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Atlantic Power (AT) Placed on CreditWatch Negative by S&P

September 17, 2014 10:06 AM EDT

Standard & Poor's Ratings Services placed its ratings on diversified power developer Atlantic Power (NYSE: AT) (APC) and affiliate Atlantic Power Ltd. Partnership (APLP), including the 'B' corporate credit ratings, on CreditWatch with negative implications. The CreditWatch listing, which is typical after such announcements, means that we could affirm, or lower, the ratings on conclusion of our review.

"The CreditWatch placement follows the departure of the company's CEO and an unanticipated cut in distributions by the company that has triggered our review of the company's financial plan," said Standard & Poor's credit analyst Aneesh Prabhu.

Atlantic Power has lowered its dividend by 70% (C$0.12 annually from C$0.40), a second distribution cut in 18-months, following a 65% reduction in February 2013. The company has also revised its distribution payments to a quarterly schedule from monthly payouts. The company has cited a reevaluation of its medium-term plan, including debt maturities and recontracting risk from 2017 onwards that have caused a change in its payout policy. Atlantic plans to focus on optimization its assets and delevering its balance sheet to improve both its cost of capital and ability to compete for new investments. In addition, the company plans to assess other potential options, including asset sales or the contribution of assets to a joint venture to raise additional capital for growth and/or debt reduction. Our review will also evaluate if the distribution reductions have the potential of weighing negatively on the company's ability to access the markets competitively as well as its future strategy given management transition.

Our 'B' corporate credit ratings on U.S. power generator Atlantic Power Corp. reflects a "fair" business risk profile and "highly leveraged" financial risk profile. Our business risk assessment reflects the company's reliance on distributions from its underlying portfolio of power generation projects, its near-term focus on operational improvements in its existing assets rather than growth projects to increase cash flow, and a mostly contracted cash flow profile. The financial risk profile reflects high consolidated debt per kilowatt and credit measures in line with the 'B' rating.

Atlantic Power is a Boston-based publicly traded power generation company with a portfolio of assets in the U.S. and Canada. The company's current portfolio consists of interests in about 30 operational power generation projects in 12 states and two Canadian provinces totaling about 2,100 megawatts (MW). We have assigned issue ratings of 'B+' and a recovery rating of '2' to about $800 million of debt--a 5.05% $600 million first-lien term loan B and a $200 million first-lien working capital facility at Atlantic Power Limited Partnership (APLP), a wholly owned subsidiary of Atlantic Power. Our issue-level rating on the C$210 million 5.95% unsecured notes due 2036 issued by APLP is 'BB-'. We rate only about $320 million of the $730 million total debt at the Atlantic Power level and have an issue–level rating of 'B' and recovery ratings of '4' on those $320 million 9% senior unsecured notes due 2018. Our estimate of year-end debt at Atlantic Power and APLP is about $690 million and $750 million, respectively.

We will conduct a review of the company's strategic and financial plan over the next several weeks and resolve the CreditWatch over the next 60 to 90 days. Our review will evaluate near-term recontracting risks of some of Atlantic's portfolio assets that would cause downward revision of future cash flow expectations, the ability of the company to successfully implement its optimization and cost-cutting initiatives, as well as assess its access to external financing given the company's recent underperformance.



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