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

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

Alberta merchant electricity prices increased significantly in 2021 to $102 per mega-watt hour (MWh) compared with $47 per MWh in 2020. The increase in the merchant price was largely due to higher weather-related demand and increased baseload facility outages. CPC was able to benefit from these increased prices because the expiration of the Alberta Power Purchase Agreements (PPAs) in 2020 resulted in CPC having less baseload generation sold ahead at the beginning of 2021 than in prior years. This increased price was partially offset from CPC having lower facility availability of 90% compared with 95% in 2020, driven by planned and unplanned outages.

The Company’s exposure to the Alberta merchant electricity market remains significant. Currently, approximately 32% of CPC's total generation capacity sells into the Alberta merchant market. CPC's exposure to the Alberta merchant market is expected to represent approximately one third of 2022 forecast EBITDA and is partially mitigated through its hedging program with 72% of CPC's Alberta baseload generation sold ahead at the beginning of 2022 and 47% sold for 2023. DBRS Morningstar expects that the amount sold ahead for 2023 will increase throughout 2022.

CPC is in the process of completing a $1.5 billion growth capex plan to 2025. The growth capex plan includes the repower of the Genesee 1 and 2 coal generation facilities into natural gas fired generation facilities with battery storage and the construction of five renewable energy projects and the completion of Strathmore Solar at the end of March 2022. The completion of the Genesee repowering will improve the competitiveness of the facilities in Alberta's merit order and will eliminate coal from CPC's generation fleet. DBRS Morningstar notes that this will decrease CPC's exposure to regulatory and carbon pricing risk but is partially offset by project execution risk. The five renewable energy projects will be predominantly contracted, which will increase CPC's portion of revenue coming from contracts.

If Alberta merchant electricity prices fall and remain low for a sustained period, resulting in CPC's financial metrics dropping below the level required to support the rating, DBRS Morningstar may take a negative rating action. Conversely, DBRS Morningstar may take a positive rating action if CPC successfully incorporates more contracted generation into its operations while maintaining strong key credit metrics on a sustained basis.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodologies are Rating Companies in the Independent Power Producer Industry (May 10, 2021; https://www.dbrsmorningstar.com/research/378166), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 21, 2021; https://www.dbrsmorningstar.com/research/386355), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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