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Executives Aaron Boles – VP, Communications & IR Mike Bernstein – CEO Mike Smerdon – CFO Analysts Kelsey Roste – RBC Capital Markets Capstone Infrastructure Corp. ( OTCPK:MCQPF ) Q1 2015 Results Earnings Conference Call May 15, 2015 8:30 AM ET Operator Thank you for standing by. This is the Chorus Call Conference Operator and welcome to the Capstone Infrastructure Corporation First Quarter 2015 Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to turn the conference over to Aaron Boles, Senior Vice President, Communications and Investor Relations. Please go ahead sir. Aaron Boles Thank you. Good morning, everyone. Thank you for joining on Friday before a long weekend, good for you, to discuss Capstone Infrastructure Corporation’s financial results for the first quarter of 2015 ended March 31. Today’s call is hosted by Mike Bernstein, Chief Executive Officer. Also on the call is Michael Smerdon, Chief Financial Officer. Our News Release was issued after market closed yesterday and is available on our website at www.capstoneinfrastructure.com. Today’s conference call is being webcast live with accompanying slides and will be archived on our website along with a transcript of the event. Following management’s remarks, we will hold a Q&A session as usual. During the Q&A, we would like to ask that you limit your questions to two before re-entering the queue so that everyone has a chance to participate. Before we begin, I would like to remind everyone that during the course of this conference call, we may make various forward-looking statements that involve known and unknown risks and uncertainties that may cause actual results to differ materially. For information about such risks and uncertainties, I refer you to the MD&A and our Quarterly Report and to our most recent AIF dated March 24, 2015. And with that, I’ll turn the call over to Mike Bernstein. Mike Bernstein Thanks Aaron. Good morning and welcome to Capstone’s quarterly conference call. Thank you for joining us. The first three months of 2015 marked the start of a busy transitional period to a new phase of growth for Capstone. Two of our heritage power assets began operating under contracts. Our 24-megawatt wind facility reached commercial operations and another 25-megawatt project neared completion. We received key approvals for the next stage of wind developments and Cardinal made substantial progress on its $30 million refurbishment and life extension work. Bristol Water successfully completed its previous five-year 560 million asset management program and also initiated a challenge to the subsequent five-year plan. As we noted in the forecast we issued at the end of last year, our mid to long-term prospects remain very positive though the changes at our businesses will exert downward pressure on some of our financials in the near term. Adjusted EBITDA was 29.1% lower than the first quarter of 2014 at $29.5 million, primarily reflecting the new long-term contracts at Cardinal and Whitecourt and reduced production at our operating wind facilities. These declines were partially offset by contributions from our new Skyway 8 and Saint-Philémon assets. Bristol Water also provided a lift in the final quarter of higher tariffs from asset management plan 5 and favorable currency exchange rates. The factors impacting adjusted EBITDA also resulted in lower adjusted funds from operations, which came in at $6.6 million. We expect these figures to improve as we build out our current wind development portfolio over the next two years. We remain committed to our current dividend policy as we continue to build our portfolio, look to improve the performance of our existing assets and execute Capstone’s growth strategy. Organic growth is progressing steadily. In the first quarter we commissioned the 24-megawatt Saint-Philémon site in Quebec and made good progress on the 25-megawatt Goulais facility near to Saint Marie. Construction is now complete. The facility is energized and we expect it to be commissioned within the next week. In the first quarter, we received approvals for the Grey Highlands ZEP and Ganaraska Development sites and recently Settlers Landing and Grey Highlands Clean also received their approvals. Typically, the last step before construction is a six-month review process. We’re also making important investments in our operating assets. The technology improvements we’re investigating or installed at our wind assets including wind boost, Vortex Generators and improved the effectiveness of the blades, turbine pitch optimization and condition based monitoring are all designed to maximize the generating capacity of the turbines. With a $30 million refurbishment at Cardinal nearly complete, including the installation of a new gas turbine roader, the plant will be ready to supply power to the Ontario Grid this summer when it makes economic sense to do so. Under its 20-year contract the plant received escalating monthly capacity payments and provides electricity during peak demand periods. The warm months are typically when additional power is required. Consequently, Cardinal did not produce electricity in the first three months of this year. We’ve engaged consulting engineers to explore the potential for additional new streams for Whitecourt. The new contract there with Millar Western took effect in January of this year and the facility generated electricity consistently and profitably in the first quarter. However, low Alberta Power