Morningstar DBRS Assigns Rating of BB, Stable, to Capital Power Corporation’s $450 Million Subordinated Notes Series 2; Places Subordinated Notes Series 1 Under Review With Developing Implications

DBRS Limited (Morningstar DBRS) assigned a rating of BB with a Stable trend to Capital Power Corporation’s (CPC or the Company) $450 million 8.125% Fixed-to-Fixed Rate Subordinated Notes, Series 2 due June 5, 2054 (Subordinated Notes Series 2). Concurrently, Morningstar DBRS placed CPC’s existing 7.95% Fixed-to-Fixed Rate Subordinated Notes, Series 1 due September 9, 2082 (Subordinated Notes Series 1) Under Review with Developing Implications.

The Subordinated Notes Series 1 and Subordinated Notes Series 2 rank equally in right of payment until the occurrence of certain bankruptcy and related events at which time the Subordinated Notes Series 1 would automatically convert into preferred shares. The Subordinated Notes Series 1 would then rank below the Subordinated Notes Series 2. According to Morningstar DBRS’ Hierarchy Principle, as outlined in the Morningstar DBRS “Credit Ratings Global Policy,” the Subordinated Notes Series 1 would be subordinate to the Subordinated Notes Series 2 in the event of insolvency of the Company. Due to our Hierarchy Principle the Subordinated Notes Series 1 should be rated one notch below the Subordinated Notes Series 2, implying a downgrade to BB (low) from BB.

However, CPC has indicated that it is evaluating possible options, including a potential solicitation process to amend the terms so the Subordinated Notes Series 1 rank pari passu in the event of insolvency with the Subordinated Notes Series 2. Based on the Company’s intent to seek noteholder approval to make the subordinated notes pari passu, Morningstar DBRS has placed the Subordinated Notes Series 1 Under Review with Developing Implications. Following a successful process that would result in the Subordinated Notes Series 1 being ranked pari passu in the event of insolvency with the Subordinated Notes Series 2, Morningstar DBRS will remove the Under Review with Developing Implications designation from the Subordinated Notes Series 1 and confirm their rating at BB with a Stable trend. Conversely, a lack of progress to make the notes pari passu over the next few months could result in Morningstar DBRS downgrading the Subordinated Notes Series 1 to BB (low). Morningstar DBRS aims to resolve any Under Review action within 90 days.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of CPC, the BRA factors are considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of CPC, the BRA factors are considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of (CPC), the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Regulated Utility and Independent Power Producer Industries (April 15, 2024), https://dbrs.morningstar.com/research/431184

Morningstar DBRS credit ratings may use of one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186

-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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