Capital Power Corporation

Randy Mah - Senior Manager, Investor Relations Brian Vaasjo - President and Chief Executive Officer Bryan DeNeve - Senior Vice President, Finance and Chief Financial Officer

Linda Ezergailis - TD Securities Inc Paul Lechem - CIBC World Markets Ben Pham - BMO Capital Markets Andrew Kuske - Credit Suisse Robert Hope - Macquarie Capital Markets Robert Kwan - RBC Capital Markets Jeremy Rosenfield - Industrial Alliance Securities Inc

Good morning and thank you for joining us today to review Capital Power’s third quarter 2015 results, which were released earlier this morning. The financial results and the presentation slides for this conference call are posted on our website at www.capitalpower.com.

We will start the call with opening comments from Brian Vaasjo, President and CEO; and Bryan DeNeve, Senior Vice President and CFO. After our opening remarks, we will open up the lines to take your questions.

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

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

These measures are not defined financial measures according to GAAP and do not have standardized meanings described by GAAP, and therefore are unlikely to be comparable to similar measures used by other enterprises. Reconciliations of these non-GAAP financial measures can be found in the Management’s Discussion and Analysis for Q3, 2015.

I’ll now turn the call over to Brian Vaasjo for his remarks starting on Slide 4.

Thanks, Randy, and good morning. I'll start off with a quick review of the highlights for the third quarter.

We had a solid operating performance quarter with an average plant availability of 95%, reflecting the planned outage at Keephills 3. We reported normalized earnings per share of $0.33, which was ahead of our expectations and up 175% compared to $0.12 in the third quarter of 2014.

Funds from operations of $97 million was also better than expected and 17% higher than the $83 million for the same period a year ago. Based on the year-to-date results and outlook for the remainder of 2015, our forecast of funds from operations has improved.

We expect 2015 FFO to improve from the low end of the $365 million to $415 million target range to the mid-point of the range. I am also pleased to announce that we have filled the vacant Senior Vice President Corporate Development and Commercial Services position.

Effective November 2, 2015, Mark Zimmerman will be joining the company in this role. Mark has more than 25 years of experience in the energy infrastructure and petroleum industries with leadership roles in focusing on finance, valuation, corporate strategy, business development, and mergers & acquisitions.

His most recent position was Vice President, Corporate Development and Strategy at TransCanada Pipelines Limited. Turning to Slide 5.

This slide summarizes the plant availability, operating performance of our plants for the third quarter of 2015, compared to the same period a year ago. As mentioned average plant availability in the third quarter was 95% compared to 97% in the third quarter of 2014.

This reflects a major scheduled outage that was completed at Keephills 3 that reduced its plant availability to 63%. As you can see our operations are back to normal at the Shepard facility, where the plant had 100% availability in the third quarter and improvement from 73% availability in the second quarter, which was negatively impacted by 28-day unplanned outage.

I’ll now turn the call over to Bryan DeNeve.

Thanks Brian. I'll discuss our financial results starting on Slide 6.

As Brian highlighted, in the third quarter we reported normalized earnings per share of $0.33 and $97 million in funds from operations. Both of these numbers were higher than expected primarily due to strong portfolio optimization activities.

The average Alberta power price was $26 per megawatt hour in the third quarter compared to $64 per megawatt hour in the third quarter of 2014. Despite this 59% year-over-year decline, our trading desk captured 135% higher realized average price of $61 per megawatt hour versus the spot price of $26.

The trading desk realized higher power prices by selling forward 100% of its commercial production, a portion of which was secured in June 2015, when forward rates increased temporarily. Slide 7, presents our Alberta power market trading performance over time.

You can see that over the past six years, our trading desk has captured an average realized power price that is 24% higher on average compared to the spot power price. Not only do our portfolio optimization activities continue to create the incremental value by capturing a higher realized Alberta power price than spot, they also help to manage our exposure to commodity risk and reduce volatility as illustrated by the flat orange line of the chart in contrast to the more volatile spot power price shown by the blue line.

Turning to Slide 8, I’ll review our third quarter financial results compared to the third quarter of 2014. Revenues were $469 million up 89% from Q3 2014 primarily due to the unrealized changes in fair value of commodity derivatives and emission credits and strong portfolio optimization results.

Adjusted EBITDA before unrealized changes in its fair values was $120 million, up 41% from the third quarter of 2014. All plant segments reported higher adjusted EBITDA year-over-year lead by 47% increase from the Alberta commercial plants in Sundance PPA segment.

