DBRS Sounds a Warning – But No Formal Change – on CPX.PR.A

DBRS has announced that it:

has today published an updated report on Capital Power Corporation (CPC or the Company). The Company’s Preferred Shares rating is based on the credit quality of its subsidiary, Capital Power L.P. (CPLP; rated BBB by DBRS). The one-notch differential in the ratings of CPC and CPLP reflects structural subordination at CPC, which is largely dependent on its own resources and dividends from CPLP. Dividends from CPLP could be curtailed if the viability of CPLP needs to be safeguarded.

DBRS is increasingly concerned about the continued challenging merchant power market environment that could materially add to the Company’s existing challenges in the medium term. In addition, the Sundance Unit 1 and 2 restarts, which are expected in late 2013, could place more pressure on the merchant power market environment in Alberta. The continued downward pressure on natural gas prices, which make natural gas combined-cycle plants more cost effective in terms of both capital and fuel costs, are expected to pressure CPLP’s merchant power earnings.

CPC has no debt issued at the parent level and is not expected to issue any debt in the foreseeable future. The Company has $122 million of preferred shares outstanding as of June 30, 2012. Preferred shares, as a percentage of common equity, are within the 20% threshold (defined as the percentage of preferred shares outstanding divided by total equity, excluding preferreds). For the six months ended June 30, 2012, CPC distributed $3 million to its preferred shareholders and $37 million to its common shareholders ($6 million and $51 million to preferred and common shareholders, respectively for fiscal 2011).

DBRS confirmed CPX.PR.A at Pfd-3(low) on July 24.

CPX.PR.A is tracked by HIMIPref™ but is relegated to the Scraps index on credit concerns.

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