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Edited Transcript of CPX.TO earnings conference call or presentation 21-Feb-17 4:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Capital Power Corp Earnings Call

EDMONTON Feb 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Capital Power Corp earnings conference call or presentation Tuesday, February 21, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Randy Mah

Capital Power Corporation - Senior Manager of IR

* Brian Vaasjo

Capital Power Corporation - President and CEO

* Bryan DeNeve

Capital Power Corporation - SVP and CFO

* Mark Zimmerman

Capital Power Corporation - SVP of Corporate Development and Commercial Services

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Conference Call Participants

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* Jeremy Rosenfield

Industrial Alliance Securities. - Analyst

* David Quezada

Raymond James - Analyst

* Robert Catellier

CIBC World Markets - Analyst

* Ben Pham

BMO Capital Markets - Analyst

* Andrew Kuske

Credit Suisse - Analyst

* Patrick Kenny

National Bank Financial - Analyst

* Robert Kwan

RBC Capital Markets - Analyst

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Presentation

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Operator [1]

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Welcome to Capital Power's analyst conference call.

(Operator Instructions)

This call is being recorded today, February 21, 2017. I will now turn the conference over to Mr. Randy Mah, Senior Manager, Investor Relations.

Please go ahead.

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Randy Mah, Capital Power Corporation - Senior Manager of IR [2]

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Good morning and thank you for joining us today.

Earlier this morning, we announced the acquisition of 294 megawatts of contracted power facilities in Ontario and BC. We also released Capital Power's fourth-quarter and 2016 annual financial results and announced the appointment effective April 3 of two new directors. These news releases and the presentation slides for this conference call are posted on our website at capitalpower.com.

Joining me on the call are Brian Vaasjo, President and CEO; Bryan DeNeve, Senior Vice President and CFO; and Mark Zimmerman, Senior Vice President, Corporate Development and Commercial Services. We will start with an overview of the acquisition transaction followed by a review of our fourth-quarter and year-end financial results. 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 analyses 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. These measures are provided to complement GAAP measures in the analysis of Company's results from management's perspective. Reconciliations of these non-GAAP financial measures can be found in the Company's 2016 MD&A.

I'll now turn the call over to Brian Vaasjo for his remarks, starting on slide 4.

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Brian Vaasjo, Capital Power Corporation - President and CEO [3]

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Thank you, Randy.

Good morning. I'm pleased to announce that we have reached an agreement with Veresen for the acquisition of four fully-contracted generation facilities. We are acquiring two natural gas fire facilities and two waste-heat assets. The CAD500 million purchase price consists of CAD225 million in cash, subject to working capital and other closing adjustments, and the assumption of CAD275 million of project-level debt.

The cash portion of the transaction will be financed through existing cash and use of our credit facilities. The transaction will provide immediate accretion to both adjusted funds from operations and earnings. In the first full year of operations, the acquired assets are expected to add CAD24 million to AFFO, which is about CAD0.25 per share, representing a 7% increase. The accretion on earnings per share is CAD0.11 per share. The projected EBITDA contribution from these assets is approximately CAD55 million per year.

The closing of the transaction is expected to occur in the second quarter of this year, and is subject to regulatory approvals and satisfaction of closing conditions. Overall, the transaction will significantly add to our contracted cash flows out to the end of the next decade.

Moving to slide 5, I want to provide more details on the assets. The two Ontario natural gas facilities are York Energy Center and East Windsor Cogen Center. We are acquiring a 50% interest in York Energy, which provides us with 200 megawatts of capacity from the total 400 megawatts capacity of the plant. We will have 100% interest in East Windsor, which has an 84-megawatt capacity. Both facilities are under long-term PPAs with the Ontario IESO and have an average remaining PPA life of 14 years.

Under the PPAs, the plants earn revenues through fixed capacity payments that are partially indexed to inflation. There is a pass-through of O&M, fuel, and start-up costs. The assets are strategically located in Ontario, which supports future recontracting of the PPAs on economic terms.

