CPX:CC - Capital Power reports strong second quarter results increases its 2022 financial guidance and announces a 6% common share dividend increase

EDMONTON, Alberta, Aug. 02, 2022 (GLOBE NEWSWIRE) -- Capital Power Corporation (TSX: CPX) today released financial results for the quarter ended June 30, 2022.

Financial Highlights

• Generated net cash flows from operating activities of $108 million and adjusted funds from operations (AFFO) of $180 million
• Generated net income of $77 million and adjusted EBITDA of $319 million
• Increased 2022 annual financial guidance for adjusted EBITDA to $1,240 million to $1,280 million (original guidance of $1,110 million to $1,160 million) and AFFO to $700 million to $740 million (original guidance of $580 million to $630 million)
• Increased the annual common share dividend by 6% to $2.32 per year representing the ninth consecutive annual increase

Strategic Highlights

• Announced the acquisition of the Midland Cogeneration Venture (Midland Cogen) facility, the largest gas-fired cogeneration facility in North America, where Capital Power and Manulife Investment Management will each own a 50% interest for a total purchase price of $1,163 million (US$894 million)
• Increased annual dividend growth guidance to 6% through to 2025 from the previous 5%
• Partnered with Mitsubishi Heavy Industries Group and Kiewit Energy Group on a front-end engineering and design (FEED) study for the Genesee carbon capture and sequestration (CCS) Project advancing the commercial application of CCS technology at its Genesee Generating Station in Alberta
• Executed a 4.5-year contract renewal for the Island Generation facility in British Columbia

“Second quarter financial results continue to exceed management’s expectations,” said Brian Vaasjo, President and CEO of Capital Power. “Higher generation and strong Alberta power prices averaging $106 per megawatt hour along with outstanding performance across the fleet led to exceptional performance in the first half of the year. Based on this performance and the positive outlook for the remainder of the year, we have increased our 2022 financial guidance with revised guidance ranges significantly exceeding the top end of our original targets.”

“We continue to execute on our strategy of acquiring mid-life contracted natural gas assets that are strategically positioned within their power markets by announcing an agreement to acquire a 50% interest in the Midland Cogen facility with our partner, Manulife Investment Management,” continued Mr. Vaasjo. “The transaction provides immediate AFFO accretion and is supported by highly contracted cash flows to 2030 and 2035. Located in Michigan, it is the largest gas-fired cogeneration facility in North America and combined with its excellent reliability history and operating flexibility, Midland Cogen is a critical asset to support grid reliability during the transition to renewables and is extremely well-positioned for recontracting beyond 2030.”

“I am pleased to announce the Board of Directors has approved a 6% per common share dividend increase effective for the third quarter 2022 dividend payment. As previously announced, we increased our annual dividend guidance to 2025, from 5% to 6% on the strength of contracted cash flows from the acquisition of the Midland Cogen facility. The growing dividend is forecasted to be below our long-term AFFO payout ratio target of 45% to 55% through 2025,” stated Mr. Vaasjo.

Operational and Financial Highlights ¹

1. The operational and financial highlights in this press release should be read in conjunction with the Management’s Discussion and Analysis and the unaudited condensed interim financial statements for the six months ended June 30, 2022.
2. Earnings before net finance expense, income tax expense, depreciation and amortization, impairments, foreign exchange gains or losses, finance expense and depreciation expense from joint venture interests, gains or losses on disposals and unrealized changes in fair value of commodity derivatives and emissions credits (adjusted EBITDA), normalized earnings attributable to common shareholders and adjusted funds from operations (AFFO) are used as non-GAAP financial measures by the Company. The Company also uses normalized earnings per share and AFFO per share which are non-GAAP ratios. These measures and ratios do not have standardized meanings under GAAP and are, therefore, unlikely to be comparable to similar measures used by other enterprises. See Non-GAAP Financial Measures and Ratios.
3. Includes depreciation and amortization for the three months ended June 30, 2022 and 2021 of $139 million and $132 million, respectively, and for the six months ended June 30, 2022 and 2021 of $281 million and $269 million, respectively. Forecasted depreciation and amortization for the remainder of 2022 is $135 million and $137 million for the third and fourth quarters, respectively.

Significant Events

Advancement of carbon capture project at Genesee

On June 27, 2022, the Company announced it had partnered with Mitsubishi Heavy Industries Group and Kiewit Energy Group on a FEED study for the Genesee CCS Project advancing the commercial application of CCS technology at its Genesee Generating Station in Alberta.

Appointment to the Board of Directors

Effective June 1, 2022, Gary Bosgoed was appointed to the Company’s Board of Directors. With this appointment, Capital Power’s Board of Directors consists of 10 directors, including 40% women and 30% with diversity beyond gender.

