The Transformation for this Utility should Payoff

Capital Power Corp. is a leading wholesale power generator in Canada. The company caters to commercial, large industrial, government, and institutional customers in the Canadian and US markets. It owns over 6,500 MW of power generation capacity at 28 facilities across North America. Most of its contracted power generation is in Canada and the U.S. and merchant power generation are in Alberta. 

Capital Power has reduced its exposure to coal significantly to near zero currently. The company derives its revenue from a balanced portfolio of renewables (18% of 2020 revenue and other income), natural gas (49%), and Natural gas/coal dual-fuel (33%).

Natural gas offers a key long-term solution for the intermittent renewables that require baseload and flexible generation for integration. Most of Capital Power’s assets are still young with average long lives of 14 years and are strategically located. Only 2% of the current generation portfolio is expected to retire over the next decade.

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Investment Data
 

Revenue Growth & Market Exposure

As a leading growth-oriented power producer in North America, Capital Power is in an excellent position to benefit from the trends of electrification of the economy and an increase in renewable generation.

Capital Power has more than doubled the gas and renewables generation technology and is projecting adjusted EBITDA from renewables to increase to 34% in 2025 from 27% in 2020. It is well-positioned to gain from improving outlook in the Alberta power market and has ~190 MW of owned generation capacity in advanced development in Alberta.

Capital Power is also balancing growth outside of Alberta by reducing merchant exposure. It has diversified its overall North American footprint reducing its exposure to 50% in Alberta from 76%, five years ago.

Over the years, Capital Power has developed a strong reputation as a trusted and reliable electricity supplier and energy services provider. The company has expertise in project development and construction and a soundtrack record of safely building and completing projects on time and on budget.

Most of these projects are secured fixed-price contracts with an average contract life of 10 years, which further adds to cash flow stability. Capital Power has been expanding its fleet through strategic acquisitions. 

The company is making good progress on its renewable energy footprint with ~27% of its adjusted EBITDA being generated from renewable assets in 2020. With the repowering of Genesee 1 and 2, the company will be off coal in 2023. Capital Power has committed ~$1.7 billion in capital for seven renewable projects and repowering of Genesee.

Dividends

Capital Power is a Canadian Dividend Aristocrat. The company has grown its dividends at more than 11% CAGR in the last decade. Capital Power has an attractive dividend yield of 5.6% and a dividend payout ratio of 84% which is on the higher side.

Capital Power has guided long term dividend payout target ratio below 45% to 55%. It last raised its dividend by 10% representing the eighth consecutive annual increase. The growth is consistent with its 7% annual dividend growth guidance for 2021 and 5% for 2022. The company also has a share repurchase plan in place. 

Capital Power typically enters into long-term PPAs that deliver stable cash flows. The company has achieved AFFO growth of 9% CAGR since 2015. Capital Power’s strong cash flow and liquidity position should support future growth. The company’s strategic shift towards balancing its leadership position in Alberta with growth outside the province, focused primarily on contracted natural gas and renewable assets has so far rewarded its shareholders. The Genesee project is further expected to contribute in the order of $0.70 AFFO per share.

2020 marked the second year of Capital Power’s 10-year company-wide operations efficiency improvement effort, Ops 2030, which is expected to deliver an incremental $50 million of annual adjusted EBITDA by 2030. The company has a solid track record of growth with seven development projects underway which are expected to contribute to earnings beyond 2021.

Capital Power witnessed a minimal impact on its cash flow generation from COVID-19 given the strong operating performance of facilities. Its highly contracted and diversified portfolio of generation assets adds security to the cash flows. The earnings from new assets and growth in AFFO per share should support future dividend growth.

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Competition

Capital Power competes with several utility companies such as TransAlta Renewables and Algonquin Power. TransAlta Renewables, the sponsored vehicle of TransAlta Corporation, is one of the largest generators of wind power in Canada, while Algonquin Power & Utilities is a diversified utility company in North America with $10 billion in total assets.

Capital Power’s in-house capability in construction is its single largest cost-effective competitive advantage. The company undergoes continuous research and development activities to improve its existing power technologies and reduce the cost of power generation. 

