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Capstone Infrastructure: Undervalued Power And Infrastructure Company Offers Significant Upside

Summary Quality power and infrastructure assets with reliable cash flows. Signficant upside to the valuation with most downside risk priced in. Pipeline of development opportunities run by management with a track record of solid execution. Capstone Infrastructure Corporation (OTCPK: MCQPF ) is a small-cap Canadian based firm that owns and operates a variety of clean power generation facilities, along with water and district heating utilities. These operations are located in Canada, the United Kingdom and Sweden. The company has a market capitalization of approximately CAD $285 million, currently pays a dividend of CAD $0.30 per year ($0.075 per quarter) and is traded primarily on the Toronto stock exchange under the ticker “CSE.” In the following sections, we’ll go into depth on each of Capstone’s operating segments and take a look at their contributions to the overall business and the sustainability of Capstone’s dividend. Natural Gas Co-generation: Cardinal Capstone owns a single 156 megawatt (MW) natural gas co-generation facility, named Cardinal. The facility has two primary revenue streams. The first stream is through its contracted arrangement with the Province of Ontario’s Independent Electricity System Operator (IESO). In this arrangement, Capstone is paid a fixed monthly fee that escalates over time in order to provide dispatchable power into the Ontario grid. When the facility is dispatched by the system operator, Capstone earns revenue on the sale of power through contracted rates. This contracted arrangement is in place until 2034. The second stream of revenue for the facility is through the co-generated steam and compressed air, which is sold at contracted rates to an Ingredion Canada Incorporated corn processing facility. With an impressive availability track record, this facility generated 49 percent of Capstone’s adjusted Funds from Operations (AFFO) in 2014. Unfortunately, this was under a much more attractive Power Purchase Agreement (PPA) than what is now in effect. In 2014, this facility generated approximately $41.5 million in adjusted EBITDA and AFFO, though is projected to come in about $30 million lower in 2015. The asset is located in Cardinal, Ontario. Wind Generation Capstone owns several wind power facilities in the Canadian provinces of Nova Scotia, Quebec and Ontario, with 228.5 MW of installed capacity today. Further, Canadian based projects in the provinces of Saskatchewan and Ontario will bring an additional 52.5 MW of capacity for the company. Its biggest wind facility is the 99MW Erie Shores Wind Farm, with 100 percent ownership and a PPA in place until 2026. Related to its development pipeline, Capstone announced on August 14, 2015, that two appeals against its wind farm development projects had been dismissed, and that it was moving ahead with the development of the Ganaraska and Grey Highlands projects. When it comes to performance, the wind segment generated $46.6 million in revenue for the firm in 2014, and added $37.7 million in adjusted EBITDA. Hydro Power Generation The corporation owns four hydro generation facilities, all on a relatively small scale between 3 and 16 MW. Two of the facilities totaling 19MW are contracted to BC Hydro and the other two facilities totaling 17 MW are contracted to OEFC (the Ontario Electricity Financial Corporation). All of the hydro facilities are 100% owned by Capstone. These facilities generated $14.1 million in revenue in 2014 and provided $10.5 million in adjusted EBITDA to the corporation. This was at a capacity factor of 50.7 percent (availability of 96.4 percent). Biomass Generation Capstone’s biomass facility, the 25 MW Whitecourt wood fired plant, is one of the largest biomass generators in Alberta. The facility runs off of waste wood, for which a 15-year supply has been contracted by the corporation. This supply agreement also has built in adjustments based on the price received in Alberta’s electricity market for the facilities’ generated power. This facility operates as a base load generator. With the change in Alberta government, additional incentives may be available in the future for green or carbon neutral generation such as biomass, which would offer an additional upside for this facility. Capstone also has a small indirect economic interest in the generation of the Chapais biomass facility, which contracts the sale of its generated power to Hydro Quebec. This interest is comprised of senior debt and preferred shares. Solar Generation Capstone currently owns a 20MW crystalline solar photovoltaic facility in Amherstburg, Ontario. This facility was designed, built and is currently operated by SunPower Corporation (NASDAQ: SPWR ). The power generated by this facility is sold at a highly attractive rate of $420 per MWh until 2031. The panels are warranted for this period and the operations are being provided under a 20-year contract, providing cost stability for the facility. Capstone is also proposing to develop, build and operate a new facility in Southwold, Ontario, with a proposed generation capacity of 38.4MW. This facility is being put forward under Ontario’s IESO Large Renewable Procurement program. Bristol Water Capstone owns a 50 percent interest in Bristol Water, a regulated water utility in the United Kingdom. The company provides water services to the city of Bristol, including treatment, storage and distribution. Bristol has substantial growth potential, with its regulated capital base expected to expand by over 25 percent in the coming five years. As Bristol earns a return on capital invested via rates, this should be accretive to its cash flow. Bristol Water has been faced with some regulatory uncertainty based upon a recent decision of its regulator, the Ofwat (UK Water Services Regulation Authority) and its asset management plan is currently under secondary review by the Competition and Markets Authority (CMA) in the UK. The impact of this is discussed further in the ‘recent developments’ section below. District Heating: Varmevarden The 33 percent equity interest in the Varmevarden district heating system in Sweden is a key cash flow generator for the corporation. The facility generates up to 639 MW of thermal heat, fueled by biomass, waste heat and oil, which is then used to heat local buildings and industrial processes. The Varmevarden facility contributed $7.4 million to Capstone’s EBITDA in 2014, an increase of 25 percent from 2013. Recent Developments The firm has struggled with some recent developments, which are indicated in a depressed share price. First, and perhaps most critically, the company is struggling with a negative regulatory decision in regards to its Bristol Water utility business. Its regulator, the Ofwat. These findings were subsequently appealed to the Competition Markets Authority or CMA. The CMA released primarily findings on July 10th. These findings were relatively positive for Bristol Water, with an