Executed 4.5-year contract renewal for Island Generation

On May 16, 2022, the Company announced the execution of a 4.5-year Electricity Purchase Agreement (EPA) through October 2026 for its Island Generation facility with BC Hydro. The EPA is subject to regulatory approval by the British Columbia Utilities Commission. The terms of the 4.5-year EPA are consistent with the Company’s expectations when it recorded a $52 million impairment in 2021.

Subsequent Events

Dividend increase

On July 29, 2022, the Company’s Board of Directors approved an increase of 6% in the annual dividend for holders of its common shares, from $2.19 per common share to $2.32 per common share. This increased common share dividend will commence with the third quarter 2022 quarterly dividend payment on October 31, 2022 to shareholders of record at the close of business on September 30, 2022.

Acquisition of Midland Cogeneration Venture

On July 12, 2022, Capital Power announced it had partnered with Manulife Investment Management on behalf of the Manulife Infrastructure Fund II and its affiliates to acquire 100% of the interests in MCV Holding Company, which owns Midland Cogen, a 1,633 MW natural gas combined-cycle cogeneration facility. Midland Cogen is being acquired from OMERS Infrastructure Management Inc and its co-investors for a total purchase price of $1,163 million (US$894 million), including the assumption of $678 million (US$521 million) of project level debt. The transaction is expected to close in the third quarter of 2022, subject to regulatory approvals and other customary closing conditions.

Located in Michigan, Midland Cogen, is the largest gas-fired cogeneration facility in North America, is a critical asset to support grid reliability during the transition to renewables and is well-positioned, given anticipated market conditions, for recontracting beyond 2030. Capital Power and Manulife Investment Management will each own a 50% interest in MCV Holding Company and will each contribute approximately $242 million (US$186 million) subject to working capital and other closing adjustments. Capital Power will finance its share of the transaction using cash on hand and its existing credit facilities. Capital Power will be responsible for operations and maintenance and asset management for which it will receive an annual management fee.

The acquisition supports Capital Power’s strategy of acquiring mid-life contracted natural gas assets that are strategically positioned within their power markets. Acquisition highlights include:

• Capital Power’s share of expected average adjusted EBITDA of US$59 million per year (ranging from US$85 million in 2023 and declining to US$45 million in 2027).
• based on the expected financing, the 5-year average accretion for Capital Power’s AFFO is expected to be US$0.30 per share, reflecting a 7% increase, or an average AFFO of US$35 million per year during the years 2023-2027.
• power purchase agreement with Consumers Energy (rated Baa1/A-/A-) for 1,240 MW of capacity to 2030
• steam and electricity purchase agreement with Corteva Agriscience (rated NA/A-/A) and Dow Silicones (rated Baa2/BBB/BBB+) to 2035.
• approximately 15% (243 MW) of uncontracted capacity is available to sell into the MISO Zone 7 market
• located on 1,200 acres leased from Consumers Energy. Current layout and additional space allow for additional turbines, battery installation or a hybrid opportunity.

Analyst conference call and webcast

Capital Power will be hosting a conference call and live webcast with analysts on August 2, 2022 at 9:00 am (MT) to discuss the second quarter financial results. The conference call dial-in number is:

(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 and Ratios

The Company uses (i) adjusted EBITDA, (ii) AFFO, and (iii) normalized earnings attributable to common shareholders as financial performance measures.

The Company also uses AFFO per share and normalized earnings per share as performance measures. These measures are non-GAAP ratios determined by applying AFFO and normalized earnings attributable to common shareholders, respectively, to the weighted average number of common shares used in the calculation of basic and diluted earnings per share.

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.

Adjusted EBITDA

Capital Power uses adjusted EBITDA to measure the operating performance of facilities and categories of facilities from period to period. Management believes that a measure of facility operating performance is more meaningful if results not related to facility operations such as impairments, foreign exchange gains or losses and gains or losses on disposals are excluded from the adjusted EBITDA measure.

A reconciliation of adjusted EBITDA to net income (loss) is as follows:

1. Total income from joint venture as per the Company’s consolidated statements of income.
   
   

Adjusted funds from operations and adjusted funds from operations per share

AFFO and AFFO per share are measures of the Company’s ability to generate cash from its current operating activities to fund growth capital expenditures, the repayment of debt and the payment of common share dividends.

AFFO represents net cash flows from operating activities adjusted to:

• remove timing impacts of cash receipts and payments that may impact period-to-period comparability which include deductions for net finance expense and current income tax expense, the removal of deductions for interest paid and income taxes paid and removing changes in operating working capital,
• include the Company’s share of the AFFO of its joint venture interests and exclude distributions received from the Company’s joint venture interests which are calculated after the effect of non-operating activity joint venture debt payments,
• include cash from off-coal compensation that will be received annually,
• remove the tax equity financing project investors’ shares of AFFO associated with assets under tax equity financing structures so only the Company’s share is reflected in the overall metric,
• deduct sustaining capital expenditures and preferred share dividends,
• exclude the impact of fair value changes in certain unsettled derivative financial instruments that are charged or credited to the Company’s bank margin account held with a specific exchange counterparty, and
• include net expected cash outflows for the Company’s share of Line Loss Rule (LLR) Proceeding amounts in the period each tranche is paid by the Company.
  

