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

DBRS has today confirmed the rating of the $225 million Senior Secured Bonds (the Bonds) of Lièvre Power Financing Corporation (the Issuer) at A (low) with a Stable trend. The Issuer is a single-purpose financing entity for the hydroelectric power generation assets (the Lièvre Project or Lièvre) of Lièvre Power LP (the Projectco). The Bonds are secured by the Project. The debt service is interest only without amortization. The rating reflects the strength of the Project’s low-cost generating facilities, supported by the power sales agreements in place. The contracts will result in solid interest coverage, although the main contract currently only extends through December 2019 and not the Bond maturity date in 2025.

The Project has a total capacity of 263 megawatts (MW) and long-term average generation (LTAG) of 1,516 gigawatt hours (GWh) per year, which is expected to be sustainable for at least 40 years. The LTAG is reviewed and assessed by a qualified independent engineer (IE) every three years, according to the trust indenture. The next IE review is due in H2 2014. A detailed 20-year capital expenditure (capex) plan and budget, also reviewed by the IE, is being carried out to ensure energy operating performance and the safety and useful life of the power generation assets.

The rating is constrained by the credit quality of the contract counterparty and expiry of the contract in 2019, six years before the Bond maturity. Lièvre has two power purchase agreements (PPAs). The Power Agency and Guarantee Agreement (PAGA) with Brookfield Renewable Power Inc. (BRPI) covers over 95% of the Project’s LTAG. The remaining production is sold to a highly-rated third-party utility under a 50-year PPA. BRPI is ultimately responsible for the PAGA obligations, including the payment obligations. The power purchase price in the PAGA is adjusted for inflation every year, and is currently near $70 per megawatt-hour (MWh). If the contract is not renewed or replaced with acceptable credit qualities in 2019, the Project would be exposed to power market risk. This risk is partially mitigated by the Project’s long-term value and favourable competitive position and market prospects. The PAGA provides reasonable protection against near-term weakness in the power markets. At the moment, it is uncertain whether the Project will manage to obtain an extension or replacement of the PAGA after 2019. Without adequate contract protection after 2019, the level of energy market volatility and resulting fluctuation in financial performance may exceed what DBRS considers acceptable for the current rating.

Hydrology risk is partially mitigated by reservoir capacity that helps regulate hydrology variability as well as provides for operational flexibility. The debt service reserve (DSR) and hydrology reserve can provide temporary liquidity for debt obligations during short periods of cash flow shortfall due to poor hydrology or other operating issues. Hydrology, nevertheless, could be 30% below LTAG, as shown in historical records. The more recent low level was about 20% below LTAG which occurred in 2012 and 2010. For the 12 months ended September 30, 2013, water flow recovered to above-LTAG level and resulted in coverage over 7 times (x) after capex.

Refinancing risk is mitigated by the long asset life and competitive strength of the Project. The regulatory environment is expected to remain favourable for emission-free renewable energy, especially existing hydroelectric facilities like Lièvre.

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.