DBRS Updates Report on Capital Power Corporation

DBRS has today published an updated report on Capital Power Corporation (CPC or the Company). The Company’s Preferred Shares rating is based on the credit quality of its subsidiary, Capital Power L.P. (CPLP; rated BBB by DBRS). The one-notch differential in the ratings of CPC and CPLP reflects structural subordination at CPC, which is largely dependent on its own resources and dividends from CPLP. Dividends from CPLP could be curtailed if the viability of CPLP needs to be safeguarded.

CPLP has continued to provide stable distributions to its equity holders (based on CPC’s increasing ownership, this amounted to approximately $43 million for the six months ended June 30, 2012, and $55 million for fiscal 2011), which in turn supported CPC’s preferred share dividend payments. CPLP has benefited from good wholesale market pricing fundamentals in Alberta, where a majority of its net generation capacity is located. Although CPLP operates in the non-regulated generation segment, it has a reasonable level of contracted output. Approximately 40% of CPLP’s net capacity is contracted for 2012 and it is expected to increase to over 50% by 2016. DBRS expects CPLP to remain a stable source of distributions in the medium term.

DBRS is increasingly concerned about the continued challenging merchant power market environment that could materially add to the Company’s existing challenges in the medium term. In addition, the Sundance Unit 1 and 2 restarts, which are expected in late 2013, could place more pressure on the merchant power market environment in Alberta. 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.

CPC has no debt issued at the parent level and is not expected to issue any debt in the foreseeable future. The Company has $122 million of preferred shares outstanding as of June 30, 2012. Preferred shares, as a percentage of common equity, are within the 20% threshold (defined as the percentage of preferred shares outstanding divided by total equity, excluding preferreds). For the six months ended June 30, 2012, CPC distributed $3 million to its preferred shareholders and $37 million to its common shareholders ($6 million and $51 million to preferred and common shareholders, respectively for fiscal 2011).

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

The applicable methodology is Rating Companies in the Non-Regulated Electric Generation Industry (May 2011), which can be found on our website under Methodologies.