A reconciliation of net cash flows from operating activities to adjusted funds from operations is as follows:

1. Included in other cash items on the condensed interim consolidated statements of cash flows to reconcile net income to net cash flows from operating activities.
   
2. Excludes unrealized changes on interest rate derivative contracts, amortization, accretion charges and non-cash implicit interest on tax equity investment structures.
3. For the three and six months ended June 30, 2021, excludes current income tax expenses of $8 million related to the Genesee 3 and Keephills 3 swap transaction as these amounts are considered investing activities.
4. Includes sustaining capital expenditures net of partner contributions of $1 million and $2 million for the three and six months ended June 30, 2022 and 2021, respectively, compared with $2 million and $7 million for the three and six months ended June 30, 2021.
5. Consistent with the Company’s definition of AFFO described above pertaining to the LLR Proceeding, AFFO for the three months and six months ended June 30, 2021 is impacted only by the Company’s net obligations related to the 2006-2009 and 2010–2013 invoice tranches.

Normalized earnings attributable to common shareholders and normalized earnings per share

The Company uses normalized earnings attributable to common shareholders and normalized earnings per share to measure performance by period on a comparable basis. Normalized earnings attributable to common shareholders and normalized earnings per share are based on net income (loss) attributable to shareholders of the Company according to GAAP and adjusted for items that are not reflective of performance in the period such as unrealized fair value changes, impairment charges, unusual tax adjustments, gains and losses on disposal of assets or unusual contracts, and foreign exchange gain or loss on the revaluation of U.S. dollar denominated debt. The adjustments, shown net of tax, consist of unrealized fair value changes on financial instruments that are not necessarily indicative of future actual realized gains or losses, non-recurring gains or losses, or gains or losses reflecting corporate structure decisions.

1. Includes impacts of the interest rate non-hedge held within a joint venture and recorded within income from joint venture on the Company’s condensed interim consolidated statements of income.

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 disclosures regarding (i) status of, and updates to, the Company’s 2022 AFFO and adjusted EBITDA guidance, (ii) expectations pertaining to the financial impacts of the acquisition of Midland Cogen (see Subsequent Events), including the impacts to AFFO, AFFO per share and adjusted EBITDA, transaction close timing, financing plans, positioning for potential re-contracting following contract expiries in 2030 and 2035, and future site development opportunities, (iii) the timing of the investment decision for the Company’s potential CCS project, and (iv) forecasted depreciation for the remainder of 2022.

These statements are based on certain assumptions and analyses made by the Company considering its experience and perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate including its review of purchased businesses and assets. The material factors and assumptions used to develop these forward-looking statements relate to: (i) electricity, other energy and carbon prices, (ii) performance, (iii) business prospects (including potential re-contracting of facilities) 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, natural gas and carbon prices in markets in which the Company operates and the use of derivatives, (ii) regulatory and political environments including changes to environmental, climate, financial reporting, market structure and tax legislation, (iii) generation facility availability, wind capacity factor and performance including maintenance expenditures, (iv) ability to fund current and future capital and working capital needs, (v) acquisitions and developments including timing and costs of regulatory approvals and construction, (vi) changes in the availability of fuel, (vii) ability to realize the anticipated benefits of acquisitions, (viii) limitations inherent in the Company’s review of acquired assets, (ix) changes in general economic and competitive conditions and (x) changes in the performance and cost of technologies and the development of new technologies, new energy efficient products, services and programs. See Risks and Risk Management in both the Company’s Management’s Discussion and Analysis for the six months ended June 30, 2022, prepared as of July 29, 2022 and the Company’s 2021 Integrated Annual Report, prepared as of February 23, 2022, 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.

About Capital Power

Capital Power (TSX: CPX) is a growth-oriented North American wholesale power producer with a strategic focus on sustainable energy headquartered in Edmonton, Alberta. We build, own, and operate high-quality, utility-scale generation facilities that include renewables and thermal. We have also made significant investments in carbon capture and utilization to reduce carbon impacts and are committed to be off coal in 2023. Capital Power owns approximately 6,600 MW of power generation capacity at 27 facilities across North America. Projects in advanced development include approximately 385 MW of owned renewable generation capacity in North Carolina and Alberta and 512 MW of incremental natural gas combined cycle capacity, from the repowering of Genesee 1 and 2 in Alberta.

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