Capstone Infrastructure Corporation Provides Updated Outlook for 2012 and Future Dividend Policy
Toronto, Ontario (December 6, 2011) – 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.