Capstone Infrastructure Corporation Reports Fourth Quarter and Fiscal 2011 Results
- 32.9% increase in annual Adjusted EBITDA excluding internalization costs
- 36.2% increase in annual revenue
- Strong performance across power portfolio and significant contributions from new businesses: Amherstburg Solar Park, Värmevärden and Bristol Water
- Executing plan to refinance debt maturing in 2012
TORONTO, ONTARIO (March 7, 2012) – Capstone Infrastructure Corporation (TSX: CSE; CSE.DB.A; CSE.PR.A – the “Corporation”) today reported audited results for the fiscal year ended December 31, 2011. The Corporation’s 2011 Annual Report to shareholders, including Management’s Discussion and Analysis and the audited consolidated financial statements, is available on the Corporation’s website at www.capstoneinfrastructure.com and on SEDAR at www.sedar.com.
“Our fiscal 2011 results were in line with or slightly ahead of our expectations. Total Adjusted EBITDA was up 32.9%, primarily reflecting the contribution from Värmevärden, Bristol Water and Amherstburg Solar Park. Adjusted EBITDA from our heritage power portfolio, including Cardinal, Erie Shores, the hydro power facilities and Whitecourt, increased by 1%, demonstrating the high quality and continuing stable performance of our businesses in a year when we experienced significantly higher gas transportation costs,” said Michael Bernstein, President and Chief Executive Officer. “During the year, we enhanced our platform for the future by diversifying into a new infrastructure category and broadening our reach internationally. Notably, with Bristol Water our portfolio now features a significant organic growth element that will help to build long-term value for shareholders. Together, we expect Bristol Water and Värmevärden, which are perpetual businesses, and Amherstburg Solar Park to significantly extend the long-term stability of Capstone’s cash flow and to elevate the investment quality of our company for investors.”
Fiscal 2011 Financial Highlights
On October 5, 2011, the Corporation’s operations changed with the acquisition of a 70% interest in Bristol Water, a regulated water utility in the United Kingdom. This acquisition was a significant driver of both quarterly and fiscal year growth in revenue and Adjusted Earnings before Interest Expense, Taxes, Depreciation and Amortization (“Adjusted EBITDA”). It is also the primary reason that the Corporation’s total assets and liabilities increased by 111.3% and 131.4%, respectively, to $1.7 billion and $1.2 billion.
Consolidated revenue for the year increased by 36.2%, or $57.5 million. The variance was primarily due to Bristol Water, the start of operations at the Amherstburg Solar Park on June 30, 2011 and higher revenue from Cardinal as a result of higher power rates.
Total expenses increased by 50.7%, or $53.9 million, including internalization costs. Excluding internalization costs, expenses increased by 33.3%, or $35.1 million, over 2010. This variance primarily reflected $21.6 million of expenses at Bristol Water. There was also a 6.9%, or $6.5 million, increase in costs at the power businesses, mostly related to higher TransCanada Pipelines Limited (“TCPL”) gas transportation tolls, which increased to $2.24 per gigajoule (“GJ”) in 2011 from $1.64 per GJ in 2010. Higher corporate administrative expenses were attributable to business development costs largely related to the acquisition of Bristol Water.
Excluding internalization costs, Adjusted EBITDA in 2011 increased by 32.9%, or $18.6 million, while Adjusted Funds from Operations (“AFFO”) increased by 4.5%, or $1.6 million, over 2010. Fiscal 2010 Adjusted EBITDA also included an approximately $2.5 million contribution from Leisureworld, which was sold in March 2010. The year-over-year increase in Adjusted EBITDA and AFFO was primarily due to strong contributions from Bristol Water, Värmevärden, the Swedish district heating business that was acquired in March 2011, and Amherstburg Solar Park.
Fourth Quarter Financial Highlights
During the fourth quarter, the Corporation’s revenue increased by 107.1%, or $47.4 million, over the same period in fiscal 2010, reflecting a $43.6 million contribution from Bristol Water and a $3.8 million contribution from the power facilities due to higher power rates than in the fourth quarter of 2010.
Total expenses increased by 97.5%, or $27.6 million, over the same period last year with Bristol Water representing $21.6 million of the increase. Fourth quarter Adjusted EBITDA excluding internalization increased by 88.3%, or $14.6 million, over the fourth quarter last year, mostly due to Bristol Water.
