Capital Power Corp. (
) is “joining the exclusive top 5 Gas IPP club” with a pair of transformative deals, according to National Bank Financial analyst Patrick Kenny.
He resumed coverage of the Edmonton-based independent power producer on Wednesday following the close of its $400-million equity financing. The proceeds will be used to assist in the funding of a pair of significant deals, announced Nov. 20, with CSG Investments, Inc., a subsidiary of Beal Financial Corp., to buy two U.S. natural gas power plants for US$1.1-billion.
Capital Power will acquire CXA La Paloma, which owns the La Paloma natural gas-fired generation facility in Kern County, Calif. It will also form a 50-50 partnership with an affiliate of a fund managed by BlackRock’s Diversified Infrastructure business to buy New Harquahala Generation Co. LLC, which owns the Harquahala natural gas-fired generation facility in Maricopa County, Ariz.
“On the strategic front, the announcement furthers CPX’s blueprint of acquiring mid-life natural gas fired assets with strong financial profiles in attractive markets well positioned for recontracting,” the analyst said.
After the deals close, which is expected in the first quarter of 2024, Mr. Kenny said Capital Power will become the fifth-largest natural gas IPP in the North America based a new unregulated capacity.
“The acquisitions add another 1,608 mega watts of net capacity to CPX’s U.S. WECC portfolio, boosting run-rate U.S. EBITDA to 40 per cent of total contributions (from less than 25 per cent), while diluting Alberta merchant exposure to less than 35 per cent (from 45 per cent),” the analyst said. “Of note, La Paloma is underpinned by resource adequacy (RA) contracts through 2029 and stands to benefit from increasing demand for reliable, dispatchable gas-fired capacity to offset the rise of intermittent renewables (inside, we highlight California’s net qualifying capacity shortfall expanding from 1,000 MW in 2023 to 11,500 MW by 2026e). Meanwhile Harquahala is 100-per-cent contracted through 2031 with contract extension upside given Arizona’s population growth.”
Given his expectation for an increase in average annual EBITDA of $265-million through 2026 from the deal, Mr. Kenny sees 8-per-cent long-term accretion, seeing an “attractive” transaction multiple. That led him to raise his 2024 adjusted funds from operations per share estimate to $7.95 from $7.57.
Reiterating an “outperform” recommendation for Capital Power shares, Mr. Kenny raised his target to $48 from $47. The average is $44.88.
“Combined with both natural gas-fired facilities well positioned to benefit from rising market demand for reliable, dispatchable generation, we reiterate our Outperform rating alongside a 37.4-per-cent total return opportunity,” he said.
Elsewhere, others making target changes include:
* Desjardins Securities’ Brent Stadler to $53 from $52 with a “buy” rating.
“The acquisition is highly accretive to AFFO/share on average through 2028,” said Mr. Stadler. “The transaction is in line with CPX’s balanced transition strategy, which includes acquiring and optimizing strategically located, midlife gas assets with the potential to innovate to decarbonize and optionality to develop renewables.”
“In our view, CPX offers investors deep value. It offers near-term exposure to a strong Alberta power market and the hot renewables market, but also provides a unique re-rate angle as it works to remove coal and decarbonize assets through efficient repowers (1H24). Longer-term, we believe another re-rate is possible as CPX cleans up its strategically located natural gas assets through a hydrogen/carbon capture, utilization and storage solution.”
* Raymond James’ David Quezada to $46 from $45 with a “market perform” rating.
“We believe this acquisition ticks all the key boxes for CPX providing solid financial accretion, strategic upside, diversification, and scale in markets with attractive demand trends. Accordingly, we are increasing our price target,” he said.
“While today’s higher cost of funding clearly implies in lower valuations for contracted energy infrastructure assets, we believe the price paid for this acquisition is attractive, and likely also reflects CPX’s ability to close on such a transaction. We also believe these large scale generating assets fit nicely with the profile of past acquisitions where CPX has shown an ability to optimize and re-contract, providing longer term upside. La Paloma and Harquahala have an 8 year remaining PPA term with La Paloma partially contracted through a various resource adequacy contracts.”
* BMO’s Ben Pham to $40 from $42 with a “market perform” rating.
“While the US$1.1-billion acquisition of two U.S. natural gas power plants (net 1.6GW) is expected to be highly accretive to FCF, the public markets may not yet fully appreciate the intrinsic value of mid-life natural gas power assets with shorter-dated contracts,” said Mr. Pham. “As such, we believe that acquiring for value could pressure CPX’s consolidated market multiple driving our Market Perform rating.”
* CIBC’s Mark Jarvi to $43 from $41 with a “neutral” rating.
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