CPN 3Q2016 Earnings Note

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Market Price (10/28/2016): $11.76/share ; ST-Target: $19/share; NIV: $41/Share

Cyclical upside around the corner

Lowered our capacity price expectations, which lowered our NIV/share to $41 from $56. Even as recent fundamentals seem weak, we believe that 2017 is turnaround year. CPN reduced top end of guidance by another $50MM to $1,850MM, but, market fundamentals are clearly improving and weather continues to be cooperative. So, we continue to believe that CPN’s still well-poised to deliver strong returns for shareholders over NT-to-MT. Also, in our opinion, in LT CPN’s story is about future of power and well beyond just macro effect of economy and commodity prices. We agree accelerated closure of coal-fired generation is coming, industry is moving more towards reliance on renewable energy, and improving natural gas prices are all tailwinds for ST-to-MT gain for CPN and credit metrics are solid. Strategically there’s little to criticize, but we’d like CPN to disavow share buybacks, and in improving fundamental market, we believe CPN’s hedging program is too aggressive. Improving commodity prices should largely continue, in our view. However, over ST-to-MT, we believe importance of heat rate will likely start to dominate IPP valuations. Environmental issues that continue to plague others present opportunities for CPN. We’d like to see CPN develop Glass Mountain Geothermal. Noble acquisition feels right, but separate management from Champion makes little sense to us. We like CPN’s balance sheet management.


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