Capstone Infrastructure Corp · TSX:CSE.PR.A
Capstone Infrastructure — Investor Day (December 2011)
65 slides from Capstone Infrastructure's investor day presentation, Dec 6, 2011
Slide 1: 2011 Investor Day
2011 Investor Day December 6, 2011
Slide 2: Agenda
Agenda Time Description Speaker 4:05 p.m. Management Presentation Michael Bernstein President & Chief Executive Officer Michael Smerdon Executive Vice President & Chief Financial Officer 4:45 p.m. Questions & Answers 5 p.m. Ontario’s Energy Marketplace Jason Chee-Aloy Managing Director Power Advisor
Slide 3: Disclaimer
Disclaimer This document is not an offer or invitation for subscription or purchase of or a recommendation of securities. in Ontario; and that Bristol Water will operate and perform in a manner consistent with the regulatory It does not take into account the investment objectives, financial situatio
Slide 4: Michael Bernstein, President & CEO
Michael Bernstein President & CEO
Slide 5: Agenda & Key Messages
CAPSTONE AGENDA & KEY MESSAGES
Slide 6: Our Mission
Our Mission Our mission is to build & responsibly manage a high quality portfolio of infrastructure businesses in Canada & internationally in order to deliver a superior total return to our shareholders by providing reliable income and capital appreciation 6
Slide 7: What We'll Cover Today
What We’ll Cover Today ‣ How our company is evolving ‣ Why Bristol Water is so important ‣ Outlook for 2012 ‣ Financial position & financing initiatives ‣ Future dividend policy ‣ Investment opportunities 2009 Today Independent and growing corporation Externally managed income fund with an increasin
Slide 8: Executing Our Strategy: The evolution of our company
Executing Our Strategy The evolution of our company ‣ Completed re-financings of near-term debt 9 maturities in 2009 - 2010 ‣ Optimizing existing asset base, including 9 working to secure best outcome we can on Cardinal ‣ Selling Leisureworld & shifting focus to core 9 infrastructure categories ‣ Br
Slide 9: Executing Our Strategy: The evolution of our company
Executing Our Strategy The evolution of our company ‣ Solid operational performance from heritage 9 power businesses: Cardinal, Erie Shores, Whitecourt & hydro facilities ‣ Moving closer to a resolution on Cardinal 9 with negotiations with OPA now underway ‣ Internalization of management secures for
Slide 10: Amherstburg Solar Park is performing well
Executing Our Strategy Amherstburg Solar Park is performing well ‣ Commenced operations June 30th ‣ Performing in line with expectations —Weather —System performance ‣ Low risk business —Long-term O&M contract —Equipment warranties —High quality of panels 10
Slide 11: Värmevärden performing well
Executing on Our Strategy Värmevärden performing well ‣ Completed acquisition in March ‣ Generally operating in line with investment base case —Warm weather in Sweden to date has had impact ‣ Successfully completed establishment of Värmevärden as independent business ‣ 2012 focus on operational effi
Slide 12: Four financings raising total of $340M
Executing on Our Strategy Four financings raising total of $340M 2011 Financings (in $ millions) Erie Shores Tranche C $40 Senior Credit Common Share Facility Issuance $150 $75 Have Preferred Share Added Issuance $75 ~$600M to EV 12
Slide 13: Bristol Water changes our business
Executing Our Strategy Bristol Water changes our business ‣ Transforms Capstone into a truly 9 diversified infrastructure company ‣ Features growing regulated & inflation- 9 linked cash flow that is perpetual in nature ‣ History of strong operating & financial 9 performance ‣ Key driver of Capstone’
Slide 14: Bristol Water: An attractive regulatory regime
