Capstone Infrastructure Corporation (TSX: CSE; CSE.PR.A;
CSE.DB.A – “CSE” or the “Corporation”) today updated its outlook
for 2012 for Adjusted Earnings Before Interest, Taxes, Depreciation
and Amortization (“Adjusted EBITDA”) and payout ratio, which is
based on Adjusted Funds From Operations (“AFFO”), to reflect the
impact of certain external events and internal initiatives
subsequent to the Corporation’s previous outlook.
“Our mission is to build a portfolio that delivers a superior
total return to our shareholders in the form of income as well as
capital appreciation,” said Michael Bernstein, President and Chief
Executive Officer. “We are particularly pleased with our recent
investment in Bristol Water, a business that is expected to grow
rapidly over the next 10 to 15 years, thereby building significant
long-term value for our shareholders. Our priorities in 2012
include completing a new contract for Cardinal and strengthening
our balance sheet to address near-term financing requirements and
to position the Corporation for future growth initiatives. However,
while our businesses are performing well operationally, we are
facing some near-term challenges and the longer term impact of
expected lower returns from Cardinal, both of which will require us
to re-evaluate our dividend policy in 2012. We recognize the
importance of our dividends to shareholders and will strive to
ensure a dividend level that delivers attractive income to
shareholders while allowing us to prudently manage our
business.”
Outlook for 2012
The Corporation currently expects 2012 Adjusted EBITDA to be
approximately $120 million compared with previous estimates of
approximately $140 million. The 2012 payout ratio is expected to be
approximately 120% to 130% compared with the previously provided
outlook of approximately 85% to 90%.1 This updated outlook reflects
the following current assumptions:
- TransCanada Pipelines Limited (“TCPL”)
recently filed an application to set the 2012 interim gas
transportation toll at $2.24 per gigajoule, representing an
additional cost to the Cardinal gas cogeneration facility
(“Cardinal”) of approximately $7 million in 2012 from previous
assumptions. This interim rate is subject to approval by the
National Energy Board (“NEB”);
- The Corporation recently finalized the
accounting treatment for Bristol Water’s business under
International Financial Reporting Standards (“IFRS”), particularly
with respect to accounting for maintenance capital expenditures.
Additionally, capital expenditures at Bristol Water in 2012 will be
higher than in 2011. Combined, these two factors result in an
impact of approximately $8 million;
- The Corporation expects Adjusted EBITDA
from Cardinal, Erie Shores Wind Farm, the hydro power facilities
and Whitecourt combined to be approximately $2 million lower than
previously anticipated due to higher costs and lower gas mitigation
revenues at Cardinal;
- The recapitalization of Värmevärden, a
process that has now been initiated and is currently anticipated to
occur in the first quarter of 2012, will reduce the amount of
interest income the Corporation receives annually to approximately
$4 million from approximately $7 million as previously expected for
2012, reflecting the lower amount of the Corporation’s capital
invested in the business. The recapitalization of Värmevärden is
expected to result in approximately $50 to $60 million of net
proceeds for the Corporation, thereby strengthening the
Corporation’s balance sheet; and
- The Corporation has updated various
financing assumptions, including earlier re-financings that
potentially include amortization profiles, resulting in higher
anticipated financing costs in 2012.
Additionally, the Corporation expects to reinvest a significant
portion of Bristol Water’s cash flow into the company’s capital
program to support long-term rate base growth and value accretion
for shareholders. This will result in limited dividends from
Bristol Water to the Corporation over the current regulatory
period.
The Corporation is now experiencing lower revenue growth at
Cardinal in 2012 and 2013 following implementation of Government of
Ontario amendments to the application of the Global Adjustment
Mechanism (“GAM”). The GAM previously represented a significant
portion of the Ontario Electricity Financial Corporation’s (“OEFC”)
Direct Customer Rate (“DCR”), which is the revenue escalator
contained in Cardinal’s current Power Purchase Agreement
(“PPA”).
Dividend Policy
Based on the Corporation’s existing portfolio, outlook and
current dividend level, management expects the payout ratio in 2013
and 2014 to return to the 100% or below range. Notwithstanding this
view, at the current dividend level the Corporation’s 2012 payout
ratio is now expected to be higher than previously anticipated.
Based on the assumptions underlying the 2012 outlook, as identified
above and which are subject to change, it is unlikely that the
Corporation will continue to pay the current dividend through 2014
as previously expected. The Corporation expects to gain clarity on
Cardinal’s future cash flow profile in the first half of 2012. As a
result, the Board of Directors and management intend to re-evaluate
the Corporation’s dividend policy in 2012.
