Capital Power Corporation (CPX) Earnings Call Transcript & Summary

My name is Jonathan Dickman-Wilkes. I'm a senior banker in JPMorgan's Power and Renewables Investment Banking Group. It's my pleasure to welcome Brian Vaasjo, CEO of Capital Power. This is the first time that Capital Power has presented at our conference, and we're thrilled that they're here. Before I turn it over to Brian, I'd just like to point out to the audience that you may submit a question through the web portal, which will funnel its way to me, because we're going to leave time after Brian's prepared remarks for Q&A. And now I'll turn it over to Brian.

Thank you, Jonathan, and thank you for -- JPMorgan for this opportunity to speak to investors. So if you could turn to the slide deck that you've been provided, and it's not necessarily because I'll talk through the number of slides and hit some highlights, but you won't necessarily have to reference this directly. So we jump to Slide #2. Capital Power is a North American power business, and that's all we do. We deal in wholesale markets. We are not involved in any other infrastructure business, and we're not involved outside of our North American [ business ]. And we have no desire to do either. As you can see from the map, or as I can describe, we have a number of locations across the U.S. and Canada, which points out 2 things. Certainly, a diversity from a geographic perspective but also a diversity as it relates to the type of energy production, whether it be from solar, wind, natural gas. And we even have some coal here in the province of Alberta. Of note is that we continue to have a strong commitment towards an investment-grade credit rating, which is not usual from a power producer [ company ]. And we also have a history over the last number of years of significant dividend increases and pretty constant ones as well, and I'll talk about that in a moment. Moving to Slide 3, talk a little bit about COVID-19 and our experience. And thus far, it's been excellent. We started early because we had a number of planned outages and started with a number of precautionary measures and enhanced hygiene and social distancing and have been very successful at [ managing effectively ]. We had no COVID-19 incidents across our fleet of operations. Likewise, all of our staff and nonessential workers are working from home. They have been since early March. And we just announced earlier this week that because of our experience and because we -- everything is working extremely well, we will be going back to the offices more where we have increased the [ operation ] at our plants until at least September, if not beyond. So thus far, very good, and our actions have done what they're supposed to do, to keep our employees safe [ and ] keep our plants operating. So our business, as I commented on before, on Slide 4, we are -- do have a renewables business. We're trying to expand that rapidly both in Canada and the U.S. and largely under long-term contracts. And that's what we're doing today. Even in the longer term, we expect to be integrating that with battery storage and other forms of storage to provide a more effective renewable energy product. We also are investing in natural gas generation. Particularly of late, we've been investing in mid-life contracted natural gas plants. And that's been a very significant piece of our business over the last little while, and I'd have to say we've been extremely successful in the plants that we've acquired and finding ways to create additional value associated with those facilities. In addition to that, we've been working on a couple of fronts to reduce the emissions profile of natural gas in general. We're looking at and investing in carbon capture and storage. We're also -- have an interesting and very unique carbon utilization technology that we expect over the next 18 months will result in us building worldscale production facility for this product. It's actually carbon nanotubes which will reduce the carbon footprint of our facilities, but in addition to that, provide an extremely important and [indiscernible] product. The last thing that we're doing is we're transitioning our existing coal facilities to be natural gas. In the shorter term, we're moving to dual fuel, whereby the end of 2021, we can burn either 100% natural gas or 100% coal. But by [ 2029 ], it will be 100% natural gas, if not earlier depending on economics but also in terms of what our investors are wanting in terms of [indiscernible]. Moving to Slide #5. This slide characterizes a number of attributes around the Capital [ portfolio ]. Firstly, our average age of our facilities is only 14 years, which is relatively young. In fact, we expect only 2% of our facilities to be retired this decade. Average contract life of our assets is 10 years, and we continue to add new assets. Our contract also [indiscernible] in a position to be contracted. [indiscernible] most of those assets, and certainly some in the near-term [indiscernible]. The last point is that we experienced a 95% availability in a cost -- fleets of assets like ours, that's very, very good. I think those who know us would characterize us as a very, very good operator, which is important because, as I'll talk about [ in a second, ] it's that operational excellence that allows us to add value, either the assets -- acquire or enable us to execute on the construction of assets very, very effectively and competitively. This slide, Slide #6, actually shows the growth in