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:FTSFTSFortisUtilitiesUtilities - Regulated Electric0.6254.4625.3020.9620.962.600.03713.710.776942.020.095167Tollbooth - RegulatedNOYESYESNOCanada1
TSE:BIP.UNBIP.UNBrookfield Infrastructure PartnersUtilitiesUtilities - Diversified0.6168.1922.6985.1385.130.800.03763.763.207242.040.129786Tollbooth - RegulatedYESYESNONOCanada1
TSE:HHHydro OneUtilitiesUtilities - Regulated Electric0.5129.6317.7110.0410.042.950.03423.420.343941.010.076136Tollbooth - RegulatedNONONONOCanada1
TSE:BEPCBEPCBrookfield Renewable Partners L.P.UtilitiesUtilities - Renewable0.3458.8716.980.000.000.000.02602.601.000041.220.055224Tollbooth - UnregulatedNONONONOCanada1
TSE:BEP.UNBEP.UNBrookfield Renewable Partners L.P.UtilitiesUtilities - Renewable0.3553.6914.760.000.00-0.840.02852.851.000041.220.057724Tollbooth - UnregulatedNONONONOCanada1
TSE:EMAEMAEmeraUtilitiesUtilities - Diversified0.6956.1614.1914.8514.853.780.04544.540.674642.550.105269Tollbooth - RegulatedNOYESYESNOCanada1
TSE:AQNAQNAlgonquin Power & Utilitties CorpUtilitiesUtilities - Renewable0.7520.0311.9611.5411.541.740.03903.900.448440.620.125778Tollbooth - UnregulatedNONOYESNOCanada1
TSE:CUCUCanadian UtilitiesUtilitiesUtilities - Diversified0.6533.769.2325.6325.631.320.05215.211.332741.760.143567Tollbooth - RegulatedNOYESYESNOCanada1
TSE:NPINPINorthland Power Inc.UtilitiesUtilities - Renewable0.4945.459.2026.0126.011.750.02642.640.6857121.200.037034Tollbooth - UnregulatedNONONONOCanada1
TSE:ALAALAAltaGasUtilitiesUtilities - Regulated Gas0.5421.185.9212.1912.191.740.04534.530.5517120.960.045336Tollbooth - RegulatedNONONONOCanada1
TSE:RNWRNWTransAlta Renewables Inc.UtilitiesUtilities - Renewable0.4520.635.5159.6559.650.350.04554.552.6846120.940.067634Tollbooth - UnregulatedNONONONOCanada1
TSE:ACO.XACO.XAtcoUtilitiesUtilities - Diversified0.6141.804.8019.0319.032.200.04294.290.815141.790.167267Tollbooth - RegulatedYESYESYESNOCanada1
TSE:BLXBLXBoralex Inc.UtilitiesUtilities - Renewable0.4441.624.2774.5774.570.560.01591.591.178640.660.064754Tollbooth - UnregulatedNONOYESNOCanada1
TSE:INEINEInnergex Renewable Energy IncUtilitiesUtilities - Renewable0.4722.733.970.000.00-0.230.03173.171.000040.720.031746Tollbooth - UnregulatedNONOYESNOCanada1
TSE:CPXCPXCapital Power CorporationUtilitiesUtilities - Independent Power Producers0.4736.753.9147.4447.440.770.05585.582.662342.050.127756Tollbooth - UnregulatedNONOYESNOCanada1
TSE:TATATransAltaUtilitiesUtilities - Independent Power Producers0.1512.102.610.000.00-1.220.01491.491.000040.180.014903Tollbooth - UnregulatedNONONONOCanada1
TSE:SPBSPBSuperior PlusUtilitiesUtilities - Regulated Gas0.3714.292.5233.4333.430.430.05045.041.6744120.720.050414Tollbooth - RegulatedNONONONOCanada1

Bottom Line

Capital Power’s proven success in acquisitions and construction makes it a leading power supplier in North America. The company continues to pursue growth in contracted power generation across North America as well as creating additional value in the Alberta market.

It is well-positioned to gain from the repowering of Genesee 1 and 2, which is in advanced development in Alberta and North Carolina.

Capital Power expects to deliver a total shareholder value of 10%-12% in the long term. Its investment-grade credit rating, predictable cash flows, and a prudent expansion strategy should fuel future dividend growth.

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