Capital Power Corporation (TSX: CPX) is a growth-oriented North American wholesale power producer with a strategic focus on sustainable energy. The company is headquartered in Edmonton, Alberta. The company build, own and operate high-quality, utility-scale generation facilities that include renewables and thermal. The company has made significant investments in carbon capture and utilization to reduce carbon impacts and are committed to be off coal in 2023. CPX owns over 6,500 megawatts (MW) of power generation capacity at 28 facilities across North America with approximately 425 MW of owned renewable generation capacity and 560 MW of incremental natural gas combined cycle capacity, from the repowering of Genesee 1 and 2, in advanced development in Alberta and North Carolina.

Investment Rationale

• Solid Dividend Yield: CPX shares are yielding higher on TSX, with a dividend yield of 5.6% with a decent track record of dividend payment over the past decade regardless of economic cycles. High yield and consistency in dividend payment over the past ten years would keep CPX shares in the investor’s limelight, especially for income-seeking investors. The company’s dividend yield is quite higher than the TSX median dividend yield of 3.18% and Canada 10-Year Average Bond Yield of 1.56%, respectively.

Dividend History. Source: Refinitiv (Thomason Reuters)

• No Significant Impact Due to Recent Extreme Weather Event: Recently, the group’s two power facilities located in Texas witnessed extreme winter weather, which caused some disruptions to the wind facilities. However, two wind facilities experienced no significant physical damage, but some turbines were forced offline. As of February 22nd, the operations were back to normal. The group estimates the impact of the production loss to be approximately US$ 8 million due to extreme weather event partially offset by commodity gains of US$ 6 million for a net loss of approximately CAD 3 million to adjusted EBITDA and adjusted funds from operations. Moreover, the group believes that the event would not have any material impact on the Company’s 2021 financial guidance of CAD 500 million to CAD 550 million for AFFO and CAD 975 million to CAD 1,025 million for adjusted EBITDA.

• Registered A Bullish Breakout: On the daily price chart, CPX shares registered a bullish breakout, with stock price crossover the crucial short-term resistance level of 50-day SMA and managed to close above it, which is a bullish indicator. Also, CPX shares are hovering well above the crucial long-term moving average of 200-day SMA, which implies that the stock is trading in a bullish zone, and a recent breakout indicates a potential upside from the current trading level.

Technical Price Chart (as on March 22, 2021). Source: Refinitiv (Thomson Reuters)

• Continued Growth in Renewables: During FY20, the company reported continued growth in renewables, with their seven renewable development projects would add a total of 427 megawatts when completed later this year and in 2022. The three North Carolina and Strathmore solar development projects have long term PPA's of 20-year and 25-year terms, respectively. The group continue to pursue contracts for the Whitla Wind 2 and 3 and the Enchant solar project. In total, the seven projects are expected to contribute an annualized adjusted EBITDA of CAD 70 million. Also, the company's seven renewable projects are on-budget and on-time with commercial operations targeted from Q4/21 to Q4/22.

Source: Company Presentation

• C2CNT investment and Genesee Carbon Conversion Centre: In FY20, the Company increased its equity interest in C2CNT, a technology company developing a proprietary solution to transform carbon into carbon nanotubes, from 5% to 25% for CAD 14 million (US$10 million).
• Extension of Decatur Energy tolling agreement: In August 2020, the Company executed a 10-year tolling agreement extension through December 2032 for Decatur Energy with the current counterparty. Decatur Energy is a natural gas-fired combined cycle facility located in Decatur, Alabama that began commercial operations in 2002. Decatur Energy sells capacity and energy to a regional entity with an A-rated credit rating under a tolling agreement with an original term of 10 years that was to expire in December 2022. 

• 2021 Operational and Financial Targets:
  • 7 renewable projects on-budget and on-time with commercial operations targeted from Q4/21 to Q4/22.
  • Repowering of Genesee 1 and 2 proceeds on-budget and targeted for 2023 and 2024
  • CAD 500 million committed capital for growth      

Source: Company Presentation

• Risk Associated with Investments: The company is exposed to power price risk as market price fluctuations creating financial impacts due to supply and demand drivers, including changing weather patterns, climate change, changing consumer behaviours, the costs to generate electricity, competitor bidding strategies and power market structures. Also, the company is exposed to fuel prices risk, political risk and climate risk, as well.

