DBRS Downgrades Atlantic Power Limited Partnership, Trends Negative

DBRS has today downgraded the Issuer Rating and the Senior Unsecured Debt & Medium-Term Notes of Atlantic Power Limited Partnership (APLP) to B (high) from BB, and the rating of Atlantic Power Preferred Equity Ltd.’s Cumulative Preferred Shares to Pfd-5 (high) from Pfd-4. The trends on all ratings are now Negative. 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 (22% of consolidated debt as at June 30, 2013).

On May 28, 2013, DBRS placed the ratings Under Review with Negative Implications. The rating action reflected DBRS’s concerns about (1) the continued challenging market environment and its impact on ATP’s credit risk profile and (2) weaker liquidity as the Company faces difficulty accessing the equity market. The Company recently released its Q2 2013 financial results, which were relatively weak due to the ongoing weak electricity pricing fundamentals, negatively affecting the profitability of ATP’s merchant portfolio and its ability to renew power contracts when they are due in certain markets. As a result, the Company’s credit metrics have weakened and are no longer consistent with the “BB” range rating.

The Negative trend reflects DBRS’s view that the Company’s key ratios could weaken further as a meaningful recovery of the wholesale power market will be challenging. The wholesale electricity market outlook remains weak and creates uncertainties associated with the renewal of certain long-term contracts, such as Selkirk (expires in August 2014), Tunis (December 2014) and Greeley (August 2013). In the absence of business environment improvement, ATP will likely have to execute a combination of the following to improve its financial profile: (1) capital and operating expense spending curtailment, (2) dividend reduction and (3) further asset sales. If ATP is successful in implementing a sustainable recovery, which would be largely influenced by the timing of the electricity price recovery, DBRS could consider changing the trend to Stable. However, should ongoing weak business fundamentals remain and key financial metrics deteriorate further, DBRS will likely take a further negative rating action.

DBRS acknowledges that ATP successfully executed an amendment to its senior credit facility on August 2, 2013. However, liquidity decreased significantly. Under the amended credit facility, the borrowing capacity was reduced to $150 million from $300 million and ATP is required to maintain at all times unrestricted cash and cash equivalents of at least $75 million as security for the credit facility. Furthermore, the Company anticipates that it may not meet the provision under its 9% senior unsecured notes requiring its fixed-charge coverage ratio to be no less than 1.75x to 1.00x during the third quarter of 2014. ATP is currently considering various initiatives to maintain compliance with this covenant, including debt reduction, expense reduction and asset optimization.

The rating 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 dated May 31, 2013, 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 (Excluding Financial Institutions) (November 2012) and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers (January 2013), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.