Slide 6 describes the waste heat generation facilities in BC. The two waste heat assets, 5 megawatts each, are located in West Coast Energy's BC gas pipeline compressor stations in Savona and 150 Mile House. Both waste heat generation facilities are fully contracted with BC Hydro and have 11 years of contract life remaining, after expiring in 2028. The electricity purchase arrangements have partial inflation indexation and provide premium pricing under peak load hours.

Turning to slide 7, this updated chart shows the growth in our contracted EBITDA from 2010 to 2017. As you can see, our contracted EBITDA has increased 194% during the same period, which translates into a 17% compound annual growth rate.

For 2017, you can see the significant increase in contracted EBITDA from a number of new sources, which includes Bloom Wind, which is expected to be completed in the third quarter; the start of annual coal compensation payments from the Alberta government and the expected contributions from the acquisition of the two natural gas plants and two waste heat assets that I discussed. Accordingly, the long-term contracted EBITDA, as a percentage of total EBITDA, increases from 66% in 2016 to 79% in 2017.

On slide 8, I'll summarize the transaction by highlighting the numerous benefits. We are acquiring young, high-quality assets that have an excellent operating history, which will strengthen our existing fleet of assets. With a waste heat facilities located in BC and the natural gas facilities located in Ontario, they provide geographical diversification from our incumbent market in Alberta.

All of the assets are under long-term contracts. The weighted average remaining contract life of 14 years enhances our contracted cash flows, as these original contracts expire between 2028 and 2032. The Ontario PPAs are well-positioned for recontracting on economic terms after these original PPAs expire.

The transaction provides immediate accretion. In the first full year of operations, we expect AFFO accretion of CAD0.25 per share and CAD0.11 per share to earnings. For 2017, our contracted EBITDA is expected to increase approximately 8%. All of these assets are under long-term contracts. The transaction will enhance our contracted cash flow profile and our ability to grow our dividends. Finally, the transaction will improve the overall business growth. We expect the credit rating agencies to affirm our credit ratings and outlook.

Turning to slide 9, I'll briefly review our highlights for 2016. Capital Power's performance in 2016 was strong, with the Company meeting its annual operating and financial targets. This includes achieving average facility availability of 94%; generating CAD384 million in funds from operations, which was within the CAD380 million to CAD430 million target, but at the lower end of the range, primarily due to the Sundance PPA settlement payment in the fourth quarter.

Financial results also included a strong year of EBITDA of CAD520 million. We continue to construct the Bloom Wind, project which is on schedule for commercial operations in the third quarter of 2017.

Other highlights for 2016 include reaching a satisfactory agreement on fair compensation for early phase-out of coal-fired generation and the settlement of the Sundance PPA dispute with the Alberta government. Finally, we increased Capital Power's shared dividend by 6.8% and confirmed annual dividend growth guidance by 7% per year to 2018.

Moving to slide 10, this slide summarizes the availability operating performance of our facilities for the fourth quarter of 2015 and 2016, for the full year of 2016. We had solid operating performance in the fourth quarter, with average facility availability of 94%, which was lower than the exceptional 99% performance in Q4 of 2015. Due to the plant outages at Genesee 3 and Shepard in the fourth quarter of 2016. For 2016, our facilities performed well, with an average availability of 94%.

The strong operational performance is illustrated on slide 11. This chart shows the average availability of our facilities over the past five years. As you can see, 2016 is a continuation of our strong track record of operations and high fleet availability. This strong operational performance has resulted in an average availability of 94% over the past five years.

I will now turn the call over to Bryan DeNeve.

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Bryan DeNeve, Capital Power Corporation - SVP and CFO [4]

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Thanks, Brian.

