NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed FirstLight Hydro Generating Company's (HGC) $320 million ($265 million outstanding) senior secured first mortgage bonds due in 2026 at 'BB-'. The Outlook is revised to Stable from Negative.
KEY RATING DRIVERS
The rating reflects a merchant revenue structure amid persistent low power prices, mitigated by sponsor commitments to support project cash flows. Moderate leverage, fixed-rate fully amortizing debt, and lower capital expenditures (capex) after 2015 help mitigate revenue volatility. The return to a Stable Outlook is based on HGC's indirect parent GDF Suez Energy North America, Inc's (GSENA) demonstrated and ongoing commitment to provide sufficient revenues to fully fund planned capex and ensure debt service coverage ratios (DSCR) of at least 1.40x.
Exposure to Merchant Revenue
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.
Stable Operating Performance
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 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 Fitch's rating case financial scenario, which assumes merchant market operations in absence of the PPA, DSCRs average 1.49x but fluctuate significantly, declining to around 1.20x. The rating assumes the sponsor will continue to provide financial support through the PPA with its subsidiary, as necessary to maintain DSCRs of at least 1.40x.
Peer Comparison
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 8.59x Debt to CFADS or $242/Kw.
RATING SENSITIVITIES
Negative- Failure of the sponsor to fund planned capex via the PPA and maintain the targeted DSCR of at least 1.40x coverage levels;
Negative- Persistent weakness in the merchant power prices and material decline in capacity prices; and
Negative- Persistent reductions in hydrology that materially reduce overall energy production.
TRANSACTION SUMMARY
The projected rating case financial profile post 2019 is more indicative of a rating in the 'B' category, but the sponsor's demonstrated commitment to maintain at least 1.40x DSCRs supports the current rating and a return to a Stable Outlook.
As a result of stable plant operations, favorable energy production and increased pricing, revenues in 2014 increased 13% compared to 2013. The 2014 debt service coverage ratio also improved to 1.46x compared to 1.21x in 2013.
Volatility and uncertainty in market pricing continues, despite recent increases in power and capacity pricing. Average 2014 market power prices in Massachusetts were 13% higher than 2013, buoyed by high power prices in 2014 Q1. Average power prices for the remainder of 2014 were below 2013 levels by an average of 16%. Forward capacity revenues will receive a material boost from 2017 to 2019, as New England's forward capacity auction prices have increased to $7.00/kW/month in Auction 8 and to $9.55/kW/month in Auction 9 from current levels of about $3.50/kW/month. Capacity revenues beyond this period are uncertain as the region grapples with adequate gas pipeline capacity, transmission and new generation.
Fitch's rating case financial analysis assumes continued low power prices, higher contracted capacity prices from 2017-2019, followed by a return to a $3.50/kW/month capacity price thereafter given the uncertainty in future pricing. Routine operating costs are inflated at 2.5%. Capex of approximately $40 million in 2015 will increase power capacity at the Northfield facility as well as support environmental compliance and other activities to relicense all of the hydro facilities, as the current FERC licenses expire in 2018.
The financial profile in the rating case demonstrates that the project can meet debt obligations but would need sponsor support to achieve 1.40x DSCR in 2015 due to high capex and from 2020 through debt maturity due to reduced capacity prices. Though capex declines materially after 2015, debt service materially increases, further pressuring DSCRs. However, projected DSCRs in 2017 through 2019 are at least 1.88x under higher contracted capacity prices. The project remains exposed to potential operational stresses, such as low hydrology, availability, and higher costs, which can further erode financial performance.
GSENA owns HGC, which serve the NEISO region. HGC is a portfolio of primarily hydroelectric power plants, including the 1,146-megawatt (MW) Northfield Mountain pumped storage facility, 12 hydroelectric plants (run-of-the river and conventional) totaling 195 MW and a 22.5-MW combustion turbine.
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=981347
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