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DBRS has announced that it:

has today downgraded the Issuer Rating and Senior Unsecured Debt rating of Capital Power Corporation (CPC) to BBB (low) from BBB. The trends of all of the above-mentioned ratings were changed to Stable from Negative. The Issuer Rating was assigned on October 27, 2016, with a Negative trend, and the Senior Unsecured Debt rating was given a Negative trend on March 10, 2016. DBRS has concurrently confirmed CPC’s Preferred Shares rating at Pfd-3 (low) with a Stable trend.

DBRS’s rating actions follow a review of CPC’s 2016 financial results, the Off-Coal Agreement (OCA) with the government of Alberta and the potential structure of the Alberta capacity market post-2020. In DBRS’s view, the long-term business risk profile of CPC has weakened, particularly post-2020 once all the Alberta Power Purchase Agreements (Alberta PPAs) expire. The weakening of the business risk profile reflects two major issues: (1) Post-2020, all current Alberta PPAs will end, exposing all assets under the current Alberta PPAs to either merchant risk or the uncertainty of the Alberta capacity market. In 2016, Alberta-contracted plants generated approximately 45% of the total consolidated operating margin before corporate expenses. (2) The implementation of the Alberta Climate Leadership Plan (ACLP) will accelerate the phase-out of all coal emissions by 2030. All of CPC’s coal assets in the province will be stranded effective December 31, 2030. However, the Company is planning to convert its coal plants to gas-fired generation. DBRS believes that the cost of the coal-to-gas conversion is lower than the cost of building new gas-fired projects. DBRS recognizes that CPC and the government of Alberta reached an OCA under which CPC will receive cash payments of $52.4 million per year. This will mitigate, but not eliminate, the potential loss of cash flow from the retirement of these assets. In addition, under the ACLP, the imposition of a carbon tax of $20 per tonne of carbon dioxide emissions beginning January 1, 2017, and $30 per tonne beginning 2018. DBRS recognizes that the near-term impact is manageable as CPC has the ability to pass through the carbon tax to Alberta PPA counterparties and the carbon tax will be reflected in increased power prices in 2018. Over the longer term, DBRS believes that CPC will maintain its competitive position in the post-2020 market in Alberta. DBRS will evaluate additional information regarding market structure as it becomes available and will continue to assess the credit quality of CPC on an ongoing basis.

The trends were changed to Stable from Negative, reflecting the following: (1) Government payments of $52.4 million per year for 14 years will begin July 31, 2017, which will significantly improve CPC’s cash flow and liquidity. (2) CPC’s 2016 financial results were solid, with stable cash flow and modestly lower debt levels over 2015, resulting in strong financial metrics for the current ratings. (3) All of CPC’s commercial activities in Alberta are fully hedged for 2017 and over 50% are hedged for 2018, significantly reducing this segment’s exposure to commodity price risk. Although the hedges are at lower prices because of the currently weak pricing environment, the impact on cash flow (before government payments) is not expected to be material. (4) Cash flow should benefit from distributions from the proposed acquisition of 294 megawatts of contracted capacity in Ontario and British Columbia (expected to close in Q2 2017) and the construction of the 184-megawatt Bloom Wind project in Kansas (expected to be commissioned in Q3 2017). In the medium term, DBRS expects CPC to generate positive free cash flow, which will limit its need for additional debt and maintain its strong financial metrics for the current rating levels.

The company has the following issues outstanding: CPX.PR.A, CPX.PR.C, CPX.PR.E and CPX.PR.G.

This entry was posted on Monday, April 3rd, 2017 at 7:07 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.