CPN 1Q2017 Earnings Note

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Market Price (4/28/2017): $10.20/share; ST-Target: $18/share; NIV: $32/share

Rightly, debt repayment is priority with Retail holding steady

Market appreciation for power stocks is lacking with CPN trading near its book value. In face of apathy, we agree CPN should focus on debt repayment – $1 debt repay is at least $1 accretion to equity value – and Retail. But, we feel macro-economic situation may improve in 2017, accelerating into 2018. Target debt repayment of $2.7B translates into at least some $7.60/share, which leads to our ST-Target. Operationally, we believe that expansion of Retail business through organic means is correct given that major pieces of the business is all in place. We believe Cal-ISO decision to grant 2 RMR contracts to CPN peaking units are but tip of iceberg for shareholder benefit. Decision to use PPA in place of building Guadalupe is in-line with our expectations and right thing to do, 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, and it seems CPN has disavowed share buybacks. But, 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. In MT-to-LT, we believe importance of heat rate will likely dominate IPP valuations.

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