our asset [ base ] from 2012. As you can see or for those who weren't following me directly, there's a significant growth in assets over that time period, and essentially $650 million a year of investment on average over that time period, with a whole range of facilities, some natural gas, some renewables, some acquisitions, some development. So again, a whole range of assets in those [ few ] asset classes across Canada and the United States. It's important to recognize that our growth hasn't been from one transaction or one [ initiative ]. It's planned from a number of -- we actually refer to it as a brick-by-brick strategy of just steady, steady growth year in and year out. And that $650 million has been our experience. Our expectation on an annual basis is that we're still targeting at least $500 million [ committed capital for growth ]. So let's now boil down to in terms of just in addition to simple growth, but it also results in -- is a number of changes in our portfolio. So if you go back to 2014, we're essentially, from an EBITDA basis, 2/3 coal. And now that 2/3 is now 1/3, so we're 2/3 -- over 2/3 natural gas and renewables [ from an EBITDA basis ]. For a contracted capacity, we've gone from 58% in 2014 to 79%. If you go back a year or 2 before that, it was about 30% contracted, so great progress in contracting up our cash flow. If you look at us from a footprint perspective, we used to be 76% Alberta. We're now 50% Alberta. And again, it's certainly resulted in [ some growth ], we've actually experienced a 9% compounded annual growth rate in our AFFO per share. So all very consistent. And when we're asked, so what's the future looks like? It actually looks like the past. We'll continue on the same strategy, the same approach. But we've been very successful at it so far. Moving to one of the questions out there around the Alberta power market. It has -- with the COVID-19 [ pandemic plus crude ] oil prices has had an impact on the Alberta demand. [ In fact, ] it was down 5% year-over-year. But we expect over time, in a relatively short period of time, much of that will bounce back. The Alberta market has the benefit of being largely industrial, and so it doesn't get hit as hard as others with economic downturn. So for example, if you look at other provinces in Canada and most of the states, they all -- they experienced 10-plus percent reductions in demand. But we're not experiencing that in Alberta, [ in fact, we ] see it bouncing back. And that's reflected in the forward prices that you see on the bottom of the page where [ Alberta ] power prices are expected to be north of $50. And we believe that, that is relatively conservative. When you look at the next slide, one of the important things that we do in our Alberta market and our merchant position is we do hedge and we very actively hedge. And you can see for the balance of this year, we're 91% hedged for our baseload capacity in the mid-50s, and the forwards are in the same range. We see across the [ 2023 ] the varying levels of hedging. [ That as ] we move close to the prompt year, we actually -- we expect these levels to be at least [ 50% ], if not, in some cases, [indiscernible] 100%. And that's very important to a slide I'll have in a moment that actually [ impresses ] our current position. So essentially, from an Alberta perspective, we're in very good shape. If you turn to Slide 11, high availability, great assets, fixed and variable costs, high capture prices from our wind facilities, and we're moving towards more and more natural gas. Going to Slide 13. As I touched on, with our natural -- our whole strategy, we're moving away from natural gas we implemented, and it's performance standard, and it's going to be complete in 2021. But we've actually reduced the emissions profile on our coal plants by 12%. And through a number of different things that we're operating in [ a lot less below the ] nameplate capacity in fact, these 3 Genesee units from a coal perspective will have the lowest emissions or megawatt of any other facilities, coal facilities in North America. And when they get converted to natural gas, it'll be the same. There will be no natural -- converted natural [ call it ] oil price for natural gas, we will have better efficiency. So that's just some great work there that we [ are doing ]. Again, we will move to 100% dual fuel. We will have that same step-up in efficiency over our competitors. We're very pleased and actually quite proud of those developments. Looking at our growth strategy, as I touched on, looking at Slide 15, we have a number of opportunities from a build perspective across North America. We expect that we'll be about [ 101 megawatts ] reduction now [indiscernible]. We expect before the end of the year we'll be announcing [ a number of ] renewable growth opportunities. And from an acquisition of mid-life natural gas contracted assets, we see the latter half of this year to have a number of opportunities out there that may well fit our objectives and our strategy around natural gas. So again, do expect to see the same sort of activity going forward as we've seen in the past. This year, we have had some significant success on the renewables perspective already. We've added 251 megawatts of renewables. We completed 150-megawatt Cardinal Point Wind project on time and on schedule -- sorry, and on budget. We also acquired the [ 101-megawatt Buckthorn Wind ] in Texas with a 15-year weighted average contract life. Another thing that's happened on our