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 6,400 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 is in Alberta.

Capital Power has reduced its exposure to coal significantly from more than 50% of the overall mix to just 22% currently. The company derives its revenue from a balanced portfolio of renewables (20%), natural gas (38%), coal (22%), and corporate and trading (~20%).

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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Revenue Growth & Market Exposure

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

Capital Power has a strong renewable energy focus, more than doubling the gas and renewables generation technology to 71% (in 2020) of the overall mix from 33% in 2014. The company successfully increased its contracted EBITDA from 58% to 79% in the past six years, with ~50% coming from outside Alberta. It has ~190 MW of owned generation capacity in advanced development in Alberta.

Given its leading market share in the Alberta market, Capital Power should gain from a rising growth of power demand in the province and improving market fundamentals in Ontario.

Over the years, Capital Power has developed a strong reputation for 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. It also has a positive outlook for the re-contracting of near term PPAs. The company has been expanding its fleet through strategic acquisitions. It has also diversified its overall North American footprint reducing its exposure to 50% in Alberta from 76%, five years ago.

COVID-19 pandemic and low oil prices have impacted the economy and demand for electricity. The company continued to make progress on the Strathmore Solar project and Whitla Wind facility that is expected to add 40.5 MW in early 2022 and 54 MW in late 2021, respectively.

Dividends

Capital Power is a Canadian Dividend Aristocrat. The company has grown its dividends at more than 7% CAGR in the last five years. Capital Power has an attractive dividend yield of 6.8% and a dividend payout ratio of 100% which is on the higher side.

It last raised its dividend by 6.8% representing the seventh 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 has increased its cash flow visibility with 78% contracted capacity, raising it from 58% in 2014. The company has achieved AFFO growth of 9% CAGR since 2015. Capital Power has guided long term AFFO payout target ratio of 45% to 55%. Its strong cash flow and liquidity position should support future growth.

Capital Power’s generation capacity increased by 2,700 MW with $3 billion of total new investments, at the same time. The generation fleet is expected to become even younger with additions of Whitla Wind and Cardinal Point. The earnings from these new assets and growth in AFFO per share should support future dividend growth.

Capital Power’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 company also continues to grow contracted cash flows outside of Alberta providing geographical diversification. Its strong balance sheet and investment-grade credit ratings also provide dividend growth visibility.

Capital Power’s capital expenditures are expected to be low due to the deferral of spending to 2021 driven by COVID-19 risk mitigation. The company 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 company is on track to deliver AFFO near the midpoint and adjusted EBITDA above the midpoint of its annual guidance ranges for 2020, respectively.

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.

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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 a strong pipeline of contracted growth opportunities and continues the expansion and evolution of natural gas and renewables in its portfolio supporting the clean energy trends.

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