DBRS Confirms Capital Power Corporation at BBB (low) and Pfd-3 (low) with Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of Capital Power Corporation (CPC or the Company) at BBB (low) with Stable trends. The confirmations reflect a relatively stable long-term business risk and financial profile. DBRS also confirmed CPC’s Preferred Shares rating at Pfd-3 (low) with a Stable trend. The ratings reflect CPC’s (1) highly contracted and hedged capacity, (2) high plant availability and (3) reasonable financial profile with good liquidity. The strengths are offset by (1) Alberta concentration risk, (2) Alberta’s volatile wholesale pricing environment and (3) operational risk.

In 2018, the Company continued to diversify with its purchase of the contracted Arlington Valley 580-megawatt (MW) combined cycle natural gas facility located near Phoenix, Arizona (see DBRS’s press release dated September 6, 2018, “DBRS Comments on Capital Power Corporation’s Acquisition of Arlington Valley, LLC”), and the New Frontier 99-MW contracted wind project in North Dakota, which reached commercial completion in December 2018. The Company is expected to add contracted assets, with the Whitla 202 MW wind project selling energy under a 20-year contract; the Alberta Electricity System Operator (AESO), expected to be commissioned in Q4 2019; and the Cardinal Point 150-MW contracted wind project in Illinois currently under construction, expected to reach commercial operation in Q1 2020.

CPC continues to have significant exposure to the Alberta market with its ownership interest in eight facilities, representing over 46% of CPC’s net capacity. Exposure to the Alberta market adds significant uncertainty to CPC because, after the Alberta power purchase agreements expire in 2020, Alberta is expected to move to a capacity market whose design has not yet been finalized. Alberta will move from an energy-only market to a new capacity market structure in 2021. The AESO forecast suggests that the all-in (capacity + energy) price in the new capacity market will be in the mid-$50 per megawatt hour (MWh) price range for a baseload unit. DBRS notes, however, that there is significant uncertainty regarding energy and capacity prices in Alberta and how the capacity market will affect CPC’s ability to realize revenues from portfolio optimization activities. To begin 2019, more than 78% of CPC’s Alberta commercial portfolio baseload generation was sold forward at the mid-$50 MWh range, which provides a high level of revenue certainty. Alberta generation sold forward for 2020 and 2021 is significantly lower at 34% and 1%, respectively. DBRS notes that the Alberta forward market for 2021 currently lacks liquidity because of the uncertainty regarding carbon pricing and the capacity market design. DBRS expects that the amount sold forward for 2020 and 2021 will increase by the end of 2019.

The Company performed well operationally in 2018 with 95% plant availability. Financial metrics also remain strong for the rating category for 2018. DBRS may take a negative rating action if the Alberta capacity market has a negative effect on CPC’s revenues or if the Company has trouble completing projects under development. DBRS may take a positive rating action if CPC continues to grow its share of contracted generation outside of Alberta and successfully incorporates these assets into its system on a sustainable basis while maintaining strong key credit metrics.

Notes:
All figures are in Canadian 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 & Criteria.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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

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