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

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and the Senior Unsecured Debt rating of Capital Power Corporation (CPC or the Company) at BBB (low) with Stable trends. Morningstar DBRS also confirmed the Company’s Preferred Shares rating at Pfd-3 (low) with a Stable trend and the Company's Subordinated Notes rating at BB with a Stable trend.

KEY CREDIT RATING CONSIDERATIONS
The confirmations 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's concentration risk, and (3) operational risk. The confirmations also reflect CPC’s relatively stable long-term business risk and financial profile.

CREDIT RATING DRIVERS
Morningstar DBRS may take a positive credit rating action if CPC incorporates more contracted generation into its operations while maintaining strong key credit metrics on a sustained basis. Morningstar DBRS may take a negative credit rating action if CPC's business risk profile significantly deteriorates and/or its cash flow-to-debt metric decreases below 15% on a sustained basis.

EARNINGS OUTLOOK
EBITDA for 2023 increased compared with 2022 primarily due to gains realized on portfolio optimization activities, strong demand for generation in the U.S. and Ontario markets, and a full year contribution from the Midland Cogeneration facility. Alberta spot power prices decreased in 2023 to $134/MWh from $162/MWh in 2022. CPC's realized Alberta power prices decreased to $90 in 2023 from $95 in 2022. Morningstar DBRS expects lower Alberta power prices in 2024 compared with 2023 as new renewables and more efficient thermal facilities come online displacing less efficient existing thermal facilities. Morningstar DBRS expects that the lower merchant prices will result in CPC having lower captured prices in Alberta in 2024 compared with 2023.

Given that CPC’s significantly contracted portfolio and nearly fully hedged Alberta merchant baseload generation exposure for 2024 was sold ahead as of December 31, 2023, Morningstar DBRS does not expect changes in merchant electricity prices to materially change CPC’s outlook, assuming that it meets its facility availability target.

FINANCIAL OUTLOOK
Over the medium term Morningstar DBRS expects CPC to fund growth capex and acquisitions prudently using a combination of debt and equity to keep the financial metrics at or near the current levels. To maintain the current credit ratings Morningstar DBRS expects the cash flow-to-debt to be solidly above 15.0%. Morningstar DBRS also expects that CPC will maintain sufficient liquidity to fund its operations and growth capex.

CREDIT RATING RATIONALE
CPC’s overall business risk profile remains stable. In Q4 2023, CPC acquired 50.15% of the 265 MW Frederickson 1 Generating Station located in Washington State. In Q1 2024, CPC acquired 100% of the 1,062 MW La Paloma gas-fired generation station located in California. Additionally, CPC acquired through a 50/50 partnership the 1,092 MW Harquahala natural gas fired facility in Arizona. The acquisitions decreased CPC's generating capacity in the Alberta market to 31% from 38%. CPC remains exposed to the Alberta market with nearly half of 2024 EBITDA expected to be generated in Alberta. However, Morningstar DBRS expects the EBITDA contribution from Alberta to diversify outside of Alberta over the medium term due to lower Alberta merchant prices and future growth outside of Alberta.

Morningstar DBRS notes that CPC is in the process of repowering the Genesee 1 and Genesee 2 units from coal-fired to natural gas combined cycle units. In January 2024, CPC announced an updated timeline to complete the repowering project with the simple cycle commissioning for Genesee 1 expected to be completed in Q2 2024, and for Genesee 2 in Q3 2024. The combined cycle for both Genessee 1 and Genesee 2 is expected to be completed in Q4 2024. Morningstar DBRS does not view the updated schedule as having a material effect on CPC, as the existing dual fuel units will continue to run until the simple cycle is commissioned. Morningstar DBRS notes that the completion of the Genesee repowering will improve CPC's competitiveness of the facilities in Alberta's merit order. The Genesee repowering will also eliminate coal from CPC's generation fleet, eliminating CPC's exposure to coal regulation.

TRANSACTION-SPECIFIC DISCLOSURES
This disclosure includes any financial statement adjustments that deviate materially from those contained in the issuer’s published financial statements.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at January 23, 2024 https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors
In the analysis of CPC, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of CPC, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA

In the analysis of Capital Power Corporation, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (January 30, 2024), https://dbrs.morningstar.com/research/427244

The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (October 19, 2023), https://dbrs.morningstar.com/research/422134

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

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 credit rating was initiated at the request of the rated entity.

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

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

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

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