DBRS Confirms Ratings of Capital Power L.P.

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Capital Power L.P. (CPLP or the Partnership) at BBB with a Stable trend. The confirmation reflects DBRS’s expectation that CPLP will continue to maintain its key credit metrics in line with the current rating category. CPLP’s ratings are supported by its favourable position in the Alberta (the Province) electricity market, good level of contracted output and reasonable financial risk profile. The ratings also factor in the challenging market conditions expected in the Province over the next several years and unplanned outage risks.

CPLP’s business risk profile has remained reasonable for the current rating. CPLP has had minimal material operational challenges over the past several years, as its fleet is relatively modern, which has resulted in average plant availability being consistently over 90% for each of the past five years. In addition, the Partnership’s reasonable contractual position partially mitigates its exposure to power price risk. CPLP’s long-term focus on the Alberta merchant power market is also expected to remain supportive of the current rating, as the Province has historically benefited from a pricing premium over nearby markets. The pricing premium has been primarily supported by a limited and disciplined level of competition within the Province, good demand growth that has outpaced nearby markets, the Province’s limited interconnections and the relatively weak production reliability in the Province in prior years. This pricing premium has supported CPLP’s stronger key credit metrics compared with those of merchant players operating in other regions of North America. However, DBRS recognizes that over the next several years, the Alberta electricity market could be challenging, driven by excess supply conditions and potentially weaker long-term demand growth. The return-to-service of Sundance Units 1 and 2 and Keephills Unit 1 in late 2013, as well as completion of the Shepard Energy Centre (Shepard; 800 megawatt (MW) gross), has added additional capacity that far exceeds current demand. In addition, the weak oil and gas pricing environment has created some uncertainty with the Province’s long-term demand growth. A prolonged weak wholesale pricing environment would likely negatively affect CPLP’s earnings and cash flow once existing contracts and hedges roll off. If these unfavourable market conditions persist over the long term, with supply far exceeding demand growth within the Province, there could be negative implications to CPLP’s business risk profile.

CPLP’s financial risk profile is supportive of the current rating category, with all key credit metrics in the BBB range. As a large majority of capex related to the Partnership’s growth initiatives was invested in 2013, particularly for Shepard, significantly lower capex in 2014 reduced any balance sheet pressures on CPLP’s key credit metrics. Furthermore, the reduction of debt during the year partially offset the negative impact of lower earnings and operating cash flows, and a stronger U.S. dollar on the key credit metrics. Based on budgeted capex and dividend payouts for 2015, CPLP is expected to generate a free cash flow surplus that will likely be used to reduce debt, fund any new development opportunities and/or repurchase shares. Going forward, DBRS expects CPLP to continue to maintain its key credit ratios in line with the current BBB rating range. Should there be any significant unforeseen costs or cash shortfalls, CPLP is expected to fund them primarily with equity in a timely manner. In addition, to offset the significant level of contracted capacity terminating in 2020, DBRS expects CPLP to have a stronger financial profile over the medium term.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Independent Power Producer Industry and Preferred Share and Hybrid Criteria for Corporate Issuers, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.