Capstone Infrastructure Corporation
TSX : CSE
TSX : CSE.DB.A
TSX : CSE.PR.A
TSX : CPW.DB

Capstone Infrastructure Corporation

March 03, 2016 17:00 ET

Capstone Infrastructure Corporation Announces Fourth Quarter and Fiscal 2015 Results

TORONTO, ONTARIO--(Marketwired - March 3, 2016) - Capstone Infrastructure Corporation (TSX:CSE) (TSX:CSE.DB.A) (TSX:CSE.PR.A) (TSX:CPW.DB) (the "Corporation") today reported audited results for the fiscal year and fourth quarter ended December 31, 2015. The Corporation's 2015 Annual Report to Shareholders, including Management's Discussion and Analysis and audited consolidated financial statements, is available at www.capstoneinfrastructure.com and on SEDAR at www.sedar.com. All amounts are in Canadian dollars.

Financial Review
Quarter ended
Dec 31
Year ended
Dec 31
In millions of Canadian dollars or on a per share basis unless otherwise noted 2015 2014 Variance (%) 2015 2014 Variance
(%)
Revenue 89.2 116.7 (24) 345.0 441.6 (22)
Expenses 45.8 55.1 (17) 183.1 226.5 (19)
Net income 21.3 (1.2) n.m.f. 26.2 33.5 (22)
Adjusted EBITDA1,2 30.3 47.0 (36) 115.3 160.4 (28)
AFFO1,3 1.9 19.0 (90) 11.2 56.4 (80)
AFFO per share1,3 0.019 0.196 (90) 0.116 0.584 (80)
Dividends per share 0.075 0.075 -- 0.3 0.3 --
Payout ratio1 388% 38% n.m.f 260% 51% n.m.f.
1 "Adjusted EBITDA", "Adjusted Funds from Operations", "Adjusted Funds from Operations per Share" and "Payout Ratio" are non-GAAP financial measures and do not have any standardized meaning prescribed by International Financial Reporting Standards ("IFRS"). As a result, these measures may not be comparable to similar measures presented by other issuers. Definitions of each measure are provided on page 6 of Management's Discussion and Analysis with reconciliation to IFRS measures provided on page 7.
2 Adjusted EBITDA for investments in subsidiaries with non-controlling interests are included at Capstone's proportionate ownership interest.
3 For businesses that are not wholly owned, the cash generated by the business is only available to Capstone through periodic dividends. For these businesses, AFFO is equal to distributions received.

Operational and Strategic Highlights

Capstone reached a number of significant goals in 2015. These included the successful conversion of Cardinal to a dispatchable facility; the continued build-out of the wind development pipeline, with two new sites commissioned and considerable progress achieved on four others; securing a 15-year price support and fuel supply contract for Whitecourt; and concluding a CMA appeal at Bristol Water that contained tangible improvements to Ofwat's business plan. Financials were negatively affected by an absence of dividends from Bristol Water after the first quarter because of the CMA appeal process, lower than normal production in the wind and hydro portfolio, and reduced merchant power prices in Alberta. Expenses were also higher in the fourth quarter because of Capstone's strategic review, which culminated in the announcement of an Arrangement Agreement with iCON Infrastructure Partners III on January 20, 2016.

Fiscal 2015 Highlights

Consolidated revenue for the year decreased by 22%, or $96.6 million, attributable to the economics of Cardinal's new contract, lower merchant rates at Whitecourt and lower tariffs at Bristol Water. Favourable foreign currency appreciation at Bristol Water and contributions from new wind facilities at Saint-Philémon and Goulais, which reached COD in 2015, partially offset the declines.

Total expenses were lower by 19%, or $43.4 million, primarily due to lower production at Cardinal. This decrease was partially offset by higher expenses at Bristol Water primarily due to foreign exchange.

