S&P: Atlantic Power Corp. Ratings Affirmed, Outlook Remains Stable

S&P Global Ratings said today that it has affirmed its 'B+' long-term corporate credit rating on Atlantic Power Corp. The outlook remains stable.

At the same time, we affirmed our 'BB-' issue-level rating on APLP Holdings L. P.'s (APLP Holdings) $700 million senior secured term loan ($540 million outstanding) and $200 million senior secured revolving credit facility and Atlantic Power L. P.'s (the Partnership) C$210 million medium-term notes. Our '2' recovery rating on all of the debt tranches remains unchanged, indicating our expectation for substantial recovery (70%-90%; rounded estimate: 75%) in the event of a default.

Our 'B+' corporate credit rating on APC reflects the company's consistent revenue as it has PPAs with mostly investment-grade off-takers for most of the power-generating assets in its portfolio. These PPAs insulate the company's revenue from market risk, such as changes in power demand and price fluctuations. However, this strength is somewhat offset by the recontracting risk related to the expiration of APC's current PPAs. Off-takers may either offer a short-term extension, possibly at lower rates, or decide not to extend the PPA for various business reasons. With 1,440 megawatts (MW) of net capacity from 22 power-generating assets located in the U. S. and Canada, we consider APC's portfolio to be relatively small compared with those of its peers that we rate, which is one of the few factors that prevents us from assessing the company's business risk profile as stronger than fair. However, we continue to apply a positive one-notch comparable rating analysis modifier to our anchor on the company because we believe that APC has a stronger contractual profile than its mostly merchant peers and could potentially reduce its leverage at a faster rate than we are currently forecasting due to the term loan's cash sweep structure.

The stable outlook on APC reflects the relatively predictable nature of the company's cash flows due to the contractual arrangements between its power assets and their respective off-takers. The stable outlook also reflects our expectation that APC will use excess cash to further pay down its term loan. We forecast that the company's S&P Global adjusted consolidated debt-to-EBITDA will remain between 5.5x and 6.0x over the next 12 months.

We could lower our ratings on APC if it appears that the company's forecast adjusted debt-to-EBITDA will increase above 6.5x. This could occur if the company is unable to recontract its expiring PPAs or obtain new ones or if it faces higher-than-expected operating costs to maintain the power assets in its portfolio, which would create uncertainty around the level of cash flow available for debt service at the corporate level.

We could raise our ratings on APC if the company reduces its adjusted debt-to-EBITDA below 5.25x on a consistent basis. This could occur if the company reduces its debt by sweeping excess cash flows in line with our expectations or if it extends its expiring contracts for a longer-term, providing increased certainty around its future cash flows.

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