Canada’s Capital Power Corp (TSX: CPX) has agreed to acquire Decatur Power Holdings LLC, which owns the Decatur Energy Center, a 795 megawatt natural gas-fired combined cycle power generation plant located in Decatur, Alabama. Capital Power agreed to pay US$441 million, subject to working capital and adjustments, to an affiliate of LS Power Equity Partners, a U.S. private equity firm focused on the power industry. Capital Power, an Edmonton-based power generation business, said the acquisition, expected to close in June, represents a significant step in its growth strategy.
Capital Power announces acquisition of Decatur Energy Center and a $183 million subscription receipt offering
EDMONTON, ALBERTA–(Marketwired – April 12, 2017) –
Capital Power Corporation (Capital Power or the Company) (TSX:CPX) announced today that it has entered into an agreement to acquire Decatur Power Holdings, LLC, which owns the Decatur Energy Center (Decatur Energy) from an affiliate of LS Power Equity Partners III (LS Power) for U.S. $441 million, subject to working capital and other closing adjustments (the Acquisition). Decatur Energy is a 795 megawatt (MW) natural gas-fired combined cycle power generation plant located in Decatur, Alabama that operates under a tolling agreement.
“The acquisition of Decatur Energy is a significant step in the execution of our growth strategy as it further strengthens our contracted cash flow profile and increases our geographical diversification,” said Capital Power’s President and CEO, Brian Vaasjo. “The facility has more than half of its 10-year contract term remaining with a high probability of re-contracting based on its history of re-contracting and the need for capacity in the region due to supply retirements and load growth.”
The Acquisition will be financed by the net proceeds raised through the subscription receipt offering described below with the balance to be financed through debt utilizing a temporary expansion of Capital Power’s bank facilities followed by permanent financing with an issuance of long-term debt expected later this year.
Capital Power’s first quarter results, to be announced on May 1, 2017, are expected to be in-line with the Company’s expectations and current market expectations. Capital Power is reaffirming its 2017 AFFO guidance of $320 million to $365 million that it provided in its 2016 year-end financial results before the acquisition of Decatur Energy. The Acquisition further supports the Company’s 7% annual dividend growth guidance for 2017 and 2018. Each annual increase is subject to changing circumstances and approved by the Board of Directors of Capital Power at the time of the increase.
Decatur Energy is a natural gas-fired combined cycle plant with a nameplate capacity of 795 MW. The facility, which was developed, designed and constructed by Calpine, entered commercial operations in 2002 and operates in the Southeastern Electric Reliability Council (SERC) market. The facility utilizes proven Siemens combustion turbine frame technology and a Toshiba steam turbine.
The facility sells capacity and energy to a regional entity with very strong investment grade credit ratings under a long-term contract. The contract has an original term of 10 years and expires December 31, 2022. The facility is well-positioned given anticipated market conditions, as well as significant remaining useful life, to be re-contracted or take advantage of other commercial alternatives at the end of the current contract. Decatur Energy also has the ability to sell power into the PJM Interconnection market starting in 2023.
The Acquisition is expected to increase adjusted funds from operations (AFFO) by an estimated $43 million in the first full year of operations, which will be accretive by 18 cents per share reflecting a 6% increase over the same period. The increase in projected annual adjusted EBITDA related to the Acquisition is estimated to be $60 million in the first full year of operations. The Acquisition is expected to be neutral to earnings per share. Combined with the acquisition of the Veresen Inc. facilities, which was announced on February 21, 2017, Capital Power’s adjusted EBITDA is expected to be 80% contracted in 2017.
JP Morgan represented LS Power in connection with the sale of Decatur Energy.
Subscription receipt offering
Capital Power expects to finance the Acquisition using a combination of debt and equity. The Company has entered into an agreement with a syndicate of underwriters co-led by RBC Capital Markets and Scotiabank to issue 7,375,000 subscription receipts (the Subscription Receipts), on a bought deal basis, at an issue price of $24.75 per Subscription Receipt (the Offering Price), for total gross proceeds of approximately $183 million (the Public Offering). The net proceeds from the Public Offering will be used to partially finance the Acquisition.
The Company has granted the Underwriters an over-allotment option to purchase, in whole or part, up to an additional 1,106,250 Subscription Receipts at the Offering Price to cover over-allotments, if any, exercisable at any time and from time to time until the date that is 30 days following the closing of the Offering. If the over-allotment option is exercised in full, gross proceeds from the Public Offering will be approximately $210 million.
Each Subscription Receipt will entitle the holder thereof to receive, without payment of additional consideration or further action, upon closing of the Acquisition, one common share of Capital Power (Common Share). In addition, while the Subscription Receipts remain outstanding, holders will be entitled to receive cash payments (Dividend Equivalent Payments) per Subscription Receipt equal to dividends declared by Capital Power on each Common Share. Such Dividend Equivalent Payments will have the same record date as the related Common Share dividend and will be paid to holders of Subscription Receipts concurrently with the payment date of each such dividend. Dividend Equivalent Payments will be paid first out of any interest on the Escrowed Funds (defined below) and then out of the Escrowed Funds.
