DBRS Comments on Capital Power Corporation’s Acquisition of Arlington Valley, LLC

DBRS Limited (DBRS) commented on Capital Power Corporation’s (CPC or the Company; rated BBB (low) with a Stable trend by DBRS) announcement that it has agreed to acquire 100% ownership interest in Arlington Valley, LLC (the Acquisition), which owns the Arlington Valley facility (the Facility), from funds managed by Oaktree Capital Management, L.P. and its co-investors for approximately $300 million, subject to working capital and other closing adjustments. The Acquisition is expected to close in Q4 2018. DBRS does not view the Acquisition as having a material negative impact on CPC’s risk profile.

The Facility is a 580-megawatt natural gas-fired combined-cycle power generation plant located approximately 50 miles southwest of Phoenix, Arizona. The Facility entered into commercial operation in 2002 and operates in the U.S. Desert Southwest (DSW) market. The Facility currently operates under a tolling agreement for capacity and energy to an investment grade load serving utility. The Facility is adjacent to the Palo Verde hub, which allows it to sell additional capacity and energy into the DSW or California Independent System Operator during the non-summer toll months.

The Acquisition is expected to generate approximately $62 million of EBITDA in 2019, the last year of its current toll. Subsequently EBITDA ranges between $32 million and $38 million during the six-year period from 2020 to 2025. Tolling agreements are expected to generate the majority of revenues from the Facility with the balance generated by the potential new non-summer period offtakers or the merchant market. The Company is planning to finance the purchase through its credit facilities, which will be converted to permanent financing at a later date. DBRS views CPC as having sufficient funds to finance the Acquisition.

DBRS views the Acquisition as having a neutral impact on the Company’s business risk assessment. DBRS notes that (1) the Facility is supported by a toll agreement with a strong counterparty; and (2) the Facility is located outside Alberta, which provides CPC with additional geographic diversification. DBRS views the Acquisition’s impact on the Company’s credit ratios to be modestly negative as a result of additional debt.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is Rating Companies in the Independent Power Producer Industry, which can be found on dbrs.com under Methodologies.

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