additional operating expense allowance of £28 million. This closed the gap between the applied for operating expenses and what was approved by the Ofwat by about half. In addition, the CMA reduced the capital expenditure allowance by £8 million, and also reduced the number of projects expected to be undertaken under that budget by a value of nearly £25 million. The total uplift provided by these two decisions was approximately £45 million. The CMA also granted a higher allowed return via a higher weighted average cost of capital, but Bristol Water believes this could move higher yet in final determinations. The final piece in dispute is pay-as-you-go rates, which Bristol Water believes were still much too low in the preliminary findings, and indicated as much in their evidence and testimony submitted in response to these findings. A more generous decision here would move the company more in line with its peer utilities in the United Kingdom. The final decision from the CMA on the rate plan for Bristol is expected in early November 2015, after the CMA announced a delay in releasing its determinations. A positive outcome in this decision could have a substantial impact on Capstone’s share price. The second negative development is related to struggles with its power segment, posting some weaker than anticipated results in the first half of 2015. The decline due to the new Cardinal agreement was well known in advance, but some poor production performance, due to external factors such as hydrology and weather conditions impacted its renewable power portfolio, driving lower power revenues for the period. Adjusted Funds from Operation were also lower due to the deferral of dividends from the Bristol Water utility business and pending dividends in the third quarter from Capstone’s Saint-Philemon and Goulais projects. We believe the weather impacts are transitory and mean reverting over time based on the long run production of these facilities, and the dividends from Saint-Philemon and Goulais will be caught up in Q3, bringing AFFO for these assets in line with expectations for the year. Finally, Capstone has a case before the Ontario Court of Appeal, referred to as the OEFC lawsuit. Capstone was successful in winning this case against the Ontario Electricity Financial Corporation related to the price paid under power purchase agreements with Capstone and other Ontario power producers. The decision on the appeal is expected in mid-2016, and if the decision is upheld, it would result in a one-time gain of $25 million. Capstone is already recognizing and receiving in cash the additional $800,000 per year in annual revenues paid to it by the OEFC under this decision. Overall, these developments have resulted in the market pricing in a significant dividend cut, with the shares currently yielding 9.6%. When compared to its peer group (as defined in the valuation section below), it appears that the market is pricing in an approximate 50 percent reduction in the dividend. Management has maintained that the dividend is sustainable, and that its maintenance is the priority of the Board of Directors. Positives Solid Operational Performance of Generation Assets: Capstone’s generation assets all have strong availability and reliability, and appear to be expertly operated. The Cardinal plant just completed a major upgrade, and the other assets are relatively early in their lifecycles, some with long-term warranty and maintenance agreements. Management Execution of Capital Program: Capstone has been proficient in hitting recent capital expenditure and commissioning targets, as well as in arranging project financing for their power projects. This provides confidence that the existing wind development assets can be developed on time and on budget, and incremental cash flow related to projects will be realized as projected. Upside to Alberta Biomass Generation: The Province of Alberta recently elected a new government that has indicated it may place a higher priority on promoting green energy projects. Whether through a cap-and-trade type system, or through credits provided to green generators, the Whitecourt Biomass facility might see some upside in terms of available revenue sources. We wouldn’t expect this to be material to the share price. Unlevered Cardinal Asset: Currently, the Cardinal natural gas co-generation facility is not levered at the operating company level, giving Capstone the ability to project finance this asset over the life of the existing non-utility generator contract with the Ontario Independent Electricity System Operator. This contract expires in 2034. This is a potential source of liquidity for the corporation if needed to support the dividend until the pipeline of wind projects is developed, or in the event of refinancing needs at Bristol Water pending the regulatory review. The corporation estimates that this could raise $31 million in incremental liquidity. Risks Bristol Water Regulatory Review: There is substantial cash flow risk in the pending CMA review of Bristol Water’s rates. While we believe that much of the downside potential is realized in the share price today, there is the possibility the decision could be worse than the preliminary findings may have indicated. However, the other side of this is a potential upside if a positive decision more in alignment with Bristol Water’s application is rendered. Executing growth over the next two years: Capstone has a number of wind development projects underway or in the early development stages. There are numerous risks involved in developing greenfield power projects, and management will need to navigate these risks. We have confidence in the management team’s ability to deliver based on previous results, but unanticipated construction, financing or political delays can always weigh in on service dates and costs. Challenging Acquisition Market: Management has discussed their appetite for pursuing M&A opportunities, if the right deal presented itself. The overall market for power and infrastructure assets is quite inflated today, and it would be hard for a company of Capstone’s size to make an acquisition that would be accretive to cash flow metrics in the next few years. With the existing pipeline of greenfield opportunities, management would be best advised to focus on completing these initiatives rather than chasing what might be expensive acquisitions. Management has had good discipline in terms of responsible M&A in the past, and a focus on maintaining the dividend through growing AFFO will hopefully keep management on track. Alberta Power Market: The Alberta power market has experienced weaker pool prices in the last several months as the oil linked economy slows. This results in lower realized revenue for the Whitecourt plant. While not material to the sustainability of the dividend or the share price, this could weigh on this specific asset’s value over time. Currency Risk for US Investors: The Canadian dollar has devalued sharply over the past year and American investors are hesitant to sink their money into Canadian