New Issue: CPX FixedReset, 5.75%+412M575

Capital Power Corporation has announced:

that it will issue 5,000,000 Cumulative Minimum Rate Reset Preference Shares, Series 9 (the “Series 9 Shares”) at a price of $25.00 per Series 9 Share (the “Offering”) for aggregate gross proceeds of $125 million on a bought deal basis with a syndicate of underwriters, co-led by TD Securities Inc. and National Bank Financial Inc. In addition, Capital Power has granted the underwriters an option, exercisable in whole or in part anytime up to two business days prior to closing, to purchase up to an additional 1,000,000 Series 9 Shares on the same terms, for additional gross proceeds of up to $25 million.

The Series 9 Shares will pay fixed cumulative dividends of $1.4375 per share per annum, yielding 5.75% per annum, payable on the last business day of March, June, September and December of each year, as and when declared by the board of directors of Capital Power, for the initial period ending September 30, 2022. Assuming an issue date of August 9, 2017, the first quarterly dividend of $0.2048 per share is expected to be paid on September 29, 2017. The dividend rate will be reset on September 30, 2022 and every five years thereafter at a rate equal to the sum of the then five-year Government of Canada bond yield and 4.12%, provided that, in any event, such rate shall not be less than 5.75%. The Series 9 Shares are redeemable by Capital Power, at its option, on September 30, 2022 and on September 30 of every fifth year thereafter.

Holders of Series 9 Shares will have the right to convert all or any part of their shares into Cumulative Floating Rate Preference Shares, Series 10 (the “Series 10 Shares”), subject to certain conditions, on September 30, 2022 and every five years thereafter. Holders of Series 10 Shares will be entitled to receive a cumulative quarterly floating dividend at a rate equal to the sum of the then 90-day Government of Canada Treasury Bill yield plus 4.12%, as and when declared by the Board of Directors of Capital Power.

Net proceeds of the offering will be used to reduce indebtedness under Capital Power’s credit facilities.

Standard & Poor’s Ratings Services, a business unit of S&P Global Canada Corp., has assigned a provisional rating of P-3 for the Series 9 Shares and DBRS Limited has assigned a preliminary rating of Pfd-3 (low) for the Series 9 Shares.

The Series 9 Shares will be issued pursuant to a prospectus supplement to Capital Power’s short form base shelf prospectus dated May 3, 2016. The prospectus supplement will be filed with securities regulatory authorities in all provinces and territories in Canada. The Offering is subject to receipt of all necessary regulatory and stock exchange approvals.

They have also announced:

On July 25, 2017, the Company’s Board of Directors approved an increase of 7.1% in the annual dividend for holders of its common shares, from $1.56 per common share to $1.67 per common share. This increased common dividend will commence with the third quarter 2017 quarterly dividend payment on October 31, 2017 to shareholders of record at the close of business on September 29, 2017.

The new issue is extraordinarily expensive, according to Implied Volatility analysis:

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It’s a standard trick, but it never gets old! Set the yield of your new issue in accordance with the yield of lower-priced instruments … which will almost always have lower yields due to their lower call risk. The theoretical price of the new issue, according to this analysis, is 23.65.

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