Capital Power Corp

Good morning, and thank you for joining us today to review Capital Power’s fourth quarter and full year 2019 results, which we released earlier this morning. Our 2019 financial results and the presentation for this conference call are posted on our website at capitalpower.com.

Joining me on the call are Brian Vaasjo, President and CEO; and Bryan DeNeve, Senior Vice President and CFO. We will start with the opening comments and then open up the lines to take your questions.

Before we start, I would like to remind everyone that certain statements about future events made on this call are forward-looking in nature and are based on certain assumptions and analysis made by the company. Actual results could differ materially from the company's expectations due to various risks and uncertainties associated with our business.

Please refer to the cautionary statement on forward-looking information on Slide 2. In today’s discussion, we will be referring to various non-GAAP financial measures, as noted on Slide 3.

These measures do not define 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 are provided to complement the GAAP measures which are provided in the analysis of the company’s results from management’s perspective.

Reconciliations of these non-GAAP financial measures can be found in our 2019 MD&A. I will now turn the call over to Brian Vaasjo for his remarks starting on Slide 4.

Thanks, Randy, and good morning. 2019 was another outstanding year for Capital Power from a performance perspective.

This included a 1 billion acquisitions of a Goreway Power Station in Ontario that doubled our 500 million annual growth target. We also completed the construction of the 202 megawatt Whitla 1 project in Alberta.

The finance growth, we successfully raised 1.2 billion in capital last year. We assumed full control of the Genesee Generating Station by swapping our interesting Keephills 3 Genesee 3 with TransAlta.

We accelerated our dual-fuel capability plans in Genesee to be completed by 2021 which involves substantially compressing the construction duration to fit into our normal planned outages. Our investment in C2CNT is part of our sustainability strategy of supporting the development and deployment of carbon conversion technology.

The testing of carbon nanotubes in concrete is ongoing. Accordingly, we continue to plan to exercise options to increase our equity interest in C2CNT from 9% to 40% by the end of this year.

Assuming the carbon nanotubes in concrete testing and preliminary marketing of the product is successful, we plan to start the commercial scale production of the nanotubes at the new Genesee Carbon Conversion Center which is expected to commence operations in 2021. We also had strong financial performance in 2019 where we met or exceeded our financial targets.

This included generating a record year of AFFO with 555 million which is 45 million than the midpoint of our 485 million to 535 million guidance range. Turning to Slide 5, I’ll review our 2019 performance versus the annual targets.

Annual facility availability was 94% last year, which was slightly before - below the 95% target. We reported 78 million in sustaining CapEx which was slightly below our target range of 80 million to 90 million.

Our reported adjusted EBITDA was a $1 billion, after removing the one-time impacts associated with the swap of interests in Genesee 3 and Keephills 3, adjusted EBITDA would be 907 million, which was within the $870 million to $920 million guidance range. As I mentioned, we had a record year of AFFO of 555 million that exceeded the 485 million to 535 million guidance range target.

I'll review the outlook for Alberta power prices on Slide 6. In 2019, the average power price was $55 per megawatt hour compared to $50 in 2018.

The higher power price in 2019 reflected the impact of higher natural gas pricing, and seasonably cold temperatures coupled with baseload facility outages experienced during the first quarter of 2019 when average power prices were 69 per megawatt hour. We see a positive outlook for Alberta power prices on a current forward - as seen in the current forward prices for 2020 to 2022.

Forward prices are averaging 57 megawatt hour. I'll now turn the call over to Bryan DeNeve.

Thanks Brian. I’ll review the financial highlights starting on Slide 7.

The fourth quarter in 2019 financial results were consistent with our updated expectations that we provided at our Investor Day in December. This included generating 555 million in AFFO that was at the high-end of our guidance range.

In the fourth quarter of 2019 the average spot price was $47 per megawatt hour. However our trading desk captured an average realized price at $57 that was 21% higher than the average spot price.

The $57 average realized price was also higher than the $52 realized price in Q4 2018. As mentioned on our Q3 call, there were one-time accounting impacts related to the transaction swap of the Genesee 3 and Keephills 3 assets that closed on October 1 that impacted both the fourth quarter and full year results.

