DBRS Confirms Lièvre Power Financing Corporation at BBB (low), Stable Trend

DBRS Limited (DBRS) confirmed Lièvre Power Financing Corporation’s (the Issuer) Issuer Rating and the rating of its $225 million Series 1 Senior Bonds (the Bonds) at BBB (low). All trends remain Stable. The 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 with a total cumulative capacity of 263 megawatts (MW) on the Lièvre River in Québec, near the Ontario border (the Project or Lièvre). ProjectCo sells approximately 95% of the total power generation to Brookfield Renewable Power Inc. (BRPI) under a fixed-price Power Agency Agreement (PAA), expiring on December 31, 2019, and 5% the total power generation to Hydro-Québec under a separate power purchase agreement (PPA), expiring on December 31, 2030.

The BBB (low) ratings assume the PAA will not be renewed after December 31, 2019, and that 95% of Lièvre’s output will be sold to the relevant merchant markets. The rating confirmations reflect DBRS’s view that the forecast future market-based credit metrics will sustain the BBB (low) rating level for the near to medium term by considering the downside scenario of low power prices. This is driven by (1) ProjectCo’s proven track record of generating sufficient market-based cash flow relative to its debt service obligations under a hypothetical scenario; (2) the relatively attractive fundamentals of the ISO New England (ISO-NE) and New York ISO (NYISO) markets, to which the Project intends to sell power and capacity; (3) the stabilizing wholesale power prices in the relevant markets; and (4) ProjectCo’s moderate debt load. The forecast minimum market-based debt service coverage ratio (DSCR (adjusted by DBRS); essentially the interest coverage ratio) of 2.17 times (x), which is based on a conservative P900F generation level, is within the BBB rating range for merchant hydro projects. For 2018, the hypothetical market-based DSCR of 4.46x (based on information provided by management) was very strong, driven by improved wholesale prices in the ISO-NE market and the robust generation level, which is significantly higher than the P90 level. DBRS notes that in 2016, the Project posted a satisfactory hypothetical market-based DSCR of 2.25x amid the lowest power price experienced in the ISO-NE market since 2003. This further lends support to the assigned ratings. One of the two waterpower lease agreements with the Québec government will expire in November 2019. ProjectCo is in the process of renewing the agreement, which DBRS will continue to follow up with.

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 PPA until 2030. The PAA’s effective counterparty is BRPI, which DBRS believes has a credit quality at the upper end of the BBB range. In 2018, the contract-based DSCR (adjusted by DBRS) was very strong at 8.16x, reflecting an attractive blended contract price of approximately $71.9 per megawatt hour (MWh), above-LTAG generation, well-contained operating cost and low capex. The forecast contract-based DSCR for 2019 is 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 market exposure starting from 2020.

POTENTIAL MARKET-BASED 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 NYISO markets, thanks to an affiliate’s designated multiple transmission/interconnections rights to these two markets. DBRS’s analysis is focused primarily on forecasting ProjectCo’s energy, ancillary and Renewable Energy Certificate revenues from the ISO-NE market and capacity revenue from the NYISO, according to management’s plan over the next few years. DBRS views that the wholesale power prices in the ISO-NE market have largely bottomed out, driven by stabilizing natural gas prices and continuing tight reserve margins in winter months. DBRS also believes that ISO-NE’s fundamentals are relatively attractive, driven by (1) the smaller supply-demand imbalances measured by the relatively tight reserve margins; (2) a functional three-year forward capacity market that offers better visibility on power prices; and (3) a consistent power price premium, driven by the regional natural-gas pipeline constraints, especially during the winter season. DBRS’s forecast rating-case minimum and average market-based DSCRs of 2.17x and 2.32x, respectively, are based on conservative assumptions, including P90 generation, discounted forward-power-price curve and conservative capacity revenue assumption. The forecast DSCR level is consistent with the BBB rating category for merchant hydro generators that operate in relatively stable markets. DBRS also takes comfort in the fact that the Project recorded a satisfactory hypothetical market-based DSCR of 2.25x in 2016 amid the lowest power price of USD 28.8/MWh experienced since 2003. In 2018, the improved average power price of USD 43.1/MWh and the above-LTAG generation resulted in a very strong hypothetical market-based DSCR of 4.46x. In addition, Lièvre’s debt load of $0.15 million/GWh (LTAG) is among the lowest of all DBRS-rated hydro projects. This is one of the key factors that allowed ProjectCo to hypothetically weather the lowest power prices experienced over the past 15 years.

REFINANCING PERIOD (AFTER OCTOBER 6, 2025):
The 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 reasonably conservative power price assumptions, the project-life coverage ratio is over 2.0x, which means the Bonds’ rating will be capped in the BBB range.

A rating upgrade is possible if the Project can sustain market-based credit metrics that are materially stronger than the rating-case projections and supported by stable market fundamentals. 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 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 (October 2018), which can be found on www.dbrs.com under Methodologies & Criteria.

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.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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

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