DBRS Downgrades Lièvre Power Financing Corporation’s Series 1 Senior Bonds to BBB (high), Changes Trend to Negative

DBRS Limited (DBRS) has today downgraded the rating of the $225 million Series 1 Senior Bonds (the Bonds) of Lièvre Power Financing Corporation (the Issuer) to BBB (high) from A (low). The trend has also been changed to Negative from Stable. The Issuer is a single-purpose financing arm for Lièvre Power L.P. (ProjectCo), which owns and operates 263 megawatts hydroelectric generating facilities on the Lièvre River in Québec near the Ontario border (the Project or Lièvre). The proceeds of the Bonds issuance were on-lent to ProjectCo on a back-to-back basis. The bullet Bonds are secured by the Project assets and mature on October 6, 2025.

The Project is supported by two fixed-price (inflation-adjusted) power purchase agreements (PPAs). The Power Agency Agreement (PAA) with Brookfield Renewable Power Inc. (BRPI) covers over 95% of the Project’s long-term average generation (LTAG) of 1,522 gigawatt-hours (GWh) and expires on December 31, 2019. The remaining generation (less than 5%) is sold to Hydro-Québec (rated A (high) by DBRS) under a separate 25-year PPA to 2030. Under the terms of the PAA, all of the electricity generated not sold via third-party contract(s) is sold by BRPI, on behalf of ProjectCo, to its subsidiary Brookfield Renewable Energy Marketing LP (BREMLP), which in turn sells it into the wholesale electricity markets in Ontario, New York and New England. BRPI is the effective counterparty under the PAA by guaranteeing the obligations of BREMLP thereunder. DBRS does not view BRPI as having a credit quality within the “A” rating category, since its credit profile is largely driven by Brookfield Renewable Partners L.P.’s (BRP, formerly known as Brookfield Renewable Energy Partners L.P.; rated BBB (high) by DBRS).

DBRS has taken the negative rating actions based on (1) the lack of the PAA re-contracting visibility after December 31, 2019, and (2) Lièvre’s weakened market-based competitive position over the past 12 to 18 months, as a result of sharply declined wholesale electricity prices in relevant markets.

For 2015, interest coverage ratio (ICR, after capex) under the PAA remained strong at 6.08 times (x), reflecting an attractive contract price at $70.6 per megawatt hour (MWh). The actual generation of 1,352 GWh was 11% below the LTAG, but still within the expected variability range. ProjectCo’s market-based ICR (according to the compliance certificates), however, declined to 1.11x from 2.45x in 2014, moving in lockstep with a 34% year over year decline of Ontario’s wholesale electricity prices to below $25 per MWh. ProjectCo’s market-based competitive position has weakened considerably as a result. According to DBRS’s project finance methodology, a project’s rating can only exceed the PPA counterparty’s if it can demonstrate a strong market-based competitive position.

DBRS expects that the wholesale electricity prices in relevant markets will continue to face pressure in the near term. DBRS also does not expect a sustainable and material recovery of prices anytime soon. ProjectCo will likely need continuing long-term PPA support after 2019 to maintain robust and stable credit metrics. Any PAA extension or a replacement PPA should also provide sufficient cash flow cushion beyond 2025 to mitigate refinancing risk. The trend can be restored to Stable at BBB (high) rating level only if (1) the PAA is extended or a similar replacement PPA is secured, with terms supportive of the rating, and (2) the Project’s market-based competitive position strengthens on a sustainable basis. Otherwise, the rating will face further downward pressure over the next 12 months.

Nonetheless, DBRS has recognized that Lièvre, on a merchant basis, may be better positioned than other Ontario-based power generating facilities, largely because it has multiple interconnections to New York and New England markets. The capacity & ancillary revenue and price premium generated from these markets, if proved to be sustainable, can be factored into DBRS’s future rating considerations.

Notes:
All figures are in Canadian 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 methodology is Rating Project Finance, which can be found on our website under Methodologies.