dollar denominated assets and cash flows. This shrinks the available pool of buyers for the stock, and likely gives American readers of this report pause when considering this investment. In our valuation, we do see significant upside that would outpace currency risk, but that doesn’t make currency risk any less real, especially for dividend investors. In terms of Capstone’s United Kingdom and Sweden operations, the company has hedged some cash flows, but does not hedge the balance sheet exposures in these countries. This does offer some currency risk diversification for US investors. Valuation In their investor presentations, Capstone has indicated it wishes to seek a stable dividend paying out approximately 70-80 percent of Adjusted Funds from Operations starting in 2017. This seems to be a reasonable approach to valuing the company, assessing what the potential 2017 dividend will be, and what the shares will trade at in a more stable environment for the firm. Here are the historical EBITDA and Adjusted FFO for Capstone for the past five years: Historical Results 2010 2011 2012 2013 2014 Adjusted EBITDA 55,818 55,673 120,343 128,421 160,359 Adjusted FFO 34,774 34,884 35,563 39,934 56,412 Next, we attempt to build up (or in the case of Cardinal and Bristol, reduce) these numbers over the following three years in order to derive a 2017 adjusted FFO number: (thousands) Low Case Mid Case High Case Comments Start: 2014 AFFO $56,412 $56,412 $56,412 Impact of Cardinal ($36,000) ($36,000) ($30,000) Low case is with project financing, high case is without. Impact of Bristol ($7,000) $0 $7,000 2015 Commissioned Wind $5,000 $6,000 $7,000 Skyway 8, Saint-Philemon, Goulais 2015 AFFO $18,412 $26,412 $40,412 2016 Commissioned Wind $2,500 $3,500 $4,000 2016 AFFO $20,912 $29,912 $44,412 2017 Commissioned Wind $0 $3,500 $4,000 Corporate Savings $2,000 $5,000 $10,000 Management projects $10 million in corporate SG&A, project cost, interest and tax savings 2017 AFFO $22,912 $38,412 $58,412 2017 Projected Share Count 96,408 96,408 96,408 Based on 93,573 outstanding at Dec 31, 2014, increased by 1% annually for DRIP 2017 AFFO per Share $0.24 0.3984 $0.61 Payout Ratio 80% 80% 80% Projected 2017 Dividend/share $0.19 0.32 $0.49 Projected Dividend Yield 6.5% 6.5% 6.5% Conservative dividend level based on peer group 2017 target share price (CAD$) $2.92 $4.92 $7.53 Based on the above AFFO cash flow analysis, driven by both the company’s cash flow projections and by our own analysis of upside and downside to each driver, we’ve developed a 2017 target price range of $2.92 to $7.53 per share. This indicates that much of the downside potential has already been priced into the shares, yet significant upside remains. Overall, we’ve reached target dividend in 2017 of $0.32 per share, which at a 6.5% yield, would result in a share price of $4.92 per share. If this price were to be realised, with the dividend only increased at the end of 2017 (not factored into the total return) and interim dividends reinvested, the annualized total return would be approximately 33% based on the August 14, 2015 closing price, for a total return of nearly 82 percent. The upside case would provide a total return of 163%, and the downside case would leave an investor with a 4 percent annual return through three years, assuming the dividend is reduced 50 percent in mid-2016. Of course, for American investors, foreign currency risk remains and a continued decline in the Canadian dollar could negatively impact your investment here. That said, the potential upside is much greater here than any reasonable expectation of further weakness in the loonie. With the amount of leverage built into the company, small swings in its AFFO create substantial differences in expected payouts. This is as much of a risk as it is a potential upside. Continued solid execution by management can deliver considerable returns to shareholders, but slip ups could have material risk to the projected returns illustrated here. Capstone Infrastructure Corporation Peer Group (price data August 12, 2015 close, CAD $): Company TSX Ticker OTCBB Ticker Dividend Yield Share Price Market Cap Boralex Inc. BLX OTC:BRLXF 3.78% $13.75 $660 Million Transalta Renewables Inc. RNW OTC:TRSWF 7.06% $11.90 $2.3 Billion Northland Power Inc. NPI OTCPK:NPIFF 6.95% $15.55 $2.6 Billion Innergex Renewable Energy Inc. INE OTC:INGXF 5.80% $10.69 $1.1 Billion Some critical assumptions go into these calculations. First, we don’t project the need to issue more shares with the current development pipeline. Second, we don’t believe that management will project finance Cardinal unless it is accretive to AFFO, or it is necessary to preserve the dividend. In other words, we don’t anticipate this to be project financed unless the additional capital freed up by this transaction could be deployed with a positive impact to AFFO through reducing higher cost debt elsewhere, funding new developments or in an acquisition transaction. The requirement of Cardinal to be project financed to maintain the dividend due to a liquidity crunch will be much clearer once a decision on the OEFC lawsuit is announced. Summary Overall, we view Capstone Infrastructure Corporation to be a well-managed company with a quality asset portfolio with a good pipeline of potential developments. There is a compelling valuation case to be made for this small-cap Canadian firm, with the vast majority of negative news and potential outcomes already priced into the stock. If management executes to plan, there is substantial upside for investors in Capstone over the next three years. In the shorter term, a positive regulatory decision regarding the Bristol Water utility due out at the beginning of November 2015 could be a catalyst for a short-term gain in the stock. But with the healthy dividend, investors may be wise to hold on for the ride towards 2017 where full value for the underlying assets may more readily be realized. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long MCQPF. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Innergex Renewable Energy’s (INGXF) CEO Michel Letellier on Q2 2015 Results – Earnings Call Transcript