Adjusted EBITDA was 28%, or $45.1 million lower in 2015, representing the economics of Cardinal's new contract and a lower contribution from Bristol Water, mainly due to lower AMP6 water tariffs. In addition, atmospheric conditions led to lower than normal wind and hydro production, while merchant power prices remained reduced in Alberta. Adjusted Funds from Operations (AFFO) was $45,200, or 80%, lower in 2015 across all segments. The decrease was primarily due to lower Adjusted EBTIDA at Power, primarily Cardinal, as well as lower dividends from Bristol Water and Värmevärden.

Fourth Quarter Financial Highlights

During the fourth quarter of 2015, revenue decreased by $27.5 million or 24%, reflecting a decrease at the power segment, primarily because of economics of the new contract at Cardinal, lower power rates at Whitecourt, and a decline from normal levels of wind and hydro production, partially offset by contributions from new wind facilities. In addition, Bristol Water's revenue was reduced primarily due to lower regulated water tariffs during AMP6.

Expenses decreased by $9.3 million, or 17%, primarily because of lower expenses at the power segment from lower production at Cardinal, partially offset by expenses from the new wind facilities. Lower expenses of $1.8 million at Bristol Water, which were the result of cost containment efforts and reduced maintenance costs, which were partially offset by foreign exchange. Corporate costs were also higher, including those related to the strategic review.

Adjusted EBITDA in the quarter decreased by 36%, or $16.7 million, reflecting the factors noted above. Fourth quarter AFFO decreased by 90%, or $17.1 million, related to Adjusted EBITDA, particularly reduced dividends from Bristol Water.

Financial Position

As at December 31, 2015, the Corporation had unrestricted cash and cash equivalents of $74.4 million, including $43.7 million from the power segment and $25.5 million from Bristol Water, with the balance at the corporate level. Bristol Water also has $142.8 million of credit available to support its capital investment program. The Corporation has $26.8 million in total cash and cash equivalents available for general corporate purposes. As at December 31, 2015, the Corporation's debt-to-capitalization ratio was 71.7% on a fair value basis.

Subsequent events

Arrangement Agreement to Acquire Capstone by iCON Infrastructure

On January 20, 2016, Capstone announced a definitive arrangement agreement with Irving Infrastructure Corp., a subsidiary of iCON Infrastructure Partners III, L.P., a fund advised by London, UK-based iCON Infrastructure LLP, that provides for the acquisition of all issued and outstanding common shares of Capstone and Class B exchangeable units of Capstone's subsidiary MPT LTC Holding LP for $4.90 cash per share or unit, as applicable. The acquisition will be completed by way of a plan of arrangement under the British Columbia Business Corporations Act. The total equity value of the transaction is approximately $480 million.

As previously announced by Capstone on November 23, 2015, the Corporation undertook a strategic review and had retained RBC Capital Markets and TD Securities Inc. to assist management and the Board of Directors in reviewing and considering various alternatives involving the Corporation. Following this comprehensive review, Capstone entered into the Arrangement Agreement, which was unanimously approved by the Board of Directors of Capstone.

Both financial advisors to Capstone have rendered fairness opinions that, as at January 20, 2016, subject to certain assumptions, qualifications and limitations, the consideration to be received by the common shareholders and convertible debenture holders of Capstone pursuant to the Arrangement Agreement is fair, from a financial point of view, to Capstone's common shareholders and convertible debenture holders, respectively. The Board of Directors and executive officers of Capstone have entered into customary voting support agreements in favour of the transaction.

The Board of Directors of Capstone unanimously recommends that common shareholders, holders of Class B exchangeable units, and holders of convertible debentures vote in favour of the resolution approving the Arrangement at the special meeting of shareholders, Class B exchangeable unit holders and debenture holders to be called to approve the transaction.

Transaction Details

The completion of the transaction is subject to court approval and the approval of Capstone's securityholders. The transaction is also subject to customary closing conditions, including receipt of all regulatory approvals, including under the Competition Act (Canada) and the Investment Canada Act. The transaction is not subject to any financing condition. The Arrangement Agreement also provides for customary Board of Directors support and non-solicitation covenants. Under the Arrangement, it is proposed that Capstone's 6.50% convertible debentures due December 31, 2016 and Capstone Power Corp.'s 6.75% convertible debentures due December 31, 2017 will be settled in accordance with the agreements, subject to individual securityholder votes.

