Capstone Infrastructure Corporation
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Capstone Infrastructure Corporation

October 06, 2015 06:55 ET

Capstone Infrastructure Responds to CMA Final Determination for Bristol Water

Affirms Support of Dividend Policy for Capstone Shareholders

TORONTO, ONTARIO--(Marketwired - Oct. 6, 2015) - Capstone Infrastructure Corporation (TSX:CSE) (TSX:CSE.DB.A) (TSX:CSE.PR.A)(TSX:CPW.DB) (the "Corporation") has received the final binding determination from the UK Competition and Markets Authority (CMA), the body responsible for overseeing regulatory references and appeals, with respect to the challenge Bristol Water launched over the 2015 to 2020 asset management plan (AMP6) set by the UK economic regulator for the water sector, Ofwat.

Based on information available to Capstone, the key areas of contention were set as follows in the CMA's final determination:

Total expenditure

Assessment of total expenditure was £429 million over the five-year period from April 1, 2015 to March 31, 2020, consistent with the CMA's provisional findings and representing a £26 million increase in operating costs over the level set by Ofwat.

Enhancement capital expenditure

Enhancement expenditure of £89 million, an increase of almost £6million over the CMA's provisional findings and Ofwat's approved level of £91 million, albeit on a reduced scope. This figure could rise by £20 million if the Cheddar Treatment Works is approved following further study.

Cost of capital

Weighted average cost of capital was set at 3.67%, versus the CMA's provisional finding of 3.65% and Ofwat's determination of 3.6%.

Pay-as-you-go ratio

The pay-as-you-go (PAYG) ratio was set at 55.3%, consistent with the CMA's provisional findings and Ofwat's final determination.

Customer pricing

Average household bills were set at £160 per year (in 2012/2013 pounds sterling) for the remainder of AMP6, an increase over the CMA's provisional findings of £159 and Ofwat's final determination of £155.

The CMA review process did produce tangible improvements to Ofwat's final determination from December 2014. Specifically, Bristol Water was allotted an additional £22 million to run the business. Enhancement capital expenditure was reduced by £2 million, but projects were removed that would have cost £20 million. The net result of these changes is an improvement of £40 million. The CMA also agreed with Bristol Water's position on cost of capital and affirmed a small company premium, embedded debt costs and removed the "customer benefit" test. These meaningful and potentially precedent-setting gains confirm that rejecting Ofwat's final determination was the right course of action.

"We appreciate the effort by the CMA in responding to a number of issues related to Ofwat's final determination. We would have preferred a different result with respect to customer rates, which we believe are below the levels at which they should be," said Michael Bernstein, President and Chief Executive Officer. "The lower PAYG ratio results in lower bills and reduced near-term cash flows but does result in substantial rate base growth, which creates long-term value. Our preliminary analysis in working with Bristol Water management suggests that there are opportunities to maintain dividends from the company at a rate consistent with those received in AMP5."

Capstone is committed to maintaining the current dividend policy for Capstone shareholders and has set a goal for the end of fiscal 2017 to bring its payout ratio in line with its long-term target of between 70% and 80%.

A summary of the CMA determination can be accessed here: https://www.gov.uk/cma-cases/bristol-water-plc-price-determination.

Conference Call

Capstone will host a conference call to discuss the outcome at Bristol Water on Tuesday, October 6, 2015 at 8:30 a.m. EDT. From Canada or the US, dial +1-800-319-4610. From elsewhere, dial +1-604-638-5340. A replay of the call will be available until Tuesday, October 20, 2015.

About Capstone

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 468 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 and financial outlook 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 and financial outlook use forward-looking words, such as "anticipate", "continue", "could", "expect", "may", "will", "intend", "estimate", "plan", "believe" or other similar words. These statements and financial outlook 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 financial outlook and, accordingly, should not be read as guarantees of future performance or results. The forward-looking statements and financial outlook 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, 2014 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 and financial outlook 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 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 Bristol Water will implement rates prescribed in Ofwat's final determination while pursuing a more appropriate outcome through the Competition & Markets Authority; 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 and financial outlook 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 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 management's assumptions of the final regulatory outcome for AMP6, 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 and financial outlook, actual results may differ from those suggested by the forward-looking statements and financial outlook 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); and 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). 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 changes reports), business acquisition reports, interim financial statements, interim MD&A 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 and financial outlook. The forward-looking statements and financial outlook 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 and financial outlook.

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
    Aaron Boles
    Senior Vice President, Communications and Investor Relations
    (416) 649-1325
    aboles@capstoneinfra.com