Pool prices resulted in reduced revenue during the first three months. Bristol Water has now concluded the Amp 5 business plan which expands from April 1, 2010 to March 31, 2015. The total expense on investments was $567 million, which translates into cumulative regulated capital value today of £418 million or roughly $770 million. It’s important to recall that this strong position at the end of the five-year plan came as a result of Bristol Water challenging the final determination set by the economic regulator Ofwat in 2009. Bristol Water is once again challenging the 2014 final determination to the competition markets authority. I’ll update the progress of the CMA review later in this call. At the end of the first quarter of 2015, following a strong finish to 2014, Capstone is in solid shape. We’re going through our contracted wind development projects, investing in our operating assets and are positioning ourselves for a better outcome for Bristol Water for the CMA review. Now I’ll turn to Mike Smerdon for a financial review. Mike? Mike Smerdon Thanks Mike. Following on Mike’s discussion of Capstone’s adjusted EBITDA and AFFO, I’ll cover our revenue expenses, capital structure and outlook for the balance of 2015. First quarter revenues were $90.2 million, which is 21% lower than in 2014. The factors driving this result were the 51% decrease from the power segment as a result of old contracts expiring at Cardinal and Whitecourt. Poor wind conditions affected most of our wind assets, but were partially mitigated by new revenue from Skyway 8 and Saint-Philémon. And declines in power were somewhat offset by gains in utilities with a 9% increase from Bristol Water through a combination of higher regulated rates and favorable current foreign currency translation. Expenses for the quarter came in at $49 million or 19% lower than in 2014. This result reflected lower operating expenses at Cardinal from reduced production requiring less fuel, the absence of administrative cost related to acquisition integration and these were partially offset by higher project development costs and higher expenses at Bristol Water related to foreign currency appreciation, a restructuring program developed as part of the PR14 business plan and cost associated with the current regulatory review. At the end of the first quarter, Capstone had unrestricted cash and cash equivalents of $55.3 million. This includes $38.3 million from the power segment, $11.1 million from Bristol Water and approximately $6 million at corporate. Of our total cash and equivalents $24.2 million is available for general corporate purposes and our undrawn corporate revolver’s capacity stands at over $39 million. Capstone’s long term debt at quarter end was approximately $929 million including debt at corporate and our proportionate share of debt at the power assets as well as Bristol Water. Our outstanding debt remains predominately fixed rate or linked to inflation and is largely secured at the operating business level and non-recourse to corporate. Approximately 98% of the long term debt at our power facilities is scheduled to fully amortize over the PPA terms. At Bristol Water, approximately 78% of the long-term debt has maturity longer than 10 years. This debt level represents a debt-to-capitalization ratio of 70.8%, which is slightly lower than at the end of our last fiscal year. In general, our capital structure aligns with the cash flow profile and duration of our businesses giving us the flexibility to pursue new investments. With the first quarter of 2015 complete, we affirm our outlook for adjusted EBITDA in 2015 of between $115 million and $125 million. We’ve planned carefully to ensure that we have the liquidity to maintain Capstone’s dividend, while our wind project developments are showing good progress. With the eminent commissioning of Goulais, we will have completed three wind projects in the past nine months with renewable energy approvals from the Ministry of Environment and Climate Change now in hand for four more. We’ve invested in new equipment, leading edge technology and refurbishments to maximize the productivity of our businesses to ensure that they can provide diversified and stable cash flow that meet our business and financial requirements and we’ve taken steps at Bristol Water to position the company for an improved business plan that meets the needs of customers and investors. Mike will speak more about that now. Mike Smerdon Thanks Mike. Capstone has a clear set of priorities for the balance of this year. The first is to achieve a successful outcome for Bristol Water. The CMA is guided by statute and therefore has a defined schedule to conclude its Bristol Water review with a firm deadline of September 3 though we expect it will be delivered in August. The process is now at about the halfway mark with the first main party hearings taking place in early June. Up to this point, both sides have made their respective cases with a series of written submissions including a statement of case from Bristol Water, our reply from Ofwat and a response to that reply from Bristol Water. These documents are publicly available on the CMA website. The prevailing opinion among experts who’ve reviewed the submissions is that Bristol has made a number of persuasive arguments for an improved outcome. And CMA’s following the termination, our provisional determination is expected to be released and made public in early July. That interim document will be subject to further refinement