DBRS Places Atlantic Power Limited Partnership’s Ratings Under Review with Negative Implications

DBRS has today placed the Issuer Rating and the Senior Unsecured Debt & Medium-Term Notes rating, both BB, of Atlantic Power Limited Partnership (APLP) and the Cumulative Preferred Shares rating of Pdf-4 of Atlantic Power Preferred Equity Ltd. Under Review with Negative Implications. The ratings of APLP are based on the credit quality of Atlantic Power Corporation (ATP or the Company; not rated by DBRS) given that APLP guarantees the majority of ATP’s debt at the holding company level (24% of consolidated debt as at April 20, 2013).

The rating action reflects DBRS’s concern over the deterioration of ATP’s credit metrics this past year, which are no longer commensurate with the current ratings, and the challenges facing the Company with respect to carrying out its long-term strategy given its limited financial flexibility. There is a possibility that ATP could breach the consolidated EBITDA-to-interest covenant of 2.25 times (x) and net debt-to-consolidated EBITDA covenant (total leverage ratio) of 7.50x for one or more quarters in 2013 and early 2014, respectively, under its senior credit facility, which could further constrain liquidity. The Company is currently in discussion with the lenders for a waiver to the senior credit facility. ATP also plans to seek a broader amendment to take into account changes in its long-term business development plans after successfully concluding the current discussions. Even if the Company successfully obtains a waiver and/or amendment, DBRS believes that the Company still faces a number of challenges in implementing its long-term business strategy of deleveraging the consolidated balance sheet and financing future project development with 50% debt and 50% equity in the midst of a weak wholesale pricing environment. If the current bank discussions are not successful, the Company plans to cash collateralize the outstanding letters of credit under the facility and terminate the facility prior to any default, in which case, a negative rating action could immediately follow.

DBRS acknowledges that the Company benefits from long-term power contracts (over 90% of ATP’s generation assets), providing cash flow stability. In addition, during 2013, ATP completed the sale of certain projects (see the rating report for more detail). DBRS views the divestitures as a moderately positive factor as the majority of the projects sold had power purchase agreements expiring in 2013 and a portion of the proceeds were used to repay the outstanding borrowings under the senior credit facility.

Notes:
All figures are in U.S. dollars unless otherwise noted.

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Non-Regulated Electric Generation Industry (May 2011), DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (November 2012) and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers (January 2013), which can be found on our website under Methodologies.