Capital Power CPA.UN

The Facts (as of Sep 7, 2010)

Unit price: $17.89. Book value per unit: $37.05. Market cap: $964 million (medium). Distribution: $0.1467 per month or $1.76 per year. Yield: 9.8%. P/E: 26.3x. Debt/equity ratio: 0.89. Payout ratio: 80%.

The Story

Capital Power Income L.P., a subsidiary of EPCOR (Edmonton) owns 19 wholly-owned power generation assets located in Canada & the United States, a 50.15 per cent interest in a power generation asset in Washington state. Drawing on over 100 years of experience, Capital Power builds, owns and operates power plants, electrical transmission and distribution networks, water and wastewater treatment facilities, and infrastructure.

The unit price has dropped from around $35 five years ago to as low as $13 during early 2009. The price is recovering, but distributions were cut last year. The current level of distribution is more sustainable, but the unit price is likely to remain lower than in the past unless distributions increase.

Pros

The company is very transparent and provides extensive information for investors. See, for example, the June 2010 fact sheet. In 2009, only 62% of distributions were taxable, the other 38% was considered return of capital. In 2011, they may merge with Capital Power Inc., which already owns 30% of their business. However, over half of their income is generated from assets in the US, subject to American taxes. They also have $1.2 billion of tax losses to carry forward, which they estimate will offset taxation until at least 2015.

Cons

Utilities are capital intensive, requiring the build out and maintenance of facility and distribution. There is some uncertainty surrounding the tax changes in 2011, but I feel the company has adequately addressed these. Having operations across two countries increases complexity, but it also varies the regulatory regimes under which the company operates.

Impression

Stable cash flow makes this a relatively dependable source of income. I would feel comfortable owning this for the income, although any growth in unit price is unpredictable.

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