I won't go over these again but there are details provided in our MD&A. Moving to Slide 8 I'll review our fourth quarter of 2019 financial results compared to the fourth quarter of 2018.

Revenues and other income were 683 million up 101% compared to the fourth quarter of 2018 due to strong results from the Alberta commercial and portfolio optimization segment and from the acquisition of Goreway in the second quarter of 2019. Adjusted EBITDA was $352 up 106% year-over-year.

As noted in the footnote on the slide adjusted EBITDA includes one-time items associated with the swap of interest in Genesee 3 and Keephills 3. Excluding these items adjusted EBITDA would be $230 million higher.

The higher adjusted EBITDA was largely driven by the acquisition of Goreway in the second quarter of 2019 and from strong portfolio optimization results. Normalized earnings of $0.29 per share was slightly down compared to $0.30 per share in the fourth quarter of 2018.

We generated $128 million in AFFO that was up 60% year-over-year. AFFO per share was $1.22, was up 56% from the fourth quarter of 2018.

Slide 9 shows our full year financial performance for 2019 compared to 2018. Revenues and other income were $CAD 2 billion, up 39% year-over-year.

Adjusted EBITDA was $1 billion, up 40% compared to 2018. Excluding the one-time items described in the foot note, adjusted EBITDA would be $907 million, up 23% due to the additions of Arlington Valley, Goreway and New Frontier and stronger performance from the Alberta commercial segment.

Normalized earnings of $1.34 per share were up 20% compared to $1.12 in 2018. As mentioned, we generated 555 million in the FFO, that was up 40% year-over-year.

The AFFO per share was $5.32 was up 38% from 2018. Overall we had double-digit increases in the key financial metrics.

Turning to Slide 10, I’ll provide an update on commercial portfolio positions. Since the third quarter of this year, we've increased our 2020 hedge position from 53% to 72% and the average contract price in the mid $50 per megawatt hour range.

For 2021 we're 3% hedged in an average contract price in the mid $60 per megawatt hour range and for 2022 we're 11% hedged at an average contract price in the low $50 per megawatt hour range. This compares to current average forward prices of $60 for megawatt hour for 2020, $57 for 2021, and $53 for 2022.

I’ll now turn the call back to Brian.

Thanks Bryan. I’ll outline our financial targets for 2020, on Slide 11.

These are the same as we shared with you in December. Our 2020 financial targets are based on 63% of the Alberta commercial base load generation hedged at an average contracted price in the mid $50 per megawatt hour range.

They include our - any impacts from the 500 million of committed capital for growth. And as a reminder, there is a $40 million reduction in AFFO from Arlington Valley's previous tolling agreement that expired in 2019.

For 2020 we are targeting $935 million to $985 million in adjusted EBITDA and for AFFO we're targeting a range of $500 million to $550 million. Slide 12 outlines our development and construction targets for 2020.

We currently have two wind projects under construction. The construction of our Cardinal Wind project in Illinois is nearly completed and is on schedule for commercial operations next month.

The project is expected to be in the budgeted range in its U.S. dollar functional currency.

We are also proceeding with the second phase of Whitla Wind in Alberta. It is a 97 megawatt project with an expected capital cost of $165 million, and expect it to begin commercial operations in 2021.

Turning to Slide 13, later today Capital Power will release its inaugural integrated Annual Report that combines our financial and ESG reporting together in one target. This report provides a comprehensive view of our priorities, performances, and progress, as well as insight into our strategy for creating long-term value.

We also conducted third party limited assurance on some of our key sustainability indicators. We have also released our 2019 climate change disclosure report which is aligned with the recommendations of the task force for climate related financial disclosures commonly referred to as TCFD.

The report provides additional details on climate change governance, strategy, risk management and opportunities. In January 2020, we received an A minus score from the CDP on their 2019 annual assessment, our highest score to-date.

For the first time last year we also participated in CDP's water security assessment and received a B minus. The water assessment looks at how companies are reducing risks and seizing opportunities for water security.