Capstone will hold a meeting of securityholders to consider the resolution approving the Arrangement on March 10, 2016, and if approved, expects to complete the transaction in April 2016 following receipt of regulatory approvals.

Dividend Declarations

The Board of Directors today declared a quarterly dividend on the Corporation's Cumulative Five-Year Rate Reset Preferred Shares, Series A (the "Preferred Shares") of $0.3125 per Preferred Share to be paid on or about April 29, 2016 to shareholders of record at the close of business on April 15, 2016. The dividend on the Preferred Shares covers the period from February 1, 2016 to April 30, 2016.

No dividends were declared in respect of the Corporation's common shareholders, nor for Class B Exchangeable Units of MPT LTC Holding LP, which is a subsidiary entity of the Corporation, in light of the arrangement agreement entered into with iCON Infrastructure Partners III, as noted in the preceding section, above. The Corporation did not issue common shares in connection with the reinvestment of dividends to shareholders enrolled in the Corporation's Dividend Reinvestment Plan, which has been suspended as a result of the Arrangement Agreement.

The dividends paid by the Corporation on its Preferred Shares are designated "eligible" dividends for the purposes of the Income Tax Act (Canada). An enhanced dividend tax credit applies to eligible dividends paid to Canadian residents.

About Capstone Infrastructure Corporation

Capstone's mission is to provide investors with an attractive total return from responsibly managed long-term investments in core infrastructure in Canada and internationally. The company's strategy is to develop, acquire and manage a portfolio of high quality utilities, power and transportation businesses, and public-private partnerships that operate in a regulated or contractually-defined environment and generate stable cash flow. Capstone currently has investments in utilities businesses in Europe and owns, operates and develops thermal and renewable power generation facilities in Canada with a total installed capacity of net 473 megawatts. Please visit www.capstoneinfrastructure.com for more information.

Notice to Readers

Certain of the statements contained within this document are forward-looking and reflect management's expectations regarding the future growth, results of operations, performance and business of Capstone Infrastructure Corporation (the "Corporation") based on information currently available to the Corporation. Forward-looking statements are provided for the purpose of presenting information about management's current expectations and plans relating to the future and readers are cautioned that such statements may not be appropriate for other purposes. These statements use forward-looking words, such as "anticipate", "continue", "could", "expect", "may", "will", "intend", "estimate", "plan", "believe" or other similar words. These statements are subject to known and unknown risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied by such statements and, accordingly, should not be read as guarantees of future performance or results. The forward-looking statements within this document are based on information currently available and what the Corporation currently believes are reasonable assumptions, including the material assumptions set out in the management's discussion and analysis of the results of operations and the financial condition of the Corporation ("MD&A") for the year ended December 31, 2015 under the heading "Results of Operations", as updated in subsequently filed MD&A of the Corporation (such documents are available under the Corporation's SEDAR profile at www.sedar.com).

