DBRS Comments on Capital Power Corporation’s Acquisition of Goreway Power Station Holdings Inc.

DBRS Limited (DBRS) notes that, on April 29, 2019, Capital Power Corporation (CPC or the Company; rated BBB (low) with a Stable trend by DBRS) announced its agreement to acquire 100% ownership interest in Goreway Power Station Holdings Inc. (the Acquisition), which owns the Goreway Power Station (the Facility), from JERA Co., Inc. and Toyota Tsusho Corporation for $387 million in total cash consideration, subject to working capital and other closing adjustments as well as the assumption of approximately $590 million of project-level debt. The Acquisition is expected to close in Q2 2019 and is subject to regulatory approvals and other customary closing conditions.

The Facility is an 875-megawatt natural gas-fired combined-cycle power generation plant located in Brampton, Ontario, approximately 50 kilometres northwest of Toronto. The Facility entered commercial operation in June 2009 and currently operates under a 20-year power purchase agreement with the Independent Electricity System Operator (rated A (high) with a Stable trend by DBRS) that expires in 2029. The Facility is expected to generate approximately $124 million of annual EBITDA. CPC will finance the Acquisition with proceeds from a $130 million subscription receipt offering, which will be converted to common equity at the closing of the Acquisition, followed by funding from other sources, including debt. DBRS notes that the Company’s assumption of project-level debt results in cash flows from the Acquisition being structurally subordinate to CPC.

The Acquisition is expected to result in a modest improvement in CPC’s business risk profile by increasing (1) diversification out of the volatile Alberta market, (2) contracted revenues and (3) average contract length. DBRS views CPC’s financing plan for the Acquisition as having a neutral effect on the Company’s financial metrics. Overall, DBRS believes that the Acquisition will have a neutral impact on CPC’s credit assessment if the following occurs: (1) CPC effectively integrates the Facility into its portfolio; (2) the Acquisition is funded as planned at the announced transaction price; (3) the Facility is able to distribute cash to CPC as expected and (4) the project-level debt is non-recourse to CPC. DBRS notes that future material acquisitions by CPC without the issuance of additional common equity could negatively affect its financial metrics, which could result in DBRS taking a negative rating action.

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.

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