On slide 12, I will review our fourth quarter financial performance. We generated CAD75 million in funds from operations, which was down 40% compared to CAD125 million in the fourth quarter of 2015. Due to the one-time Sundance PPA settlement payment of CAD20 million and realized losses from the settlement of interest rate swaps.

We reported normalized earnings per share of CAD0.27, which was lower than the CAD0.42 in the fourth quarter of 2015. Our trading desk performed well and captured realized price of CAD67 per megawatt hour on our Alberta commercial assets. That is 205% higher than the average spot price of CAD22 per megawatt hour in the fourth quarter of 2016.

Slide 13 shows the summary of our fourth-quarter financial results compared to the fourth quarter of 2015. Revenues were CAD280 million, down 17% from the fourth quarter of 2015. Primarily due to unrealized changes in the fair value of commodity derivatives, and emission credits and lower revenues from the Alberta commercial facilities, Sundance PPA and portfolio optimization segment.

Adjusted EBITDA before realized changes in fair values was CAD138 million, down 5% from the fourth quarter of 2015. This was primarily due to the one-time Sundance PPA settlement payment and a net unrealized loss on the termination of interest rate derivatives.

Normalized earnings of CAD0.27 per share decreased 36%, compared to CAD0.42 in fourth quarter of 2015. As mentioned, we generated funds from operations of CAD75 million in the fourth quarter, which was down 40% on a year-over-year basis and impacted by the Sundance payment.

Slide 14 shows our annual 2016 financial results compared to 2015. Revenues in 2016 were approximately CAD1.2 billion, which was down 2% year over year. Adjusted EBITDA before unrealized changes in fair values was CAD509 million, up 5% from 2015, primarily due to strong portfolio optimization results.

Normalized earnings per share were CAD1.22 in 2016, up 6% compared to CAD1.15 in 2015. Funds from operations were CAD384 million in 2016, which was down 4% year over year, primarily due to the Sundance settlement payment and realized losses from the settlement of interest rate swaps. The realized losses from interest rate swaps flow through FFO but do not impact adjusted EBITDA.

I will conclude my comments with an updated financial outlook for 2017 on slide 15. 2017 marks the commencement of annual off-coal compensation payments of CAD52.4 million that we will receive each year for the next 14 years. With the acquisition of two natural gas and two waste heat facilities that is expected to close in the second quarter, we expect to experience an increase in EBITDA. The projected EBITDA contributions on a full-year basis from these assets is approximately CAD55 million.

The slide shows our commercial hedging profile for 2017 to 2019 as of the end of 2016. For 2017, we continue to be fully hedged at an average contracted price in the mid-CAD40 per megawatt hour range. In 2018, we are 53% at an average contracted price in the low CAD50 per megawatt hour range. For 2019, we are at 40% hedged at the average contracted price in the low CAD50 per megawatt hour range.

In summary, our baseload merchant exposure is fully hedged in 2017.

I'll now turn the call back to Brian Vaasjo.

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Brian Vaasjo, Capital Power Corporation - President and CEO [5]

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Thanks, Bryan.

On slide 16, I will review our 2016 operational and financial results compared to the 2016 annual targets and provide an update on our 2017 targets. In 2016, we achieved all of our annual targets. This included an average facility availability of 94%, which met our annual target. Our sustaining CapEx was CAD55 million, which was lower than the CAD65 million target due to lower expenditures on [power] outages and deferral of various projects into future periods. Our plant operating and maintenance expenses in 2016 were CAD205 million, which was in line with CAD200 million to CAD220 million target.

Finally, we generated CAD384 million in funds from operations, which was in line with the CAD380 million to CAD430 million annual target range. The slide shows our original 2017 targets, which we announced at our Investor Day in December 2016.

With the guidance of the natural gas and waste heat assets, we have provided updated guidance. The acquisition is expected to increase O&M expenses from the original range of CAD195 million to CAD215 million to a revised range of CAD205 million to CAD230 million. We have increased our 2017 AFFO financial target from the original CAD305 million to CAD345 million to the new range of CAD320 million to CAD365 million.

