DBRS Comments on Capital Power’s Partnership with ENMAX in the Shepard Energy Centre

DBRS notes today that Capital Power L.P. (Capital Power or the Company; rated BBB with a Stable trend) has announced its partnership with ENMAX Corporation (ENMAX; rated A (low) with a Stable trend) in the development of the Shepard Energy Centre (Shepard). Capital Power’s 50% share of the project is estimated to cost $824 million (including financing costs) and the transaction is expected to close in Q1 2013.

Shepard is an 800 MW natural gas combined cycle generation facility, located within the Calgary city limits. Construction on Shepard began in July 2011 and the facility is expected to be in commercial operation by Q1 2015. The transaction includes a 20-year tolling agreement with ENMAX that result in: (1) 75% contracted from 2015 to 2017 and (2) 50% contracted for the remaining term of the tolling agreement. Commercial arrangements also include contracts for differences for 100 MW in 2013, 300MW in 2014 and 100MW in 2015 at current Alberta forward power prices. Both companies will have management oversight, with ENMAX remaining as the operator.

In its review, DBRS’s analysis will focus on (1) the business risk profile of Capital Power and (2) the financial impact of the proposed transaction on the Company’s credit profile. Overall, DBRS views this transaction as credit neutral.

(1) Business Risk Profile – Neutral
Based on its preliminary review, DBRS views the proposed partnership as neutral with respect to Capital Power’s existing business risk profile. The long-term contract with ENMAX mitigates the expected decline in wholesale prices following Sundance A’s restart in late 2013 (75% contracted from 2015 to 2017). Furthermore, Shepard is positioned to meet the expected demand growth over the medium term. As demand in Alberta increases, the reserve margin is expected to tighten, leading to higher prices.

(2) Financial Risk Profile – Neutral to Negative
Based on its preliminary review of the proposed partnership and Capital Power’s funding strategy, DBRS views the impact on Capital Power’s financial risk profile as neutral to negative. DBRS expects the Company to fund the partnership with a mix of equity (including preferred shares and dividend re-investment proceeds), debt and asset divestitures. If Capital Power funds the capital costs as planned, the impact on its key credit ratios is expected to be neutral. However, if equity issuances or asset divestitures are delayed, this could add pressure on Capital Power’s current rating. In addition, the rating assumes that significant unforeseen costs or cash shortfalls will be funded by equity (including preferred shares and dividend re-investment proceeds) in a timely manner to maintain its current leverage level. Any significant increase in leverage could cause Capital Power’s credit risk profile to deteriorate to a level that is no longer commensurate with the current BBB rating.

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.