Bristol Water An attractive regulatory regime Revenue target provides for recovery of operating costs & allows for a reasonable rate of return on invested capital 1 GBP=1.63 CAD Asset Management Plan (AMP5) (2010 – 2015) Real Weighted Average Cost of Capital 5.0% Real Return on Equity (“ROE”) 6.6% L
Slide 15: Significant Growth in Rate Base
Significant Growth in Rate Base Large capital program over AMP5 RCV 2010/11 2011/12 2012/13 2013/14 2014/15 (₤M) (2007/08 Prices) Opening RCV 264.2 278.0 306.9 326.3 336.7 Capex (net of grants/contributions) 45.6 61.7 53.3 44.6 31.4 Depreciation & IRC (30.7) (31.6) (32.8) (33.1) (33.0) Regulatory Ad
Slide 16: Bristol Water Growth Profile
Bristol Water Growth Profile Bristol Water’s Regulated Capital Value (RCV) grows by a compounded 7.5% per year over the current regulatory period (AMP5) 500 450 7.5% 400 Nominal Closing RCV (£m) 350 300 250 200 410 419 386 352 150 310 280 100 50 - Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Fiscal Yea
Slide 17: Regulated, Growing Utility
Regulated, Growing Utility An illustrative example A business with $200 in regulatory book value (RCV) funded at 70% debt… 17
Slide 18: Regulated, Growing Utility
Regulated, Growing Utility An illustrative example … Has a $60 equity book value & a $100 market value assuming a 1.2x multiple 18
Slide 19: Regulated, Growing Utility
Regulated, Growing Utility An illustrative example Growing at 7.5% per annum, the $200 RCV will grow to $287 after 5 years… 19
Slide 20: Regulated, Growing Utility
Regulated, Growing Utility An illustrative example … With a $86 equity book value & a $144 market value assuming the same multiples 20
Slide 21: Regulated, Growing Utility
Regulated, Growing Utility An illustrative example … Of the $44 increase in equity value, $26 is attributable to capital reinvested in the business & $18 to the additional market premium on reinvested capital $144 $100 21
Slide 22: Regulated, Growing Utility: Investing in growth
Regulated, Growing Utility Investing in growth The $100 equity investment generates 3% in cash yield & 5% in RCV growth… 5 Year Average Total Annual Return Return Cash 15.0% 3.0% Dividend Book 26.1% 5.2% Equity Value Total 41.1% 8.2% Return 22
Slide 23: Regulated, Growing Utility: total return
Regulated, Growing Utility Increasing long-term cash flow profile & substantial total return … Plus an additional 3.5% in fair market value uplift for a total return of over 11% 5 Year Average Total Annual Return Return Cash 15.0% 3.0% Dividend Book 26.1% 5.2% Equity Value Fair 17.4% 3.5% Market Upl
Slide 24: Executing Our Strategy: Key messages
Executing Our Strategy Key messages 1 0.3% Taking significant steps to diversify, de-risk & re-position 2012 Adjusted EBITDA our portfolio ‣ Moving away from depleting assets & towards long-life, perpetual businesses ‣ Greater diversification across industries & 5.0% Bristol Water 10.8% 3.5% Cardina
Slide 25: Bristol Water extends cash flow profile
Executing Our Strategy Key messages 2 Bristol Water significantly extends Capstone’s cash flow profile Contractual/Regulated Terms Cardinal Whitecourt Chapais Sechelt Dryden Hluey Lakes Erie Shores Amherstburg Wawatay Bristol (Perpetual) Varmevarden (Perpetual) 2010 2015 2020 2025 2030 2035 2040 204
Slide 26: Positioning to become a total return vehicle
Executing Our Strategy Key messages 3 Positioning to become a total return vehicle with organic growth component ‣ Focused on businesses that feature long- term cash flow growth —Support sustainable & growing dividends to investors —May mean lower initial yield in early years of an investment e.g. B
