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Capital Power Q3-2018 Earnings & Price Target Update

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Capital Power (TSX:CPX) is a North American power producer headquartered in Edmonton owning 4,500MW of power generation capacity and $6.9B in power generation and related assets. This includes acquisitions of the Ontario natural gas-fired generation assets from Veresen in Q2-2017 for $499M, Decatur Energy acquisition in Jun-2017 for $603M and completion of the Bloom Wind Project in the US in Jun-2017 for $250M. There is 1,00MW of owned generation capacity in advanced development in Alberta, North Dakota (Frontier Wind) and Illinois. The 99MW Frontier Wind project is North Dakota is expected to come on stream in Dec-2018. The 298MW Whitla Wind Facility in 50/50 partnership with Alberta first nations is under development. Phase One for 202MW and will be completed in Q4-2019 and the 150MW Cardinal Wind in Illinois in Mar/2020. The balance of the forecast 600MW capital projects is mainly natural gas facilities in Alberta that are pending final investment decision. Capital Power acquired the 580MW Arlington Co-Facility for $396M in Nov-2018. The facility is located in the Phoenix area.

As of Sept-30-2018 they owned interests in 24 facilities. Facilities in Canada comprise 74% of capacity and 26% in the US. Alberta comprises 53% of total capacity, Ontario – 12%, BC-9%, and US -26%. Coal facilities comprise 34%, natural gas 50% and the balance is wind powered with a solar at 16%. Contracted revenues comprise 66% of capacity with the balance sold at current market prices. Hedging has made a significant improvement to prices earned over the past 8 years. Approximately 30% of total capacity is coal fired and located in Alberta, of which two thirds is contracted until 2020. This portion of the Alberta production is subject to an off-coal agreement with the Alberta government that will pay $52M ($0.40 per share after tax) until 2030. They plan to convert the Alberta coal fired facilities to natural gas using the same boilers converted to a different fuel source.

Capital Power Corp.(CPX) power generation operations and assets are owned by Capital Power L.P. (CPLP). As at Dec-31-2015 Capital Power Corp. owned 82% of CPLP, the remaining 18% is owned by EPCOR Utilities Inc. During 2013 Epcor reduced their interest from 29% by selling 9.6M shares in a secondary public offering at $21 per share. This compares to 79% ownership by Epcor as of the IPO date in Jul-2009. As at Mar-31-2015, Capital Power Corp. (CPX) owned 82% of Capital Power LP, and EPCOR owned 18%. Effective Apr-2-2015 EPCOR reduced their interest to 9.1% with a secondary public offering. If EPCOR owns less than 20% the $341M due to Epcor is due on demand and EPCOR may only elect two of Capital Power's directors compared to four previously. EPCOR has advised that it plans to eventually sell all or a substantial portion of its remaining interest in Capital Power, subject to market conditions.

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