Capstone Infrastructure Corporation
TSX : CSE.PR.A

Capstone Infrastructure Corporation

August 04, 2016 16:36 ET

Capstone Infrastructure Corporation Announces Second Quarter 2016 Results

TORONTO, ONTARIO--(Marketwired - Aug. 4, 2016) - Capstone Infrastructure Corporation (TSX:CSE.PR.A) today announced results for the 2016 fiscal year second quarter ended June 30, 2016. The Corporation's Management's Discussion and Analysis and unaudited consolidated financial statements are available at www.capstoneinfrastructure.com and on SEDAR at www.sedar.com. All amounts are in Canadian dollars.

Financial Review
Quarter ended Jun 30
In millions of Canadian dollars or on a per share basis unless otherwise noted 2016 2015 Variance (%)
Revenue 83.1 81.4 2.1
Net income (20.8 ) (5.6 ) 274.7
Adjusted EBITDA1,2 12.2 28.8 (57.6 )
AFFO1,3 (9.6 ) 0.9 (1,131.8 )
(1) "Adjusted EBITDA" and "Adjusted Funds from Operations" 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 4 of Management's Discussion and Analysis with reconciliation to IFRS measures provided on page 5.
(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

On April 29, 2016, Capstone completed the previously announced arrangement agreement under which Irving Infrastructure Corp ("Irving"), a subsidiary of iCON Infrastructure Partners III ("iCON III"), a fund managed by London, UK-based iCON Infrastructure LLP ("iCON"), acquired all the issued and outstanding common shares of Capstone and all the Class B exchangeable units of Capstone's subsidiary MPT LTC Holding LP ("Class B units") for $4.90 cash per share or unit, as applicable. Pursuant to the arrangement agreement, the outstanding 2016 convertible debentures were redeemed by Capstone and the 2017 convertible debentures were converted into common shares prior to being acquired by Irving. The transaction was subsequently approved at special meetings of security holders held on March 10 and March 17, 2016. Upon completion, the common shares, Class B units and 2016 and 2017 convertible debentures were delisted from the Toronto Stock Exchange and ceased trading.

During the second quarter, Capstone continued to make strong progress with its wind energy projects. The company's 17.6 megawatt Ganaraska project located in Ontario achieved commercial operation on May 6, 2016 and builds on the momentum of the 10-megawatt Grey Highlands ZEP wind project which went into operation in February 2016.

On May 25, 2016, twelve months' written notice of termination was given to Agbar, Capstone's partner in Bristol Water, in accordance with the O&M agreement.

On June 30, 2016, Värmevärden, a Swedish based district heating company which Capstone owns a 33.3% interest in, completed a third party financing which was used to repay Värmevärden's senior secured bonds. The net excess proceeds, including operating cash flows generated from the business for a total of $24.8 million, was received by Capstone in the form of a reduction in pre-existing shareholder loan and accrued interest.

Second Quarter Financial Highlights

Adjusted Earnings before Interest, Taxation, Depreciation and Amortization (EBITDA) in the second quarter was $12.2 million, a decrease of $16.6 million from the same period in 2015. Second quarter Adjusted Funds from Operations (AFFO) was ($9.6 million), a decrease of $10.5 million. The decreases were primarily due to professional fees and higher staff costs resulting from the iCON III acquisition of Capstone.

Capstone's quarterly Adjusted EBITDA and AFFO were largely impacted by one-time costs of $14.7 million associated with iCON's acquisition of Capstone, such as professional fees and related staff costs. In addition, Capstone accrued $7.0 million for Bristol Water's O&M termination costs. Excluding these one-time costs, Adjusted EBITDA increased by $5.1 million for 2016 and AFFO increased by $4.2 million.

Revenue for the second quarter was $83.1 million, an increase of 2.1% over the same period last year. Revenue was higher for nearly all of Capstone's power assets and lower for Bristol Water. Higher power segment results were primarily attributable to Capstone's operating wind and hydro facilities, which generally experienced more favourable wind and hydrology conditions, resulting in higher revenue. In addition, Grey Highlands ZEP and Ganaraska contributed favourably since they became operational in 2016 while Goulais, which became operational in May 2015, contributed for a full quarter in 2016. This was partially offset by lower Bristol Water revenue due to lower regulated water tariffs since April 1, 2015.

Expenses for the second quarter were $71.5 million, representing an increase of 63.6% over the same period last year. Operating expenses were higher primarily due to Bristol Water which included an accrual for the termination costs under the O&M agreement. Tower repairs at the Ferndale wind project site also contributed to the higher costs. Administrative expenses increased in the quarter due primarily to higher staff costs resulting from the iCON III acquisition. Project development costs also increased as a result of professional fees for the iCON III acquisition as well as costs to advance the Ganaraska and Grey Highlands wind development projects.

Financial Position

As at June 30, 2016, the Corporation had unrestricted cash and cash equivalents of $78.0 million, including $23.3 million from the power segment and $22.0 million from Bristol Water, with the remaining balance at the corporate level. Bristol Water also had $120.6 million of credit available to support its capital investment program. The Corporation has $32.7 million in total cash and cash equivalents available for general corporate purposes.

Subsequent Events

Preferred Shares Dividend Rate Reset

On July 4, 2016, Capstone announced to preferred shareholders the applicable fixed and floating dividend rates for its cumulative five-year rate reset preferred shares, which took effect on July 31, 2016. Shareholders were given the option of choosing Series A fixed rate shares or Series B floating rate shares by July 15, 2016. Shareholders chose to retain Series A shares at the fixed rate and all Series A shareholders will receive a 3.271% quarterly cumulative preferential cash dividends following declaration by the Board of Directors of Capstone.

Snowy Ridge Wind Project

Building on the successful start of its Ganaraska project in the second quarter, on July 8, 2016, Capstone entered into a credit agreement to provide up-to $35.8 million for the construction of its Snowy Ridge wind project, a 10-megawatt wind facility located in the Kawartha Lakes area of Ontario.

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 $0.2044 per Preferred Share to be paid on or about October 31, 2016 to shareholders of record at the close of business on October 14, 2016. The dividend on the Preferred Shares covers the period from July 31, 2016 to October 30, 2016.

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 482 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, and include, among other things, statements found in "Results of Operations" and "Financial Position Review". 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 headings "Changes in the Business", "Results of Operations" and "Financial Position Review", 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; that there will be no further 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 that Cardinal is dispatched; the price that 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 preferred shares are not guaranteed; volatile market price for the Corporation's preferred shares; and 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 (market price for electricity; 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); and risks related to Bristol Water (Ofwat price determinations; failure to deliver capital investment programs; economic conditions; operational performance; outcome incentives; failure to deliver water leakage target; service incentive mechanism ("SIM") and the serviceability assessment; pension plan obligations; regulatory environment; competition; seasonality and climate change; and labour relations).

For a comprehensive description of these risk factors, please refer to the "Risk Factors" section of the Corporation's Annual Information Form dated March 29, 2016, 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 management's 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).

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.

Contact Information

  • Capstone Infrastructure Corporation
    Michael Smerdon
    Executive Vice President and Chief Financial Officer
    (416) 649-1300
    msmerdon@capstoneinfra.com