Outlook for 2011
The Corporation also updated its outlook for 2011 to reflect the
impact of IFRS adjustments related to the accounting for Bristol
Water. Excluding the one-time costs related to the internalization
of management in April 2011, Adjusted EBITDA is expected to be
approximately $70 to $75 million, which is generally consistent
with the previously provided outlook of approximately $75 million.
The payout ratio in 2011, which is based on AFFO and excludes
internalization costs, is expected to be approximately 130%
compared with approximately 120% previously. The 2011 outlook
remains subject to the final purchase price accounting treatment
and final transaction costs (such as stamping fees) for Bristol
Water, which will be finalized in early 2012.
Investor Day Event
The Corporation will hold its 2011 Investor Day today in Toronto
commencing at 4 p.m. ET to discuss this outlook as well as its
strategic objectives for 2012. The Investor Day webcast will be
available with accompanying slides on the Corporation’s website in
the Investor Centre section, which is located at:
http://www.capstoneinfrastructure.com/InvestorCentre/EventsandPresentations.aspx
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 a
regulated water utility in the United Kingdom. Please visit
www.capstoneinfrastructure.com for more information.
Non-GAAP Measures
This news release contains figures that are performance measures
not defined by International Financial Reporting Standards. These
non-GAAP performance measures do not have any standardized meaning
prescribed by IFRS and are, therefore, unlikely to be comparable to
similar measures presented by other issuers. The Corporation
believes that these indicators are important since they provide
additional information about the Corporation’s performance and cash
generating capabilities and facilitate comparison of results over
different periods. The Corporation uses Adjusted EBITDA to measure
the performance of its assets prior to the impact of financing
costs, taxes and charges for depreciation and amortization.
Adjusted EBITDA is calculated as revenue less operating expenses
and administrative expenses plus interest and
dividends/distributions received from equity accounted investments.
Adjusted EBITDA is reconciled to net income (loss) by adjusting
standardized EBITDA for unrealized gains and losses on derivatives,
unrealized loss on Class B exchangeable units, unrealized loss on
the conversion option for the convertible debentures maturing on
December 31, 2016, foreign exchange gains and losses, equity
accounted income and dividends/distributions from equity accounted
investments.
The Corporation uses Adjusted Funds From Operations as a measure
of cash generated during the period for distribution to
shareholders. The Corporation defines AFFO as FFO less maintenance
capital expenditures and scheduled repayment of principal on debt,
net of changes to the levelization liability. Payout ratio measures
the proportion of cash generated from operations that is paid as
dividends. The payout ratio is calculated as dividends declared
divided by AFFO.
Notice to Readers:
Certain of the statements contained within this document are
forward-looking and reflect management’s expectations regarding
Capstone Infrastructure Corporation’s (the “Corporation”) future
growth, results of operations, performance and business 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 use forward-looking words, such as “anticipate”,
“continue”, “could”, “expect”, “may”, “will”, “estimate”, “believe”
or other similar words. 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 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 for each
of the Corporation’s assets 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, 2010 under the heading “Asset Performance”, as updated
in subsequently filed interim MD&A of the Corporation (such
documents are available under the Corporation’s profile on
www.sedar.com). Other material factors or assumptions that were
applied in formulating the forward-looking statements and financial
outlook contained herein include 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; a full
year of contribution from the Corporation’s Amherstburg Solar Park,
Swedish district heating business (“Värmevärden”) and UK water
distribution business (“Bristol Water”); a TransCanada Pipelines
Limited (“TCPL”) gas transportation rate of $2.24 per gigajoule;
the accounting treatment of Bristol Water’s business under
International Financial Reporting Standards related to maintenance
capital expenditures and capital expenditures at Bristol Water
being higher in 2012 than in 2011; an aggregate reduction of
approximately $2 million in Adjusted EBITDA (as defined in the most
recently filed annual or interim MD&A of the Corporation),
excluding the impact of TCPL rates, from the Cardinal cogeneration
facility (“Cardinal”), Erie Shores Wind Farm, Whitecourt biomass
generation facility and the Corporation’s hydro facilities; that
there will be no unplanned material changes to the Corporation’s
facilities, equipment or contractual arrangements, no unforeseen
changes in the legislative and operating framework for the
Corporation’s businesses, no delays in obtaining required
approvals, no unforeseen changes in rate orders or rate structures
for the Corporation’s power business, Värmevärden or Bristol Water,
no unfavourable changes in environmental regulation and no
significant event occurring outside the ordinary course of
business; that there will be a stable regulatory environment and
favourable decisions will be received from regulatory bodies
concerning outstanding rate and other applications; that the
Corporation’s senior credit facility, used to partially fund the
Bristol Water acquisition, will be repaid on or prior to its
maturity on October 3, 2012; earlier than previously anticipated
refinancing of the credit facility in place at the Corporation’s
Capstone Power Corp. and Cardinal Power of Canada, L.P.