with more input and representations from both sides to follow, that will provide useful insights about where the CMA is likely to settle in its review. Our next priority is to continue to achieve organic growth through the development of our wind projects. We anticipate that Goulais will be commissioned within the next week and we have approvals in hand as Mike mentioned for four additional facilities in Ontario. Construction is expected to start on the first of these by the end of 2015. We’re also preparing to engage in the appeal of an Ontario Superior Court decision from March 12, 2015, which found that the Ontario Electricity Financial Corporation did not properly calculate the price paid in payable for electricity produced under PPAs with Capstone and other power producers in Ontario. On April 10, 2015, the OEFC served a Notice of Appeal in respect of the March 12 decision. Capstone intends to defend the appeal, which could take as long as 16 months. If the decision is upheld following appeal, Capstone would receive about $25 million net, representing retroactive adjustments for revenue claims from the OEFC. In addition the future price paid for electricity at Capstone’s Wawatay and Dryden Hydro facilities is expected to be calculated in accordance with the original pre-2011 methodology into respective PPAs, resulting in higher future power rates. This could result in a gain of almost $900,000 per year for the duration of the Power Purchase Agreements at these hydro facilities. Developments in public policy have also drawn our attention. The Ontario Government has recently announced plans to join with Quebec in California in a cap-and-trade system under the Western Climate Initiative. The details haven’t been finalized, but this system will be designed to reduce the amount of green-house gas produced in the province by setting a limit on emissions and creating a market for trading credits. We continue to evaluate perspective investments across our four targeted pillars of power, utilities, public private partnerships and transportation. The uncertainty surrounding Bristol Water has affected our share price and made it more challenging in the short term to complete acquisitions. However, we know that the CMA decision will remove that uncertainty this summer and we’ve continued to set this foundations for new opportunities. Capstone will hold its Annual Meeting of Shareholders on Wednesday, June 17 at the Ivey Tangerine Leadership Centre in Toronto. We encourage our shareholders to attend and look forward to speaking with you there or to join our live webcast from the event for those unable to attend. At the end of the first quarter, Capstone is tracking to plan for 2015. Our organic development projects have been completed. Our operating portfolio is performing well and the Bristol Water regulatory review is progressing towards satisfaction and will be concluded over the coming summer and we look forward to moving ahead with our growth strategy with more certainty for our company and our shareholders. Thank you for your continued support and now we’ll be happy to take your questions. Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today is from Kelsey Roste with RBC Capital Markets. Please go ahead. Kelsey Roste Good morning, everyone. Mike Bernstein Good morning. Kelsey Roste I had a question in respect to the four development facilities that you received approval. You had mentioned it was with Grey Highlands Clean Energy as well as Grey Highlands ZEP, what were the other two projects? Mike Bernstein Ganaraska and Settlers yeah, and we’re hoping for snowy imminently. Kelsey Roste And snowy imminently and all of those are expected to achieve CPD in 2016. Are any of them expected to have a material contribution in 2016? Mike Bernstein Not material in 2016, no. Kelsey Roste Thank you. And then just kind of turning to the M&A market, so solar and wind developments M&A still seems to be pretty hot in North America and if you had mentioned the negative pressure on your share prices, put some pressure on your ability to do acquisitions. Are you guys still actively looking in North America for wind and solar? Are you more learning towards P3, there can you provide a little bit more additional color on your acquisition strategy? Mike Bernstein Yeah, I think overall I’d say not just in the solar and wind sector, but generally for operating assets where we’re seeing it is a pretty frothy market. So we’re focusing a lot of our efforts right now on the development side. So looking particularly in the U.S. on gas development and this is with our CPD team and we’re also evaluating opportunities with the upcoming LRP in Ontario. On the P3 side, it’s a combination of partnering with established players at the — again probably at the earlier phases, but that also could involve looking at portfolios that include some operating assets, but you’re quite right. Even with the strong currency it is more of a seller’s market than a buyer’s market on the M&A front. Kelsey Roste Great, thank you. That’s all my questions. Mike Bernstein You’re welcome. Operator [Operator Instructions] There are no more questions at this time. I’ll hand the conference over to Mr. Aaron Boles for closing comments. Aaron Boles All right. Thank you for joining us this morning and everybody have a great long weekend. Okay. Thank you. Operator Ladies and gentlemen, this concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. 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