CPN - Covered Call

CPN is a power generation business. Instead of using coal, it is using natural gas as the energy source. It is the largest unregulated power generation company using natural gas – eliminate 99% of carbon based waste compared to coal fired plants

This is a green energy play. Currently, natural gas is still more expensive than coal. However, with the tax on carbon emission, it is expected that not only electric price will rise substantially.

Coal will be taxed heavily and thus CPN will become more competitive.

The company emerged from bankruptcy in Jan 2008. Current, it has $1.6b in cash, $7.5 b in current assets and another $11.9b in capital equipments and power plant.

Market cap is current 1.2 of book value.

The company has its gas price hedged till 2010. So a sudden increase in Natural gas price will not affect the company for next year.

Last 2 quarters earning reports show that they are gaining share and generate a free cash flow of about $520m. The company’s balance sheet is in good position

My target is that it will reach 2X of book value and equivalent to $18 per share. With the impact of carbon tax, the stock could even go up to $25.

Nevertheless, I am making a conservative trade with all the odds on my side.


BTO 1000 stocks at 10.15
STO 10 DEC 12.5 SC at 0.35

Cost Basis : 9.8
Max Income: 2.7 or 27.55% in 2 months. ( I am bullish on the stock )

PE: Let the SC expired or stock assigned. I will continue to short call as long as it is not assigned as stock has the target of reaching $18.
SE: If stock drops below 10 which is a clear support, may roll down the SC or add a put and turn it into a collar.