Financial Highlights: FY20

Source: Company Presentation

• The company’s financial results in 2020 were generally in line with their guidance which resulted in an AFFO dividend payout ratio of 40%, which is below their long-term target of 45% to 55%. Overall, solid progress was made in 2020 on the company’s decarbonization strategy.
• The group’s energy mix shows that in 2020, CPX renewable assets contributed 27% of the total adjusted EBITDA, which is expected to increase to 34% in 2025 based on the seven announced renewable projects. Natural gas facilities generated 43% of adjusted EBITDA in 2020. This is expected to increase to 66% in 2025, including the repowering of Genesee 1 and 2 and 100% gas utilization at Genesee 3. There would be a significant shift in the generation mix as the group transition off coal in 2023.
• During the FY20, the group’s average facility availability of 95% significantly exceeded the 93% target. This was driven by excellent operational performance on top of the deferral of planned outages due to COVID-19.
• Sustaining Capex of CAD 73 million was below the CAD 90 million to CAD 100 million target, mainly due to the deferral of various capital projects to 2021, most notably at Genesee driven by COVID-19.
• For FY20, the group’s reported revenue was slightly lower to CAD 1.9 billion as operations were slightly hit by COVID-19. The decline also reflects the accounting recognition change of off coal compensation payments.
• Adjusted EBITDA stood at CAD 955 million, down 7% compared to 2019, primarily due to the contribution from asset additions that were offset by the Arlington Valley toll decrease and the off coal compensation recognition.
• The group generated AFFO of CAD 522 million which was down 6% YoY, while AFFO per share was CAD 4.96 per share compared to CAD 5.32 per share in 2019. However, AFFO was in line with the guidance to be near the midpoint of CAD 525 million before the CAD 6 million line loss payment.
• Further the group generated net cash flows from operating activities of CAD 159 million and adjusted funds from operations (AFFO) of CAD 86 million in the fourth quarter of 2020.
• The group generated net cash flows from operating activities of CAD 159 million.
• The group executed 20-year contracts for three new solar development projects in North Carolina and executed a 25-year power purchase agreement for Strathmore Solar project in Alberta.

Top-10 Shareholders

Top-10 shareholders in the company held around 13.81% stake in the company. TD Asset Management Inc. and The Vanguard Group, Inc.  are among the largest shareholder in the company and carrying an outstanding position of 3.33% and 2.53%, respectively. The institutional ownership in “CPX” stood at 18.98%, and ownership of the strategic entities stood at 0.35%.

Source: Refinitiv (Thomson Reuters)

Valuation Methodology (Illustrative): EV to Sales Based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: 2020 performance reflects Capital Power's resilience in the face of COVID-19 pandemic, also the acceleration of their path to a lower-carbon future and net carbon neutrality with Genesee 1&2 repowering and transition off coal in 2023. Further, seven new renewable projects, including five solar projects demonstrating CPX competitiveness in solar development.

Early indications post the newly elected Joe Biden administration shows that there would be a more robust environment for building renewables in the United States, and in particular, an increasing appetite for solar.

In August 2020, the Company executed a 10-year tolling agreement extension through December 2032 for Decatur Energy with the current counterparty. Decatur Energy is a natural gas-fired combined-cycle facility located in Decatur, Alabama, that began commercial operations in 2002. Since the acquisition in June 2017, Capital Power has been upgrading Decatur Energy's combustion turbines to increase capacity, improve the facility's heat rate and fuel efficiency and maintain reliability.

Moreover, the group has a proven track record of dividend distribution and continue to distribute dividend amid a challenging time. Moreover, the stock is offering a lucrative yield amid a low-interest rate environment.

Therefore, based on the above rationale, bullish technical signals and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 36.65 on March 22, 2021.

1-Year Price Chart (as on March 22, 2021). Source: Refinitiv (Thomson Reuters) 

*Recommendation is valid at March 23, 2021 price as well.

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