DBRS Comments on Capital Power Corporation’s Acquisition of 294 MW of Generation Assets

DBRS Limited (DBRS) is today commenting on Capital Power Corporation (CPC or the Company; rated BBB with a Negative trend by DBRS) announcing its acquisition of 294 megawatts (MW; net) of generation assets from Veresen Inc. (the Acquisition; rated BBB, Under Review with Negative Implications, by DBRS). Based on DBRS’s initial review of the proposed Acquisition, it is DBRS’s opinion that the impact on the credit profile of CPC is neutral.

The Acquisition assets include the following: (1) a 100% interest in the 84 MW East Windsor Cogeneration Centre (East Windsor), (2) a 50% interest in the 400 MW York Energy Centre (York Energy) and (3) a 100% interest in 10 MW of zero-emissions waste heat generation from two facilities (5 MW each) located at Westcoast Energy’s Gas Pipeline compressor stations in Savona and 150 Mile House, British Columbia (Waste Heat Facilities).

Both East Windsor and York Energy are under long-term power purchase agreements (PPAs) with the Ontario Independent Electricity System Operator (rated A (high) with a Stable trend by DBRS) with terms expiring in 2029 and 2032, respectively. Upon closing, these assets will be operated by CPC. The Waste Heat Facilities are under 20-year Electricity Purchase Agreements (EPAs) with British Columbia Hydro and Power Authority (rated AA (high) with a Stable trend by DBRS). The EPAs provide for partial inflation indexation as well as premium pricing under peak load hours. Spectra Energy provides operations and maintenance services for these assets under a long-term agreement.

The purchase price for the Acquisition is estimated to be approximately $225 million in total cash consideration, subject to working capital adjustments and other closing adjustments, and the assumption of $275 million of project-level debt (on a proportionate basis, non-recourse to CPC). DBRS understands that CPC intends to finance the Acquisition through cash and existing credit facilities and the Acquisition is expected to close in Q2 2017. The Acquisition assets are expected to generate EBITDA of $55 million (on a proportionate basis) and adjusted funds from operations (AFFO) by approximately $15 million (CPC’s portion). Based on DBRS’s pro forma of CPC’s 2017 cash flow — the sources of cash and the use of cash, as well as its available credit facilities — DBRS is of a view that CPC has sufficient funds to finance the Acquisition and would incur an incremental debt of approximately $200 million immediately following the closing. That amount is expected to be substantially reduced by the end of 2017.

DBRS views the Acquisition as having a modestly positive impact on CPC’s Business Risk Assessment factors as (1) the Acquisition assets are supported by long-term PPAs with highly rated counterparties; (2) cash flow from the Acquisition assets is expected to be stable reflecting the nature of capacity contract payments, which account for approximately 80% of the revenues of the Acquisition assets; and (3) the assets being located outside of Alberta also provides CPC with additional geographic diversification, away from the heightened political risk in the province. However, DBRS views the impact of the Acquisition to be modestly negative on CPC’s credit ratios as a result of additional debt from the Acquisition. Overall, DBRS does not view the Acquisition as having either a material positive or negative impact on CPC’s rating.

DBRS notes that CPC’s rating remains BBB with a Negative trend due to Alberta’s challenging wholesale power market environment and heightened political risk for the power market in Alberta. DBRS expects the Negative trend to be resolved upon the completion of its annual review of the Company, which is anticipated to occur in March 2017.

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

The principal methodologies are Rating Companies in the Independent Power Producer Industry, and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on www.dbrs.com under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.