-- We are lowering our long-term corporate credit and senior unsecured
debt ratings on Capital Power Corp. (CPC) and subsidiary Capital Power
L.P. to 'BBB-' from 'BBB'.
-- We are also lowering our global scale preferred stock rating on CPC to
'BB' from 'BB+', and our Canada scale rating to 'P-3' from 'P-3(High)'.
-- We base the downgrade on weakness in the Alberta power market, which
we forecast will not improve materially in the medium term.
-- The significant exposure of the company to lower Alberta forecast
prices is heightened by the lower amount of hedging undertaken by the
partnership with respect to its Alberta merchant power.
-- The stable outlook reflects our view that adjusted funds from
operations-to-debt will remain in the 15% to 20% range, below the 20%
threshold we associated with the previous rating.
On Nov. 16, 2012, Standard & Poor's Ratings Services lowered its long-term
corporate credit and senior unsecured debt ratings on Edmonton, Alta.-based
power generation company Capital Power Corp. (CPC) and subsidiary Capital
Power L.P. (CPLP) to 'BBB-' from 'BBB'. At the same time, Standard & Poor's
lowered its global preferred stock rating on the company to 'BB' from 'BB+',
and its Canada scale rating to 'P-3' from 'P-3 (High)'. The outlook is stable.
The ratings on CPC reflect Standard & Poor's opinion on the company's key and
only material operating subsidiary, CPLP. The downgrade reflects our views
that CPLP will not improve and maintain its adjusted funds from operations
(AFFO)-to-debt to levels consistent with the previous ratings or improve its
business risk profile in the near term.
The ratings on CPC and CPLP reflect Standard & Poor's opinion of the
partnership's strong business risk profile and significant financial risk
profile. Providing key support to the ratings is a more measured perspective
on growth and a moderately diversified generation portfolio, which consists of
a relatively young fleet. Moreover, the partnership recently completed the
Quality Wind project under budget, reducing construction risk and
demonstrating strong project development capability. We also believe CPLP
benefits from a portion of its cash flow from long-term power purchase
contracts with predominantly creditworthy counterparties, which add
predictability. In our view, offsetting these strengths is a high degree of
leverage, notwithstanding the partnership's efforts to reduce leverage through
such things as equity issuance, which exposes it to weakening in power prices,
particularly in light of a relatively large open position. We believe this
heightens the volatility of cash flow.
The Alberta power market has weakened and is experiencing lower power prices.
Currently the forecast Alberta forward price for 2013 and 2014 is
approximately C$58 and C$54 per megawatt-hour (MWh), respectively. This is in
contrast to earlier this year where forecast prices were in the
mid-to-upper-C$60 MWh for the same period. We attribute the lower prices in
part to the recent independent arbitration panel's decision regarding Sundance
Units 1 and 2, which are now expected to return to service in the fall of
2013. As we had said in our report from June 27, 2012, a decline in power
prices in which the partnership operates could inhibit its ability to achieve
the credit metrics consistent with the ratings.
In addition, given some of the changes to power purchasing patterns in the
Alberta market, there is a decreased amount of liquidity in the forward
market, not allowing power generators such as CPLP to hedge itself as long as
in the past. As of Sept. 30, 2012, the partnership had hedged 32% and 14% of
its Alberta commercial portfolio for 2013 and 2014, respectively. We believe
that the size of the open position of its Alberta commercial portfolio
increases the volatility of cash flow and heightens the partnership's exposure
to the lower merchant power prices.
Based on our forecast level of adjusted debt of approximately $2.1 billion for
2013, for CPLP to achieve an AFFO-to-debt of 20% in 2013, we believe power
prices would need to average more than C$60 per MWh. This is approximately
C$1.50-C$2.00 per MWh higher than the current forward price for 2013.
In addition, the partnership has forecast that FFO for 2012 will be C$380
million-C$420 million. If power prices for 2013 were C$3 per MWh lower than
the current 2013 forward price, we believe that the partnership's AFFO-to-debt
would be approximately 19%, which is below the credit metrics which we
associate with the 'BBB' rating. This assumes that FFO for 2013 were largely
in line with 2012 and was at the mid-to-upper end of the forecast for 2013
(notwithstanding a more depressed price environment) but recognizing that the
new wind projects will add incremental cash flow in 2013.
Our forecast level of adjusted debt relies on the assumption that CPLP will
expend no further capital beyond what it currently plans to do for existing
projects which are scheduled to be completed in 2013. Therefore, to the extent
that additional acquisitions or development projects are added, the amount of
debt would likely increase, putting further stress on credit metrics.
We believe that as per our criteria, CPLP has adequate sources of liquidity
that should cover more than 1.2x its projected uses of cash in the next 12
months. Aspects of our liquidity profile assessment include the following
factors and assumptions:
-- We expect the sources of liquidity to exceed uses more than 1.2x in
the next 12 months.
-- We expect net sources would be positive, even with EBITDA declines
-- Near-term debt maturities are minimal. The revolving credit facility
expires in 2017.
-- CPLP's liquidity sources include FFO which we forecast to be
approximately C$400 million, and C$869 million availability under its
committed credit facility. Its liquidity uses include committed capital
expenditure of approximately C$350 million, and dividends and distributions of
approximately C$100 million.
The stable outlook reflects our expectation of AFFO-to-debt remaining in the
15%-20% range and a relatively stable business risk profile. We could raise
the ratings during our two-year outlook period if CPLP improves its business
risk profile or if we expect the company to achieve and maintain AFFO-to-debt
of more than 20%. Conversely, while we don't expect it, a material
debt-financed acquisition or capital building program or operational
disruptions of a prolonged nature leading to AFFO-to-debt falling below 15%
could result in a downgrade.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business And Financial Risks In The Investor-Owned
Utilities Industry, Nov. 26, 2008
-- Standard & Poor's Methodology For Imputing Debt For U.S. Utilities'
Power Purchase Agreements, May 7, 2007
Capital Power Corp.
Capital Power L.P.
Corporate credit rating BBB-/Stable/-- BBB/Negative/--
Senior unsecured debt BBB- BBB
Capital Power Corp.
Global scale BB BB+
Canada scale P-3 P-3(High)
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left