DBRS Downgrades Boralex Power Income Fund Stability Rating

DBRS has today downgraded the stability rating of Boralex Power Income Fund (BPIF or the Fund) to STA-3 (high) from STA-2 (low), and removed the rating from Under Review with Developing Implications. The downgrade of BPIF’s stability rating reflects a number of factors, including: 1) the increased fuel supply risk stemming from the decline in the Québec forestry industry, which has resulted in lower volumes and higher costs at the Fund’s wood-residue operations (63-MW, approximately 20% of average annual EBITDA over the past five years); 2) the reduced visibility of future earnings and cash flows with the expiry of the Kingsey Falls power purchase agreement (PPA, 20% of average annual EBITDA) in 2012; and 3) the risks related to BPIF’s stream revenues which are derived from two forest products industry participants.

While the Fund has experienced fuel supply difficulties with its biomass facilities, financial performance indicators have remained relatively stable, underpinned by long-term power contracts, diversification across fuel sources and power stations, as well as modest maintenance expenditures and debt levels. BPIF’s portfolio of power plants should generate a reasonably consistent stream of cash flows although at overall lower levels than in the recent past largely due to lower earnings from the biomass facilities. Any material downward pressure on cash flows would likely be the result of either poor hydrology, continued challenges in securing fuel for the two biomass facilities or a significant reduction in steam revenues. In 2008, BPIF reduced distributions by approximately 23%, citing both challenges in the forestry industry resulting in lower volumes and higher costs at its wood-residue operations as well as the rise of the Canadian dollar against the U.S. dollar, which had a negative impact on distributions from the U.S. power facilities. The distribution cut equates to an annual savings of approximately $12 million, which has provided some financial flexibility and cash reserves to cover operating risks. While the distribution reduction has offset some of the operational issues, and the Canadian dollar has since weakened versus the U.S. dollar, the stability rating has been reduced one notch largely to account for uncertainty in the Fund’s biomass operations and for potential variability in steam revenues.

Both of the Fund’s biomass facilities were closed for periods in 2008 due to difficulties in securing wood-residue supply due to the closure of a number of sawmills; however inventory was stockpiled so that both facilities could operate during the winter premium pricing period. Overall, the reduction in EBITDA from the biomass facilities in the third quarter of 2008 was largely offset by higher EBITDA from the hydroelectric facilities due to strong hydrology, demonstrating the benefit of diversification.

The Fund generates a DBRS-estimated $10 million of revenues from the sale of steam under a contract with Bowater Canadian Forest Products Inc. (Bowater, rated CCC (high), Under Review with Negative Implications), with the steam supplying Bowater’s Dolbeau paper facility. A bankruptcy filing or court-supervised restructuring of Bowater would not necessarily impact the Fund’s ability to maintain distributions; this would depend on factors such as the competitiveness of that particular facility, the likelihood it would keep operating (and purchasing steam from the Fund) during a restructuring process and the potential for the facility to be sold. While the Fund maintains adequate levels of liquidity (cash and bank lines) to maintain distributions through short-term disruptions, DBRS believes that in a scenario in which there was a permanent loss of Bowater steam revenues, the Fund would likely adjust its distributions.

BPIF’s ratings were originally placed Under Review with Developing Implications along with a number of other Canadian income funds because of the uncertainty created by the proposed federal government income trust tax legislation on November 1, 2006. On March 2, 2007, DBRS maintained the ratings at Under Review – Developing when the Fund announced a process to solicit proposals that could lead to a potential sale or merger. Since that process was terminated in September 2007, the Fund has disclosed no intended near-term change of strategy with regards to the impact of taxation. While the Fund’s ability to maintain its current payout ratio at current levels could be impacted in the future by the change in tax legislation, a reduction in the future payouts will be viewed as a one-time event and DBRS’s analytical focus would then be on the stability and sustainability of distributions following the adjustments.

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

The applicable methodology is Rating Income Funds which can be found on our website under Methodologies.

This is a Corporate rating.