subsidiaries and the project financing of the Corporation’s hydro
power facilities (that potentially include amortization profiles);
the recapitalization of Värmevärden; the implementation of the
Government of Ontario’s amendments to the application of the Global
Adjustment Mechanism which comprises a portion of the revenue
escalator in the power purchase agreements for Cardinal and the
Corporation’s hydro facilities located in Ontario; and that Bristol
Water will operate and perform in a manner consistent with the
regulatory assumptions underlying its current asset management plan
(“AMP”), including, among others: a 7% increase in Bristol Water’s
2011/2012 revenue (including a 4% real increase as provided by the
UK Water Services Regulation Authority (“Ofwat”) and an
approximately 3% inflationary increase), a 3% increase in Bristol
Water’s 2011/2012 expenses in line with inflation, UK pound
sterling to Canadian dollar exchange rate of £0.625:$1.00, and
capital investment, leakage, customer service standards and asset
serviceability targets.
Although the Corporation believes that it has a reasonable basis
for the expectations reflected in these forward-looking statements
and the financial outlook, actual results may differ from those
suggested by the forward-looking statements and financial outlook
for various reasons, including risks related to: power
infrastructure (operational performance; power purchase agreements
(in particular, the risk associated with Cardinal power purchase
agreement expiring in the fourth quarter of 2014); 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
requirements; climate change and the environment; and force
majeure) 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); the Corporation’s investment in
Värmevärden (general business risks inherent in the district
heating business; fuel costs and supply; reliance on industrial
customers and ability of residential customers to cancel contracts
on short notice; geographic concentration; government regulation;
environmental health and safety liabilities; reliance on key
personnel; labour relations; enforcement of indemnities against the
vendors of Värmevärden; minority interest; and foreign exchange);
and Bristol Water’s business (revenue is substantially influenced
by price determinations made by Ofwat; failure to deliver capital
investment programs; failure to deliver water leakage targets; the
imposition of penalties under Ofwat’s new comparative incentive
mechanism; the economic downturn impacting the lending environment,
as well as debt and capital markets, resulting in more costly
financing and inflation negatively impacting leverage and key
financial ratios, which may have a negative impact on credit
ratings, as well as increasing the cost of capital expenditures;
pension plan obligations may require Bristol Water to make
additional contributions; failure to meet existing regulatory
requirements and the potentially adverse impact of future
legislative and regulatory changes; the ability for a Special
Administrator to be appointed by the UK Secretary of State for the
Environment, Food and Rural Affairs or Ofwat in certain
circumstances (including the breach by Bristol Water of its
license); foreign exchange; operational risks (including
significant interruption of the provision of its services and
catastrophic damage resulting in loss of life, environmental damage
or economic and social disruption); development of competition
within the water sector; reliance on key personnel; default under
its Artesian loans, bonds, debentures or credit facility;
geographic concentration; potential seasonality and climate change;
labour relations; and enforcement of indemnities against the
vendors of Bristol Water).
For a more comprehensive description of these and other possible
risks, please see the risks set out in the annual information form
of the Corporation for the year ended December 31, 2010, under the
heading “Risk Factors”, as updated in subsequently filed interim
MD&A, the business acquisition report filed June 14, 2011 in
respect of the Corporation’s acquisition of Värmevärden and other
filings by the Corporation with Canadian securities regulatory
authorities (such documents are available under the Corporation’s
profile on 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 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 Canadian law, the
Corporation does not undertake any obligation to publicly update or
revise any forward-looking statements or financial outlook.
1 The Corporation’s prior outlook was subject to the final
accounting treatment for Bristol Water transaction costs and
Bristol Water’s business under International Financial Reporting
Standards, the actual results of the business, and foreign currency
rates for financial reporting purposes. Other assumptions
underlying the previous 2012 outlook included a full year of
contribution from the Amherstburg Solar Park, Värmevärden and
Bristol Water; and that the TransCanada Pipelines Limited gas
transportation rate in 2012 would return to the 2010 rate of $1.64
per gigajoule from the 2011 rate of $2.24 per gigajoule.
Capstone Infrastructure (TSX:CSE.PR.A)
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Capstone Infrastructure (TSX:CSE.PR.A)
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