Normalized earnings per share of $0.33 increased to 175% compared to $0.12 a year ago. Funds from operations of $97 million were ahead of the expectations and up 17% year-over-year.

Turning to Slide 9, I’ll quickly cover our third quarter year-to-date results compared to the same period in 2014. Overall, the year-to-date results show year-over-year improvement across all financial measures.

Revenue was $910 million, up 14% year-over-year primarily due to strong portfolio optimization results. Adjusted EBITDA before unrealized changes in fair values was $329 million, up 16% from a year ago primarily due to higher contributions from the Alberta commercial plants in Sundance PPA segment.

Normalized earnings per share were $0.73 on a year-to-date basis in 2015, up 43% compared to $0.51 a year ago. We generated $275 million in funds from operations on a year-to-date basis, which is 6% higher than last year.

I’ll conclude my comments with our financial outlook on Slide 10. Our original 2015 FFO guidance was based on an average Alberta power price of $44 compared to an actual power price of $37 in the first nine months of 2015.

As mentioned, the strong performance of our trading desk has offset the weakness in Alberta prices. Accordingly, our latest forecast shows an improvement in our 2015 FFO expectation to the midpoint of our guidance range from the lower end of the range.

With respect to a provincial climate change announcement, we remain actively engaged in the consultation process and we expect the Alberta government to announce a long-term climate change strategy prior to the climate change conference in Paris in early December. I’ll now turn the call back to Brian Vaasjo.

Thanks Bryan. I'll conclude with an update on our targets and corporate priorities.

The charts on Slide 11 show our year-to-date operational and financial results versus the 2015 annual targets. After nine months, our average plant availability was 94% and we remain on track to achieve the 94% target for 2015.

Our year-to-date sustaining CapEx was $50 million versus the $65 million annual target. Nine months plant operating and maintenance expenses are $143 million versus the $180 million to $200 million annual target.

Finally, we have generated $275 million in funds from operations through nine months and expect to be at the midpoint of the $365million to $415 million annual range. Overall, we are on track to meet our 2015 annual operational and financial targets.

Turning to Slide 12, we have two development and construction targets in 2015 relating to the K2 Wind project in Ontario and Genesee 4 and 5 here in Alberta. The K2 Wind project was completed on time and on budget in the second quarter.

Our Genesee 4 and 5 our goal is to transition to the construction phase of this year. We are progressing with site preparation at the Genesee site.

For 2015 the total CapEx spend for Genesee 4 is expected to be approximately $14 million where our joint-venture partner ENMAX and that’s would equally share in the costs. I will now turn the call back over to Randy.

Thanks, Bryan. Matthew, we are ready to start the question-and-answer session.

Thank you. Congratulations on a strong quarter.

And just a quick question on restructuring, can you comment on what sort of ongoing cost savings you might realize from that and if you expect to do more cost savings prospectively either through your supply chains or other means, or if you're kind of done for now?

Good morning Linda. The restructuring charges part of an overall program that the impacts of which including cost savings around lower staff levels, increasing efficiencies of our plans and also some other initiatives from the cost management side we’re actually intending on bundling together and speak at our Investor Day as to the overall impact of the combination of these initiatives.

But there is more than just the restructuring charge.

Okay, that's helpful. I look forward to hearing that.

And then can you comment on the nature of the unplanned outage at your Clover Bar Unit 2, and whether there was any systemic thing there or just what happened?

So for that what was happening as we were having an unplanned outage associated with some of the problems that we have encountered from a blade perspective and well in there, there was some processes that again from a GE perspective that didn't quite go right and it resulted in much longer outage than we had anticipated, but as it sits today units running fine no other problems or issues.

Okay that's helpful and just one final clean-up question. You mentioned in your submission to the Leach panel that critical investment commitment decisions need to be made in the next six months to nine months.

Do you think that any sort of policy direction or strategy communicated over, I guess, before the end of the year will be enough to make major investment decisions, or would you want more crystallization of the details in order to really make substantial commitments to the Alberta market?

Certainly the greater levels of detail that are provided by the government this year would be very, very helpful in making that decision either to go forward or not to go forward. Our hope and we've been communicating with the government as to the types of information we think are necessary for us to make a fully informed decision.

Undoubtedly at that point in time there will be some details still to be worked out just given the nature of and complexity of the issues but we’re hopeful there is enough information that would provide us with the comfort, again to either go forward or not.

Great, thank you.

