DBRS Downgrades Capital Power Income L.P., Trend Is Stable

DBRS has today downgraded the ratings of Capital Power Income L.P.’s (CPILP or the Partnership) Senior Unsecured Debt & Medium-Term Notes, to BB from BBB (high) and also downgraded the Cumulative Preferred Shares of CPILP’s affiliate, CPI Preferred Equity Ltd., to Pfd-4 from Pfd-3. The trends are now stable. As part of our leveraged finance rating methodology, DBRS has also assigned an Issuer Rating of BB to CPILP and a recovery rating of RR4 (indicating an expected recovery of 30% to 50%) on the Senior Unsecured & Medium Term Notes.

The downgrade reflects the closing of the previously announced acquisition of CPILP by Atlantic Power Corporation (ATP, not rated by DBRS) (the Transaction) on November 7, 2011. DBRS had stated in its October 21, 2011, Comment that if the Transaction closes as currently anticipated, the Transaction is expected to result in a downgrade of CPILP’s ratings to BB. CPILP’s Issuer Rating of BB is based on DBRS’s assessment of the new combined entity.

The downgrade was precipitated by the combined entity’s weaker financial profile as a result of the higher total debt, lower equity offering by ATP to fund the acquisition, complex financial structure and subordination implications. Post-acquisition benefits include an increase in the average power purchase agreement (PPA) term, asset base and market capitalization, as well as greater diversification of fuel source; geography and counterparty risk were also factored into the current combined rating. Current estimated credit metrics for the combined entity of EBITDA-to-interest of 2.7 times (x), cash flow from operation-to-debt of 10.7%, debt-to-capital of 59% and debt-to-EBITDA of 5.6x are weaker than CPILP’s stand-alone credit metrics. Furthermore, CPILP and various subsidiaries will be providing guarantees to the following ATP obligations:

(1) ATP’s new $300 million secured credit facility.

(2) ATP’s $460 million senior unsecured note with 9% coupon due in 2018. The guarantees of the ATP bonds will be senior unsecured obligations of the respective guarantors and will rank equally in right of payment with all of the guarantors existing and future senior debt of the guarantor and will be effectively subordinated in right of payment to all secured debt of each guarantor.

All of CPILP’s bonds will be subordinated to ATP’s $300 million credit facility. Due to the binding of ATP and CPILP through the guarantees, DBRS views the entities as a combined credit.

Prior to the close of the acquisition, DBRS had previously stated that CPILP’s $210 million bonds due in 2036 will receive a senior unsecured guarantee from ATP (with the guarantee being an obligation of ATP and subordinate to its secured $300 million credit facility). At this time, the ATP guarantee to the $210 million bonds has not yet been put in place. As such, these bonds along with the US$415 million of CPILP subsidiary bonds (in three separate issues of US$150 million, US$75 million and US$190 million) will receive no guarantee from ATP. Based on the recovery prospects under the current complex guarantee/subordination structure, CPILP’s $210 million and US$415 million bonds rank equally after ATP’s US$460 million bonds.

If and when a guarantee is put in place for CPILP’s $210 million bonds as previously contemplated and not the remaining US$415 million, DBRS does not believe that a rating differential would exist based on the current estimated default scenarios utilized in the recovery analysis pursuant to DBRS’s Rating Methodology for Leverage Finance. However, while not currently expected, under certain circumstances there could exist materially improved recovery prospects for ATP in the future, and a scenario may result wherein there may be a rating differential between CPILP’s $210 million bonds and the remaining US$415 million debentures. DBRS notes that this is difficult to estimate at this point.

ATP has cancelled the bank facilities previously held by CPILP and terminated the contemplated bridge facility intended if the bond offering had not closed.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Companies in the Non-Regulated Electric Generation Industry and DBRS Rating Methodology for Leveraged Finance, which can be found on our website under Methodologies.