renewable side [ is we signed an agreement ] with Vestas for an extension on our LTSAs. The main factor associated with that, that's very positive is that we've reduced our cost by 26% over -- as those extensions are implemented, so feel very, very positive. The other thing that people don't recognize is that also [indiscernible]. As I mentioned earlier, we've got -- so a lot of recontracting activities going on at our Decatur plant in Alabama and Island Generation. Both of those we expect to be contracted, I think, by back or before the end of the year. Conversations are ongoing and going very well in that respect. In terms of a financial overview, one of the things that we've been very focused on is -- as everybody is, it's just what's a prudent capital allocation. As when you go through our history, we certainly have been investing in asset opportunities over there. But we've also engaged in share buyback and as well as debt repayments from excess cash, or share prices were such that it made more sense to be buying back shares and not necessarily in making investments. So from our perspective, we've managed our overall capital allocation very well over the last [ 14 ] years, and of course, significant dividend growth in terms of the allocation of that capital back to our shareholders. Over the last 5 years, as I commented earlier, we've had a 9% growth, in Slide 20, in terms of AFFO per share. And again, a very, very good growth profile in [ average ] we've been basing dividend increases. Looking at that profile in a little bit more depth. It's important to recognize that with the growth in cash flow, of course, we do have a payout ratio target of 45% to 55% related to AFFO. But also important to point out that at this point in time, we're at 40% in 2020, the payout. So we're well below our range, which gives us certainly headroom for our future growth and protection against the existing debt dividend. And from our overall cash flow, we end up with over $300 million in discretionary cash flow investment. And of course, looking at Slide 22, you see, since 2013, a 7%, given that our average growth rate -- the compounded annual growth rate in dividends out to 2022, which is where we have given guidance that we will increase dividends at 7% for '20 and '21 and 5% [ for 2022 ]. When we look at today and our financial position and our liquidity, which is a question that's out there given COVID-19, we have very strong cash flow, as I just spoke to. And that cash flow is very protected. As this pie chart on the right indicates, well over 80% of our cash flow is from long-term contracts. And of what is merchant, the province of Alberta, 13% of that's hedged, which means 4% that is subject to the vagaries of the markets. So a very, very strong cash position and cash flow position. In terms of liquidity, we've got a $900 million of availability [ in our credit facility ] that matures [ in 2024 ]. So a lot of financing capability and short-term capability [indiscernible] that facility. We are a BBB low which has just been confirmed by DBRS. And based on the strong financial position and our outlook, turning to the Slide 24, we have confirmed our guidance for 2020 in terms of AFFO expectations as well as facility availability and the other [ debt facility ] we'll get and offer the market each quarter. So a very good position for 2020, which also when we confirmed our guidance associated with our cash flow and other parameters, we also confirmed our dividend guidance for 2020 and beyond. Moving to sustainability, Slide 26, very important to us as was, obviously, to everybody. From an environmental perspective, we already talked about what we're doing on emissions side and kind of reduce the emissions profile of our units now and in the future. From a social perspective, whether it's gender equality in the organization, [ we see the nominal 30%, with 44% women on our Board and 33% on ] executive. You move over to the guidance side or the governance side, certainly, we've been doing a lot from that perspective and are recognized by -- in a number of different organization [indiscernible]. One of the things that does make us a little different is 20% of our KPIs, key performance indicators, are ESG-related, and those [ will have direct impact to our short-term incentive ]. Moving just to touch on our sustainability targets. We are very, very clear that not only do we have these targets that we are pursuing, but when we talk about being carbon neutral [ on or before 2050 ], unlike many organizations that are -- we don't know we can get there, this is how we're going to get there. We're going to get there through the application of technology, places of technology through managing our asset and asset [ profile over the next several years ] so that we will be in a position to actually meet that aspiration of carbon neutral [ by 2050 ]. Of course, on Slide 28, reporting critical and continue to move the needle in terms of our own reporting [ significant year ]. And next year in February, you'll see an actual integrated report that goes a couple of steps further than this year's. So with that, I'd just like to touch on Capital Power's [ long-term drivers or ] attractive investment opportunity. We talked about the assets and strength, the markets, the diversity and the fact that what the growth performance [ we achieved over the last few years ] you can expect to see over the coming years as well. So with that, thank you very much. And over to you, Jonathan.