Thank you, good morning. Just maybe some follow-on questions around where you might see the power market going in Alberta.

In your discussions with the government have you had any or has the government had any thoughts about changes in the market design itself to supports the changes that they want plus the investment either down the road. Do you have a sense of any upcoming changes to the market design?

So just in terms of you know as we look at it. In terms of the feedback from the government, there are certainly elements that can have significant impacts on market design such as the way renewables or increased renewables are brought into the market and can have some significant implications that don't necessarily drive towards specific design, but towards specific impact.

So the government is very aware of those elements and the impact of different decisions might have on the market itself, but in terms of market design, we've heard a pretty consistent message that the government has a strong preference for maintaining the existing market design and it’s been a pretty consistent message.

Okay, so you haven’t heard any commentary around moving to a capacity market or any substantive changes to the actual design?

You know that there is - as you know there's a number of industry participants and others who have made comments about potentially changing market design.

Is supportive of investments going forward, what would your spend beyond Genesee 4 in 2016?

We don't have that entirely finalized as you can anticipate, we’re going through our budgeting process and fine-tuning those numbers, but you it is somewhere in the order of magnitude of about $100 million.

$100 million?

Yes.

Okay and last question Beaufort Solar project you expect to complete that I think this year. Is there anything else in the queue in the U.S.

that you can see moving actually into construction over the course of the next year?

So we do have the Bloom Wind project, which we have – which were active in our PPA processes right now and we’re also looking at various potential bilateral contracts to move that project forward. If we’re successful over the next month or so potentially two months we would expect that wind farm to be complete by the end of next year.

And what would the CapEx be for that?

It would also - a lot of that would depend on structuring, but somewhere in the order of $350 million.

Canadian or U.S.?

That would be U.S.

All right, great. Thank you very much Brian.

Okay, thanks good morning everybody. I just want to go back on the climate change policy that you expect; everyone is expecting it to come out.

And as you think about your own submissions and then even some other submissions that have come in from your competitors in the marketplace. I mean how do you guys think about just the realistic outcomes that can how this thing all plays out in the end just in terms of probability and also just how you guys are managing those different outcomes too on a go forward basis right now?

So obviously Ben, we’re looking at the whole range of outcomes and implications both in the short, medium and long-term and trying to understand the impacts of those. For example, things like earlier plant closures help build power price and so on in the shorter-term.

And so there is a lot of nuances around not only I'll call it the discrete decision, but also the combination of decisions and what it means for Capital Power, what it means for the Alberta power market and obviously things like what does it do in terms of emissions objectives et cetera for the government. So we’re looking at the full range of alternatives quite actively.

Okay. Maybe I can just go to your guidance change and there is a swing there to the positive and I'm just curious I mean most of the hedges were layered on in June and you talked about this in the last quarter and you guided towards some sort of potential net positive.

But you didn't change your guidance last quarter so I’m just wondering was there anything else that came out of the quarter that provided you greater confidence and you guys look at the numbers and just giving you greater confidence and rate share guidance?

I think in addition to we had layered on those additional hedges as we mentioned, but we also had very strong availability from the fleet in Q3, which locked in additional value and also as we move through Q3 we’ve continued to firm up our position in Q4 of this year, which has also firmed up our expectations and being able to revise the guidance.

Okay. Great.

Thanks for taking my questions.

Thank you, good morning. I guess my question is to Brian whether it’s for the I or the Y.

Could you just give us some context on customer conversations you are having right now, because obviously there is a lot changing in the Alberta power market and there is a quite bit of uncertainty. So how is that affected customer behavior unlocking in long-term contracts are even contemplating power delivery in 2016, 2017 and beyond?

So we've certainly seen some reduction in terms of activity on the retail side of the market. So what we're hearing from customers is some of them are waiting on the sidelines until some of the policy decisions are made.

So certainly, we would expect that activity to start to ramp up after the clarity starts to come forward.

Okay, that’s helpful. So are you expecting when you get into 2016, bit more of a ramp up in the book.

I mean typically the way you ladder in things, you usually open in a longer term basis and open in the near-term if you think prices are officially depressed, but do you anticipate retailers coming back in and then industrials maybe have some flexibility ramping in later into the book as there’s greater clarity.

Yes, we would see that activity increased in Q1 and looking at again some industrial large commercial customers that have been waiting for that additional clarity. We would see their activity increase to lock-in over the next three to five years.

