Capital Power Corp.
(CPX-T) C$36.58
Resuming Coverage; U.S. Acquisitions Add Scale, Diversification
Event
We are resuming coverage of Capital Power following the completion of its
acquisitions of interests totalling 1.6 GW in two gas-fired facilities in the
U.S. Southwest: La Paloma (100%) and Harquahala (50%). These transactions
were announced in mid-November 2023. Separately, in January 2024, management
updated its 2023 guidance and provided its 2024 outlook.
Impact: SLIGHTLY POSITIVE
The transactions increase the company’s Enterprise Value by 17%, and
further diversify CPX's asset base while substantially expanding the
company's footprint in the U.S. Southwest. We view these acquisitions as
significant, but not transformative. We consider the transaction valuation (5.4x
five-year average EV/EBITDA) to be attractive given the reliability attributes of
these assets; CPX anticipates 8% AFFO/share accretion (5-year average).
Outside of a cold snap in mid-January, Alberta power prices have reflected
a relatively mild winter. 2023 results are expected to land at the low end
of the previous guidance, while the company's 2024 outlook was soft relative
to consensus expectations at the time of its release in mid-January. Alberta
wholesale prices have averaged $131/MWh YTD; recent forwards imply an
average price for 2024 of ~$82/MWh. The company's assets have run well so far
this winter, including high availability at Genesee during January's cold weather.
We reiterate our BUY recommendation; our $49.00 target price is
unchanged. The impact of the acquisitions is offset by more conservative
multiples in our SOTP valuation. We have updated our estimates for the U.S.
acquisitions and related financing initiatives, CPX's updated guidance, and other
adjustments.
TD Investment Conclusion
We view CPX's U.S. acquisitions as attractively valued and consistent with its mid-life
gas acquisition strategy. The company's natural-gas repowering initiative at Genesee
1+2 is expected to produce the most efficient combined-cycle units in Canada. We
continue to anticipate further progress on the Genesee CCS initiative in the coming
months. CPX has also demonstrated its ability to complement its fleet with additional
renewable/thermal power development projects. We believe these initiatives will
support CPX's annual dividend growth target of 6% through 2025, further diversify
its operations, and complement the company's high-quality Alberta portfolio.