Turning to slide 17, we had two development and construction growth projects in 2016. Our Genesee 4 and 5 projects, the full notice to proceed decision has been deferred. The continuation and timing of the project will be considered once more. Alberta market structure certainty exists and a new generation is required to balance supply and demand in the province.

Turning to slide 18, our gross target for new development outside of Alberta was to execute a contract for output for new development. This was achieved with our Bloom Wind project, with a 10-year fixed-price contract having 100% of the output. For 2017, our target is to complete Bloom Wind on time for commercial operations in the third quarter and on budget.

Our growth targets also include the execution of contracts for the output of two new developments as we continue to actively progress our development pipeline in the US.

I will now turn the call over to Randy.

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Randy Mah, Capital Power Corporation - Senior Manager of IR [6]

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Okay. Thanks, Brian.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Jeremy Rosenfield, Industrial Alliance Securities.

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Jeremy Rosenfield, Industrial Alliance Securities. - Analyst [2]

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Just a few questions on the acquisition that was announced this morning and congratulations on that. But with regard to the AFFO guidance, does the CAD24 million number there, is that from the assets alone, excluding the project level debt payments, or have you assumed something with regard to additional interest costs to transaction?

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Bryan DeNeve, Capital Power Corporation - SVP and CFO [3]

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Yes, so that AFFO would include the interest expense from the existing project debt in place, as well as any incremental debt we would see associated with the transaction.

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Jeremy Rosenfield, Industrial Alliance Securities. - Analyst [4]

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Okay. You are assuming some portion of permanent debt financing associated with the cost there. With regard to the balance sheet, just following on that, do you have a view as to where this takes the balance sheet in terms of leverage, following the transaction and how comfortable you are with the new level as to where you'd like to be over the longer-term?

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Brian Vaasjo, Capital Power Corporation - President and CEO [5]

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Yes, so certainly that's one of the key areas we look at when we're considering the implications of a potential acquisition. In this case, when we look at our FFO to debt metric, it does decline, of course, to some degree given we're looking at 100% debt financing. However, it declines to around 18% FFO to debt from S&P's perspective and how they calculate it. That still leaves us a cushion over the minimum threshold to 15%. So this acquisition certainly adds leverage, but leaves us with lots of cushion relative to the credit metrics that DBRS and S&P are looking at.

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Jeremy Rosenfield, Industrial Alliance Securities. - Analyst [6]

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Great. Maybe just one additional question. In terms of the Ontario PPAs for the Ontario assets, do you know what the terms are with regard to carbon cost pass-throughs? If there's a -- those are pass-through to the buyers under PPA?

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Mark Zimmerman, Capital Power Corporation - SVP of Corporate Development and Commercial Services [7]

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It's Mark Zimmerman here. Yes, they are.

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Jeremy Rosenfield, Industrial Alliance Securities. - Analyst [8]

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Okay. I will leave it there for the moment. I'll get back in queue. Thanks.

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Operator [9]

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David Quezada, Raymond James.

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David Quezada, Raymond James - Analyst [10]

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Just first on the Ontario natural gas facilities, I see here in the presentation, they are strategically located at the odds of recontracting. Could you give us any color on -- I guess detail on why there -- those locations are so advantageous compared to others that haven't gotten recontacted?

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Mark Zimmerman, Capital Power Corporation - SVP of Corporate Development and Commercial Services [11]

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Mark Zimmerman here again. Just in terms of the location of these things inside of the grid and the transmission constraints that we have there, it is very advantageous for the operation. The organization itself is very strategically placed. Peak, or is called upon quite frequently as load increases in both winter and summer. So we feel very confident that they will continue to need that. The alternative is building on much more expensive transmission to try to alleviate that and connecting to other facilities.

