Funding Disciplined Growth to Build Shareholder Value
At Capital Power, we are a growth-oriented North American Power producer delivering Responsible Energy for Tomorrow. As Chief Financial Officer, I ensure our financial strategy delivers this growth responsibly through our capital allocation strategy.
Our Strategic Approach to Capital Allocation
At a high level, our capital allocation strategy allows us to fund growth by taking 50% of our free cash flow over the long-term and provide that back to investors in the form of dividends, while using the other 50% to reinvest in growth opportunities, which in turn allows us to continue to grow the dividend over time. Since 2012, we’ve targeted $500 million of growth investments per year, which primarily has been in the form of development and construction of wind facilities and acquisitions of natural gas-fired facilities. At times, there are circumstances where we may be generating a cash flow greater than expected or when growth opportunities are inconsistent, leaving us with excess cash flow. In those circumstances, we’ll look to repurchase shares or pay down debt – depending on our balance sheet. Capital Power is committed to maintaining an investment grade credit rating so that really dictates what we do with excess cash flows to bolster our balance sheet. We’ll pay down debt in order to maintain our investment grade credit rating or, if we’re in good shape and comfortable with our credit metrics, we’ll then look to re-purchase shares.
We’ve chosen this capital allocation strategy, to deploy our expected cash flows equally between dividends and growth, to ensure longevity of Capital Power’s financial health, and to meet the diverse needs of our shareholders. Currently, about half of our investors are retail investors who are looking for a stable and growing dividend – which Capital Power delivers. For those investors looking for growth opportunities and share price appreciation, the growth element of our strategy caters to them. Together, our capital allocation strategy is effective in appealing to a broad range of shareholders. Capital Power is a bit unique compared to independent power producers in the U.S. Typically, they are non-investment grade, have much higher costs of debt and are a much riskier investment proposition for equity investors. In the case of Capital Power, having an investment grade credit rating not only optimizes the cost of debt in terms of our financing but also provides assurance to our shareholders on the stability of our dividend, which is a huge value.
Investing in Disciplined Growth
Specific to the capital that we reinvest in growth, we are focused on disciplined growth opportunities. For Capital Power this means our investments must meet our target return, which varies depending on the type of growth opportunity we are evaluating. Some examples of the targeted returns we seek are contracted cash flow, cash flow subject to re-contracting risk and merchant cash flow. Depending on the nature of the growth opportunity, we’ll come up with a blended target return and our business development team will seek growth opportunities that meet those financial hurdles. We set these target returns at levels that ensure our chosen growth opportunities are adding to shareholder value.
The other element of disciplined growth is selecting assets that fit well into our overall strategy and play to our competencies and competitive advantages as an owner and operator of power generation assets. For instance, we’ve demonstrated our excellence in the development, construction and integration of wind facilities to the extent that we add additional shareholder value by typically being able to build those facilities under budget. We’ve also proven our effectiveness as an operator through our success in commercially optimizing assets that we’ve acquired. The very high availability of our facilities is a testament to that, as well as our commitment to innovation and finding ways to optimize our assets, which enhances shareholder value. Additionally, when pursuing disciplined growth, we are also making decisions that preserve or enhance our investment grade credit rating, which we are committed to maintaining. For growth opportunities, this means we focus on opportunities under long-term contract to help support our target of having two thirds or our Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) under long term contract. We want opportunities that meet or exceed our cash flow to debt metric, which is key from S&P and DBRS to maintaining our investment grade credit rating.
Overall, disciplined growth means we are seeking opportunities that meet or exceed our well-defined target returns, fit with our core competencies and competitive advantages as a power generator, and help support our investment grade credit rating.
Delivering Shareholder Value
Our approach to capital allocation allows us to continue to grow our business sustainably, ensuring long-term success and operation, while delivering real value to our shareholders. We will continue this growth focus into 2020 and the future, tapping into the pipeline of viable opportunities we see in Canada and the United States that will allow us to meet our targets and sustain this disciplined growth, both for our fleet and our dividend.
In our recently released third quarter 2019 results, we reached a milestone in our 10-year history, hitting a record quarter of Adjusted Funds from Operations (AFFO) of $225 million. Our current dividend guidance has our dividend growing annually by 7% through 2021 and we will be providing further guidance for 2022 at Investor Day this December. Overall, Capital Power expects to finish the year at the top end of our AFFO guidance range.