DBRS Morningstar Confirms Capital Power Corporation’s 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). These confirmations reflect 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) and the Subordinated Notes rating at BB. All trends are Stable. 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.

CPC's adjusted EBITDA increased by more than 20% in 2022 compared with 2021 primarily driven by (1) higher Alberta merchant prices, (2) higher generation across the majority of the Company’s Alberta commercial facilities, (3) incremental generation from newly commissioned renewable energy projects, and (4) higher availability on average. The Company's exposure to the Alberta merchant electricity market remains significant. Currently, approximately 28% of CPC's total generation capacity is exposed to the Alberta merchant market. This exposure is expected to represent approximately 38% 2023 forecast EBITDA and is partially mitigated through CPC’s hedging program.

DBRS Morningstar notes that CPC has received a limited notice to proceed from its board for the Genesee Carbon Capture and Storage Project (Genesee CCS). Currently, the project is expected to cost $2.3 billion. It is expected to be 42% funded by investment tax credits, 29% funded by government sources, and 29% funded from Capital Power and Partner. CPC is currently expecting a decision on a final notice to proceed in Q4 2023. DBRS Morningstar notes that it does not incorporate the project into CPC's ratings. If the Company were to proceed with the Genesee CCS, DBRS Morningstar would review the project's risk profile and CPC's financing plan to determine its impact on the ratings.

CPC is in the process of completing the repowering of the Genesee 1 and 2 coal generation facilities into natural gas-fired generation facilities with battery storage. Genesee 1 and 2 repowering is expected to be complete in Q1 2024. The completion of the Genesee repowering will improve the competitiveness of the facilities in Alberta's merit order. The Genesee repowering will also eliminate coal from CPC's generation fleet in 2023, eliminating CPC's exposure to coal regulation.

DBRS Morningstar may take a negative rating action 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. 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.

There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

Notes:
All figures are in Canadian dollars otherwise noted.

DBRS Morningstar applied the following principal methodology:
-- Rating Companies in the Independent Power Producer Industry (May 18, 2022) https://www.dbrsmorningstar.com/research/396971

The following methodology has also been applied:
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 20, 2022) https://www.dbrsmorningstar.com/research/404248

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577