarding the performance standard and carbon pricing framework that will apply, effective January 1, 2018, to facilities that are currently subject to the Specified Gas Emitters Regulation (SGER). The standard and pricing framework will be reflected in a new Carbon Competitiveness Regulation that will replace the current SGER regulation. The Company expects that the performance standard for the electricity sector will be consistent with the emissions performance of a combined-cycle natural gas-fired facility in Alberta, with specific details to be developed through consultation.

Alberta renewable electricity procurement

On January 26, 2016, the Government of Alberta tasked the AESO to develop and implement a plan to bring on new renewable electricity generation capacity to the grid by 2030 in connection with the Climate Leadership Plan. The AESO undertook a process to receive industry perspectives regarding various elements of the Renewable Electricity Program (REP), and provided its recommendations regarding the REP to the Government of Alberta on May 31, 2016. On September 14, 2016, the Government of Alberta confirmed a firm target of achieving 30% of Alberta's electricity use by 2030 from renewable energy sources, and announced that the Government of Alberta would support 5000 MW of additional renewable capacity to help achieve that target. The AESO has provided a timeline for the first REP auction in 2017 with a request for proposals expected in the fourth quarter of 2017 with winning bids required to be operational in 2019. Financial support for projects funded through the first REP auction will reflect a contract-for-differences approach, and be for a 20-year term. Future REP auctions may be structured differently with respect to the form and amount of financial support provided, and contract length.

Preferred share offering

On October 4, 2016, the Company issued 8 million Cumulative Minimum Rate Reset Preference Shares, Series 7 (Series 7 Shares) priced at $25.00 per share for gross proceeds of $200 million less issue costs of $5 million on a bought deal basis with a syndicate of underwriters. The preferred shares will pay fixed cumulative dividends of $1.50 per share per annum, yielding 6.00% per annum, payable on the last business day of March, June, September and December of each year, as and when declared by the Board of Directors of Capital Power, for the initial period ending December 31, 2021. The dividend rate will be reset on December 31, 2021 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield and 5.26%, provided that in any event such rate shall not be less than 6.00%. The Series 7 Shares are redeemable by Capital Power, at its option, on December 31, 2021 and every five years thereafter at a value of $25.00 per share.

Holders of the Series 7 Shares will have the right to convert all or any part of their shares into Cumulative Floating Rate Preference Shares, Series 8 (Series 8 Shares), subject to certain conditions, on December 31, 2021 and every five years thereafter. Holders of the Series 8 Shares will be entitled to receive a cumulative quarterly floating dividend at a rate equal to the sum of the then 90-day Government of Canada Treasury Bill yield plus 5.26%, as and when declared by the Board of Directors of Capital Power. The Series 8 Shares would be redeemable by Capital Power, at its option, on December 31, 2026 and December 31 of every fifth year thereafter at a value of $25.00 per share. The Series 8 shares would also be redeemable by Capital Power, at its option, on any date after December 31, 2021, excluding December 31 of every fifth year, at a value of $25.50 per share.

$160 million private placement debt financing

On September 13, 2016, the Company issued a $160 million, 10-year unsecured senior note to Prudential Capital Group. The note bears an annual interest rate of 3.85%, payable semi-annually, and matures in September 2026. The net proceeds of the offering were used to repay amounts owing under credit facilities and for general corporate purposes.

K2 Wind partnership

On August 9, 2016, a consortium composed of Axium Infrastructure, Alberta Teachers' Retirement Fund Board, and Manulife Financial Corporation acquired Samsung Renewable Energy's one-third interest in K2 Wind. There is no change to the remaining interest in K2 Wind, which is still held equally by Pattern Energy Group Inc. and the Company.

Dividend increase

On July 25, 2016, the Company announced that its Board of Directors approved a 6.8% increase in the annual dividend for holders of its common shares, from $1.46 per common share to $1.56 per common share. This increased common dividend commenced with the third quarter 2016 quarterly dividend paid on October 31, 2016 to shareholders of record at the close of business on September 30, 2016.

