Capital Power Corp T.CPX

RBC Notes

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April 17, 2024

Canadian Energy Infrastructure
Budget 2024: Modest positives, but nothing game-changing

Our view: Based on our initial review, we see the federal government's Budget 2024 as neutral to slightly positive for the Canadian Energy Infrastructure sector. We find the launch of the Indigenous loan guarantee program, the lack of targeted tax-related action on the energy sector, and setting a time limit for nuclear project reviews were directionally supportive announcements for the sector. On the flip side, announcements related to the higher inclusion rate for capital gains and the 2% tax on share buybacks are notable, although we broadly view any negative impact to the sector to be limited. Meanwhile, we do not view the updates to certain previously-introduced measures, such as the investment tax credits relating to items such as clean electricity, hydrogen, and CCUS, as well as the carbon contracts for difference instrument, to be material to investor sentiment.

New loan guarantee can support greater Indigenous equity participation in major energy infrastructure assets. Budget 2024 proposes to launch a federal Indigenous loan guarantee program, with up to $5 billion in guarantees to unlock access to capital for Indigenous communities. We believe the program can be supportive of the various capital recycling initiatives in the sector, particularly potential partial asset monetizations by TC Energy and Enbridge.

Additional measure introduced to help support the development of nuclear energy. Following the November 2023 update of the federal Green Bond program to include nuclear energy expenditures, Budget 2024 proposes to set a three-year target for nuclear project reviews, which we view to be supportive of our views laid out in our RBC ImagineTM report (please click here). Within our coverage, we see TC Energy (Bruce Power) and Capital Power (joint assessment with Ontario Power Generation on the development and deployment of SMRs in Alberta) as most likely to benefit.

Updates on the investment tax credits (ITC) and carbon contract for differences (CCFD) unlikely to materially shift investor sentiment. We think the announcements relating to the ITC (updated legislative timetable, with the rates and scope being largely consistent with prior government announcements) and the CCFD (expanded offerings) could ultimately be positive for the sector, although the market is likely in wait-and-see mode on certain projects (e.g., Capital Power's Genesee CCS project, Canadian Utilities' hydrogen project) until tangible evidence of this benefit emerges. Further, we see the pace of renewables development as being primarily driven at the provincial level (e.g., Capital Power, Canadian Utilities, TransAlta and Northland Power are active in Alberta and Ontario, while Boralex and Innergex are active in Quebec, Ontario and B.C.).

Higher inclusion rate for capital gains and a tax on share buybacks could have a modest negative impact on certain companies. Budget 2024 proposes to raise the inclusion rate on all capital gains realized by corporations and trusts from one-half to two-thirds effective June 25, 2024, which could modestly reduce the after-tax proceeds for companies that are looking to monetize assets. Additionally, Budget 2024 introduced a 2% tax on share buybacks by public corporations in Canada; however, share buybacks are not a prominent feature of the return of capital strategy for Canadian energy infrastructure companies.