Fitch Affirms FirstLight Generating Co's Mortgage Bonds; Outlook Remains Negative

NEW YORK--()--Fitch Ratings has affirmed at 'BB-' FirstLight Hydro Generating Company's (HGC) $320 million ($271 million outstanding) senior secured first mortgage bonds. The affirmation reflects the sponsor's demonstrated financial support for the project resulting in financial metrics consistent with the current rating. The Negative Outlook considers the reliance for continued sponsor support through a power purchase agreement (PPA) with an unrated affiliate in light of a near-term capital program that will pressure a weak financial profile.

KEY DRIVERS

Exposure to Merchant Revenue: HGC manages a portfolio of hydropower assets that sell a bundled product to an unrated affiliate under a PPA expiring in 2019. The PPA includes a pass-through provision for capital expenditures that include discretionary outlays such as efficiency programs and compulsory outlays for relicensing of facilities. However, post-2019, the project could become exposed to merchant risk absent a renewal or replacement of the PPA and could face considerable price volatility and an uncertain revenue profile.

Stable Operating Performance: The project benefits from a long history of stable operations at its conventional and run-of-river hydro units. Large capital expenditures particularly at the Northfield pumped storage facility are expected to be passed through via the PPA and should result in increased plant output and reliability.

Supply Risk: 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.

Conventional Debt Structure: Debt is fixed-rate and fully amortizing through 2026, eliminating refinancing risk, and leverage levels are lower than similarly rated peers.

Debt Service: Under base and rating case financial scenarios which assume merchant market operations in absence of the PPA, Fitch estimates that HGC's cash flow could be insufficient to service the project's debt obligations. The rating relies on the sponsor, GDF Suez Energy North America Inc. (GSENA), to provide continuing financial support through the PPA and its subsidiary, necessary to maintain the current financial profile.

RATING SENSITIVITIES

--Failure of the sponsor to fund planned capital expenditures via the PPA and maintain target coverage levels will result in negative rating action;

--Persistent weakness in the merchant power prices and material decline in capacity prices could lead to a downgrade; and

--Persistent reductions in hydrology that materially reduce overall energy production may result in a downgrade.

SECURITY

The first mortgage bonds are secured by all ownership interests, all physical assets, contracts, accounts, cash, investments, and all other tangible and intangible property.

CREDIT UPDATE

The rating affirmation is due to demonstrated sponsor support of the project, which Fitch expects is necessary to meet the project's debt obligations. The Negative Outlook reflects the need for continued support as the project enters a period of capital outlay necessary for relicensing, upgrading and dredging, at a time when market conditions are weak. The Sponsor has reiterated to Fitch its intention of maintaining coverage levels near 1.5x. The sponsor paid in full the $430 million debt obligations on the First and Second lien loans in March 2012 and provided other material amounts of support related to the Northfield Mountain facility in the past. As there is no guarantee for future support of HGC obligations, Fitch will continue to monitor the management's commitment to HGC.

Favorably, improved hydrology in 2013 led to increased overall plant electric output by about 8.7% and 4.0% above budget due to the Northfield pump storage unit performing 11.1% above plan. Management has budgeted 2014 output to be 7.23% lower than 2013 and reflect units being down for upgrades.

Although 2013 average power prices in Massachusetts were $56.32/MWh, up 52.5% from the 2012 average of $36.92/MWh, the sustainability of current market prices is uncertain. Expected near-term capacity shortages and extreme weather conditions are driving higher forward capacity and current power prices in New England. The region has gone from surplus capacity to an estimated deficit with the retirement of a few large power plants. As such, Auction 8 forward capacity prices (mid-2017 through mid-2018) have more than doubled for existing capacity to $7.00/kW-month from Auction 7 at about $3.00/kW-month. Future capacity clearing prices and power price volatility remain as the region grapples with the need for additional infrastructure including gas pipelines, transmission, and new generation.

The project's 2013 debt service coverage ratio (DSCR) was 1.21x, below the 2012 level of 1.46x. Management reports that the decrease was due to the timing of intercompany transactions which would have otherwise resulted in a DSCR consistent with 2012. A technical event of default occurred when the company failed to provide investors unaudited quarterly and audited annual financial statements of FirstLight Power Resources Management, LLC (the power purchaser) in 2012 and 2013. This event is expected to be cured by submission of the required statements prior to the end of April 2014 and management has committed to timely provision of future financial statements to remain compliant.

Fitch's rating case assumes power prices averaging $53/MWh, with actual contracted capacity prices through mid-2018 and $3.00/kW-month thereafter. Under the rating case, the project's DSCR falls below 1.0x, requiring sponsor support to meet obligations throughout the tenor of the debt. The project remains exposed to additional potential stresses, such as low hydrology, which can further erode financial performance.

HGC is a portfolio of hydroelectric power plants, including the 1,102-megawatt (MW) Northfield Mountain pumped storage facility, and 12 hydroelectric plants totaling 195 MW.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=824846

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Contacts

Fitch Ratings
Primary Analyst
John Kennedy
Director
+1-212-612-7853
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Yvette Dennis
Senior Director
+1-212-908-0684
or
Committee Chairperson
Gregory Remec
Senior Director
+1-312-306-2339
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
John Kennedy
Director
+1-212-612-7853
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Yvette Dennis
Senior Director
+1-212-908-0684
or
Committee Chairperson
Gregory Remec
Senior Director
+1-312-306-2339
or
Media Relations
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com