Executives Marie-Josée Privyk – Director Communications and Sustainable Development Michel Letellier – President and CEO Jean Perron – Chief Financial Officer Jean Trudel – Chief Investment Officer Analysts Rupert Merer – National Bank Nelson Ng – RBC Capital Markets Ben Pham – BMO Capital Markets Innergex Renewable Energy Inc. ( OTC:INGXF ) Q2 2015 Results Earnings Conference Call August 6, 2015 10:00 AM ET Operator Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Innergex Renewable Energy’s Conference Call and Webcast for the Second Quarter 2015 Results. [Foreign Language] [Operator Instructions]. I would like to remind everyone that this conference call and webcast is being recorded today, Thursday, August 6, 2015, at 10 a.m. ET. I will now turn the conference over to Marie-Josée Privyk, Director Communications and Sustainable Development. Please go ahead. Marie-Josée Privyk Thank you.[Foreign Language] Good morning, ladies and gentlemen. I’m here today with Mr. Michel Letellier, President and CEO of Innergex, and Mr. Jean Perron, Chief Financial Officer. Also joining us is Mr. Jean Trudel, Chief Investment Officer. Please note that the presentations will be in English. However, you are welcome to address your questions either in French or English.[Foreign Language] I’d also like to point out that journalists are invited to call us afterwards if they wish to address any question. In a minute, Mr. Perron will provide some details on our financial results for the second quarter, ended June 30th, 2015. Mr. Letellier will then provide an immediate review of our operating activities and outlook, and Mr. Trudel will present our financing activity. We will then open the Q&A session will all three senior executives. The financial statements and the MD&A have been filed on SEDAR and are readily accessible via the Internet. You may also access the press release, financial statements and the MD&A on the Internet website in the Investor’s section. During this presentation, we will refer to financial measures such as adjusted EBITDA, free cash flow and payout ratios that are not recognized measures according to International Financial Reporting Standards, as they do not have a standardized meaning. Please be advised that this conference call and webcast will contain forward-looking information that reflects the Corporation’s expectations with respect to future results or developments. For explanations concerning the principal assumptions used by the Corporation to derive this forward-looking information and of principal risks and uncertainties that could cause actual results to differ materially from those anticipated, I invite you to consult the first pages of the Company’s MD&A, as well as its Annual Information Form. I now turn the conference to Mr. Perron. Jean Perron Thank you, Marie-Josée. Good morning. The quarterly results for Q2 2015 are showing production that was at 93% of the long-term average of 931 gigawatt-hours, due mainly to below-average water flows at the six 50%-owned facilities of the Harrison Hydro Limited Partnership in British Columbia. This translates into 904 gigawatt-hours of production, compared with production of 899 gigawatt-hours in Q2 2014. Production of the first six months of 2015 stands at 103% of long-term average. Revenues for the quarter were 70.2 million, compared with 69.6 million in 2014. Revenues for the first six months were 127.9 million compared to 107.2 million last year. The increase is due to above-average water flows in BC and higher wind regimes and to [indiscernible] of SM-1 in June 2014. Adjusted EBITDA for the quarter stood at 53.4 million, compared to 53.8 million in Q2 2014. Adjusted EBITDA for year to date stood at 96.4 million, compared to 79.1 million in 2014. The increase is mainly due to the higher production since the beginning of the year. Finance costs of 24.5 million for the quarter were similar to Q2 2014, while they stood at 41 million since the beginning of the year, down 3.2 million compared to last year due to the lower inflation compensation interest. During the quarter, a 24.7 million loss was realized on derivative financial instruments resulting from the settlement of the Big Silver Creek bond forward contract upon closing of the 197.2 million financing of the project. A similar 68 million loss was incurred in the previous quarter for the Boulder Creek and Upper Lillooet River upon closing of the 491.6 million financing of the projects. The realized losses are a result of decreases in benchmark interest rates since the date the bond forwards were entered into in late 2013, and the settlement date. It will be compensated by lower respective weighted average interest rates of 4.71% and 4.36% for the 25 to 40 years term loans, compared to higher interest rates set at the time of the issues. These losses were funded with proceeds from the project financing. For the same reasons, further losses could be recognized on closing the MU project financing in the coming months. The Corporation recognized unrealized gains on derivative financial instruments of 43.1 million, due mainly to the reversal of the unrealized loss accrued upon settlement of bond forward contacts of Big Silver Creek. Together with the settlements of the Boulder Creek and Upper Lillooet River bond forwards in Q1 2015, this resulted in a 55.1 million unrealized gain since the beginning of the year. Excluding the realized loss and unrealized gains on loss on derivatives and the related income taxes, net earnings would have reached 7.4 million for the quarter, compared with 8.5 million for Q2 2014, while it would have reached 13.6 million for the first six months, compared to a loss of 2.8 million in 2014. Overall, slightly below average second quarter, combined quarter, allowed us to achieve positive results since the beginning of the year. As a result, and combined with a very good fourth quarter 2014, our trailing 12 months free cash flow ending on June 30, 2015, reached 85.7 million, compared to 48.2 million for the same period ending in Q2 2014, and our payout ratio improved to 72% from 118%. Since the beginning of Q3 2015, power production has been somewhat above the long-term average at most facilities, at the exception of BC. We remain confident in our ability to reach our long-term average production, year over year. This concludes my review of the results. I’ll be happy to answer any questions later on during the call. I’ll now turn it back to Michel. Michel Letellier Thank you, Jean, and good morning, everybody. Just a little bit of, for people that can follow on the webcast, we are going to follow the presentation available on the website. The agenda is that we are going to recap the objectives that we had put forward at the beginning of the year, operating performance, project development; financing activities will be covered by Jean Trudel. I’ll then come back with an outlook on our 2017 run rate, and progress on the international expansion of the Company, and then we’ll follow it with period question. So, objective of performance, we had said that we would increase by 3% to 5% the revenue during 2015, compared to 2014. We will have a full contribution of SM-1 hydro facility, the acquisition last year, and we will increase the adjusted EBITDA by 1%. What we did up to date is that we have, actually, had a 19% increase on the year-to-date production, and 22% increase in EBITDA. That is basically the contribution of SM-1 for the six months that we didn’t have in 2014. Production year to date four to six months stands at 103% of the long-term average. As Jean mentioned, all our facilities across Canada is doing great, except for the Harrison LP, the six facilities that are southeast of BC that doesn’t have any glacier have had lower than long-term average. But the other ones has been very good performance up to now. So, we think we’re still on track to achieve the full year. If you remember, last year BC had been slow during summer time, but then