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David Quezada, Raymond James - Analyst [12]

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Okay, great. That is helpful. Just in terms of the timing of the acquisition, I see a closing in 2Q 2017. But based on the additional FFO you're targeting for 2017, it looks like it will probably be towards the earlier part of the quarter. Is that fair to say?

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Brian Vaasjo, Capital Power Corporation - President and CEO [13]

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Directionally yes, but of course, it does require a number of typical closing conditions. So we will need to see how those play out to refine our thinking as we move down the road here.

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David Quezada, Raymond James - Analyst [14]

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Okay great. And then just my last one here, just on the US developmental portfolio and potential to do some new projects there. Any update on the environment that you are seeing in light of potential tax reform in the US?

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Bryan DeNeve, Capital Power Corporation - SVP and CFO [15]

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We are not seeing, although there is a lot of controversy around potential tax reform and so on and it certainly does impact on the potential of the economics of a tax equity partner. That, we expect, should be settling down sometime over the next couple of months. We don't see that it is actually disrupting the level of activity in terms of people looking for a long-term power purchase arrangement.

On the other hand, we do see a little bit of push back from some traditional interests in some of the states relating to more consolidated anti-renewable segments are certainly coming out a little bit more in force.

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David Quezada, Raymond James - Analyst [16]

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Okay, great. Thank you very much. I will get back in the queue.

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Operator [17]

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Robert Catellier, CIBC World Markets.

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Robert Catellier, CIBC World Markets - Analyst [18]

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Congratulations on the acquisition. I had a couple of questions. What are you assuming in terms of synergies for the acquisition and what are the nature and timing of these synergies?

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Brian Vaasjo, Capital Power Corporation - President and CEO [19]

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So we do have an infrastructure here in place as it relates to many of the corporate functions that need to support services like this. We would expect there is some value that we'll be able materialize out of that. As it relates to the plant itself and cost synergies, you have a complement of individuals there that will be taking over to run that.

We haven't factored any synergies into our thinking on that front. There, of course, will also be some potential revenue synergies as we look at the cost of the commodity and the transportation of it. But again, not a huge amount that we're assuming in the early days of these plants.

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Robert Catellier, CIBC World Markets - Analyst [20]

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Just on that transportation, so if there were to be a recontracting at the Trans-Con Mainline, and the rates come down, is that included in your synergies? Or is the Company even exposed to that element?

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Brian Vaasjo, Capital Power Corporation - President and CEO [21]

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Specifically, we have not included that in our synergies as to the level of benefit that we would get for that or how to share. We're not in a position right now to give guidance on that.

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Robert Catellier, CIBC World Markets - Analyst [22]

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Okay. And just finally, I guess to wrap up questions, when did it -- did this acquisition come with a development portfolio at all? And then finally, the average availability on these assets since inception?

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Brian Vaasjo, Capital Power Corporation - President and CEO [23]

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On the development portfolio, generally not. As it relates to availability, we are into the high 90%s. I will probably have to get Randy to come back to you with the specific number. But it is the high 90s that we have on these assets.

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Robert Catellier, CIBC World Markets - Analyst [24]

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Okay, thank you very much.

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Operator [25]

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Ben Pham, BMO Capital Markets.

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Ben Pham, BMO Capital Markets - Analyst [26]

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I just wanted your thoughts about your priorities for capital allocation post this transaction. It looks like you're taking on a little bit more debt than perhaps your overall corporate structure on a debt to EBITDA basis. The payout still seems pretty low. Does this transaction -- does it potentially drive the dividend growth higher, or more of an extension, or more status quo?

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Bryan DeNeve, Capital Power Corporation - SVP and CFO [27]

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So, I think as we look forward, our number-one priority is, of course, maintaining the existing dividend and growing it. But the priority following that, of course, is growth that makes sense and meets our financial metrics. I think as you look forward, you can expect, depending on the nature and size of the potential growth opportunity we are looking at.

