DBRS Confirms Capital Power Corporation at BBB (low) and Pfd-3 (low) with Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of Capital Power Corporation (CPC or the Company) at BBB (low). The trends remain Stable. The confirmation reflects relatively stable long-term business risk and financial profile. DBRS has concurrently confirmed CPC’s Preferred Shares rating at Pfd-3 (low) with a Stable trend. The ratings reflect (1) CPC’s high contracted and hedged capacity, (2) high plant availability and (3) reasonable financial profile with good liquidity. The strengths are offset by (1) Alberta’s concentration risk, (2) low wholesale pricing environment in Alberta and (3) operational risk.

During 2017, CPC acquired a total of 1,089 megawatts (MW) of contracted natural gas-fired facilities located outside of Alberta and completed the Bloom Wind (178 MW) project in Kansas. DBRS views the acquisition and development of these facilities as modestly improving CPC’s business risk assessment from the contracted cash flows and from additional geographic and fuel diversification. DBRS notes that even after these acquisitions, CPC remains concentrated in Alberta, which exposes CPC to significant uncertainty. The Alberta government’s implementation of a carbon tax of $20 per tonne of carbon dioxide in 2017, which increased to $30 per tonne in 2018, is not expected to materially affect CPC in the short term as they will be able to pass on the carbon tax through their Alberta Power Purchase Agreements (PPAs). However, all of the Alberta PPAs expire in 2020, and the carbon tax’s net financial impact on CPC post 2020 remains unclear. After 2020, all of the Alberta PPA assets will also be exposed to the planned capacity market whose actual structure is currently uncertain with further clarity expected in H2 2018.

CPC’s 2017 financial metrics remain strong for the rating category and are expected to remain stable for 2018, as 66% of generating capacity is contracted, and the 34% of uncontracted generation capacity, which is all located in Alberta, is currently 87% hedged for 2018. Contracted generation is expected to contribute to 82% of 2018’s projected EBITDA. A significant improvement in CPC’s business risk profile while maintaining the current level of key credit metrics could result in a positive rating action. However, a substantial decrease in revenues from lower wholesale electricity prices, an increase in debt, operating issues or significant cost overruns on planned capex projects could potentially result in a negative rating action.

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

The principal methodology is Rating Companies in the Independent Power Producer Industry, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.