The B minus is a strong score for the first time submission and a solid platform to build upon as we focus more on water management and disclosures. I'll conclude our presentation with an ESG slide on Slide 14.

The Capital Power 2019 was another outstanding year. Our strategy has been delivering value for our shareholders year-after-year.

Underpinning our strategies has always been a strong commitment to sustainability. I won't go over the ESG highlights noted on this slide but you can see a very good progress in recognition in all three areas of environment, social and governance.

We also recognized a growing stakeholder interest in understanding climate related risks and opportunities, and I can assure you that the sustainability is and will remain a very important part of our business. I'll now turn the call back over to Randy.

Okay. Thanks, Brian.

Operator, we’re ready to start the question-and-answer session.

Maybe to start off just wanted to touch on the sustainability your thinking of allocation of capital there. When you're looking at future capital investments, how do you weigh, I would guess your historical practice of buying mid-merit gas plants versus new renewables?

So, generally speaking when you look at renewables, they tend to have a much longer project life, building a wind farm such as Whitla 2 is a 30 to 40-year life whereas a mid-life natural gas asset is considerably shorter. So, the basic economics takes into consideration evolving trends associated with decarbonization.

In addition to that, we continue to do some work considering the different discount rates that should be applied to those assets which, fully takes into account the changing trends in terms of the overall capital attraction associated with either natural gas or with renewables. So, we think we are taking into consideration at least the economic implications associated with the difference between natural gas assets and wind assets.

All right, so I guess it would be fair to say that you're quite happy continuing to invest in gas, but with a higher implied discount rate there?

Yes, and you know we've always said that our preference - if you're ending up with projects that look the same in terms of sort of adjusted economics returns, et cetera that we would view the development of renewable assets more favorably.

All right, and then just moving on. Can you update us on your re-contracting initiatives and Decatur and what else is ongoing in the fleet?

So we currently have two re-contracting discussions taking place one with Decatur and the other one with Island Generation. And over that the last couple of months very significant progress has been made on both projects.

And we are hopeful that we'll have something to announce on Decatur within the near future.

All right. And then just on Decatur that was of pretty similar kind of messaging at the Investor Day, is anything holding up or is it just taking longer to close everything off?

It's actually more associated with approval processes than it is actually kind of negotiations or working out terms and conditions.

The first question I guess Brian in relation to the announcement that you continue your role as CEO. To the extent that matters to investors, may I ask what’s change your decision to retire this year and in relation to that should we view our strategy as being largely moving forward?

So essentially - it ended up being a very much a personal decision. And as I've been going through the last number of months and looking at the other activities that I would be getting involved in outside of Capital Power and through retirement.

I was finding that I would tend to be almost as busy and came to the conclusion that, that certainly if I was going to continue to be a very active in a business and giving back to community life. I might as well go back to what I was very much enjoying and continuing to enjoy, which was the President and CEO of Capital Power.

And the timing of it basically you know the board had a vigorous process taking place in terms of the search and it kind of came to a point where you know it was continuing to proceed. And it reached a point where I either needed to come to a decision and throw my hat in the ring or continue to - on my plans for retirement.

So from that perspective - January was when I approached the Board and said that I would be happy to continue in my role as CEO for another three years.

And just a follow-up on that strategy-wise, I know we just had our Investor Day a couple of months ago. I suppose as you look across your three-year contract.

Should we expect growth and diversification as part of your strategy moving forward or should we expect a little bit of a move or a change moving forward?

So actually, it's the - one of the things that really continued to excite me about Capital Power and its future was the ongoing prospects of growth that Capital Power has and certainly the challenges going forward in terms of the growth, decarbonization, ESG. Those are all challenges to Capital Power, which we are extremely well-situated to meet.

So, that sort of excitement actually got greater and greater, as I was looking at retirement, not less and last. So, very enthusiastic about continuing on generally the same path as Capital Power has been on.

Having said that, very responsive to the changes that we do expect will be taking place in the market.

Thanks. And just to finish off, as you mentioned, changes to the market.