Financial Performance Highlights by Segment
Total power produced in fiscal 2011 increased by 2.0%, or 36.9 gigawatt hours (“GWh”), due to the start of operations at Amherstburg Solar Park and higher production at Erie Shores Wind Farm (“Erie Shores”), the Whitecourt biomass facility and the hydro power facilities compared with 2010. Revenue increased by 8.8%, or $13.9 million, primarily reflecting the contribution from Amherstburg Solar Park, which accounted for 47.7% of the increase, and higher electricity rates at Cardinal, which accounted for 26.6% of the increase. Strong revenue performance was partially offset by a 6.9%, or $6.5 million, increase in operating expenses due primarily to higher gas prices and TCPL tolls. As a result, Adjusted EBITDA increased by 11.7%, or $7.6 million.
During the fourth quarter, revenue and Adjusted EBITDA increased by 8.7% and 7.3%, respectively, reflecting the contribution from Amherstburg Solar Park, strong production at Erie Shores and higher electricity rates at Cardinal partially offset by lower production at the Ontario hydro power facilities.
As Bristol Water was acquired on October 5, 2011, there are no comparative results available for fiscal 2010. Bristol Water has significantly diversified the Corporation’s portfolio by asset category and geographic location, representing approximately 47.4%, or $43.6 million, of the Corporation’s fourth quarter revenue and approximately 50%, or $15.6 million, of its Adjusted EBITDA, excluding internalization costs. The contribution to the Corporation’s Adjusted EBITDA was higher than expected as operating expenses in the fourth quarter were below expectations due to lower than anticipated capital expenditure and fewer burst pipes as a result of warmer than expected weather.
As at December 31, 2011, the Corporation had cash and cash equivalents of $57.6 million. The corporate component accounted for approximately $8.2 million while the power businesses contributed $14.0 million and Bristol Water contributed $35.4 million, which will be used to support its capital investment program. Bristol Water has an additional $82.3 million in short-term investments. As at December 31, 2011, the Corporation’s debt to capitalization(5) ratio was 71%, reflecting a lower common share price and higher debt outstanding following the completion of the Amherstburg Solar Park and the acquisition of Bristol Water. The Corporation and its subsidiaries complied with all debt covenants as at December 31, 2011. With the recapitalization of Värmevärden now complete, management is continuing advanced discussions to refinance the remaining approximately $150 million in debt maturing in 2012. Alternatives include issuing new debt, extending the maturity of existing debt, or portfolio optimization initiatives.
The Corporation’s outlook for each of its business segments is provided in the fiscal 2011 annual report on pages 32 to 34. Overall, the Corporation expects stable operational performance from its portfolio in 2012. Adjusted EBITDA in 2012 is currently expected to be approximately $120 million based on the Corporation’s current portfolio and assumptions.(6)
“We are pleased with the sound performance of our portfolio and are focused on addressing our strategic priorities as expeditiously as possible,” Mr. Bernstein continued. “We remain confident that our efforts to shift the mix and cash flow characteristics of our portfolio will bear fruit for our shareholders in the years ahead in the form of steady dividends and capital appreciation.”
The Corporation’s strategic priorities for 2012 include:
Improving its financial strength and flexibility by refinancing its credit facilities that mature in 2012.
The Corporation completed the recapitalization of Värmevärden in February, repatriating approximately $46 million in capital that was used to repay a portion of the $78 million outstanding on the Corporation’s senior credit facility. The Corporation expects to complete the financing of its hydro power facilities by the end of the first quarter or early April.
Securing a new PPA for Cardinal.
The Corporation is working to obtain a fair outcome on Cardinal that recognizes the value of the facility and its industrial, economic, social and community importance. The Corporation anticipates gaining clarity on Cardinal’s future cash flow profile in the first half of 2012 as negotiations with the Ontario Power Authority move forward. The Corporation currently expects that future cash flow from Cardinal will be lower post-2014, reflecting current Ontario power market and fiscal dynamics.
Establishing a new dividend level.
With greater clarity on Cardinal’s future cash flow profile and the refinancing of 2012 debt maturities, the Corporation expects to establish its new dividend policy in the first half of 2012. The Corporation’s goal is that the new dividend level will be sustainable over the long term with the potential for growth.
Maximizing the performance of its existing businesses.
The Corporation continues to identify and pursue new cash generation opportunities. These initiatives include improving the availability of the power infrastructure businesses, and the sale of renewable energy credits at Whitecourt, which is expected to generate additional revenue in 2012.
