DBRS Morningstar Confirms Capital Power Corporation Rating 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.

In 2020, Alberta merchant electricity prices decreased primarily because of reduced oil prices and electricity demand from industrial customers as a result of the Coronavirus Disease (COVID-19). CPC was not significantly affected by the lower prices because most of its assets are contracted and most of its Alberta merchant electricity exposure is hedged. CPC also performed well operationally throughout the pandemic with 95% plant availability for 2020.

The Company's exposure to the Alberta merchant electricity market increased in 2021 following the expiry of the Alberta Power Purchase Arrangements (PPAs) in 2020. Currently, approximately 34% of CPC's total generation capacity sells into the Alberta merchant market compared with 20% in 2020. CPC's exposure to the Alberta merchant market is expected to represent approximately 30% of 2021 forecast EBITDA and is partially mitigated through its hedging program with 29% of its Alberta baseload generation sold ahead at the beginning of 2021 and 27% sold for 2022. DBRS Morningstar expects that the amount sold ahead for 2022 will increase throughout 2021.

In 2020, CPC announced its repower of the Genesee 1 and 2 coal generation facilities into natural gas fired generation facilities. The completion of these projects will improve the competitiveness of the facilities in the merit order. Additionally, CPC's coal generation capacity will decrease from approximately 20% of total capacity in 2020 to zero in 2023. This will reduce CPC's exposure to the regulatory risk from coal generation and carbon pricing but is partially offset by increased project execution risk, which, given CPC's experience and track record, DBRS Morningstar views as manageable.

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.

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 19, 2020; https://www.dbrsmorningstar.com/research/361185), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2, 2020; https://www.dbrsmorningstar.com/research/369165), and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 14, 2021; https://www.dbrsmorningstar.com/ research/372344), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodology includes the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 info@dbrsmorningstar.com.

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 info@dbrsmorningstar.com.

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