Slide 27: Strengthen balance sheet for growth
Executing Our Strategy Key messages 4 Strengthen balance sheet for growth & address refinancing requirements in 2012 ‣ Already taking steps to rebuild balance sheet ‣ Recognize importance of refinancing strategy to investors ‣ Strategy in place to accomplish objectives 27
Slide 28: Executing Our Strategy: Challenges
Executing Our Strategy Challenges ▸Terms of a new contract at Cardinal ▸Keep eye on the ball to achieve optimal performance from existing portfolio ▸Balance financial prudence with quality opportunities that will: —Further diversify portfolio —Contribute to increasing shareholder value ▸Will require
Slide 29: Michael Smerdon, EVP & CFO
Michael Smerdon Executive Vice President & CFO
Slide 30: Outlook
CAPSTONE OUTLOOK
Slide 31: 2012 Operating Performance
2012 Operating Performance ‣ Full year of results from Amherstburg Solar 9 Park & Bristol Water ‣ Interest income & first dividend payment 9 from Värmevärden ‣ Higher electricity rates in PPAs for 9 Cardinal, Erie Shores & hydro facilities – although at a lower rate than in past years ‣ Normal outpu
Slide 32: 2012 Operating Performance: Lower admin costs
2012 Operating Performance Lower admin costs ▸Internalization now behind us ▸Expect admin costs to be in range of ~$12M going forward1 1 – Based on existing businesses & excluding business development expenses, which will fluctuate from year to year 32
Slide 33: Updated 2012 Outlook
Updated 2012 Outlook Revised since Q3 2011 results Fiscal 2012 ▸ Expect Adjusted EBITDA to be ~$120M compared with ~$140M previously ▸ Expect payout ratio, which is based on AFFO, to be ~120% to 130% compared with ~ 85% to 90% previously ▸ Revised outlook reflects the following: —TCPL interim rate o
Slide 34: Updated 2012 Outlook: TCPL interim rate impact
Updated 2012 Outlook TCPL interim rate impact Prior Outlook Assumed Return of Rates in 2012 to 2010 Level of $1.64/GJ vs. $2.24/GJ in 2011 ▸Prior outlook based on TCPL’s 2012/2013 proposal for tolls of $1.63/GJ ▸Interim 2012 application of $2.24/GJ represents an additional cost of ~$7 in 2012 ▸Prude
Slide 35: Updated 2012 Outlook: IFRS adjustments at Bristol Water
Updated 2012 Outlook IFRS adjustments at Bristol Water Prior Outlook was Based on UK GAAP & Amount of Capex in 2011 ▸IFRS requires a portion of Infrastructure Renewals Expenditure (IRE) under the regulatory model to be expensed in operating expenses rather than accounted for as a capital item ▸As a
Slide 36: Updated 2012 Outlook: Recapitalization at Värmevärden
Updated 2012 Outlook Recapitalization initiative at Värmevärden Updated Outlook on Timing of Re-capitalization Initiative1 ▸Supports re-positioning of balance sheet ▸Will have effect of reducing interest income Capstone receives from this investment to ~$4M compared with the ~$7M that it would have
Slide 37: Updated 2012 Outlook: 2012 business planning outcome
Updated 2012 Outlook Outcome of 2012 business planning process Prior Outlook Formed on 2011 Business Plan Approved in November 2010 ▸New plan factors in actual results of 2011 & recently approved budgets for each asset in 2012 ▸Now expect: —Lower gas mitigation revenue at Cardinal & small increase i
Slide 38: Updated 2012 Outlook: Updated financing assumptions
Updated 2012 Outlook Updated financing assumptions Changes in Financing Assumptions ▸Earlier refinancings than previously planned ▸Some may potentially include amortization profiles ▸Anticipate higher financing costs in 2012 38
Slide 39: Overview of variance in Adjusted EBITDA