Continuing to evaluate new investment opportunities.
Following the completion of its financing initiatives and the establishment of a new dividend policy, the Corporation expects to resume the evaluation and pursuit of new growth opportunities to build value for shareholders, seeking to expand its existing power and utilities platforms and to further diversify its portfolio by infrastructure category.
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, and include, among other things, statements found in “Strategic Overview” and “Results of Operations”. 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, 2011 under the heading “Results of Operations” (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 the UK water distribution business (“Bristol Water”); a TransCanada Pipelines Limited (“TCPL”) gas transportation rate of $2.24 per gigajoule in 2012; the level of gas mitigation revenue earned by the Corporation’s Cardinal cogeneration facility (“Cardinal”); 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; refinancing of the credit facility in place at the Corporation’s Capstone Power Corporation 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 completion of the previously-announced follow-on Värmevärden bond offering; 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; the accounting treatment for Bristol Water’s business under International Financial Reporting Standards, particularly with respect to accounting for maintenance capital expenditures; the amount of capital expenditures by Bristol Water; the UK pound sterling to Canadian dollar exchange rate and Swedish kroner to Canadian dollar exchange rate; 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, real and inflationary increases in Bristol Water’s revenue, Bristol Water’s expenses increasing in line with inflation, 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’s power purchase agreement expiring in the fourth quarter of 2014); fuel costs and supply (including increases in the gas transportation rate charged by TCPL); 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); to 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 the Swedish kroner to the Canadian dollar); to the Corporation’s investment in Bristol Water (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 licence); 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); and to 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.
For a more comprehensive description of these and other possible risks, please see the risks set out in this document under the heading “Risks and Uncertainties”, as updated in subsequently filed interim MD&A, subsequent Annual Information Forms of the Corporation 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 law, the Corporation does not undertake any obligation to publicly update or revise any forward-looking statements or financial outlook.
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 by providing reliable income 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.
1 - "Adjusted EBITDA", “Adjusted Funds from Operations”, “Adjusted Funds from Operations per Share” and “Payout Ratio” 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 pages 26 and 27 of Management’s Discussion and Analysis with reconciliation to IRFS measures provided on page 27.
2 - While Bristol Water’s revenue and expenses are fully consolidated into Capstone’s financial results, Capstone’s Adjusted EBITDA only includes its 70% economic interest in Bristol Water.
3 - In 2011, Capstone recorded $19.7 million in one-time costs related to the internalization of management on April 15, 2011.
4 - Adjusted EBITDA reflects Capstone’s 70% economic interest in Bristol Water while Bristol Water’s revenue and expenses are fully consolidated into Capstone’s financial results.
The year-over-year increase in the debt to capitalization ratio on a fair value basis was primarily attributable to a 53.6% decline in the share price since December 31, 2010, the addition of Capstone’s pro rata portion of the $504.5 million of consolidated long-term Bristol Water debt, $112.4 million of additional corporate debt to finance the Bristol Water acquisition, and a $63.3 million increase in long-term debt at Amherstburg Solar Park to finance construction of the facility.
The material factors or assumptions that were applied in formulating the Corporation’s financial outlook 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 Amherstburg Solar Park, Värmevärden and Bristol Water; a TransCanada Pipelines Limited gas transportation rate of $2.24 per gigajoule in 2012; the level of gas mitigation revenue earned by the Cardinal facility; 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 businesses, 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; refinancing of the credit facility in place at the Corporation’s Capstone Power Corporation 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; the accounting treatment for Bristol Water’s business under International Financial Reporting Standards, particularly with respect to accounting for maintenance capital expenditures; the amount of capital expenditures by Bristol Water; the UK pound sterling to Canadian dollar exchange rate and the Swedish kroner to Canadian dollar exchange rate; and that Bristol Water will operate and perform in a manner consistent with the regulatory assumptions underlying its current asset management plan, including, among others, real and inflationary increases in Bristol Water’s revenue, Bristol Water’s expenses increasing in line with inflation, and capital investment, leakage, customer service standards and asset serviceability targets.
The corporation will host a conference call to discuss year-end results on March 8, 2012 at 8:30 a.m. ET. 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 March 22, 2012. 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#. The event will be webcast live with an accompanying slide presentation on the Corporation’s website at www.capstoneinfrastructure.com.