You may see a financing structure that starts to bring in more equity. But certainly, that will depend on that timing and nature of the growth opportunity.

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Ben Pham, BMO Capital Markets - Analyst [28]

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Just to follow-up on that. Would you say that your balance sheet capacity for growth for acquisitions with this deal is potentially a bit more less flexible than it was coming into the deal that you may potentially have to potentially look at alternative sources of equity, such as ex your own financing or asset sales?

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Bryan DeNeve, Capital Power Corporation - SVP and CFO [29]

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Certainly, we would be comfortable with looking at raising equity in the markets for the right acquisition or right development project that comes to us. Certainly, you wouldn't see us applying the same leverage we did here because we did have that room and capability on the balance sheet. But, we would be comfortable moving forward with an opportunity that did require some equity financing.

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Ben Pham, BMO Capital Markets - Analyst [30]

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And can you comment? There are some other assets that Veresen is trying to sell in Ontario. Was that more of a balance sheet constraint on you guys near term, or is it something else?

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Brian Vaasjo, Capital Power Corporation - President and CEO [31]

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I'm sorry. I am not at liberty to go through all the pros -- or the ups and downs of the whole discussion. Suffice to say that we are very intrigued with strategic nature of these gas assets and our capabilities, as it relates to other parts of the portfolio. While we had some interest, not an interest at the same level of, say, some others. We very much focused our attention on the gas operations only.

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Ben Pham, BMO Capital Markets - Analyst [32]

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Okay, that is helpful. Thanks everybody.

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Operator [33]

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Andrew Kuske, Credit Suisse.

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Andrew Kuske, Credit Suisse - Analyst [34]

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It is an interesting acquisition this morning from an economic standpoint and a strategic standpoint. But what does the acquisition also say about the balancing act of your Alberta versus your non-Alberta exposure, and does this send any kind of messaging to the government on capital allocation as they work into the capacity payment process?

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Bryan DeNeve, Capital Power Corporation - SVP and CFO [35]

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Actually, one of the things when you look at Alberta, Andrew, is in terms of a spending capital and large amounts of capital over the next few years, those opportunities are relatively limited. As you know, and as evidenced by this transaction, we've got a lot of balance sheet capacity.

We still have a little bit of dry powder on our balance sheet and a lot of a very strong cash flow. We, I think, have made it very clear that we expect to be putting out a lot of capital into the US and the balance of Canada. Not just for diversification reasons, but there is, I will call it, an absence of near-term capital commitments available in Alberta.

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Andrew Kuske, Credit Suisse - Analyst [36]

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That is helpful. And then, building upon that theme, but when you look at just your development portfolio and the opportunity you have in particular on the wind projects in the US, what kind of appetite have you seen to really do a rinse-and-repeat on Bloom and the structure you've used on Bloom and some of the other things in the pipeline in the US?

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Brian Vaasjo, Capital Power Corporation - President and CEO [37]

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Bloom was a little bit of a unique structure, although we have seen a significant amount of interest in the market associated with it. There definitely could be an opportunity to reuse the Bloom structure. I would say most of the opportunities that are out there that we are participating in, I'll call it, are more vanilla in nature, than say Bloom was.

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Andrew Kuske, Credit Suisse - Analyst [38]

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Very helpful. And one final if I may, just to Brian DeNeve. Just on the impairment test and Albert assets being grouped as one. I noticed some details in the notes. It this just really a function to avoid some undue volatility in the near term in the financials on the single unit impairment versus having only a collection of one?

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Bryan DeNeve, Capital Power Corporation - SVP and CFO [39]

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We, earlier this year, we looked at our cash generating units and their grouping. It became apparent to us that Genesee 1 and Genesee 2, which as we refer to as our Alberta contracted cash generating unit, has really now reached the point to where it will be fully merchant starting in 2021.

