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

DBRS has today confirmed the Issuer Rating of Capital Power L.P. (CPLP or the Partnership) and its Senior Unsecured Debt at BBB, both with Stable trends. The confirmation reflects CPLP’s strong position in Alberta (the Province), where approximately 53% of CPLP’s net owned capacity is located (approximately 44% contracted, versus 56% merchant). The Partnership’s merchant operations in Alberta benefit from a pricing premium relative to other nearby markets (typically $20/MWh), driven by: (1) the Province’s limited interconnections with adjacent provinces and states; (2) the generation companies within the Alberta electricity market, which have historically been disciplined in their supply strategies; and (3) the relatively weaker production reliability in the Province, driven by the aging coal plants. This pricing premium in Alberta has supported CPLP’s stronger key credit metrics, compared to those of merchant players operating in other regions of North America.

However, the merchant power market environment continues to be challenging for CPLP, particularly with the weak spark spreads in the Northeast United States (the Northeast). In 2012, CPLP recorded an impairment on its Northeast plants, due to reduced expected operating margins. Lower power prices in Alberta over the short term are also expected, as additional capacity is expected to be added in 2013 (with Sundance Unit 1 and 2 to increase supply by 560 MW once online), offsetting the Province’s load growth. A low wholesale pricing environment over the medium term will likely make it difficult for CPLP to maintain the current contracted volumes when Alberta purchase power agreements (APPAs) expire in 2020. This scenario will likely have negative credit implications on CPLP.

In December 2012, CPLP entered into a partnership with ENMAX Corporation (ENMAX; rated A (low)) in the development of the Shepard Energy Centre (Shepard), an 800 MW natural gas facility located within the Calgary city limits. Including financing costs, CPLP’s 50% share of the project is estimated to cost $860 million. DBRS views the partnership as neutral, with respect to CPLP’s existing business risk profile, as the long-term contract with ENMAX mitigates the expected decline in wholesale prices in the near to medium term (75% contracted from 2015 to 2017). DBRS expects CPLP to fund the partnership with a mix of equity (including preferred shares and dividend re-investment proceeds), debt and asset divestitures. If equity issuances or asset divestitures are delayed, this could add pressure on CPLP’s current rating. DBRS expects CPLP to maintain its key credit ratios in line with the current BBB rating range and to fund any significant unforeseen costs or cash shortfalls 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 strong financial profile over the medium term.

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.

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.