The proceeds from the sale of the Subscription Receipts (the Escrowed Funds) will be held in escrow by Computershare Trust Company of Canada, as subscription receipt agent (the Subscription Receipt Agent) and invested in interest-bearing deposits with banks and other financial institutions with issuer credit ratings with Standard & Poor’s Rating Services of at least A (as contemplated by, or specified in, the subscription receipt agreement) or other approved investments as set forth in the subscription receipt agreement, provided that Dividend Equivalent Payments may be made from the Escrowed Funds and the interest credited or received thereon from time to time, as described above.
Under the Purchase and Sale Agreement, Capital Power is acquiring 100 per cent of the ownership interests in Decatur Power Holdings, LLC. The Acquisition is expected to close in June 2017, subject to regulatory approvals and satisfaction of other customary closing conditions.
Once notice has been delivered to the Subscription Receipt Agent that the parties to the Acquisition are able to complete the Acquisition in all material respects in accordance with the terms of the Purchase and Sale Agreement, but for payment of the purchase price, and Capital Power has available to it all other funds required to complete the Acquisition, the Escrowed Funds, less any amounts required to satisfy payment of unpaid Dividend Equivalent Payments, will be released to or as directed by Capital Power up to six business days prior to the closing of the Acquisition. In the event such notice has not been delivered prior to October 19, 2017 or if the Acquisition is terminated prior to such time, or Capital Power advises the underwriters or discloses to the public that it does not intend to proceed with the Acquisition, then the Subscription Receipt Agent and Capital Power will return to each holder of Subscription Receipts an amount equal to the aggregate issue price of such holder’s Subscription Receipts, plus any unpaid Dividend Equivalent Payments owing to such holders of Subscription Receipts (the Termination Payment). The Termination Payment will be made from the balance of the Escrowed Funds at the Termination Time, including from any remaining interest on the Escrowed Funds. If the balance of the Escrowed Funds, together with any such interest, is insufficient to cover the full amount of the Termination Payment, Capital Power will pay any difference to the holders of Subscription Receipts. If no Dividend Equivalent Payment is payable to the holders of Subscription Receipts prior to the Termination Time, such holders will receive, in addition to the aggregate issue price of such holder’s Subscription Receipts, such holder’s pro rata share of the interest earned on the Escrowed Funds and such holder’s pro rata share of the interest that would have been earned on 50% of the underwriting fee were such portion of the fee included in the Escrowed Funds.
The Public Offering will be offered in all provinces and territories of Canada by way of a prospectus supplement to Capital Power’s base shelf prospectus dated May 3, 2016. Completion of the Public Offering is subject to certain conditions including receipt of all necessary approvals, including the approval of the Toronto Stock Exchange. Closing of the Public Offering is anticipated to occur on or about April 24, 2017.
All references to dollar amounts contained herein are to Canadian dollars unless otherwise indicated.
Non-GAAP Financial Measures
Commencing in 2017, the Company uses adjusted funds from operations (AFFO) as a financial performance measure to measure the Company’s ability to generate cash from its current operating activities to fund growth capital expenditures, debt repayments and common share dividends to the Company’s shareholders. The Company uses earnings before net finance expense, income tax expense, depreciation and amortization, impairments, foreign exchange gains or losses, finance expense from joint venture, and gains or losses on disposals (adjusted EBITDA) to measure the operating performance of facilities and categories of facilities from period to period. Management believes that a measure of facility operating performance is more meaningful if results not related to facility operations such as impairments, foreign exchange gains or losses and gains or losses on disposals are excluded from the adjusted EBITDA measure. These terms are not defined financial measures according to GAAP and do not have standardized meanings prescribed by GAAP and, therefore, are unlikely to be comparable to similar measures used by other enterprises. AFFO and adjusted EBITDA should not be considered alternatives to net cash flows from operating activities and net income, respectively, calculated in accordance with GAAP. Rather, these measures are provided to complement the nearest GAAP measures in the analysis of the Company’s results of operations from management’s perspective. The AFFO performance measure is FFO reduced by sustaining capital expenditures, distributions received from the Company’s joint venture interests and preferred share dividends and adjusted to include the Company’s share of the adjusted funds from operations of its joint venture interests and cash from coal compensation that will be received annually.
A reconciliation of the increase in net cash flows from operating activities to the increase in AFFO resulting from the Acquisition is as follows: (See data here.)
About Capital Power
Capital Power (TSX:CPX) is a growth-oriented North American power producer headquartered in Edmonton, Alberta. The company develops, acquires, operates and optimizes power generation from a variety of energy sources. Capital Power owns more than 3,200 megawatts of power generation capacity at 18 facilities across North America. More than 700 megawatts of owned generation capacity are in advanced development in Alberta and under construction in Kansas.
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Photo courtesy of Calpine