DBRS Comments on Capital Power Corporation’s Acquisition of Decatur Energy Centre

DBRS Limited (DBRS) has today commented on Capital Power Corporation’s (CPC or the Company; rated BBB (low) with a Stable trend by DBRS) announcement that it has entered into an agreement to acquire Decatur Power Holdings, LLC (Decatur Power) from LS Power Fund II (LS Power) affiliates for USD 441 million, subject to working capital and other closing adjustments (the Acquisition). Based on DBRS’s initial review of the proposed Acquisition and CPC’s planned financing, it is DBRS’s opinion that the impact on CPC’s credit profile is neutral.

Decatur Power owns the Decatur Energy Centre (Decatur Centre or the Facility), which is a 795 megawatt (MW) natural gas-fired combined cycle power generation plant located in Decatur, Alabama (the Acquisition Assets). The Facility entered commercial operations in 2002 and operates in the Southeastern Electric Reliability Council (SERC) market. The Facility operates under a toll agreement for capacity and energy with a strong-credit profile counterparty. The Toll Agreement (the third Toll Agreement) has an original term of ten years and expires in December 2022. Commodity pricing risk for Decatur Energy is minimal, reflecting that the Facility is fully contracted. In addition, there is minimal fuel cost risk associated with the Facility. Based on the current market fundamentals in the SERC market, the recontracting risk for the Toll Agreement is viewed as modest and manageable as a result of tightening reserve margins and load growth in the area. DBRS notes that the Facility can also sell power into the Pennsylvania, New Jersey and Maryland interconnection market starting in 2023.

CPC is planning to finance the purchase through approximately $200 million of equity from a subscription receipt with the balance financed through a temporary expansion of CPC’s credit facilities, which will be converted into permanent financing later in 2017. 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 believes that CPC has sufficient funds to finance the Acquisition.

DBRS views the Acquisition as having a modestly positive impact on CPC’s Business Risk Assessment factors as (1) the Facility is supported by a Toll Agreement with a strong credit counterparty and modest re-contracting risk; (2) cash flow from the Facility is expected to be stable, reflecting the nature of the Toll Agreement; and (3) the Facility is located outside Alberta, which provides CPC with additional geographic diversification away from the heightened political risk in the province. However, DBRS views the Acquisition’s impact to be modestly negative on CPC’s credit ratios because of additional debt. The Facility is expected to generate normalized full-year EBITDA of approximately $60 million and adjusted funds from operations of approximately $43 million. Based on DBRS’s pro forma, CPC’s key credit metrics would weaken modestly following the Acquisition; however, the Company’s credit metrics at the end of 2016 were strong and, despite the potential weakening of these metrics, they would remain consistent with the current rating. Overall, DBRS does not view the Acquisition of the Facility as having either a material positive or negative impact on CPC’s rating.

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

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