Credit quality for North American non-utility merchant and contracted power companies has moderately improved compared with last year. The proportion of investment-grade ratings, defined as 'BBB-' and higher, is broadly similar at about 26% of the 54 issuers that we publicly rate. Like last year, our rating outlooks within the sector are mostly stable at about 82% for corporate and project developer issuers, and 75% for project finance issuers. The corporate subgroup's rating distribution has improved, with 14% of issuers on positive outlook, compared with 5% last year. In the project finance subgroup, 75% of outlooks are on stable and 22% are negative, compared with only 67% stable and 26% negative last year.

Our Rankings

The following lists rank the North American non-utility merchant and contracted power companies that S&P Global Ratings rates, from strongest to weakest. We rank companies, in turn, by the rating, outlook, stand-alone credit profile (SACP), business and financial risk profiles, and liquidity assessment. We rank investment-grade companies by business risk profile, then financial risk profile. We order speculative-grade companies by financial risk profile, then business risk profile. We then list companies in alphabetical order, if not distinguished by these factors.

We rank project finance entities by rating, outlook, operations phase business assessment (OPBA), preliminary SACP, downside mapping, liquidity, comparable rating assessment, debt structure, and transaction structure. We order projects by rating and outlook. We then list them in alphabetical order, if not distinguished by these factors.

In line with our corporate, project finance, and project developer rating methodology, the final rating might differ from the SACP, where government, group, or rating above the sovereign considerations apply. Where the SACP differs from the anchor, we have applied one or more modifiers. We've noted the anchor and active modifiers of each company for informational purposes only. Please refer to the company-specific pages on RatingsDirect via the hyperlinks in the tables below.

Given our low industry risk assessment for the power sector, country risk has no material impact on the corporate industry and country risk assessment or final OPBA because the rated companies are based in jurisdictions where we assess country risk as very low.

The tables and charts in this article provide an overview of 54 North American merchant power companies, spread across our corporate, project finance, and project developer criteria. The distribution of these 54 companies is shown in chart 1.

Chart 1

We publicly rate 21 merchant power projects. All are speculative grade ('BB+' and below) with about 38% in the 'BB' category, 52% in the 'B' category, and 10% in the 'CCC' category. Our outlook on the sector has improved from last year--76% of merchant power project credits have a stable or positive outlook, compared with just 61% last year.

Table 1

We publicly rate 11 contracted or partially contracted power projects; about 63% of the ratings are investment grade and 36% are speculative grade. This is a slight decrease compared with last year, when about 69% of the projects were investment grade. We also note that there is one rating below 'BB-', compared with zero ratings in the 'B' category last year.

Table 2

We publicly rate 14 corporate merchant power companies; 21% are investment grade and 79% are speculative grade, which is almost exactly in line with last year's distribution. Relative to last year, credit quality has improved, with 14% currently on positive outlook. There are still there are no companies rated lower than 'B+'.

Table 3

We publicly rate eight project developers; 50% are investment grade and 50% are speculative grade, which is similar to last year's distribution.

Table 4

Rating Distribution

In terms of rating distribution, we note that the overall distribution is broadly consistent with last year's rankings, with about 26% of the issuers being rated above 'BBB-'.

Chart 2

Outlook And CreditWatch Distribution

Our rating outlooks are mostly stable. Our ratings are underpinned by our base-case assumptions, but also generally factor in some headroom for short-term volatility related to fluctuations in weather-driven power demand, the impact of the Inflation Reduction Act, and current uncertainty around upcoming capacity auctions, including PJM.

Our expectations for increased power demand coupled with generally robust hedging practices and higher-margin capture have improved our outlook on the sector. As a result, more corporate ratings have a positive outlook. Although asset-level financings have not benefited as much as larger entities with scale have, fewer merchant power project ratings have a negative outlook compared with last year and some have maintained high availability and robust hedges.

Chart 3

Chart 4

Liquidity

Liquidity is neutral for all of the merchant and contracted power issuers we rate. Most power projects have forward-looking debt service reserve accounts of at least six months and corporate issuers generally have ample liquidity available under revolving credit facilities. We also assess the liquidity of two issuers, Constellation Energy Generation LLC and Brookfield Renewable Partners, as strong due to their robust projected sources of liquidity compared with uses.

Business Risk Profile Distribution

Of the 22 issuers rated under S&P Global Ratings' corporate (14) and project developer (8) criteria, 86% of our business risk assessments are either satisfactory or fair. These assessments typically reflect some degree of cash flow visibility due to contractual agreements and some scale. We also assess two companies as having a business risk profile of strong, Constellation Energy Generation LLC and NextEra Energy Partners L.P.

Chart 5

Operations Phase Business Assessment Distribution

Of the 32 issuers rated under our project finance criteria, there is a diverse range of operations phase business assessments (OPBAs). All the projects that we view as merchant (21) have an OPBA of 9 or higher, primarily due to their inherent market risk exposure. The contracted power projects have a wider range of OPBAs, spurred by different underlying technologies and contractual profiles.

Chart 6

Debt Maturity Distribution

Here we show the quantitative ratings upgrade and downgrade metrics, organized by rating category. While many project entities are closer to the downside trigger, we note the projected minimum DSCR often occurs later in the life of the asset, and we view near-term DCSRs to be generally strong (given our positive outlook on the sector). Therefore, most project finance ratings are currently stable.

Chart 7

The vast majority of our publicly rated power project financings are financed with term loan B structures that have a 7-year loan life. As a result, 38% of these loans mature within the next 2 years and 81% of loans mature within 5 years. The longer dated maturities all correspond to fully or partially contracted power projects that are financed with fully amortizing loan structures.

Chart 8

Similarly, revolving credit facilities are generally five-year facilities for power projects. We consider revolving credit facilities crucial for most projects to maintain adequate liquidity and support debt service reserve accounts and we generally expect these facilities to be fully refinanced.

Chart 9