Capstone Infrastructure Corporation (TSX:CSE)(TSX:CSE.PR.A)(TSX:CSE.DB.A) ("CSE"
or the "Corporation") today announced it has acquired a 70% interest in Bristol
Water, which is a regulated water utility in the United Kingdom, from SUEZ
ENVIRONNEMENT through its subsidiary, AGBAR (Sociedad General de Aguas de
Barcelona), for approximately $215 million. The purchase price was funded
through a combination of existing credit facilities, cash on hand and a new
$150-million senior debt facility. All amounts are in Canadian dollars unless
otherwise noted.
"Bristol Water is an established, core infrastructure business with regulated
and predictable inflation-linked cash flow and a strong growth profile in a
stable OECD country, making it an ideal complement to our existing portfolio,"
said Michael Bernstein, President and Chief Executive Officer of the
Corporation. "This is a platform investment that builds on our international
footprint, diversifies our portfolio by infrastructure category, and is expected
to contribute to the long-term sustainability of our dividends to shareholders.
We are equally delighted to partner with AGBAR, which brings more than 140 years
of experience in the water sector globally and shares our commitment to quality
service, outstanding performance and efficient, environmentally responsible
operations."
SUEZ ENVIRONNEMENT, through its subsidiary AGBAR, will continue to hold a 30%
interest in Bristol Water. AGBAR, which is headquartered in Spain with
operations in nine countries, is approximately 75% owned by SUEZ ENVIRONNEMENT,
which is a world leader in water and waste management services. AGBAR will
continue to provide strategic counsel on trends and operational innovations
within the global water services industry under an operational and management
agreement.
Josep Bague, Chief Financial Officer and General Secretary of AGBAR, stated, "We
are delighted to have secured, in Capstone, a long-term partner for Bristol
Water. Bristol Water has a track record of excellent operational performance and
is poised for rapid expansion in the years ahead. The Capstone team brings
significant infrastructure investment and management expertise, including in the
water utility sector, and a strong commitment to building lasting stakeholder
relationships. Capstone is an ideal fit for Bristol Water and we look forward to
a long and successful partnership."
Investment Merits
This acquisition will significantly increase the size, value and diversity of
the Corporation's portfolio and is expected to deliver stable cash flow to
shareholders:
-- Platform investment in a new core infrastructure category. The
acquisition of Bristol Water provides the Corporation with a platform
investment in a new infrastructure category, positioning it to pursue
additional growth opportunities in the water infrastructure sector
globally.
Numerous North American, European and Australian pension funds and other
institutional investors have emerged in recent years as significant investors in
the water infrastructure sector, seeking the stable, long-term cash flow and
growth potential offered by water utilities. The average annual global
investment needed to repair, maintain, improve and build new water and
wastewater infrastructure is estimated to be US$772 billion per year by 2015.(1)
-- Diversifies the Corporation's cash flow by asset type and geography.
With this acquisition, the Corporation extends its footprint in Europe
and diversifies its portfolio by asset type. In 2012, approximately 18%
of the Corporation's Adjusted Funds from Operations ("AFFO") is
anticipated to be generated by Bristol Water. Varmevarden, the
Corporation's district heating business in Sweden, is anticipated to
contribute approximately 11%; the Cardinal gas cogeneration facility,
42%; Erie Shores Wind Farm, 10%; the hydro power facilities, 7%; the
Whitecourt biomass facility, 5%; the Amherstburg Solar Park, 5%; and the
Chapais biomass facility, 2%.
-- Regulated, perpetual business that offers long-term cash flow and value
accretion. As a perpetual business with a strong competitive position,
Bristol Water significantly extends the average life of Capstone's cash
flows. Additionally, the regulated nature of the business provides for
recovery of operating costs and allowance for a fair return.
-- Expected to deliver an attractive total return. The Corporation's
investment in Bristol Water is expected to deliver a total return(2) at
the lower end of the Corporation's targeted 10 - 14% range, reflecting
the quality, stability and longevity of Bristol Water's business.
Key Transaction Metrics
The terms of the Corporation's acquisition of Bristol Water imply a value equal
to approximately 1.2 times(3) the regulated capital value ("RCV") of the
business and an EV/EBITDA multiple of approximately 8.2 times(4), comparing
favourably with recent transactions in the sector. The RCV of the business as at
the fiscal year ended March 31, 2011 was approximately $505 million. The
enterprise value of the business was approximately $617 million(5) as at June
30, 2011.