the fall was very, very wet and we did catch up all of the power for the lack of production during early summer. So, for us, a quarter, two quarters, it’s difficult to call, but we’re still very confident on the long-term average for the corporation. Objective for the development, we said that we would advance the four projects under construction Tretheway, Upper Lillooet, Boulder, Big Silver, and start the construction on the wind farm in Quebec, Mesgi’g Ugju’s’n soon. We’re renewal of the Saint-Paulin, Windsor PPA, and we would begin commercial operation of Tretheway. I’m glad to report that the constructions are advancing very well. We’ll talk a little about the Upper Lillooet and Boulder fire. It’s unfortunate, but as we describe it, we’re very well covered with the insurance. We were also lucky to have most of our equipment and assets to be minor — well, they have minor. There’s no major losses on those assets, so, we’re still working on the insurance company, and with the firefighters to come back on site. The firefighters are basically fighting. The fire is still active. It’s about 45% contained. So, there’s still a lot of smoke in the valley. So, it’s not yet safe for our people to come back to work, but things are improving. There’s a little bit of rain in BC yesterday and tonight. So, things are cooling down a little bit, but it’s a little bit too early to call for the start of the construction onsite. Very happy, also, to have started construction on Mesgi’g Ugju’s’n in May. Things are going very well. We’re very accustomed to build wind firms in Quebec, so, don’t see an issue of going forward and make these units here. Contractual renewal process is pending with Hydro Quebec. Hydro Quebec is right now under an arbitrages system with three other smaller producers, independent producers in Quebec, so, they’re working the result to reinitiate the discussion with the other [IPB]. And we’re on track to the commissioning of Tretheway in Q4. We have received– all the equipment are installed in the power plant. Water division into the waterway has been initiated. So, things are going very well in Tretheway. So, if you flip the projects under development, I just gave quite a bit of development on Tretheway, Boulder Creek, and Upper Lillooet. Big Silver is going very well, as well. We have finished the tunnel in the last quarter. So, that is a big milestone in Big Silver. The water intake is almost finished, the diversion work very well. So, Big Silver is doing, I guess, very well in terms of civil work, and there’s no issue in the timing. Mesgi’g Ugju’s’n I just mentioned. Just a reminder, this COD date is with Hydro Quebec is the first of December. That’s a firm date in Hydro Quebec. Again, the impact of the forest fire on Upper Lillooet and Boulder I think it’s important to reiterate that we have all the coverage and insurance to have late start, so, if we’re late, the insurance would cover the interest costs or the lost revenue and, obviously, all the assets are protected, as well. So, on that note, I’ll let Jean update you on all of our financing. Jean Trudel All right. Thank you, Michel. So, the next page, that would be page 9 on the presentation, what we had mentioned early in the year is to pursue financing activities. So, therefore, close the financing of Upper Lillooet, Boulder, and Big Silver, and the MU project, and also refinance the Umbata Falls project finance that we have. So, I’m glad to report that we– well, as you’ve seen, on March 17 we closed the Upper Lillooet and Boulder Creek financing. Then the Big Silver financing was closed just late, June 22nd and we are now proceeding with the financing of the MU project. So, we have signed an engagement letter and a term sheet, and we’re in the process of putting the documentation in place to close this financing during the month of September. And, as for Umbata, we refinanced Umbata Falls on March 30th, earlier this year. So, everything is going according to plan. We actually were successful in putting financing that attractive condition that were actually a bit more attractive than what we anticipated. The market was quite receptive to our financings, and so, it provides us with additional flexibility in the future with these financings that are at the lower cost. On the next page, you see the amounts and the financing. It was a pretty significant program and so, we’re close to ending that leg of the work that we had to do. It’s very important to note that with all these projects that we are building, there is actually no additional equity component that is required to complete all these projects. So, the financing that we are putting in place will be sufficient, coupled with the use of the revolving facility and the cash flow that we generate to complete all these projects. On the next page, just an update on the corporate finance activities, we issued, as you’ve seen, I suppose, $100 million convertible debenture. Basically, the market was very favorable, a very attractive coupon at 4.25%. We took the opportunity to issue this convert, taking the advantage, of course, of the low rates, but also having in mind to potentially affect the redemption of the existing convert and, therefore, to reduce, potentially, the dilution to our shareholders. So, if we are not successful at redeeming the existing debenture in cash, well, it will provide us, actually, greater flexibility to conduct our development activities and/or potential acquisitions. So, Michel will talk about our international activities later on and I think that would provide us with great flexibility to do this. And also, the excess cash can also be used to buy back our shares and, coupled with that, I guess, we also eliminated the discount on the DRIP program today. That’s what we announced. I think we don’t– management doesn’t feel that the share price actually should offer an additional discount under the DRIP, so, it was a good thing to do to cancel the discount and also to potentially buy back shares if the situation remains. So, on this, I guess I’ll turn back to Michel. Michel Letellier Thank you, Jean. So, all good news on the terms of financing. So, 2017 run rate, I like that slide very much. Just to remind that this has been built and updated for taking into consideration the better financing that we had anticipated. Important to remember that this slide takes into consideration only the projects that the Company has existing PPA and has under developed, as I mentioned, the four hydro facilities in BC and the one wind facility in Quebec. So, we reiterate the EBITDA target rate for 2017, without having into consideration any other future project in mind, or future acquisition, only the existing projects that we have. The EBITDA takes into consideration about $8 million of prospective expenses. We always forecast those amounts. So, the EBITDA is net of those expenses. We have showed or reported $180 million of EBITDA last year. We’re forecasting for 2017, based on the long-term average $295 million of EBITDA. So, that’s an increase of about 63% from 