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 profiles. DBRS Morningstar also confirmed the Company’s Preferred Shares rating at Pfd-3 (low) with a Stable trend. The ratings reflect CPC’s (1) highly contracted and hedged capacity, (2) high plant availability, and (3) reasonable financial profile with good liquidity. The strengths are offset by (1) Alberta concentration risk, (2) Alberta’s volatile wholesale pricing environment, and (3) operational risk.
The Company performed well operationally in 2019 with 94% plant availability. CPC also continues to diversify out of the Alberta merchant energy market with the acquisition of Goreway Power Station, a contracted 875-megawatt (MW) combined-cycle natural gas facility located in Brampton, Ontario; the completion of Whitla Wind 1, a 202 MW contracted wind project in Alberta that reached commercial operation in December 2019; and Cardinal Point, a 150 MW contracted wind project in Illinois that reached commercial operation in March 2020.
The Company continues to have significant exposure to the Alberta merchant electricity market with 24% of CPC's capacity selling into the Alberta merchant market. Exposure to the Alberta merchant market is expected to increase to 38% in 2021 following the expiry of the Alberta power purchase agreements in 2020. At the beginning of 2020, CPC sold ahead 72% of its Alberta merchant generation at an average price in the mid-$50 per MW hour range. The Company’s Alberta merchant generation that is currently sold ahead for 2021 and 2022 is significantly lower at 3% and 11%, respectively. DBRS Morningstar expects the portion sold ahead to increase by the end of 2020.
DBRS Morningstar notes that the recent significant decrease in oil prices due to the Coronavirus Disease (COVID-19) pandemic is expected to result in lower demand for electricity from industrial customers in Alberta, which could result in lower Alberta merchant electricity prices. DBRS Morningstar does not expect lower Alberta electricity prices to materially affect CPC in 2020, as 72% of its Alberta merchant production for 2020 was sold ahead either to regulated utilities or through ICE NGX. If Alberta merchant electricity prices fall and remain low for a sustained period of time, resulting in CPC's financial metrics dropping below the level required to support the rating level, DBRS Morningstar may take a negative rating action. Conversely, DBRS Morningstar may take a positive rating action if CPC continues to successfully incorporate more contracted generation into its operations while maintaining strong key credit metrics.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Companies in the Independent Power Producer Industry, DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships, and DBRS Morningstar Criteria: Guarantees and Other Forms of Support, which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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 firstname.lastname@example.org.
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.
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