I wonder if you've had any recent discussions with the Alberta government or forgot sort of two ISO initiatives on market pricing - sorry, pricing framework as well as market power. Obviously, some of the recommendations from ISO to the government were not made public.

So, I wonder if they reached out to you or vice versa?

Yes, the ISO does have a process that’s underway where they are engaging stakeholders so, where we're involved in terms of providing our thoughts and feedback on those two items.

Firstly, maybe just starting on the nanotube front, I’m just wondering if you can give us a little more color on how that testing is progressing both at Shepard and with Heidelberg’s Canadian subsidiary?

So as I indicated, we - the C2CNT continues to work with Heidelberg in terms of finding basically two different or in two different areas. One is, around the actual production of - an optimal carbon nanotube for concrete.

And the other one is for the interface between the carbon nanotubes and concrete in terms of getting an appropriate distribution, and considerable progress has been made on both; but it is as expected an iterative process of continually optimizing. So, I would say, generally speaking, it's going as expected.

And then just one question on the debt at Goreway, I think just looking at your financials that 560 million - sorry 590 million is due in 2020. Is that just - a refi in normal course with more non-resource - project financing excuse me is that the plan there?

Yes, and actually we've completed that extension out from the 2020 timeframe. But that's - yes that's just a normal course in terms of moving it out it doesn't it dramatically affect the cost of that debt.

Congrats Brian on your announcement. Just wanted to start off by asking about the recent announcement on Cascade and that plant coming online and what impact you might think that could have on the market kind of in the post-2022 timeframe?

So the - it certainly in fact that plan was to proceed there would be an impact on our power prices in Alberta, but given Suncor’s announcement to move ahead with their co-gen facility at the end of 2023. Our view that it’s very unlikely that plant will proceed, the economics are going to be - materially challenged if it was to be coming on at the same time as the Suncor co-gen.

And maybe more in the near-term here so 72% hedged for 2020 only 3% 2021 looks like the forwards are still in kind of - the $50 range. So, I just want to show if that’s a reflection of your view on forward prices potentially moving higher in 2021 or just a lack of liquidity in the market?

No it's a, lot of that work in 2021 is driven by our view of fundamentals in the Alberta market which we feel are very bullish and I would anticipate prices will settle materially above where forwards are currently trading for that year.

And the last one maybe just to follow-up on the - your sustainability report and you know looking across your portfolio of assets here. Any assets that may not quite fit with your ESG story going forward.

And thinking about potential consolidation opportunity or non-core asset sales, say at the Joffre facility or any other assets do you think cannot be a strategic fit from an ESG perspective?

So as we look across the fleet and the assets that we have, from an ESG perspective, certainly the facilities in North Carolina have - I'll call it a more negative profile and those, you know the contracts are terminating next year. So, we think that's taking a course that will one way or another have those facilities not in our fleet.

As we look at the other assets, certainly the Joffre co-gen facility is a good asset or efficient co-generation facility, large one. We would as always consider either increasing our interest or reducing our interest on that facility depending on the other two partners.

When we look across the kinds of opportunities that might be out there on the natural gas side, certainly there's a number of co-gen facilities in the province that from time-to-time are rumored to potentially you know come to market and would certainly consider those from a contracted perspective and from a natural gas perspective. But again as we look across our fleet we the - you know the natural gas assets we have are very efficient and in fact becoming more efficient in our hands.

Very pleased with our move to taking our coal assets and moving them to do a few and certainly as we continue to look at those assets and as we've talked in the past you know we always look at a range of opportunities associated with those assets. And certainly, the possibility of repowering is always there.

So as we look forward - where we have in our and we'll be ending up with in a very, very efficient fleet of natural gas assets. And there really aren't any weak ones there anyones that we would say from an ESG perspective aren’t reasonably positive.

So, I think with the exception of the North Carolina assets we're in a pretty good position. Having said that, that doesn't mean that at some point in time we might not be looking at divesting various assets for a whole range of reasons including demand for capital.

Okay. If there are no more questions, we’ll conclude our conference call.

Thanks for your interest in Capital Power and have a good day everyone.