And just within that, and I know you typically don't talk about pricing dynamics and obviously, the uncertainty surrounding some of the coal facilities that creates a lot of variability in pricing, but is the expectation from industrials is really more wait-and-see and that's why they have been sort of standing on the sidelines?

I believe so yes.

Okay, just on demand in the market. Demand continues to move positively.

Do you see any real derailing of that or are we seeing steadily chugging along even in a pretty lackluster commodity market?

Well, certainly we’re watching this very closely, year-to-date, we see a weather normalized growth in Alberta of 1.5% through the end of Q3 of this year. As we project forward, there is uncertainty of course around 2016 and how the prolonged lower oil price will manifest itself in terms of load growth, but our view is that if we look over the next three to five years, we would expect that load growth to be in that 2% to 2.5% range per year.

Okay. That’s very helpful.

Thank you.

Good morning, just a question on the Alberta climate change panel, if the recommendations do come in at our overly punitive what recourse would you expect to pursue?

I think a lot of that depends on what the nature and type of decision is and we had carefully weigh all of our alternatives in terms of action and at that time come to a conclusion, but we would be looking at the full range of what actions are available to us.

So consultation through legal meaning that you assume?

Potentially.

All right. Maybe just broader, in terms of capital allocation in this environment we saw you buyback some additional shares this quarter.

What would the thinking there be, is that there is uncertainty regarding investments on Bloom acquisitions as well as G4 and that see the best use of your capital to be repurchasing shares?

Yes, so at this time we've looked at our free cash flow that we've had available and until some of those growth projects in the U.S. start to crystallize we've been utilizing those funds to buyback shares as you mentioned.

In earlier in the year we actually bought back some of the debt so we are we looking to doing that at balanced way, but certainly our priority as we move forward is on the growth side so as we see Bloom start to move forward and potentially some of the other projects in our element portfolio that will be the priority for our free cash flow.

Thank you.

Good morning. If I can just come back to just what you're expecting on climate change and more so just a release from the government.

Have you heard anything specific that leads you to feel that the government is going to announce it sounds like a more formal strategy I guess a little bit of what you are hearing is that there’s an expectation the government is just going to release a few options or up to five options on the path forward?

So maybe Robert, just a point of clarification. I think the issuing of options was from the Leach panel to the government and we expect that to be not public and then in fact we expect until a decision is made we don't expect to know what those options are.

So from that point what we do expect is the government to be releasing some minimum framework that wouldn’t describe their direction and hopefully some specifics around climate change and what the various initiatives are, because it certainly has something to do with oil, sands and certainly something to do with the electricity sector. But in addition to that our understanding is it’s going to cover a number of other elements as well.

Again not the Leach panel, but some of these other things are going to be involved as well. So it will be fairly complex and we’ve encouraged the government to provide much specificity as they can at the earliest moments.

So hopefully there will be enough that we can fully assess the impact of the direction that the government's going.

Got it. Thanks Brian.

And I guess just on that and has the government indicated that there will be or kind of what are you basing your thought that there will be enough in terms of a framework rather than so it's a pretty quick turnaround from the release of the Leach report than to Paris for the government has something more concrete on the path forward. So is that just kind of your hope where they’ve indicated that their intention is to have enough details out there for people to start making decisions off of it?

Well, there is the Leach report that comes out, but also at the same time the bureaucracy in the government is working very hard and in terms of understanding and knowing what the various ranges of alternatives are. The elected officials who started to be getting briefed not necessarily on specific initiatives or approaches, but in terms of generally on the file, we’re very hopeful that there will be enough information provided early this year and maybe with a little bit more detail early next year that we can make some business decisions then it'll bring significant amount of certainty to the power market in Alberta.

Got it, okay. Just somewhat related you'd mentioned that the strong indications you’ve heard repeatedly from the government is this is a preference not to change the market design I was just wondering is that with respect to a direct change in market design or does that include the indirect impact such as introduction of an RPS or governments entering into contracting that effectively changes the design itself?

Robert the way we look at it is there are certainly approaches to RPS standards and that whole framework that drives fundamental changes and the market design and the degree to which people may want or to be willing to invest from a merchant perspective. But there are also market friendly approaches that can basically leave the market design and the price signals and everything else in the market continuing to be robust and predictable and circumstances where companies like ours may continue to be willing to invest in gas.

Because that’s one other significant components that’s out there of course is that they need gas, natural gas build as well. So they need a healthy merchant market for that to occur.

Okay, sorry can you just give us some specific examples of what market friendly changes might be?