2014 up to 2017, and the good news is that we had given the guidelines of $95 million of free cash flow for 2017. Based on the good financing and better financing than we had anticipated, we have now a conservative forecast of $105 million for 2017, so that’s 10 million more cash flow available in 2017. When we say “free cash flow,” our definition of free cash flow for us is important to remember that we take into the calculation the full reimbursement of our project finance. It’s after the dividend, and after $8 million of prospective projects. So good news for us in terms of the availability of internal cash flow. The growth opportunity after 2017, or even earlier, obviously we said that we would pursue Greenfield unlocking activities. We’re getting prepared to submit projects in the Ontario RFP. We have advanced, also, the Nulki Hills wind of BC. We have an agreement now with the Saik’uz First Nation on a fifty-fifty partnership program joint venture. And the RFP in Ontario is for the first of September. So, we’re getting very close to the date for submitting projects. We intend to have at least two very good projects. Ontario it’s very competitive, as you know, so we’re confident, but we’re cautious into the optimism of winning projects from Ontario, very busy, and it’s not a big RFP, if you remember. It’s about 300 megawatt of wind, and 150 megawatt of solar. But there’s another RFP in 2016 for roughly the same amount of power. Also, we said that we would go with the external growth opportunity. We would pursue partnership, acquisition, development opportunity in Europe and Latin America, and may be looking for acquisitions. We are focusing our international activity. We have been a little bit more focused on Europe, mainly France, for wind and solar. Latin America is big, but we’re now focusing more on Mexico than a couple of times in Mexico, meeting with very promising future partners. The market in Mexico is very dynamic. It’s in right now a little bit, I guess, in waiting for the new rules to free up the market, but the potential is great. So, we like what we have been seeing, and have been meeting with very interesting folks in Mexico. And, obviously, we’re looking into North America, as you know. Saskatchewan has said that they might come up with a new RFP for wind in the future. Alberta, with the new government, is talking about renewable energy, as well. So, still very open with Canada and the U.S. Obviously, it’s very active, but it’s very competitive, as you know. So, in summary, I just wanted to make sure that people remember that we have a sustainable dividend. I think that, given the profile of the portfolio that we have, just remember that we have one of the longest durations on the existing PPA. We have more than 70% of our revenue coming from hydro, fairly new asset, visible cash flow expansion with existing projects with PPA. As we mentioned, a internal growth with organic assets that we already have for EBITDA about 63% and for the cash flow, 54% from 2014 up to 2017. We have also, obviously, the payout ratio, given the cash flow that we’ll have, will go down. We have said that we have a target payout ratio of roughly 80%. Given the cash flow that we have announced, the $105 million of free cash flow, and given the amount of shares outstanding, you can make the calculation that this target is easily reachable for us and something else we have room there, as well. So, we will concentrate on capital deployment. We will have internal cash flow. For us, that’s something that’s a new era for Innergex. As you know, since the merger in 2010 with the income trust, the payout ratio has been always an issue but, given the advancement of our projects, this is behind us, so we can now focus a little bit more on the growth. So, on that note, we’ll be happy to answer the questions. Thank you. Marie-Josée Privyk This completes our presentation. Thank you, Michel and Jean. We now invite you to ask your questions. [Foreign Language]. Question-and-Answer Session Operator Thank you. [Operator Instructions] Your first question comes from the line of Rupert Merer with National Bank. Your line is open. Rupert Merer Good morning, everyone. Michel Letellier Good morning, Rupert. Rupert Merer I wanted to follow up with a few questions on your development plans, your growth plans. You mentioned the Nulki Hills project in BC. Can you talk a little about how that project might develop? Do you expect to enter direct negotiations with BC Hydro, for example? And how much longer do you think this project would be in development if it was to move successfully to construction? Michel Letellier Well, this a big question mark. It’s a good question, Rupert. We don’t know exactly how fast BC could come up with an RFP or to start direction negotiations with the First Nation joint venture project in the northwest of BC but it’s definitely a region where it’s very sensitive in terms of, I guess, being positive towards bringing renewable energy to offset a little bit of the future CO2 emission from the LNG, if LNG’s getting built, so, it’s very linked with the development of the LNG. So far, in that area there’s Petronas and Shell that have proposed and be, I guess, aggressively pursuing the development of a LNG project. So, I guess it’s a little bit of a Catch-22 there. If the LNG goes forward, I think that demand in that area will increase and, hence, maybe more possibility will be done. We also have some good prospects in Port Nelson area where a lot of the extractions are going to be happening. We’ve been monitoring wind for the last eight or nine years in that area, so there potential, as well, in that area. But BC is, I guess, a little bit on a standby to see how much LNG projects will be developed. And, as you know, Site C is being built, and I think that more and more people are thinking that Site C is going to be a reality, even though there were a lot of pushback from First Nation and local community. I think that BC Hydro has succeeded in signing some of the First Nation that [were] against the project. So, the odds of seeing Site C being built are greater now. Rupert Merer Great. And then, on Ontario, what do you think it’s going to take to win in this RFP? Do you think the prices will be comparable to what we saw in the last Quebec RFP? And do you have any particular strengths in your bid that will make it competitive? Michel Letellier I hate to talk about active bids, as you know, Rupert. But it will be competitive, but contrary to Quebec, Ontario has a system of points where, depending on how much points you get, and those points are basically given if you have support of the population, if you have support of the land involvement around your project, both on wind and solar. So, we’ve been concentrating on obtaining the maximum of points in the project that we’d like to submit. So, these points is giving you a discount when you compare your price to the others. So, prices are obviously sensitive, but if one has all the social acceptability points, then the project can be– even if