Preferred Shares (Series 1) dividend rate reset

On February 18, 2016, the Board of Directors of Capital Power declared a quarterly dividend of $0.19125 per share on the Company's Cumulative 5-Year Rate Reset Preference Shares, Series 1 (Series 1 Shares). This quarterly dividend was paid on March 31, 2016. The Annual Fixed Dividend Rate for the Series 1 Shares for the next five-year period was reset from 4.60% to 3.06% on December 31, 2015 at a rate equal to the sum of the then Government of Canada bond yield and 2.17%. The Annual Fixed Dividend Rate will be next reset on December 31, 2020 and every five years thereafter.

Subsequent events

Appointments to the Board of Directors

On February 17, 2017, the Capital Power Board of Directors approved the appointment of Keith Trent and Kate Stevenson to the Board of Directors. The appointments will be effective April 3, 2017.

Acquisition of thermal facilities

On February 21, 2017, the Company announced that it has entered into an agreement to acquire the thermal power business of Veresen Inc., consisting of two gas-fired and two waste-heat generation facilities.

Under the terms of the agreement, Capital Power will acquire 284 MW of generation from two natural gas-fired power facilities in Ontario consisting of the 84 MW East Windsor Cogeneration Centre (East Windsor) and a 50% interest in the 400 MW York Energy Centre (York Energy) and will operate both facilities. Both East Windsor and York Energy are under long-term power purchase agreements, with the A rated Ontario Independent Electricity System Operator, with original terms expiring in 2029 and 2032, respectively. Both facilities earn revenue through fixed capacity payments partly indexed to inflation and are compensated for operations and maintenance, and fuel (commodity and transportation) as well as start-up costs. Additionally, East Windsor is under a long-term steam supply agreement with a BBB rated third party.

The transaction also includes 10 MW of zero-emissions waste-heat generation from two facilities (5 MW each) located at Westcoast Energy's BC Gas Pipeline compressor stations in Savona and 150 Mile House, British Columbia. The waste heat facilities are under 20-year Electricity Purchase Agreements (EPAs), with AA rated BC Hydro, with original terms expiring in 2028. The EPAs provide for partial inflation indexation as well as premium pricing under peak load hours. A third party provides operations and maintenance services for the assets under a long-term agreement.

The purchase price for the acquisition is $225 million in total cash consideration, subject to working capital adjustments and other closing adjustments, and the assumption of $275 million of project level debt (on a proportionate basis). Capital Power expects to finance the transaction through existing cash and its credit facilities. The transaction is expected to close in the second quarter of 2017, subject to regulatory approvals and satisfaction of closing conditions.

Analyst conference call and webcast

Capital Power will be hosting a conference call and live webcast with analysts on February 21, 2017 at 9:00 am (MST) to discuss the fourth quarter and 2016 year-end 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) adjusted EBITDA, (ii) funds from operations, (iii) normalized earnings attributable to common shareholders, and (iv) 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. Reconciliations of adjusted EBITDA to net income (loss), funds from operations to net cash flows from operating activities and normalized earnings attributable to common shareholders to net income (loss) attributable to shareholders of the Company are contained in the Company's Management's Discussion and Analysis, prepared as of February 17, 2017, for the year ended December 31, 2016 which is available under the Company's profile on SEDAR at www.SEDAR.com.

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 expectations regarding: (i) the transition to and structure of the proposed capacity market in Alberta, (ii) growth opportunities that may come to the Company as a result of new renewable electricity generation capacity, (iii) future contracted cash flows, dividend growth and business growth, (iv) financing plans for the acquisition of the thermal facilities, (v) closing of the acquisition of the thermal facilities, and (vi) timing of the closing date of the acquisition of the thermal facilities.

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 and other energy 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) acquisitions and 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, prepared as of February 17, 2017, 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.