DBRS Confirms Capital Power L.P. at BBB, Stable Trend

DBRS has today confirmed the Senior Unsecured Debt rating of Capital Power L.P. (CPLP or the Partnership) at BBB with a Stable trend. The confirmation reflects (1) the Partnership’s balanced portfolio of contracted and merchant generation with reasonable fuel-hedging positions, (2) high plant availability and (3) increased geographical and fuel diversification. A well-hedged portfolio and/or contractual position are key to reducing the volatility of earnings and cash flow as power generators generally operate in competitive environments where profitability varies with commodity pricing (both output and input) and production volumes. CPLP’s contract output is expected to increase to over 50% of earnings in 2016 from the current 40% as contracted wind projects are expected to come online over the next few years. CPLP also has a relatively modern and efficient fleet of generating assets, with an average age of approximately 12.5 years. As a result, unplanned outages are expected to be relatively low.

With 53% of net generation capacity located in Alberta, CPLP is expected to continue to benefit from good wholesale market pricing fundamentals in the province, supported by (1) above-average national energy and load demand growth, (2) a relatively tight reserve margin in the region with limited interconnect capacity and (3) relatively limited competition, dominated by a few large players. As a result, credit metrics are expected to remain reasonable for the current rating category, barring material debt-funded acquisitions in the foreseeable future. However, DBRS is increasingly concerned about the continued challenging merchant power market environment that could materially add to the Partnership’s existing challenges in the medium term. The continued downward pressure on natural gas prices, which make natural gas combined-cycle plants more cost effective in terms of both capital and fuel costs, are expected to pressure CPLP’s merchant power earnings, particularly coal-fired plants. Natural gas-fired combined-cycle generation has continued to move up in the regional supply curve, increasingly displacing coal-fired generation. CPLP’s coal-fired power facilities account for 40% of total net capacity (37% merchant, 63% Alberta power purchase arrangements (APPAs)). If this negative natural gas market outlook continues in the medium term and power prices also fall correspondingly, CPLP's ability to maintain current contracted volumes will likely prove difficult when APPAs expire in 2020. However, CPLP is committed to maintaining a balance of merchant and contracted cash flows to support the credit rating.

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

The applicable methodology is Rating Companies in the Non-Regulated Electric Generation Industry, which can be found on our website under Methodologies.