Capital Power Corporation

Welcome to Capital Power's second quarter 2022 results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded today, August 2nd, 2022. I will now turn the call over to Mr. Randy Ma, the Director of Investor Relations. Please go ahead.

Good morning. Thank you for joining us today to review Capital Power's second quarter 2022 results, which we released earlier this morning. Our second quarter report and the presentation for this conference call are posted on our website at CapitalPower.com. Joining me this morning are Brian Vazio, President and CEO, and Sandra Haskins, Senior Vice President, Finance and CFO. We'll start with opening comments and then open the lines to take your questions. Before we start, I would like to remind everyone that certain statements about future events made on the call are forward-looking in nature and are based on certain assumptions and analysis made by the company. Actual results could differ materially from the company's expectations due to various risks and uncertainties associated with our business. Please refer to the cautionary statement of forward-looking information on slide two. In today's discussion, we will be referring to various non-GAAP financial measures and ratios as noted on slide three. These measures 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. These measures are provided to complement the gap measures which are provided in the analysis of the company's results from management's perspective. Reconciliations of these non-gap financial measures to their nearest gap measures can be found in our second quarter 2022 MD&A. I will now turn the call over to Brian for his remarks starting on slide four.

Thanks, Randy, and good morning. Capital Powers head office in Edmonton is located within the traditional and contemporary home of many indigenous peoples of the Treaty 6 region and Métis Nation of Alberta Region 4. We acknowledge the diverse indigenous communities that are located in these areas and whose presence continues to enrich the community and our lives as we learn more about the indigenous history of the lands on which we live and work. In the second quarter, there were notable developments that took place that are very supportive of our natural gas strategy. I'll briefly touch on these developments and comment further later in my remarks. First, we continued our successful track record of recontracting with the recent four and a half year contract renewal on our island generation facility in BC. In July, we announced an agreement to acquire a 50% interest in the Midland Cogen facility the largest natural gas cogeneration facility in North America. This acquisition checks all the boxes of our natural gas strategy, including being well positioned for recontracting beyond 2030. The Ontario ISO has identified significant incremental capacity needs as early as 2025. This provides a positive outlook for our three natural gas facilities that are well positioned in the province. And last month, the federal government released its proposed frame for its clean electricity regulation. Under the proposed frame, it recognizes the continued role of natural gas generation in supporting reliability and integrating renewables. All these developments are positive as we continue executing on our natural gas strategy going forward. As mentioned, Sorry, turning to slide five. As mentioned, we announced an agreement to acquire the Midland Cogen facility with our partner, Manulife Investment Management. Midland is right down the middle of the fairway relative to our midlife acquisition strategy. This includes its competitive operational features, the potential to add value by leveraging its existing site, its accretive and contracted, and its advantaged location where it's well positioned for future recontracting. The purchase price is approximately $894 million U.S. that includes $521 million U.S. of project-level debt. We plan to finance our portion of the $186 million U.S. with cash on hand in utilizing our credit facilities. No equity will be required to finance this transaction. The five-year average AFFO accretion per share is forecast to be $0.30 U.S. or 7%. Approximately 85% of the capacity is under long-term contracts with high-quality counterparties with contract expiries in 2030 and 2035. Midland Cogen is a critical asset to support grid reliability during the transition to renewables in Michigan and is extremely well positioned for recontracting beyond 2030. The closing of the transaction is expected to be in the third quarter of this year. Slide six highlights our track record of recontracting natural gas assets after they've been required. This includes recontracting two U.S. facilities with financial upside compared to the previous PPAs. At Decatur in Alabama, the 10-year extension included immediate enhancements for additional capacity before the previous contract expired. And for Arlington in Arizona, we executed a six-year extension with materially higher AFFO over the extended term. And most recently, we executed a four and a half year renewal for island generation in BC. We continue to advance for longer term recontracting as part of our BCUC's IRP review process. In Ontario, the ISO's future forecast of additional capacity and energy needs are significant over the next two decades. To meet this demand, they have announced their intention to run procurement processes with contract awards being made as early as Q1 2023. Our three natural gas facilities, Gorway, York Energy, and East Windsor, all fall in these areas of Ontario that the ISO has signaled as high-need zones. All three sites have capacity for future new-build developments such as batteries, and our peaking facilities, as well as potential upgrades. And we've been working to get all three sites ready to be positioned to bid into the procurement processes. Providing additional capacity may require extending the existing contracts. Turning to slide seven, I'll discuss the recent update to the Clean Energy Standard in March 2022. The federal government initiated consultations on CES design principles and considerations with a commitment to manage the transition to maintain reliability and affordability. In July, the proposed frame for the clean energy regulation was released. One of the key elements in this classification of new and existing units. New units defined as those with a COD in 2025 or later would be subject to the near zero intensity base performance standard starting in 2035. Existing units defined as those with a COD before 2035 would be subject to the performance standard either in 2035 or linked to its end of life. Consultation with stakeholders will continue and the Environment and Climate Change Canada is targeting the end of 2022 for the release of its draft Clean Electricity Standard Regulation. One of the key takeaways is the recognition that our Canadian thermal fleet, including Genesee Repowering, would qualify as existing units and not new units. The framework would accommodate regional differences and mitigate potential for market disruption. It would leave it to provinces to develop detailed pathways reflective of their particular market structure and resource endowment. It also affirms a continued role for natural gas generation within a net zero framework. The framework recognizes a larger and long-term role for abated natural gas generation and does not reflect a ban on natural gas generation. Overall, the proposed frame is positive and enhances the value of our natural gas fleet. Turning to slide eight. This morning, we announced our ninth consecutive year of dividend growth with a 6% dividend increase. Based on the strength of our contracted cash flows from Midland Cogen acquisition, we announced an increase to our annual dividend growth guidance through 2025 from 5% to 6%. From 2022 to 2025, the average AFFO payout ratio based on a higher dividend increase is forecasted to be approximately 40%, and below our target of 45 to 55%. I'll now turn it over to Sandra.