OREANDA-NEWS. Fitch Ratings has affirmed FirstLight Hydro Generating Company's (HGC) $320 million ($260.5 million outstanding) senior secured first mortgage bonds due in 2026 at 'BB-'. The Outlook has been revised to Negative from Stable.

The 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 Negative Outlook is based on uncertainty of the project's longer-term cost profile and future sponsor support due to a pending change in ownership to PSP Investments from HGC's indirect parent GDF Suez Energy North America, Inc. (GSENA). 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.

Debt Service
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.

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 5.73x Debt to CFADS or $194/kW.

RATING SENSITIVITIES
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
GSENA owns HGC, which serves the ISO-NE 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) totalling 195 MW and a 22.5-MW combustion turbine.

To resolve the Negative Outlook, Fitch will seek to clarify the new sponsor's willingness to provide sufficient financial support to maintain a DSCR profile consistent with Fitch's rating case amid market challenges and operational needs. Fitch will also consider the new sponsor's strategy for managing the project's cost profile.

Financial performance in 2015 was adequate with a Fitch calculated DSCR of 1.62x. Power prices 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, 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. 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.