Fitch Affirms FirstLight Hydro's $320MM Mortgage Bonds at 'BB-'; Revises Outlook to Stable
OREANDA-NEWS. Fitch Ratings has affirmed FirstLight Hydro Generating Company's (HGC) $320 million ($257.5 million outstanding) senior secured first mortgage bonds due in 2026 at 'BB-'. The Rating Outlook has been revised to Stable from Negative based on Fitch's expectation that the new sponsor, Public Sector Pension Investment Board (PSP Investments), will provide the project financial support as needed to maintain a financial profile consistent with the rating.
The 'BB-'rating reflects a merchant revenue structure amid persistent low power prices, mitigated by the sponsor's structured revenue stream to support project cash flows. Moderate leverage, fixed-rate fully amortizing debt, and moderate capital expenditures (capex) help mitigate revenue volatility. The return to a Stable Outlook is based on commitment from the expected new owner, PSP Investments, to provide sufficient support to ensure debt service coverage ratios of at least 1.40x, consistent with the support provided by GDF Suez Energy North America, Inc. (GSENA), which is selling the FirstLight portfolio. Despite near term improvement to the projected cash flow profile, Fitch forecasts future periods where the project may require continued sponsor support to maintain a financial profile consistent with the rating.
KEY RATING DRIVERS
Exposure to Merchant Revenue- Revenue Risk - Price: Weaker
HGC manages a portfolio of hydropower assets that sell a bundled product to an affiliate under a power purchase agreement (PPA) expiring in 2019. The PPA includes a pass-through provision for capex. Fitch, however, assesses the project's revenues as exposed to the volatility of merchant power prices because the PPA is contracted with an unrated affiliate.
Revenue Risk-Volume: Midrange
Hydrology variability is mitigated by projections based on actual historical water flows, which include drought-like conditions, to minimize output volatility in expected energy production.
Stable Operating Performance- Operating Risk: Midrange
The project benefits from a long history of stable operations at its conventional and run-of-river hydro units. Large capex particularly at the Northfield pumped storage facility have been and are expected to continue to be passed through via the PPA and should result in increased plant output and reliability.
Conventional Debt Structure- Debt Structure: Midrange
Debt is fixed-rate and fully amortizing through 2026, eliminating refinancing risk, and leverage levels are lower than similarly rated peers.
Under Fitch's rating case financial scenario, which assumes merchant market operations in absence of the PPA and lower electric output, DSCRs average 1.90x but fluctuate, with 1.36x coverage in 2016 and declining to around 1.43x in later years.
The merchant power projects Fitch rates have suffered material cash flow erosion amid generally depressed market prices in recent years. FirstLight benefits from fully amortizing fixed-rate debt, avoiding refinancing risk faced by comparable merchant hydropower projects. Leverage is also relatively lower at 5.73x Debt to CFADS or $194/kW.
Negative- Failure of the sponsor to continue supporting project cash flows sufficient to meet rating case coverage levels;
Negative- Persistent reductions in hydrology that materially reduce overall energy production.
SUMMARY OF CREDIT
PSP Investments has entered into an agreement to purchase from GSENA the HGC portfolio. HGC, located in ISO-NE region, is a portfolio of primarily hydroelectric power plants, including the 1,168-megawatt (MW) Northfield Mountain pumped storage facility, 12 hydroelectric plants (run-of-the river and conventional) totalling 195 MW and a 22.5-MW combustion turbine.
PSP Investments is among Canada's largest pension investment managers reporting over CAD$112 billion of net assets under management in 2015. Fitch is satisfied that the HGC hydro portfolio is of strategic value to the sponsor. The sponsor's long-term investment approach is suitable for the assets which have estimated long lives but face potential periods of financial weakness. While there is no explicit guarantee, Fitch finds that the sponsor has the financial capacity to sustain its commitment to provide financial support as needed for the project to maintain a DSCR profile of at least 1.40x. Fitch will continue engagement with the sponsor for further details on refinement of the project's expected capex needs and routine O&M cost profile. The transaction is expected to close in early June pending FERC approval.
Financial performance in 2015 was adequate with a Fitch calculated DSCR of 1.64x based on audited financial statements. Power prices in 2015 remained low with an average of about $41/MWh, below the $49/MWh average power price in the last five years. In addition to low power prices, run of river facilities achieved below budget generation due to lower hydrology amid milder weather conditions. Despite low market prices and lower volume output, 2015 financial performance was buoyed by the sponsor's support of capex.
Financial performance will be under pressure in 2016 despite capex declining by nearly 40% from 2015 to about $25 million to continue plant upgrades, environmental compliance and relicensing activities. Generation output in 2016 Q1 is nearly 55% above budget but Fitch expects overall financial performance to be moderated by continued low power prices. Through the first four months of 2016, power prices averaged $26.65/MWh, lower than in the same period in the past five years. The project will continue to operate under low market power prices and low contracted capacity payments in the ISO-NE region just as debt service payments begin increasing.
Fitch projects improved financial performance between 2017 and 2020 as annual capex is projected to remain consistent with the lower 2016 level and forward capacity auction prices have more than doubled to $7/kw/month to $9.55/kw/month from $3.43/kw/month. Whether capacity prices remain high will in part depend on whether ISO-NE adds generation in the region, gas pipeline capacity and/or new transmission to import energy to meet regional needs.
Fitch's rating case financial analysis of stressed power prices (averaging about $32/MWh) and reduced electric output, DSCRs average 1.90x with a minimum of 1.36x in 2016. The minimum is driven by lower contracted capacity price while DSCRs over 1.70x are driven by higher contracted capacity prices through 2020. DSCRs decline after 2020 based on uncertainty in future capacity prices. Under a scenario where regional power capacity increases and capacity prices decline to historic levels of around $3/kw/month, Fitch projects a cash flow profile of below 1.0x, suggesting sponsor support would continue to be required to maintain the current rating.