DBRS Confirms Ratings of Capital Power L.P. at BBB, Stable

DBRS has today confirmed the Issuer Rating and the Senior Unsecured Debt rating of Capital Power L.P. (CPLP or the Partnership) at BBB, each with a Stable trend. The confirmation reflects the Partnership’s strong contractual position, which reduces its exposure to power price risk, its position and long-term focus on the favourable Alberta (the Province) electricity market (approximately 74% of net capacity) and its reasonable financial risk profile that is in line with the current rating.

In November 2013, CPLP completed the sale of its Northeast U.S. merchant power generation facilities for $576 million (the Divestiture; 1089 megawatt (MW) capacity). DBRS viewed the Divestiture as modestly positive with respect to CPLP’s business risk profile as it reduced the Partnership’s exposure to the challenging Northeast U.S. merchant power market. The Divestiture also reflects CPLP’s long-term refocus on the Alberta merchant power market, which has historically experienced a pricing premium. This has been driven by (1) the Province’s limited interconnections, (2) the Province’s operators being disciplined in their supply strategies and (3) the relatively weak production reliability in the Province. This pricing premium in Alberta has supported CPLP’s stronger key credit metrics compared with those of merchant players operating in other regions of North America.

However, DBRS also recognizes that the lower wholesale power prices expected in Alberta over the short term, which are primarily due to new capacity that was added in 2013 and expected to be added in 2015, could be challenging for CPLP. 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. If CPLP’s contractual position declines significantly, this will likely have negative credit implications.

CPLP’s financial risk profile remains reasonable and in line with the current rating category, with all key credit metrics in the BBB range. The use of the proceeds from the Divestiture to repay the debt used to finance the second tranche payment of the Shepard Energy Centre (Shepard; $821 million capex budget) reduced the balance sheet pressures arising from Shepard and resulted in a modest improvement in key credit metrics. 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 (including preferred shares) in a timely manner. In addition, to offset the significant level of contracted capacity terminating in 2020, DBRS expects CPLP to have a stronger financial profile over the medium term.

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

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.

The applicable methodology is Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.