Other potential material factors or assumptions that were applied in formulating the forward-looking statements contained herein include or relate to the following: that the business and economic conditions affecting the Corporation's operations will continue substantially in their current state, including, with respect to industry conditions, general levels of economic activity, regulations, weather, taxes and interest rates; that the preferred shares will remain outstanding and that dividends will continue to be paid on the preferred shares after completion of the plan of arrangement (the "Arrangement") and that the listing of the preferred shares will not be affected by the Arrangement; that the meeting of securityholders will occur on March 10, 2016; that the Arrangement will be completed in the second quarter of 2016, that there will be no material delays in the Corporation's wind development projects achieving commercial operation; that the Corporation's power infrastructure facilities will experience normal wind, hydrological and solar irradiation conditions, and ambient temperature and humidity levels; that there will be no material changes to the Corporation's facilities, equipment or contractual arrangements;
that there will be no material changes in the legislative, regulatory and operating framework for the Corporation's businesses; that there will be no material delays in obtaining required approvals for the Corporation's power infrastructure facilities, or Värmevärden; that there will be no material changes in rate orders or rate structures for Bristol Water; that there will be no material changes in environmental regulations for the power infrastructure facilities, Värmevärden or Bristol Water; that there will be no significant event occurring outside the ordinary course of the Corporation's businesses; the refinancing on similar terms of the Corporation's and its subsidiaries' various outstanding credit facilities and debt instruments which mature during the period in which the forward-looking statements relate; market prices for electricity in Ontario and the amount of hours Cardinal is dispatched; the price Whitecourt will receive for its electricity production considering the market price for electricity in Alberta, the impact of renewable energy credits, and Whitecourt's agreement with Millar Western, which includes sharing mechanisms regarding the price received for electricity sold by the facility; the re-contracting of the Power Purchase Agreement ("PPA") for Sechelt; that there will be no material change from the expected amount and timing of capital expenditures by Bristol Water; that there will be no material changes to the Swedish krona to Canadian dollar and UK pound sterling to Canadian dollar exchange rates; and that Bristol Water will operate and perform in a manner consistent with the regulatory assumptions underlying the Competition and Market Authority's ("CMA") final determination, including, among others: real and inflationary changes in Bristol Water's revenue, Bristol Water's expenses changing in line with inflation and efficiency measures, and capital investment, leakage, customer service standards and asset serviceability targets being achieved.

Although the Corporation believes that it has a reasonable basis for the expectations reflected in these forward-looking statements, actual results may differ from those suggested by the forward-looking statements for various reasons, including: risks related to the Corporation's securities (dividends on common shares and preferred shares are not guaranteed; volatile market price for the Corporation's securities; shareholder dilution; and convertible debentures credit risk, subordination and absence of covenant protection); risks related to the Corporation and its businesses (availability of debt and equity financing; default under credit agreements and debt instruments; geographic concentration; foreign currency exchange rates; acquisitions, development and integration; environmental, health and safety; changes in legislation and administrative policy; and reliance on key personnel); risks related to the Corporation's power infrastructure facilities (power purchase agreements; completion of the Corporation's wind development projects; operational performance; contract performance and reliance on suppliers; land tenure and related rights; environmental; and regulatory environment); risks related to Värmevärden (operational performance; fuel costs and availability; industrial and residential contracts; environmental; regulatory environment; and labour relations); risks related to Bristol Water (Ofwat price determinations; failure to deliver capital investment programs; economic conditions; operational performance; failure to deliver water leakage target; SIM and the serviceability assessment; pension plan obligations; regulatory environment; competition; seasonality and climate change; and labour relations); and risks related to completion of the Arrangement . For a comprehensive description of these risk factors, please refer to the "Risk Factors" section of the Corporation's Annual Information Form dated March 24, 2015, as supplemented by disclosure of risk factors contained in any subsequent annual information form, material change reports (except confidential material change reports), business acquisition reports, interim financial statements, interim managements' discussion and analysis and information circulars filed by the Corporation with the securities commissions or similar authorities in Canada (which are available under the Corporation's SEDAR profile at www.sedar.com). There can be no assurance that the Arrangement will occur. The proposed Arrangement is subject to various regulatory approvals, including approvals under the Competition Act (Canada) and Investment Canada Act, and the fulfillment of certain conditions, and there can be no assurance that any such approvals will be obtained and/or any such conditions will be met. The proposed Arrangement could be modified, restructured or terminated.

The assumptions, risks and uncertainties described above are not exhaustive and other events and risk factors could cause actual results to differ materially from the results and events discussed in the forward-looking statements . The forward-looking statements within this document reflect current expectations of the Corporation as at the date of this document and speak only as at the date of this document. Except as may be required by applicable law, the Corporation does not undertake any obligation to publicly update or revise any forward-looking statements.

This document is not an offer or invitation for the subscription or purchase of or a recommendation of securities. It does not take into account the investment objectives, financial situation and particular needs of any investors. Before making an investment in the Corporation, an investor or prospective investor should consider whether such an investment is appropriate to their particular investment needs, objectives and financial circumstances and consult an investment adviser if necessary.

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