Key Business Drivers
Founded in 1846 and located in the Bristol region of the United Kingdom, Bristol
Water is responsible for the abstraction, treatment, storage and distribution of
water, supplying approximately 278 million litres of water every day to over 1.1
million people and businesses in an area of approximately 2,400 square
kilometres. Bristol Water's system encompasses: 26 water sources, including
reservoirs, rivers, springs and wells; 6,670 kilometres of water mains; 164
pumping stations; and 139 covered storage reservoirs. Bristol Water, which has
approximately 440 employees, is one of 11 regulated Water-Only Companies ("WOC")
in England and Wales and is the sole water supplier in the Bristol area. Bristol
Water has a history of stable cash flow and is expected to achieve annual growth
in Adjusted EBITDA of approximately 8% from 2012 to the end of the current asset
management plan period ("AMP5"), which runs until March 2015.
Key drivers of Bristol Water's business include:
-- A stable regulatory regime. Bristol Water is regulated by the UK Water
Services Regulation Authority ("Ofwat") through a price cap mechanism on
five-year rate cycles. The current five-year period is AMP5. The revenue
target set by Ofwat provides for recovery of operating costs and allows
for a reasonable return on invested capital. Bristol Water's revenues
have historically increased in line with the regulatory allowance and
feature a real as well as an inflation component, thereby offering a
natural inflation hedge. For the AMP5 period, the company is targeted to
realize a post-tax real return on equity of 6.60% (pre-inflation) based
on the 40% deemed common equity component of Bristol Water's capital
structure.
-- Continuing capital improvements and rate base growth. Bristol Water
expects to execute a significant capital expenditure program in the
years ahead to maintain and improve its infrastructure and operations,
to continue to meet water quality requirements, and to support growth
arising from an increasing population and expanded business activity in
the region. As a result, the company's RCV is anticipated to grow
considerably. Bristol Water had approximately $132 million of cash on
hand that can be invested in its growth program. Bristol Water's RCV is
anticipated to grow by approximately 26% over the AMP5 period compared
with an industry average of approximately 8% over the same period.
Financing Details
The Corporation's approximately $215 million investment was funded through a
combination of existing credit facilities, cash on hand and a new $150-million
senior debt facility provided by a subsidiary of Macquarie Group Limited. The
senior debt facility carries a term of 12 months and initially bears monthly
interest at an annual rate equal to the Canadian Dealer Offered Rate ("CDOR")
plus a specified margin. The annual interest rate payable on the senior debt
facility is approximately 4.75% initially and it will increase to a maximum rate
of approximately 7.25% after nine months, assuming no change in CDOR during that
period. Future sources of capital to refinance the new senior debt facility
include a potential offering of the Corporation's securities, proceeds from a
future recapitalization of Varmevarden, internally-generated cash flows and the
addition of holding company debt at Bristol Water, or any combination thereof.
Outlook(6)
With the addition of Bristol Water to its portfolio, and excluding
internalization costs, the Corporation expects its fiscal 2011 Adjusted EBITDA
to be approximately $75 million compared with approximately $60 million as
previously stated. Based on the current financing structure, the Corporation
expects its 2011 payout ratio, which is based on Adjusted Funds from Operations
("AFFO") and excludes internalization costs, to remain consistent with the
previously provided outlook of approximately 120%.
For 2012, the Corporation now expects Adjusted EBITDA to be approximately $140
million compared with approximately $80 million previously. The 2012 payout
ratio, which is based on AFFO, is expected to be consistent with the previously
provided outlook of approximately 85% to 90%. Based on its existing portfolio,
outlook and current dividend level, the Corporation anticipates that its payout
ratio will remain less than 100% through 2014, subject to the continuing
execution of the Corporation's growth strategy, which could include development
projects or businesses with a strong growth profile that may cause the payout
ratio to fluctuate in any given year.
With the assumption of Bristol Water's approximately $440 million in long-term
debt and reflecting the impact of the transaction financing, the Corporation's
debt to capitalization ratio is expected to increase from 39.3% as at June 30,
2011 to approximately 60%, an amount consistent with the low risk profile of the
Corporation's business.
Bristol Water's stable, regulated cash flow profile supports the Corporation's
ability to sustain its current dividend of $0.66 per share on an annualized
basis through 2014, subject to any significant unexpected events or an
unfavourable resolution on the terms of a new contract at the Cardinal gas
cogeneration facility.
Advisers
The Corporation was advised on the transaction by Macquarie Capital (Europe)
Limited, a subsidiary of Macquarie Group Limited.
Conference Call and Webcast
Management will hold a conference call (with accompanying slides) today at 9:30
a.m. ET. The event will be accessible via webcast through the Corporation's
website with accompanying slides at www.capstoneinfrastructure.com and by
telephone. To listen to the call from Canada or the United States, dial
1-800-319-4610. If calling from elsewhere, dial +1-604-638-5340. A replay of the
call will be available until October 19, 2011. For the replay, from Canada or
the United States, dial 1-800-319-6413 and enter the code 1385#. From elsewhere,
dial +1-604-638-9010 and enter the code 1385#.