Terrific. Thanks, Brian, for that. That was pretty comprehensive. I have a couple of questions here. The first of which, maybe a challenging question, check question, answer quickly. You've been a public company since 2009, how -- and CEO the whole way through. How do you see the business today versus when you initially went public?

So there's been an evolution on a number of fronts. When we became a public company in 2009, so we were trying to balance our merchant and our contracted business. We were looking at 50-50 as a mix, and the market seemed to be quite comfortable with that and have number of merchant assets in the Northeast. I think actually, JPMorgan was part of a transaction last year to sell those assets again, the [indiscernible] assets. So it was very different outlook on risk, a very different outlook on the market. There was a disclosure [indiscernible] financial money in the market [indiscernible]. So what we're seeing is these trends play out, and our targets now for merchant is 25% or less. Our target in terms of return, we're finding opportunities in [indiscernible]. And also, there will be places where there's not a strong presence from a financial buyers, i.e., it actually takes knowledge and expertise to operate assets to get value. So we live in a very broad trends. One way to look at what's happened environmentally, we've been environmentally conscious [indiscernible] side right from the turn of the century. We -- when we were building the Genesee 3 facility, which was being constructed in just after 2000, we actually were committed to offset their emissions, carbon emissions profile down to the natural gas level way back then. And so from our perspective and what we've actually been doing and how [ -- what we're seeing ] we've actually been doing an awful lot of [indiscernible].

Terrific. You touched on your carbon capture and storage investments, which is something that several U.S. companies have, I would say, maybe flirted with over the years. Can you talk a little bit more about that, and whether that would be a sort of a unique Alberta opportunity, or whether there could be some additional runway for you to make similar investments in the future?

So there's 2 signs to what we look at. One is actual carbon capture and storage, and we are working [ on different ] opportunity to potentially with in-place a carbon capture and storage and on the cogeneration facility. It looks pretty promising. And it's those kinds of opportunities that we look at. Probably what's more exciting, and again, I have to comment, I suspect that there is a -- I mentioned we're investing in technology. This technology is called carbon nanotubes. And essentially, there's literally thousands of technical papers out there where this is going to be amazing stamp of [indiscernible] strength in cement by 40%. They can double the strength of titanium in very, very small amount. The issue with it is that it's extremely expensive, and the technology that we are working with and that we will have an ownership position, have an ownership and an increasing ownership position, is that it reduces the cost by an order of magnitude. It makes it very viable. [ It will hold huge amount of emissions ]. And it actually takes carbon out of the air or out of an emissions profile and creates carbon nanotubes, which is, again, a very commercial product. So we're extremely excited about that and believe that technology by its help will move the needle on the climate change.

Maybe just focused on the U.S. a little bit. As we're a U.S. bank, you're here at our conference. I believe you operate in something like 7 U.S. states. You spoke, Brian, about your sort of expected fuel mix going forward, transitioning, obviously, away from coal and towards renewables. How do you see your growth and sort of future mix of business between the 2 countries in which you operate?

So we see that when you look at, again, Canada versus the United States, we think there's a lot more opportunities for Capital Power in the United States. It's the size of the market for one thing. But we're also finding that in some of our traditional areas such as Ontario and Alberta, they're likely not going to have a [indiscernible] change in mix that will require a lot of new investment. There's again -- the United States is a very large group of markets, and we certainly see more opportunities there. So we would expect that we'll increase our U.S. presence once [indiscernible] and see that as probably our greatest growth area.

On the financial side, Brian, you mentioned, obviously, your investment-grade rating. It's interesting that a few of the U.S. players that the focus on power generation historically have been some investment-grade, but a lot of those companies are now articulating their desire to be investment-grade, and to some extent, coming to where you have always been from a ratings perspective. Could you talk about sort of the benefits of investment-grade and your focus on maintaining that credit rating?

So certainly, having an investment-grade credit rating has benefits from the debt perspective, cost to debt perspective, availability of debt. But it also was extremely important to us from the standpoint of signaling to equity investment that their dividend is secure, unlike a lot of, say, for example, U.S. IPPs. They haven't actually, unless they move into the rural high-yield area, they haven't been actually -- dividends hasn't been a significant amount of their appeal to investors. I mean we have a very significant dividend. We are right now, and we believe we're very much undervalued. We have a dividend yield of 7%. And as I said earlier -- and that's with a 40% payout ratio. And to us, the evidence of the sustainability of the dividend and the future growth of the dividend, a large signal to investors is the fact that we are an investment-grade, and we're committed to continue with that investment-grade credit rating.

Terrific. Okay. Brian, I think we're out of time. So let me take one more moment to thank you for your participation in our conference and maybe turn it over to you for one final thought.

Well, again, thank you very much, Jonathan, for the opportunity today. And I think I'd just underline the comment that I was just making around the fact that we're continuing to do what we've done in the past [indiscernible]. We'll continue to have the [ same ] investment opportunities. And when you look at where our dividend is or where our shares are trading at around -- at 7%, it wasn't too long ago that we were just at 5%. We believe that somewhere in the north of 5% to 5.5% range is where we should be with a proper recognition in investment and reward. And so we do believe that when you put all these pieces together, our risk profile and our track record and other things should drive a much lower yield than what we're experiencing today.

Very good. Thanks, Brian, once more.

Thank you.