DBRS Downgrades Lièvre Power Financing Corporation to BBB and Maintains Negative Trend

DBRS Limited (DBRS) has today downgraded the rating of the $225 million Series 1 Senior Bonds (the Bonds) issued by Lièvre Power Financing Corporation (the Issuer) to BBB from BBB (high). The trend remains Negative. The bullet Bonds mature on October 6, 2025. The Issuer is a single-purpose financing vehicle for Lièvre Power L.P. (ProjectCo), which owns and operates four hydroelectric generating facilities of 263 megawatts on the Lièvre River in Québec near the Ontario border (the Project).

The rating downgrade, following last year’s negative rating actions, reflects (1) a continuing lack of re-contracting visibility of the Power Agency Agreement (PAA) after December 31, 2019; (2) a continuing weakening of relevant wholesale power prices. The further weakened market-based interest coverage ratio (ICR, after capital expenditure (capex)) in 2016, has solidified DBRS’s view that the Bonds’ rating can no longer be maintained at BBB (high) without future contract price protection. Concurrently, DBRS does not expect significant and sustainable recovery of relevant wholesale power prices in the near term and is therefore maintaining the Negative trend. DBRS will carefully review price trends in relevant markets to determine whether an investment-grade rating can still be maintained on a merchant basis in the future. DBRS has recognized that Lièvre may be better positioned than many other Ontario-based hydro-power generating facilities, largely because it has multiple interconnections to New England and New York markets, whose wholesale power prices are more attractive, relative to the Ontario market.

The Project is currently supported by two inflation-adjusted fixed-price power purchase agreements (PPAs). The PAA with Brookfield Renewable Power Inc. (BRPI) covers over 95% of the long-term average generation (LTAG) but 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. Pursuant to the PAA, BRPI, on behalf of ProjectCo, sells all the electricity generated to its subsidiary Brookfield Renewable Energy Marketing LP (BREMLP), which in turn could sell it into wholesale markets in Ontario, New York and New England. BRPI is the effective PAA counterparty by guaranteeing BREMLP’s obligations.

In 2016, ICR under the PAA was very strong at 7.91 times (x), reflecting an attractive contract price at approximately $70.9 per megawatt hour (MWh), as well as better-than-expected hydrology, well-controlled operating cost and low capex. By contrast, the Ontario market-based ICR (based on compliance certificate), declined further to 0.65x, from 1.11x in 2015, moving in lockstep with a 30% year-over-year decline of Ontario’s wholesale power prices to $16.6 per MWh. Management, however, indicates that Lièvre has been generating an average premium of approximately $21.4/MWh over Ontario’s prices by selling electricity to the New England market over the past four years. Therefore, the adjusted New England market-based ICR (normalized for LTAG and levelized capex) of 1.70x in 2016 would be stronger, even though the prices in that market have also shown a downward trend over the past few years. Nonetheless, DBRS does not believe the market-based ICRs based on the current wholesale power price levels can support a BBB-rating level. DBRS may take further negative rating action in the future, in the event of no re-contracting progress; or no improvements to the relevant wholesale power prices.

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 principal methodology is Rating Project Finance, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.