Updated 2012 Outlook Overview of variance in Adjusted EBITDA Adjusted EBITDA (2012) Bridge (C$m) 160 140 140 (7) 120 (8) (2) (3) 120 100 80 60 40 20 - Previous TCPL Toll Bristol Water Varmevarden Other Current Outlook (2012 interim) (IFRS impact) (recapitalization (Business Plans) Outlook impact) 39
Slide 40: Our Definition of AFFO
Our Definition of AFFO A measure of sustainable cash generation from our businesses. It is defined as Adjusted EBITDA less interest paid on debt, taxes paid, preferred dividends, scheduled debt repayments & maintenance capital expenditures required to maintain cash flow potential. 40
Slide 41: Overview of variance in payout ratio
Updated 2012 Outlook Overview of variance in payout ratio AFFO Payout Ratio (2012) Bridge 140% 7% 15% 125% 120% 14% 100% 90% 80% 60% 40% 20% -% Previous TCPL Toll Financing Other Current Outlook (2012 interim) Assumptions (Business Plans) Outlook 41
Slide 42: Calculation of AFFO at Bristol Water
Calculation of AFFO at Bristol Water Complexities 1 Bristol Water has pre-funded a significant amount of capex through cash on the balance sheet from debt offerings 2 Bristol Water is expected to continue to borrow additional debt rather than having scheduled debt repayment that reduces leverage ove
Slide 43: Calculation of AFFO at Bristol Water
Calculation of AFFO at Bristol Water ► START WITH Adjusted EBITDA $49.9M —Cash interest ($12.1M) - LESS —Preferred dividends ($1.2M) $0.7M —Taxes = EQUALS Funds From Operations $37.2M —IRE expensed under IFRS $14.5M + ADD —IRC (maintenance capex) - LESS —CCD ($18.7M) ($23.2M) —Inflation adjustments
Slide 44: Updated 2011 Outlook
Updated 2011 Outlook Fiscal 2011 ▸Excluding internalization costs, now expect Adjusted EBITDA to be ~$70M to $75M ▸Expect 2011 payout ratio, based on AFFO & excluding internalization costs, to be ~130% compared with ~120% previously ▸2011 outlook remains subject to final purchase price accounting tr
Slide 45: Dividend Policy
Dividend Policy To evaluate in 2012 ▸Currently expect payout ratio to return to the 100% or below range in 2013 & 2014 based on our existing portfolio, outlook & current dividend level ▸However, our comfort level with current dividend level has changed due to: —Impact of higher TCPL rates & lower DC
Slide 46: Re-Positioning Our Balance Sheet
Re-Positioning Our Balance Sheet $119M – CPC-Cardinal Credit Facility $78M – Senior Credit Facility $200M in total to be refinanced in 2012 How? ▸$85M: hydro facilities So, ~$60M remains ▸$50 – 60M: Varmevarden recap outstanding $140M ▸Corporate facility ▸Convertible debentures ▸Bristol Water holdco
Slide 47: 2012 Priority: CPC-Cardinal Facility
2012 Priority Repositioning balance sheet for next phase of evolution CPC-Cardinal Facility Due on June 29, 2012 ▸Currently $119M drawn ▸Target timeframe is Q1/early Q2 2012 ▸Expect to move $85M in debt to hydro facilities 47
Slide 48: 2012 Priority: Recapitalization of Värmevärden
2012 Priority Repositioning balance sheet for next phase of evolution Recapitalization of Värmevärden ▸Värmevärden is currently unlevered ▸Target timeframe is Q1 2012 ▸Expect to result in $50 - $60M in net proceeds for Capstone as repatriation of shareholder loan principal 48
Slide 49: 2012 Priority: Senior credit facility balance
2012 Priority Repositioning balance sheet for next phase of evolution Senior credit facility balance due October 3, 2012 ▸Facility initially in amount of $150M ▸Currently $78M outstanding ▸Options to pay outstanding balance likely to come mostly from Värmevärden recapitalization 49
Slide 50: 2012 Priority: Rebuild investment capability
2012 Priority Repositioning balance sheet for next phase of evolution Rebuild capability to pursue new investment opportunities ▸Prudent to maintain financial flexibility at corporate level to pursue new investments ▸Plan to have more flexibility with a new corporate facility 50
