CPX : TSX : C$22.92
BUY Target: C$26.00
COMPANY DESCRIPTION: Capital Power has interests in 16 facilities across North America, with about 3,600 MW of net owned or operated power generation capacity as well as 371 MW of capacity owned through power purchase agreements (PPAs). The company has an additional 595 MW of capacity under construction or in advanced development.
All amounts in C$ unless otherwise noted. Refer to page 2 for target price valuation methodology.
Infrastructure — Power CLEAN Q4/13; MORE CONTRACTS, GROWTH PROJECTS ON SCHEDULE AND TALK OF DIVIDEND INCREASE
Capital Power reported fourth quarter recurring earnings of $0.35 per share, in line with our estimate and the $0.34 consensus estimate. The earnings benefitted from strong plant availability, but were offset by a lower average Alberta power price on merchant production. The fourth quarter results were clean, with solid numbers, and had little in the way of additional news. However, Capital Power continues to march along with the development and construction of new assets which are on time and below original budget: the Port Dover & Nanticoke Wind Farm is now expected to have a capital cost of $300 million, down from an original estimate of $340 million and a revised estimate of $315 million. We view 2014 as a transition year where increased contracting at a modestly lower average price may provide greater certainty over earnings and cash flow yet at a lower level than seen in 2013. However, as new, highly contracted projects are completed in 2015 and 2016, earnings should steadily improve. Also, as greater clarity is known on the targeted early 2015 startup of the Shepard facility, the potential for a dividend increase also climbs. Given the statements from management about a possible dividend increase, we have speculated that an announcement could occur later this year. The company has quality assets, a robust growth portfolio, is becoming more contracted and should generate strong and improving cash flow and earnings per share growth over the next three years, which should garner an expansion in the stock’s valuation multiples as well as provide flexibility for future dividend growth. We believe the stock is set for gradual turnaround as growth initiatives are executed on and as the EPCOR block of shares declines. We are maintaining our BUY rating.