'We came to the conclusion that the strategy of being in natural gas works very well,' says Capital Power chief executive Brian Vaasjo.John Ulan/The Globe and Mail
Like so many Alberta-based companies, the fall of 2014 was brutal for Capital Power Corp.
At the time, the power producer had just spent five years earning a following after being spun out of Epcor, Edmonton’s power utility, in 2009. But as oil and gas prices crashed in the second half of 2014, the pain ricocheted through Alberta’s economy.
A year later, Albertans elected an NDP government and then-premier Rachel Notley committed to a carbon tax that would hit $30 a tonne, and also promised to end all coal-power production in the province by 2030 because of its environmental impact. Capital Power was a major producer of this type of power.
From its peak in September, 2014, to its trough in December, 2015, the company’s share price tumbled 46 per cent. “The uncertainty was very, very significant," chief executive Brian Vaasjo said in an interview.
Yet, in the four years since, Capital Power has staged a rather remarkable comeback. June marked its tenth anniversary as a public company, and three months earlier, the share price set a new record high of $32.44 – more than doubling from the dark days in 2015. The stock has since pulled back slightly, closing at $30.15 on Friday.
By roaring back, Capital Power has defied the odds. Scores of fellow Alberta-based businesses are still struggling, including many energy companies, as well as rival power producer TransAlta Corp., yet Capital Power has won many investors over − again.
How did management do it? The turnaround is marked by two defining features: Embracing a lower-carbon future – whether Capital Power’s executives really wanted to – and some clever marketing.
Five years ago, Capital Power’s leadership did not show much urgency about fully pivoting away from coal- power production. But after some soul searching, management came to see that what the Alberta NDP was doing wasn’t just a government going rogue − climate change had become a major issue around the world.
Capital Power decided to seek out assets with lower carbon emissions. "We came to the conclusion that the strategy of being in natural gas works very well,” Mr. Vaasjo said.
To diversify, Capital Power started buying natural gas − and wind − assets, particularly in the United States and Ontario. In doing so, the company was able to reduce its dependence on its struggling home province. In 2014, Alberta accounted for 76 per cent of Capital Power’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA); today, the province comprises 56 per cent of EBITDA.
Around the same time, Capital Power’s executives also decided to market the company in new light. The utility once benefited from its exposure to the Alberta energy boom. But by 2014, its concentration had become a liability because the province’s economy was in a rut.
With the Alberta glow gone, Capital Power was judged solely as a power company − and few retail investors know much about the complex power market. What they do know, however, are dividends, so Capital Power started pitching itself as a dividend-paying utility and committed to dividend increases of 7 per cent annually for the next five years.
“It’s much easier to understand a dividend story than a business like ours,” Mr. Vaasjo said.
Capital Power had some help to get through the worst of the storm. When Alberta’s NDP government was first elected, it wasn’t clear whether the province’s power companies would receive any compensation in exchange for the future ban on coal power. Capital Power was eventually promised annual cash payments of approximately $52-million commencing in 2017 and ending in 2030.
Government bond yields also plummeted around the world. As they tumbled, dividend-paying companies were major beneficiaries. Other Canadian utilities, including Algonquin Power and Utilities Corp. and Northland Power Inc., also saw their share prices climb higher.
And as the turnaround took shape, Capital Power also got a bit lucky. The company needed to acquire natural gas and wind assets outside of Alberta, and many came available. “There seems to be no shortage of sellers," Mr. Vaasjo said.
Most recently, in April, Capital Power acquired the gas-fired Goreway power plant in Brampton, Ont., for $977-million, including assumed debt. At the time, rating agency DBRS Ltd. said that the deal was likely to modestly improve Capital Power’s business risk profile because it would help to diversify the company away from the volatile Alberta market; it would add contracted revenues − or those with long-term power purchase agreements; and it would increase the company’s average contract length.
The agency rates Capital Power’s debt as BBB (low), which is investment grade − albeit just barely.
Despite its rally, Capital Power still has to prove itself. For one, it continues to have substantial exposure to Alberta, and the province recently initiated a 90-day review of its electricity market. Once complete, the province could fundamentally change the way electricity producers are paid.
But because Capital Power has found so many assets to acquire, and has built others, management remains comfortable with its dividend-first approach. Its initial five-year promise of dividend hikes has run its course, but at a December investor day, management committed to 7-per-cent annual dividend increases through 2021.
“We view the shares as attractive for yield-oriented investors seeking a mix of higher yield (roughly 6 per cent) and annual dividend growth (target of 7 per cent),” RBC Dominion Securities analyst Robert Kwan wrote in a May research note.
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Tim Kiladze