the price submitted is a little big higher, you can win the project if the project gets all the points. Obviously, most of the developers are focused that aspect of the bid, as well. But we intend to have 100% of the points, so, maybe those will help. In terms of competitive price, Quebec is a little bit different. If you remember, Quebec is paying the interconnection. So, the price is net of the interconnection, where in Ontario, the IPB has to pay for the interconnection. So, when the prices of a win might be a little bit higher than in Quebec, and the win in Ontario is a little bit less variable than in Quebec. But, in general, the prices will be competitive, and certainly below what we have seen in the FIT in the past. Solar will also be I think in Ontario they’ll be certainly below $0.20, so, a fair discount compared to the $0.42, $0.44 the FIT program was giving in the past. Rupert Merer Great. Well, thanks for the color. Operator Your next question comes from the line of Nelson Ng with RBC Capital Markets. Your line is open. Nelson Ng Thanks and good morning, everyone. Michel Letellier Good morning to you, Nelson. Nelson Ng Just a quick question on the generation this quarter. Have you seen continued weakness in the hydrology in BC? And what about wind? Have you seen continued strength into the second quarter — sorry, third quarter? Michel Letellier Yes. We’ll start with the positive, Quebec and Ontario are doing great, and they are — for July they have been over the budget. BC, it’s not a secret. BC is dry. Like Jean was mentioning, the worst effected plants are the plant that doesn’t have glacier or very little glacier component into the hydrology, and that are the six Harrison Hydro facilities that we own 50%. The rest Ashlu, Miller Creek, Fitzsimmons, Rutherford have been doing fairly good so far. But, obviously, August is also a little bit dry. So, eventually it will rain in BC and the Harrison Hydro facilities, just like last fall, were over-producing. We had a tremendous quarter with those plants last fall with the rainy season. But, again, quarter-to-quarter for us I think that, again, the diversification across Canada, both in wind and hydro has shown a great flexibility to be able to face specific dry conditions in one part of the country. Nelson Ng Okay, thanks for that. Just a clarification. Did you say Ontario and Quebec both wind and hydro were above budget in July? Michel Letellier Yes, they were even over budget. Nelson Ng Okay, got it. And then my next question relates to, you mentioned the forest fire in Upper Lillooet. When do you think you’ll be able to have a like finish, or have a detailed assessment of what the total impact would be and how much of that would be offset by insurance? And then, just more on the construction schedule. How much flexibility was kind of built into the original construction schedule? Michel Letellier That’s a couple of components. We’ve been on site. The assets, apart from two or three kilometers of transmission line, have not been touched. It’s really funny. We’ve been looking at the aerial photo and stuff like that. You can see the power houses, the [indiscernible], the intake, even the big crane at the intake of Boulder, the fire went all over or around, but didn’t touch the big crane. So, material is very limited. The camp has been also saved. The camp now is hosting about 85 firefighters. We’re glad to see these guys occupying the camp. I think it’s a mutual win/win because they have better access to both the Boulder Creek fire and the Elaho fire from this camp. It’s saving them about an hour and a half of travel morning and night. So, the firefighters are on site and, obviously, protecting the camp if they’re living in them. So, that’s a good news. They’re very dedicated fellows. It’s a hard job. They’re working hard. We were supposed to have some of our people being reintroduced this week on the construction, but we had a little bit of a drawback because of this weekend was very dry and warm. But with the rain that we had yesterday and today, conditions are a little bit improving. So, slowly, we’re getting back into the camp. To answer your question how much — when are we going to be able to fully assess the timing, it’s a little bit difficult to say. We definitely have insurance coverage on everything from delay start, delay construction, to all our assets the same thing with the contractor. The deductible for assets is about $150,000, so it’s very– it’s not material compared to the size of the construction budget there. We have two deductibles possible in terms of construction delay or startup delay. One, if we trigger from the first measure is only two days of delayed construction. If we go with natural disaster, fire and what-have-you, it’s then 30 days waiting time, so the maximum impact to the Company could be 30 days of delay start. And when we say that coverage, that means they would cover all the interest costs, all the acceleration costs related to try to catch up on the construction. It’s the equivalent of protecting your future revenue, so it’s a very comprehensive insurance package– expensive, but when you need it, it’s very handy to have that. And the other component of your question was, do we have a little bit of a buffer? Well, we had– we always had the winter of 2016 as a buffer, so it’s two, three months. We didn’t have the plan to work during winter, because it’s a little bit more expensive to clear out the road and what have you. But we had that as a buffer, so, we had three to four months as a buffer. So, we’re just hoping that that buffer would be enough to catch up and still meet COD date in 2016, might be late in 2016, but we’re still confident that we can reach the COD about that time. Given the fact that insurance might cover the acceleration cost to work during winter 2016. Does that cover your question? Nelson Ng Yes. No, that was a lot of detail. That’s good color. My next question relates to the four prospective projects with the First Nation groups. I guess, from your perspective, is there any– is there like one project that is kind of ahead of the other projects, or more advanced in terms of having a process and a more visible timeline? Michel Letellier We have an ongoing discussion with the Inshaka [ph] First Nation and their government. The issue with this government, they’re very focused on not having any impact on the cost, on the electricity for the rate payers. So, it’s– we’re very, I guess, sympathetic to that. So, we’re trying to work the prices. We’re trying to work the schedule with them to try to meet their targets with BC Hydro as well, so it’s an ongoing discussion. It’s positive. We’re talking. We’re still talking. That’s positive. But we have a little bit of a challenge trying to make sure that we get to a point where everybody’s satisfied, First Nations are very supportive, and government BC Hydro, are still engaged, so still positive but a little bit of challenge to get into the schedule and prices. Nelson Ng I see. Okay and then a quick question on the MU wind project