Yes, there is a number of different kinds of market friendly ones. So for example if RPS standards are very much focused on say for example, I'll just take our proposal which had two market friendly approaches, one was is to create basically market prices that would drive that build them renewables, so an RPS standard would be notional it wouldn’t be something that that the government is issuing RFPs for.

The other approach that we put in was to actually have 50% of the retirement energy from coal plants replaced by renewables and they could come through a bidding process a typical RPS process and our analysis says that actually doesn't negatively impact on the market, the price signals the prudence around building natural gas into that market.

Okay.

Those are just two examples of market friendly approaches.

Okay, great. If I can just [ask actually] one question on the quarter just in the Alberta contracted segment.

I was just wondering if there’s anything unusual during the quarter I guess Q1 2015 very high availability so similar to this quarter but and actually slightly higher power prices for the incentives, but the EBITDA was about $10 million lower. So I am just wondering was that an unusual quarter?

Was this an usual quarter?

So you are comparing this quarter Q3 2015 to Q3 2014?

No Q1 2015, so very high availability quarter similar pricing environment, but quite a bit different EBITDA?

Back in Q1, 2015. Yes, one of the things that has occurred is we reached a settlement with the balancing pool on replacement indices under the power purchase arrangement.

So the indices determined compensation on the capital invested in those facilities. So the replacement indices that has been put in place is favorable for us for Genesee 1 and 2, so those benefits are showing up in Q2 onward for those facilities.

Okay. So this is now kind of for lack of better term of run rate under the new index, but there was no kind of catch up booked in the quarters, is that correct?

Not in Q3, no.

Okay, perfect. Thank you.

Great, thanks. Good morning.

Just a follow-up on the Alberta contracted segment was the coal cost also an issue that was factored into the difference in the EBITDA there?

Yes, actually I'm glad you raised that Jeremy, that would be the other factor is we've continued to see declines in the coal cost at Genesee 3 or in Genesee 1 and 2 as well as seeing some of that start to occur on Keephills 3 through our joint venture there.

I was wondering if you could just break it out. I don’t know if you have the number in front of you, but just in terms of notionally that versus the other item that you described earlier with relation to the indices?

Yes, on a go forward basis I would say the coal – the savings on the coal side is probably about two thirds of it.

Okay, that helps. The other question that I had really just relates to your hedging strategy going forward.

Looking beyond 2016, looking at 2017 about 30% hedge right now, is the strategy just to maintain a sort of low level of hedges given where prices are I think in the market right now and seek to hedge up if there is change in the overall market this December. Is that sort of the way you're thinking out to 2017 or it will be part of a more comprehensive strategy, just curious how you are thinking about that?

So basically we look forward into 2017, we have a very detailed view of – fundamental view of what spot prices we expect in 2017 and we look at how that compares relative to where forwards are. And really that's the primary driver between that determines.

How much we lock in 2017 subject to the amount of liquidity in the market. So as typically what happens is as we get closer to 2017, we’ll see liquidity around 2017 improve and that provides an opportunity to lock in increasing percentage, is that more favorable pricing.

And just from a pricing perspective like previously you’ve been $50 range is what would had been targeted, but is that still sort of realistic sort of pricing target as you look forward or has your expectation for what you think you can get when locking in hedges that has that changed?

It’s dynamic as information becomes available in the market in terms of what we are seeing with the new generation announcements of course the climate change discussions as we have a view that the market design will continue to function as it has. So that's constant when we look forward.

I can't as I mentioned earlier we have sort of a 2% to 2.5% expectation around loan growth. So prices in the $50 range is still a reasonable expectation.

Okay, and just in terms of guidance I'm assuming when you have your Investor Day later this year you’ll introduce guidance for 2016, but when you think about setting that, when you think about the high level of contracting where you are right now. How much real variability is still let's say in the 2016 numbers at this point?

So we’ll certainly provide a lot more detail around that at Investor Day in December. Our base load production is for the most part hedged in 2016, but certainly we see opportunities in terms of our peaking generation capability which is [off C back] as well as for the Joffre facility as well as our potential upside on our Halkirk Wind project are all elements that will start to firm up as we move towards into 2016.

All right, thanks. End of Q&A

Okay, thanks Mathew. We hope you can join us for our Annual Investor Day events that would take place on December 30 in Toronto.

More details will be announced shortly. Thanks again for joining us today and for your interest in Capital Power.

Have a good day everyone.