So it made sense to have one group of Alberta assets that were a single cash generating unit, just given that they are all so closely tied to the Alberta market. That was a decision we made earlier this year. As we rolled through the impairment and completed that testing, it was just basically bringing all the components together, what the payment was from the government and our current full review on those assets.

We then tested that as a single cash generating unit. And came to the conclusion that we weren't a place where there was an impairment on those assets.

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Andrew Kuske, Credit Suisse - Analyst [40]

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Okay, that's great. Thank you.

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Operator [41]

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Patrick Kenny, National Bank Financial.

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Patrick Kenny, National Bank Financial - Analyst [42]

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I'm wondering if you might be able to quantify for us your internal assumptions surrounding East Windsor and York after their PPAs expire, what percentage reduction in EBITDA you're assuming, if any, after the recontracting?

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Mark Zimmerman, Capital Power Corporation - SVP of Corporate Development and Commercial Services [43]

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As we look out there, bear in mind as well that we are looking at 14 years or 13.8 years out there, I think, for East Windsor and excess of 14 for York. We are expecting that there could be a nominal reduction in EBITDA as we get way out there, just given the profile where we are looking at and the strategic nature of these assets.

But that being said, a lot of that is going to depend upon the nature of the fleet at that point in time. Load growth, what Ontario does with it, et cetera. So I would be hesitant, given how far out in the future this is.

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Patrick Kenny, National Bank Financial - Analyst [44]

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Okay. And then for funding the cash purchase price, I'm wondering if it makes sense to look at securitizing a portion of your coal compensation payments here, or is it more attractive to pursue term debt at current market pricing?

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Bryan DeNeve, Capital Power Corporation - SVP and CFO [45]

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We have certainly been exploring and looking at securitization of some or a portion of the coal compensation payments. There are a number of considerations to doing that. But I will say that certainly, it does potentially provide an attractive financing cost. That comes with quite a degree of complexity. We are very pleased though, like, in terms of our spreads on term debt and what it will have come down to. Certainly, raising debt, medium-term notes in the market in Canada is a very competitive alternative for us at this point.

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Patrick Kenny, National Bank Financial - Analyst [46]

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Okay, great. One last question if I could, just at Genesee, if you can reconcile for us the higher coal costs experience for 2016? Your overall Genesee mine optimization program. Maybe what your targets are for reduced coal cost per ton through 2017?

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Bryan DeNeve, Capital Power Corporation - SVP and CFO [47]

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We are in the process, of course, working with Westmoreland in terms of a revised manning plan, given we will be off-coal at the end of 2030, and working through that. Where that specific answer to your question, that's something we'll have to follow up with you on.

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Patrick Kenny, National Bank Financial - Analyst [48]

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Thank you very much.

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Operator [49]

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(Operator Instructions)

Robert Kwan, RBC Capital Markets.

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Robert Kwan, RBC Capital Markets - Analyst [50]

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Just looking at EBITDA guidance and working our way down to the FFO guidance. Just in terms of the different line items, you've covered interest expense. I'm just wondering, can you give any granularity around expectations for cash taxes, maintenance cutbacks? And then are you including the amortizing principal on the debt in the FFO?

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Bryan DeNeve, Capital Power Corporation - SVP and CFO [51]

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We aren't including the amortizing principal in terms of the calculation of FFO. At Investor Day, we walked through the adjusted funds from operations calculations. So it basically takes out funds from operations and goes to the next step in terms of removing the preferred share dividends and capital maintenance expenditures and then adds back the coal compensation.

So that is how we get to the AFFO calculation and number. The CAD24 million associated with this acquisition is consistent with that, approaching calculation. Again, in response to your question, it would exclude what we see as -- or would have taken out what we see as capital maintenance for the offsets over the next year, interest payments, but not the principal payments on amortizing debt.

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Robert Kwan, RBC Capital Markets - Analyst [52]

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Okay, so just in terms of leverage from CAD55 million down to CAD24 million, obviously, you've got the interest which is a huge component of it. Is after the rest maintenance CapEx or is there material cash tax that you're seeing?

