TEXT-S&P cuts Capital Power Corp, and subsidiary to 'BBB-'
Overview -- 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. Rating Action 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. Rationale 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. Liquidity 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 above 15%. -- 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. Outlook 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, 2012 -- 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 Ratings List Ratings Lowered To From Capital Power Corp. Capital Power L.P. Corporate credit rating BBB-/Stable/-- BBB/Negative/-- Senior unsecured debt BBB- BBB Capital Power Corp. Preferred stock 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 column.
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