The Transformation for this Utility should Payoff

CPX - Capital Power

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 5,100 MW of power generation capacity at 25 facilities across North America.

Capital Power has reduced its exposure to coal significantly from more than 50% of the overall mix to just 28% currently. The company’s portfolio of assets now comprises a good mix of renewables (17%), natural gas (55%) and coal (28%). 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 long lives and are strategically located. Only 3% of 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 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, almost doubling the gas and renewables generation technology to 64% of the overall mix in the last five years. It is also expecting the construction of two more wind facilities by 1Q’20. Capital Power is targeting to improve its renewable asset yield up to 5% increase in EBITDA within 5 years.

The company has been expanding its fleet through strategic acquisitions. It has also extended its overall North American footprint reducing its exposure to 55% in Alberta from 76%, five years ago. Given its leading market share in the Alberta market, Capital Power should gain from a rising 3%-4% growth of power demand in the province and improving market fundamentals in Ontario.

Over the years, Capital Power has developed a strong reputation of a trusted and reliable electricity supplier and energy services provider. The company has strong expertise in project development and construction and a sound track 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.

Dividends

Capital Power is a Canadian Dividend Aristocrat. The company has grown its dividends at more than 7% CAGR in the last three years. Capital Power has an attractive dividend yield of 6.3% and a dividend payout ratio of 69% which is on the higher side. It last raised its dividend by 7.3%.

Capital Power has increased its cash flow visibility with 77% contracted capacity, raising it from 58% in 2014. The company has achieved AFFO growth of 88% over the last five years and is targeting ~14% CAGR growth over the next five years. It has set an ambitious target for 2030 as can be seen below:

Capital Power has guided annual dividend growth of 7% by 2021, and long term AFFO payout target ratio of 45% to 55%. The company also has a share repurchase plan in place. Over the last five years, Capital Power has generated an additional $400 million of earnings annually. It is now capable of building growth projects without having to access the equity market. Capital Power’s generation capacity increased by 2,700 MW with $3 billion of total new investments, during the same time. The generation fleet is expected to become even younger with additions of New Frontier Wind, Whitla Wind, and Cardinal Point by March 2020. 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. Its strong balance sheet and investment-grade credit ratings also provide dividend growth visibility.

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.

Bottom Line

Capital Power’s proven success in acquisitions and construction makes it a leading power supplier in North America. Strong demand for US wind projects, supportive state policies, and corporate desire for renewables act as strong tailwinds for the company. Capital Power is favorably placed to deliver long term shareholder value. The company’s strong AFFO growth and contracted cash flow profile should support dividend growth in the future.

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DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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