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

DBRS Limited (Morningstar DBRS) confirmed Capital Power Corporation's (CPC or the Company) Issuer Rating and Senior Unsecured Debt Ratings at BBB (low) and Preferred Shares at Pfd-3 (low) and Subordinated Notes Ratings at BB. All trends remain Stable.

KEY CREDIT RATING CONSIDERATIONS
The confirmations reflect CPC's (1) meaningful contracted and hedged capacity which reduce exposure to market volatility, (2) high plant availability, and (3) reasonable financial profile with adequate liquidity and prudent financial management. These factors contribute to a stable business and financial risk profile The key credit challenges include (1) Alberta's volatile wholesale pricing environment and concentration risk, (2) elevated capital spending requirements to support growth and asset renewals, and (3) increase in leverage related to growth initiatives.

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

EARNINGS OUTLOOK
EBITDA for 2024 remained relatively stable compared with 2023, supported by continued contributions from the U.S. portfolio, which was further supported by Harquahala and La Paloma facilities. These gains helped offset lower realized power prices and generation in Alberta. Spot prices in Alberta averaged $63/MWh during 2024, down sharply from $134/MWh in 2023, due to increased renewable penetration, return of previously offline thermal capacity, and milder weather conditions. CPC's realized Alberta prices also declined accordingly, impacting its commercial portfolio. Morningstar DBRS expects Alberta prices to remain soft in 2025, as additional renewable capacity enters the grid and structural oversupply continues, particularly in off-peak periods. However, CPC's Alberta baseload exposure remains substantially hedged for 2025, and the Company has proactively extended hedges into 2026, mitigating earnings volatility from the merchant segment.

FINANCIAL OUTLOOK
Over the medium term, Morningstar DBRS expects CPC to fund its growth capital and acquisitions through a balanced mix of debt and equity, maintaining financial metrics near current levels. The recently announced acquisition of PJM assets is expected to provide stable cash flows in a capacity market framework. However, any significant increase in leverage, particularly if growth is not accompanied by stable and contracted earnings, could weaken credit metrics. To maintain the current credit ratings, CPC is expected to sustain a cash flow-to-debt ratio above 15%.

CREDIT RATING RATIONALE
On April 14, 2025, CPC announced that it has entered into definitive agreements with LS Power to acquire two natural gas-fired generation facilities in the PJM Interconnection region (primarily the eastern portion of the U.S. for a total purchase price of approximately CAD 3 billion (the Acquisition). The transaction is expected to close in Q3, 2025. Morningstar DBRS views the transaction as credit neutral, with expected benefits to the Company's business risk profile offset by an increase in financial leverage due to a slight weakening in financial metrics. The Acquisition will add 2,147 megawatts (MW) of net capacity to CPC's fleet through 100% equity interests in (1) the Hummel Station (1,124 MW), located in the PJM Mid-Atlantic Area Council (MAAC) region, and (2) Rolling Hills (1,023 MW), located in the PJM Regional Transmission Organization (RTO) zone. These assets are expected to contribute to long-term value creation given their flexible dispatch profiles and strong positioning in markets experiencing tightening supply-demand dynamics due to rising electrification and capacity retirements. The total capacity of the company as a result increases to 11.8 gigawatts (GW). CPC intends to fund the transaction through a balanced financing mix of debt and equity- including a new equity issuance of minimum CAD 500 million, with the remainder to be financed through a combination of senior debt, hybrid subordinated notes issuance, and internal liquidity. In addition, the Company has secured a CAD 2 billion fully committed bridge facility to provide interim funding flexibility. The Company also has access to a fully undrawn CAD 1 billion revolving credit facility. These facilities are expected to provide additional backstop and liquidity to the pro forma balance sheet.

CPC's exposure to the PJM Interconnection - a capacity auction-based market offers greater revenue visibility relative to Alberta's fully merchant structure. While capacity revenues are subject to periodic clearing price volatility, they provide a more predictable earnings profile compared to spot-exposed merchant markets and help support contracted-style stability in cash flows over the medium term. The benefits to the overall business risk profile are partially offset by the increase in financial leverage associated with the transaction. However, CPC's planned equity contribution, strong liquidity, and prudent financing mix are expected to support credit metrics over time. Morningstar DBRS will monitor the integration and operational performance of the newly acquired assets, including the company's ability to manage them effectively and meet expected financial contributions.

In 2024, approximately 43% of CPC's EBITDA is derived from U.S. operations, reflecting the Company's successful execution strategy away from the Alberta market. The U.S. portfolio consists largely of mid-life natural gas assets under capacity or tolling contracts, which adds stability and predictability to cash flows, while the Alberta portfolio continues to remain primarily exposed to merchant market risks. Alberta's EBITDA contribution has come down materially over the past two years, and we expect it to remain modest in the medium term, barring any meaningful recovery in power prices. However, optionality from initiatives such as colocation with data centers could provide upside, though timing remains uncertain. Morningstar DBRS could take a negative rating action if CPC's cash flow-to-debt falls below 15% on a sustained basis or if the business risk profile materially deteriorates due to a weakening contractual position or regulatory risks.

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 Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781

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

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

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

C) Weighting of the BRA and the FRA
In the analysis of CPC, 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 (November 25, 2024)
https://dbrs.morningstar.com/research/443429

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 03, 2025) - https://dbrs.morningstar.com/research/447186 which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

-- Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

-- Morningstar DBRS Global Corporate Criteria (February 03, 2025)
https://dbrs.morningstar.com/research/447186

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/431153.

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@morningstar.com.

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 info-DBRS@morningstar.com.

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