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Stock to Watch: Capital Power may be takeover target

Capital Power CEO Brian Vaasjo

John Ulan/©John Ulan/Epic Photogaphy Inc.

Capital Power Corp.

Monday's close: $22.05, up 3 cents a share

52-week trading range: $20.75 - $25.72 a share

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Annual dividend: $1.26 a share for a yield of 5.7 per cent

Analysts' ratings: There were 6 buys, 3 holds and 2 sells, according to Bloomberg data. Targets ranged from $20-to-$28 a share.

Recent history: Shares of the North American power producer, which was spun out in 2009 from Edmonton's Epcor Utilities Inc., have struggled this year. Including dividends, the stock is down 8.5 per cent this year. Its stock has been hurt partly on concerns about weaker power prices in Alberta. Standard & Poor's recently lowered its ratings on Capital Power's long-term credit and senior unsecured debt ratings to BBB- from BBB and preferred stock to BB from BB+. The rating agency is forecasting that power prices "will not improve materially in the medium term" as two units at TransAlta Corp.'s Sundance coal-fired plant in Alberta will come back online after major repairs late next year. Capital Power operates mainly gas-fired generation facilities and has several wind farm projects.

Outlook: The company announced last week that its board has approved a shareholders rights plan, commonly known as a "poison pill," to gain time to explore alternatives if faced with a hostile takeover bid. The three-year plan will go to shareholders for approval next April. Epcor is the largest shareholder of Capital Power, but only owns a 29-per-cent stake.

"It's a signal that there is a reasonable potential that this [company] gets taken out," and it could even happen as early as the next month or two, suggested John Stephenson, a portfolio manager with First Asset Investment Management Inc. who owns shares in Capital Power. He sees potential suitors in names like Fortis Inc., Emera Inc., Northland Power Inc., Algonquin Power & Utilities Corp. or even TranCanada Corp. looking to diversify into power production.

"It is highly likely that they [Capital Power] has had some interest given how cheap [its stock] is relative to the peer group, and the fact that the longer-term prospects for Alberta is one of growth and tightening power markets...They are not going out and hedging all their production."

Capital Power trades at 7.2 times EBITDA [earnings before interest, taxes, depreciation and amortization], he noted. Its stock is cheap not only when compared with other independent power producers at 10.5 to 12 times EBITDA, but also TransAlta, which is at just over 8.2 times EBITDA, he said. "Both are calls on Alberta power when it comes right down to it."

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The valuation of Capital Power is "pretty hard to ignore," he said. "Incremental cash is also coming from two wind farms [coming online this year]...They will not add boatloads of extra cash, but they will go from being a cash drain to a cash positive."

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