DBRS Downgrades Lièvre Power Financing Corporation to BBB (low), but Revises the Trend to Stable

DBRS Limited (DBRS) downgraded the rating of the $225 million Series 1 Senior Bonds (the Bonds) issued by Lièvre Power Financing Corporation (the Issuer) to BBB (low) from BBB but revised the trend to Stable from Negative. The bullet Bonds mature on October 6, 2025. The Issuer is a single-purpose funding vehicle established for Lièvre Power L.P. (ProjectCo) to operate four hydroelectric generating facilities of 263 megawatts (MW) on the Lièvre River in Québec, near the Ontario border (the Project or Lièvre).

Because of an increasing possibility for the Project to sell most of the generation (approximately 95%) to the wholesale power markets once the Power Agency Agreement (PAA) expires on December 31, 2019, DBRS is increasingly focused on assessing the Project’s future debt-service capacity on a merchant basis starting from 2020. The rating downgrade, which follows last year’s negative rating action, reflects DBRS’s view that the forecast future market-based credit metrics would be difficult to sustain at the BBB rating, especially in a downside scenario of low power prices for a protracted period. The trend change to Stable reflects DBRS’s expectation that the Project’s future market-based credit metrics will likely sustain a BBB (low) rating, driven by (1) ProjectCo’s proven track record of generating sufficient market-based cash flow relative to its debt service obligations; (2) the relatively attractive fundamentals of the ISO New England (ISO-NE) market, which is the Project’s primary export market for the time being; (3) the seemingly stabilizing wholesale power prices, albeit still at low levels; and (4) ProjectCo’s moderate debt load. The forecast minimum market-based debt service coverage ratio (DSCR; essentially the interest coverage ratio) of 2.26 times (x), which is based on a conservative P90 generation level, is within the BBB rating range for merchant hydro projects.

Contracted period (up to December 31, 2019):
For this period, the inflation-adjusted fixed-price PAA will continue to cover about 95% of the long-term average generation (LTAG), while the rest will be sold to Hydro-Québec under a separate power purchase agreement until 2030. The PAA’s effective counterparty is Brookfield Renewable Power Inc. (BRPI), which DBRS believes has a credit quality equal to BBB (high). In 2017, the contract-based DSCR was very strong at 8.12x, reflecting an attractive blended contract price at approximately $71.4 per megawatt hour (MWh), as well as above-the-LTAG actual generation, well-contained operating cost and low capex. The forecast contract-based DSCR until 2019 is above 7.0x. This DSCR level would normally map into the “A” rating category without being constrained by the PAA counterparty’s credit quality. Nevertheless, DBRS’s final rating considerations look beyond the remaining contractual period for potential merchant exposure starting from 2020.

Potential merchant period (January 1, 2020, to October 6, 2025):
For this period, ProjectCo will have the flexibility to export electricity, capacity and ancillary services to either the ISO-NE or New York ISO (NYISO) markets thanks to its designated multiple transmission interconnections/rights to these two markets. DBRS’s analysis is focused primarily on forecasting ProjectCo’s cash flow generating capacity from the ISO-NE market because ProjectCo has been selling most of the power to this market on the back end of the PAA since at least 2013. DBRS views that the wholesale power prices in this market have largely bottomed out, driven by the stabilizing natural gas prices. DBRS also believes that ISO-NE’s fundamentals are relatively attractive, driven by (1) the smaller supply-demand imbalances measured by the relatively tight operating reserve margins; (2) a functional three-year forward capacity market that offers better visibility on power prices and supply-demand balances; and (3) a consistent power price premium, driven by the regional natural-gas pipeline constraints. DBRS’s forecast rating-case minimum and average DSCRs of 2.26x and 2.33x, respectively, are based on conservative assumptions, including P90 generation, discounted forward power prices and relatively low capacity revenue stream. The forecast DSCR level is consistent with the BBB range credit metrics for a merchant hydro generator that operates in relatively stable markets. DBRS also takes comfort in that the Project recorded a satisfactory market-based DSCR of 2.34x in 2016 even while facing the lowest power price of USD 28.8/MWh since 2003. In 2017, the average power price recovered to USD 33.5/MWh, which resulted in an improved market-based DSCR of 3.15x. The price recovery has continued into the first four months of 2018.

In addition, Lièvre’s debt load of $0.15 million/GWh is among the lowest of all DBRS-rated hydro projects. This is one of the key factors that allowed ProjectCo to weather the lowest power prices experienced over the past 14 years.

Refinancing period (after October 6, 2025):
The bullet Bonds will need to be refinanced on or before the maturity date. DBRS has tested ProjectCo’s ability to fully retire the debt on a hypothetical 25-year amortization schedule. By using conservative assumptions for future cash flow and a high interest rate of 6%, the project life coverage ratio (PLCR) is 1.75x, which means the Bonds can be successfully amortized with a deemed DSCR of 1.75x. Given this PLCR level, the current Bonds’ rating would be capped at the BBB range.

A rating upgrade in the next two years is unlikely unless the PAA is renewed or replaced with supportive terms. A rating downgrade could be triggered by (1) a material and sustained deterioration of the relevant wholesale power prices that causes the market-based P90 DSCR to fall below the BBB (low) level for a protracted period and (2) a material deterioration of the operating performance and asset quality. Since the Project’s market-based cash flow is less predictable than the contracted one, it is possible that future rating movements would become more volatile.

Notes:
All figures are in Canadian dollars unless otherwise noted.

PXX means exceedance probabilities. A P50-P90-P99 value describes estimated minimum electricity generation with a probability of 50%, 90% or 99% in any given year (P50, one-year P90 and one-year P99).

The DSCR (adjusted by DBRS), in this case, is effectively the interest coverage ratio because of there being no mandatory principal payments.

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 under Related Documents or by contacting us at info@dbrs.com.

The principal methodology is Rating Project Finance (February 2018), which can be found on www.dbrs.com under Methodologies.

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

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