To read the full note, please log-in and click on the following link:
Market Price (2/10/2017): $11.65/share; ST-Target: $20/share; NIV: $34/share
ST Value Creation through Debt Repay, but Economy may Surprise
We feel CPN is focused on debt repayment to create value – $1 debt repay is at least $1 accretion to equity value – which we agree is correct in unexciting market/economy. But, we feel macro-economic situation may change fairly quickly for better in 2017, accelerating into 2018. Target debt repayment of $2.7B translates into at least some $7.6/share, which leads to our ST-Target. Operationally, acquisition of Noble Americas Energy Solutions (NAES) introduced CPN Retail to customers in 8 states in which CPN has no-to-low generation, but we believe this isn’t an issue. Decision on Guadalupe construction expected in 2H2017, but likely to be renegotiated. Rejection by Nevada PUC for acquisition of South Point doesn’t mean CPN shuts it down. In our opinion, we continue to believe CPN’s story is about LT future of power. 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 likely to improve rapidly. 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 continue, at least through 2017, but beyond depends on economy, which we believe may surprise. Also, over MT-to-LT, we believe importance of heat rate will likely start to dominate IPP valuations.