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Bryan DeNeve, Capital Power Corporation - SVP and CFO [53]

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No, there wouldn't be a material cash tax. So the majority is interest expense.

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Robert Kwan, RBC Capital Markets - Analyst [54]

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Okay, and just knowing that gas can be a little lumpy, is maintenance CapEx any higher in the near-term than normal kind of run rate?

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Bryan DeNeve, Capital Power Corporation - SVP and CFO [55]

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No.

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Robert Kwan, RBC Capital Markets - Analyst [56]

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There was just that discussion on synergies. I just want to make sure I'm clear. So does the CAD55 million include your estimate of synergies or is that excluding synergies?

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Brian Vaasjo, Capital Power Corporation - President and CEO [57]

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It does not, Robert, include our estimate of synergies.

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Robert Kwan, RBC Capital Markets - Analyst [58]

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Okay. I think Mark, you mentioned just on the Mainline -- and you don't have anything there on long-haul toll. I'm just wondering, are those contracts actually exposed to that, or are a Dawn indexed?

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Mark Zimmerman, Capital Power Corporation - SVP of Corporate Development and Commercial Services [59]

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It is Dawn. It's more -- what's the relationship between NIT and Dawn and how that may change vis-a-vis the cost of gas and the pricing of it for any changes that you have on the transportation side.

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Robert Kwan, RBC Capital Markets - Analyst [60]

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Okay, so are you not flow-through though out of Dawn, or is --

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Mark Zimmerman, Capital Power Corporation - SVP of Corporate Development and Commercial Services [61]

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We are in that sense. My -- until we see how that would manifest itself, what we go through with the commodity and different things we may do. If there is some benefit, we will obviously pursue it. On the face of it, we are predominantly a flow-through mechanism there.

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Robert Kwan, RBC Capital Markets - Analyst [62]

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Understood. If I could just finish, Brian, you mentioned to an earlier question, you look forward past the transaction that you may look at financial structures that bring in more equity.

Coming back to securitizing the Alberta payment, you mentioned that as an option. But how does that comment square up with looking at something that would require more equity?

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Bryan DeNeve, Capital Power Corporation - SVP and CFO [63]

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Well, certainly, if we secure the payments, we view that as an alternative source of debt effectively at the end of the day. And generally, that is just because of how it will work through and affect our credit metrics.

We look at securitization as an alternative to going to do a private placement in the US, or potentially access in the bond market here in Canada. But it wouldn't be viewed as a substitute for equity.

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Robert Kwan, RBC Capital Markets - Analyst [64]

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Okay, understood. Thank you.

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Operator [65]

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Jeremy Rosenfield, Industrial Alliance Securities.

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Jeremy Rosenfield, Industrial Alliance Securities. - Analyst [66]

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Just on a different topic for a second, maybe high-level, if you could comment on the tone of the [day pro] consultations going on in Alberta with regard the development in the capacity market and how you think that is developing so far?

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Brian Vaasjo, Capital Power Corporation - President and CEO [67]

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The process is laid out and there is a number of processes that are -- have again, been laid out. It is pretty early days. I would have to characterize it as certainly continuing to be a positive tone and one on which the government both from the policy perspective and from the implementation perspective, they will continue to have a positive tone.

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Jeremy Rosenfield, Industrial Alliance Securities. - Analyst [68]

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Okay. Great. Thanks.

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Operator [69]

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There are no more questions at this time. I will now turn the call back over to Randy Mah.

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Randy Mah, Capital Power Corporation - Senior Manager of IR [70]

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Okay, if there are no more questions, we will conclude our call. Thank you for joining us today, and for your interest in Capital Power. Have a good day, everyone.

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Operator [71]

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Ladies and gentlemen, this concludes Capital Power's analyst conference call. You may disconnect your lines. Thank you for participating. Have a nice day.