Capstone Infrastructure Corporation
TSX : CSE.PR.A

Capstone Infrastructure Corporation

November 10, 2016 17:51 ET

Capstone Infrastructure Corporation Announces Third Quarter 2016 Results

TORONTO, ONTARIO--(Marketwired - Nov. 10, 2016) - Capstone Infrastructure Corporation (TSX:CSE.PR.A) today announced results for the 2016 fiscal year third quarter ended September 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

In millions of Canadian dollars or on a per share basis unless otherwise noted Quarter ended Sep 30 Variance (%) Nine months ended Sep 30 Variance (%)
2016 2015 2016 2015
Revenue 113.6 84.1 35.0 285.2 255.8 11.5
Net income (18.8) 5.0 (474.0) (37.1) 4.9 (857.4)
Adjusted EBITDA1,2 52.3 26.7 96.2 94.4 85.0 11.1
AFFO1,3 25.7 1.9 1,217.3 18.3 9.3 96.0
(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

Capstone's power development group achieved commercial operations ("COD") on three wind development projects within the first nine months of 2016. The three projects are Grey Highlands ZEP (February 26, 2016), Ganaraska (May 6, 2016) and Grey Highlands Clean (September 21, 2016), which collectively add 46 megawatts to Capstone's power portfolio under management. All three projects were completed within budget and on schedule.

The Cardinal gas facility experienced high demand during the quarter contributing 82.5 GWh of power, a 72% increase over the same period in 2015 and the highest power producing quarter since Cardinal converted to a peaking facility on January 1, 2015.

On July 4, 2016, Capstone announced to preferred shareholders the applicable dividend rates for its cumulative five-year rate reset preferred shares effective July 31, 2016. Shareholders will receive a 3.271% quarterly cumulative preferential cash dividend following declaration by the Board of Directors of Capstone.

Financial Highlights

Adjusted Earnings before Interest, Taxation, Depreciation and Amortization (AEBITDA) in the third quarter was $52.3 million, an increase of $25.7 million from the same period in 2015 and $94.4 million year-to-date, an increase of $9.5 million. Third quarter Adjusted Funds from Operations (AFFO) was $25.7 million, an increase of $23.7 million and year-to-date AFFO was $18.3 million an increase of $9.0 million from the same period in 2015. The increases were mainly due to higher power segment results, primarily attributable to net OEFC proceeds awarded for retroactive payments to Cardinal and the hydro facilities as well as contributions from four new wind facilities and favourable wind and hydrology conditions.

Excluding costs related to the transaction with iCON Infrastructure Partners III, LP ("iCON III") transaction related costs, fees associated with staff separation and the lump sum payment received from the net OEFC proceeds, AEBITDA in the third quarter was $29.0 million, an increase of $2.3 million from the same period in 2015 and year- to-date AEBITDA was $91.5 million, an increase of $6.5 million over the same period last year. Third quarter AFFO excluding one-time items was $2.3 million, an increase of $0.4 million and year-to-date AFFO was $15.4 million, an increase of $6.0 million compared to the same period in 2015. Removing these one-time items from the quarterly financial results reveals a solid portfolio of performing power and infrastructure assets with a sustained focus on delivering growth for our stakeholders.

Revenue for the third quarter was $113.6 million, an increase of 35.0% over the same period last year and year-to- date revenue increased 11.5% compared to the same period last year. Revenue was higher for nearly all of Capstone's power assets and lower for Whitecourt and Bristol Water. Higher power segment results were primarily attributable to net OEFC proceeds, contributions from the Grey Highlands ZEP and Ganaraska operations partially offset by lower Bristol Water revenue due to lower regulated water tariffs and unfavourable foreign currency translation.

Expenses for the third quarter were $52.4 million, representing an increase of 17.3% over the same period last year and year-to-date expenses increased 22.3% compared to the same period last year. The increase in operating expenses was due to higher power segment expenses relating to the Cardinal fuel expenses for supplier commitments relating to the OEFC settlement partially offset primarily by lower operating expenses at Bristol Water due to foreign exchange translation.

Financial Position

As at September 30, 2016, the Corporation had unrestricted cash and cash equivalents of $57.9 million, including $24.5 million from the power segment and $22.0 million from Bristol Water, with the remaining balance at the corporate level. Bristol Water also had $119.5 million of credit available to support its capital investment program. The Corporation has $11.5 million in total cash and cash equivalents available for general corporate purposes.

Capstone's annual goodwill impairment test relating to its investment in Bristol Water resulted in a $58.0 million goodwill impairment charge during the period ended September 30, 2016 as a result of recent market pricing information. For context, Capstone's recoverable amount of $198.0 million exceeds its original investment of $144.5 million for 50% of Bristol Water.

On September 2, 2016, Capstone used its portion of the proceeds from the June 30, 2016 Värmevärden refinancing to repay 160 million SEK of the promissory note held by iCON III. The interest-free promissory note has been reduced from $316.2 million to $291.2 million.

On July 8, 2016, Capstone entered into a credit agreement whereby lenders will 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.

On August 26, 2016 the GHG construction facility converted to a term facility maturing on August 26, 2021 which has regular principal and interest payments fully amortizing over the remaining term and bears interest at a fixed, annual rate of 3.08%.

Subsequent Events

The Settlers Landing wind project located in the City of the Kawartha Lakes, Ontario successfully completed the ERT appeal process. This was the final approval required for the project which will now go ahead as an 8 megawatt project. Construction has now commenced and COD is expected in early 2017.

On March 12, 2015, the Ontario Superior Court of Justice determined that the OEFC had not properly calculated the price paid for electricity produced under its power purchase agreements with Cardinal, Wawatay and Dryden, and a number of other power producers in Canada. The OEFC filed an appeal which was dismissed on April 19, 2016. During the third quarter, the OEFC brought legal motions to defer making payment, which were denied by the Court of Appeal on September 19, 2016. Capstone received the payment on October 21, 2016.

Capstone's Snowy Ridge wind project completed construction during the third quarter and achieved COD on October 5, 2016. This is the fourth development project Capstone has completed within the first ten months of 2016.

Dividend Declaration

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 January 31, 2017 to shareholders of record at the close of business on January 13, 2017. The dividend on the Preferred Shares covers the period from October 31, 2016 to January 30, 2017.

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 505 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, Värmevärden or Bristol Water; 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