financing. I guess that’s for Jean, but are you looking to also have an interest-only period, similar to some of your hydro facilities, or is that option limited due to the shorter PPA period relative to hydros. Jean Trudel Yes, of course, it’s limited because of the shorter period. And when you analyzes the financing, and we received, actually, a tremendous– tremendously great amount of offers, so we [indiscernible] many institutions, and we received very good term sheets. So, when we analyze the terms and conditions, that’s one of the aspects to analyze to see if it’s a better or not a better transaction for us, and we look at the IRR of the project, the NPV, the cash-on-cash profile to determine which is the best term sheet that we should finance, so, the one that we are working with is using a structure similar to the structure we’ve put in place with Upper Lillooet and Big Silver. So, there’s a dual-tranche, if you want, in it, and it’s going to be– we’re implementing it now, so you’ll see all the details if it gets announced. But it’s going to be a very favorable financing again. Right now, the market is very hot from our standpoint. There’s a lot of demand for our product, I guess, from the financial institutions. And so — Michel Letellier And I think– it goes, also, to the credit of the project. We’ve been fortunate to have had the ability to renegotiate the prices and the model of the turbine, with the same deal so, the profile of the cash flow of this project is very robust. So, it helps, also, to have very good financing conditions. Jean Trudel That’s totally right, Michel. So, the debt service coverage ratio profile of the Mi’kmaq project is very high. So, it provides a very good credit rating. So, institutions are very– can be more aggressive when that’s the case, so, we’re benefiting from that, for sure. Nelson Ng Okay, got it. And then, just one last question. You mentioned that the free cash flow guidance for 2017 is 105 million, and the increase was, I think, mainly due to have an interest-only period, I presume. I was just wondering, given that the free cash flow benefit was from having an interest-only period, like, can you comment in terms of targeting the 80% payout ratio profile, whether you’ll be targeting that 2017 80% payout, or are you thinking about longer-term normalized full debt amortization 80% payout profile? Michel Letellier Well, that’s very deep [indiscernible]. I don’t want people thinking that post-2017 only 80% payout is sustainable. I think that 80% payout means that we would have a lot of room to increase the dividend. On that basis, I think that if we don’t increase dividend, the payout ratio will be much lower than 80%, and it’s not only because we interest-only period, I think that given the fact that we have also indexation in our PPA and when I view that $105 million is sustainable going forward. It’s not just a few years and there’s a drop. Whenever we’re getting engaged in long-term forecasts and sustainability, I think, hopefully, by the time you have been following Innergex, we’ve been quite consistent in our longer view. So, if we’re giving guidance of $105 million, it’s because it’s sustainable. Jean Trudel And to add on this one, when we establish a program of debt financing, we rarely put in consideration the possibility of having a delay in capital payment. So, when it occurs, when it happens, it’s just additional cash, which is a bonus. I think our target payout ratio is 80%. It has been like this for a while now, even before what were the terms and conditions of our financing, I mean, [indiscernible]. Michel Letellier And we have a little bit of a corporate finance, as Jean has mentioned, but we have 13, 14 power assets to support that debt, and all the rest we are fully amortizing, except for a $50 million balloon payment for [upward-lowered] in 40 years. So, contrary to maybe some other player that does a little bit more project finance or bond, that we are capital — we are reimbursing the capital of those project finance in our long-term forecast for EBITDA cash. Nelson Ng Great. Thanks for that clarification. Those are my questions. Operator Your next question comes from the line of Ben Pham with BMO Capital Markets. Your line is open. Ben Pham Okay. Thank you and good morning, everybody. Michel Letellier Good morning. Ben Pham Many of my questions have been asked, and so, I just had one follow up on the fire situation in BC. You mentioned that there’s a bit of rain over the last few days, which is contained it, and I’m just wondering, just because you have a pretty big portfolio in BC, is there any potential risk that that fire could expand to some of your other facilities, or is it pretty much all contained at the moment? Michel Letellier The problem in BC is that it’s dry all over the place. There’s another fire that has started up south of Tretheway. It’s about 40 kilometers from Tretheway. For the time being, it’s not a threat for that particular asset, and Elaho fire, right now, is north of Ashlu, but quite far north, and there’s a glacier in between. So, there’s no big danger there. But obviously it’s, BC is in a situation where there’s a lot of potential fire, and people have to be very careful. The last fire that was lighting up not so far from Tretheway was a human error. I don’t know if it was a fire camp or a cigarette butt that was thrown, but I think that BC government is doing a great job in trying to educate people that the fire danger is extreme. So, who knows? There’s many places where fire can be started again in BC. Hopefully, we’re getting towards September and rainy season should start, and that should be behind us, but for the time being, the fire danger is extreme. Jean Perron And just to be clear, we have the same insurance package everywhere, if it ever happens, we’re well covered everywhere. Michel Letellier Yes, it’s in place, not only on construction site. We have the insurance coverage, which is roughly the same package that I’ve described for all our operating assets. Ben Pham Okay, great. Thanks for the update, everybody. Michel Letellier Thank you. Operator [Operator Instructions] Ms. Privyk, there are no further questions at this time. Marie-Josée Privyk Thank you, and thank you, everyone. We appreciate this opportunity to provide an update on our Company and please don’t hesitate to contact us if you have any other questions. [Foreign Language]. Michel Letellier Thank you very much. Operator Ladies and gentlemen, that concludes our conference call and webcast. Please note that a replay of the conference call and webcast will be available on the Innergex website. The press release, financial statements and the management’s discussion and analysis are also available on the Innergex website at www.innergex.com in the Investors section. Thank you. You may now disconnect at this time.

Capstone Infrastructure’s (MCQPF) CEO Mike Bernstein on Q1 2015 Results – Earnings Call Transcript

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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