About Capstone Infrastructure Corporation
Capstone Infrastructure Corporation's mission is to build and responsibly manage
a high quality portfolio of infrastructure businesses in Canada and
internationally in order to deliver a superior total return to shareholders
through a combination of stable dividends and capital appreciation. The
Corporation's portfolio currently includes investments in gas cogeneration,
wind, hydro, biomass and solar power generating facilities, representing
approximately 370 MW of installed capacity, a 33.3% interest in a district
heating business in Sweden, and a 70% interest in Bristol Water, a regulated
water utility in the United Kingdom. Please visit www.capstoneinfrastructure.com
for more information.
Notice to Readers
Certain of the statements contained in this news release are forward-looking and
reflect management's expectations regarding the Corporation's future growth,
results of operations, performance and business 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",
"estimate", "believe" or other similar words. These statements are subject to
significant 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 in this news release are
based on information currently available and what the Corporation currently
believes are reasonable assumptions, including the material assumptions for each
of the Corporation's assets set out in its fiscal 2010 Annual Report under the
heading "Asset Performance" as updated in subsequently filed Quarterly Financial
Reports of the Corporation and other filings made by the Corporation with the
Canadian securities regulatory authorities (such documents are available on the
Canadian Securities Administrators' System for Electronic Document Analysis and
Retrieval ("SEDAR") at www.sedar.com). Other material factors or assumptions
that were applied in formulating the forward-looking statements contained herein
include the assumption 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, and that there will be
no unplanned material changes to the Corporation's facilities, equipment or
contractual arrangements.
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: power infrastructure (operational
performance; power purchase agreements; fuel costs and supply; contract
performance; development risk; technology risk; default under credit agreements;
land tenure and related rights; regulatory regime and permits; environmental,
health and safety; climate change and the environment; and force majeure) and
the Corporation (tax-related risks; variability and payment of dividends, which
are not guaranteed; geographic concentration and non-diversification; insurance;
environmental, health and safety regime; availability of financing; shareholder
dilution; and the unpredictability and volatility of the common share price of
the Corporation). There are also a number of risks related to the Corporation's
investment in Varmevarden, the district heating business in Sweden, including:
fuel costs and availability; industrial and residential contracts; geographic
concentration; regulatory environment; environmental, health and safety;
reliance on key personnel; labour relations; assumption of liabilities; minority
interest; and foreign exchange. There is also a risk that Varmevarden may not
achieve expected results. There are also a number of risks related to Bristol
Water's business, including operational (contamination or interruption of water
resources/supplies; failure of key assets to maintain expected outputs;
climate/weather pattern change adversely affecting resource availability),
regulatory (failure to meet existing regulatory requirements; increased costs of
meeting regulatory requirements; impact of legislative changes; including those
related to environmental or drinking water quality requirements; development of
competition within the water sector; impact of future periodic and/or interim
determinations of price limits by Ofwat) and financial (loss of major customers
as a result of closure of their facilities; pension funding requirements and
changes in pension regulations that could have a significant impact on future
company contributions; worsening debt collection experience; increases in energy
prices; changes in the taxation regime applicable to the company; failure to
meet banking covenants).
For a more comprehensive description of these and other possible risks, please
see the Corporation's Annual Information Form dated March 24, 2011 for the year
ended December 31, 2010 as updated in subsequently filed Quarterly Financial
Reports and other filings made by the Corporation with the Canadian securities
regulatory authorities. These filings are available on SEDAR. 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. These forward-looking
statements reflect current expectations of the Corporation as at the date of
this news release and speak only as at the date of this news release. Except as
may be required by law, the Corporation does not undertake any obligation to
publicly update or revise any forward-looking statements.
(1) Infrastructure to 2030, Organization for Economic Cooperation and
Development, 2007.
(2) Return range is on a levered and post-tax, post-foreign exchange hedging basis.
(3) Based on RCV as at fiscal year ended March 31, 2011.
(4) Based on EBITDA for the 12 months ended June 30, 2011.
(5) Enterprise value based on 100% of debt and cash of approximately $132
million as at June 30, 2011 and assumes a currency exchange rate of 1 GBP: 1.63
CAD.
(6) The outlook for 2011 excludes the impact of internalization costs. The
outlook for both 2011 and 2012 assumes the impact of the current financing
structure for the acquisition of Bristol Water. The Corporation's outlook for
2012 also assumes a full year of contribution from the Amherstburg Solar Park
and Varmevarden as well as a return to 2010 TransCanada Pipelines Limited gas
transportation rates.
Capstone Infrastructure (TSX:CSE.PR.A)
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