Slide 51: Pro Forma Long-Term Debt
Pro Forma Long-Term Debt Debt-to-capitalization ratio ~60% ($millions unless otherwise noted) Maturity Date All in Rate(1) Sep 30, 2011 Pro forma Sep 30, 2011(2) CPC-Cardinal facility(3) Jun 29, 2012 4.34% 85.0 119.0 Erie Shores project debt Tranche A Apr 1, 2026 5.96% 60.4 60.4 Tranche B Apr 1, 201
Slide 52: Michael Bernstein, President & CEO
Michael Bernstein President & CEO
Slide 53: 2012 Priorities
CAPSTONE 2012 PRIORITIES
Slide 54: 2012 Priorities
2012 Priorities 1 Restore balance sheet 2 Negotiate a new contract for Cardinal 54
Slide 55: 2012 Priorities
2012 Priorities 3 Advancing organic growth opportunities 4 Continue to assess investment opportunities 55
Slide 56: Cardinal Re-contracting
Cardinal Re-contracting Negotiating a new contract ‣ Commenced negotiations in August ‣ Compelling argument for re-contracting: — Well maintained — Grid stability — Local economy & community — No NIMBY issues — Ability to re-configure, providing flexibility to the electricity system while meeting Ca
Slide 57: Organic Growth Initiatives: Bristol Water
Organic Growth Initiatives Bristol Water RCV 2010/11 2011/12 2012/13 2013/14 2014/15 (₤M) (2007/08 Prices) Opening RCV 264.2 278.0 306.9 326.3 336.7 Capex (net of grants/contributions) 45.6 61.7 53.3 44.6 31.4 Depreciation & IRC (30.7) (31.6) (32.8) (33.1) (33.0) Regulatory Adjustments (1.1) (1.1) (
Slide 58: Organic Growth Initiatives: Renewable power portfolio
Organic Growth Initiatives Renewable power portfolio ▸Whitecourt has completed agreement to sell Renewable Energy Credits (RECs) ▸RECs certified under federal government’s EcoLogo program ▸Expected to contribute an additional $450,000 in revenue each year until 20151 ▸Whitecourt has additional REC c
Slide 59: New Investment Opportunities
New Investment Opportunities Areas of focus 1 Build scale with quality assets, either operating or development stage 2 Further diversify portfolio by infrastructure category & geography 3 Focus on Canada, the US, Western Europe & Australia 59
Slide 60: Continue to diversify across core infrastructure categories
New Investment Opportunities Continue to diversify across core infrastructure categories Power Utilities P3s Transportation ▸ Traditional ▸ Water ▸ Courts ▸ Roads ▸ Renewable ▸ Gas ▸ Hospitals ▸ Rail ▸ District heating ▸ Electricity ▸ Schools ▸ Airports & cooling ▸ Transportation Opportunities acros
Slide 61: Focus on Canada, US, Western Europe & Australia
New Investment Opportunities Focus on Canada, US, Western Europe & Australia Privatizations in Utilities in UK & Europe Europe Renewable power opportunities in Canada US$772B P3s, transportation Average annual in Australia global investment needed by 2015 to repair, maintain, improve & build new wat
Slide 62: Why Invest?
CAPSTONE WHY INVEST?
Slide 63: Why Invest?
Why Invest? Confident in our ability to build a sizable, successful business 9Existing businesses are operating well 9Successfully advancing our strategy to diversify & de-risk our portfolio 9Significantly extended cash flow profile of portfolio, thereby tempering impact of Cardinal’s PPA expiry 9A
Slide 64: Questions
CAPSTONE INFRASTRUCTURE
Slide 65: Non-IFRS Performance Measures
Non-IFRS Performance Measures Definitions While the accompanying unaudited interim consolidated financial statements have been prepared in accordance with IFRS, this MD&A also contains figures that are performance measures not defined by IFRS. These non-GAAP performance measures do not have any stan
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