Two power companies suffer downgrades in their credit rating

Two Alberta companies caught up in the NDP government’s overhaul of the provincial electricity system were hit with credit rating downgrades Tuesday amid uncertainty in the power market.

The credit rating agency DBRS Ltd. issued separate downgrades for TransAlta Corp. and Capital Power Corp., which have both been affected by power market changes triggered by the province’s climate change agenda.

Eric Eng, a DBRS analyst, said a major drag on both companies is the uncertain design of a new power market structure once the government’s changes take effect.

“The power market in Alberta is not being clear about what kind of structure will they follow,” Eng said.

DBRS said its downgrades for both companies came after reviews of their 2016 financial statements, along with the agency’s assessments of future power market conditions and the province’s deal with coal power producers.

Capital Power declined to comment while TransAlta did not immediately respond to a request for comment.

Alberta’s power market was sent into upheaval after the province made plans to phase out coalfired generation by 2030. The move means TransAlta, Capital Power and ATCO Ltd. have to shut down plants earlier than they had planned, which triggered a government-funded $1.36-billion compensation package for the three Alberta companies.

The phase-out of coal power also means there must be significant new electricity generation to replace the coal plants. In a climate of historically low electricity prices, the province opted to replace the current deregulated market with what is called a capacity market, which provides incentives for generators to build new plants and upgrade old ones.

Generating companies will be paid for their capacity to produce power, even when they are not producing it, which ensures an adequate supply of electricity to keep the lights on. They will use this income to recover most of their plant construction costs while they collect revenues by selling power to the grid.

This new market comes into effect in 2021.

DBRS said Tuesday the change brings risk to Capital Power’s finances, given that 45 per cent of the company’s operating margin before expenses last year came from contracted power plants in the deregulated market.

Another concern is that Capital Power’s share of the provincial compensation package for coal producers — $52 million for the company annually for 14 years — “will mitigate, but not eliminate, the potential loss of cash flow” caused by shutting down its coal plants early, according to DBRS.

Still, the credit rating agency said it recognized the company plans to convert its coal facilities to produce power with natural gas, which it noted is likely cheaper than building new gas-fired generators.

DBRS said it was also concerned about the effect that power market changes would have on TransAlta. The company’s Alberta coal plants account for more than a third of its earnings before interest, tax, depreciation and amortization expenses.

While some of its coal plants will be shuttered, TransAlta’s remaining power plants, including coal facilities that will be converted to gas-fired plants, will be subject to the new capacity market, but there is uncertainty surrounding how the market will be designed, DBRS said.

There is also uncertainty surrounding the company’s plan to convert most of its coal plants to produce power from gas, the agency said.