DBRS Morningstar Confirms Lièvre Power Financing Corporation at BBB (low) with a Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the Series 1 Senior Bonds (the Bonds) rating of Lièvre Power Financing Corporation (the Issuer) at BBB (low). Both trends remain Stable. The interest-only (IO) bonds of $225 million mature on October 6, 2025, subject to refinancing risk. The Issuer is a single-purpose funding vehicle established to finance Lièvre Power L.P.'s (ProjectCo) operations of four hydroelectric generating facilities on the Lièvre River in Québec (the Project or Lièvre). Starting in 2020, approximately 95% of ProjectCo's total power generation is sold to ISO New England (ISO-NE) and/or New York ISO markets, introducing market price exposure. DBRS Morningstar notes that ProjectCo has the flexibility to sell the power in either market with higher power prices, which is typically ISO-NE. The rest of the generation is sold to Hydro-Québec (rated AA (low) with a Stable trend by DBRS Morningstar) under a fixed-price power purchase agreement, expiring in December 2030.

The rating confirmations reflect DBRS Morningstar’s view that the forecast market-based credit metrics will sustain the BBB (low) rating level for the near-to-medium term, considering the (1) moderate debt level for the Project to withstand downside power prices, (2) conservative P90 generation assumption, and (3) significant price hedging position in 2021 and 2022. The Coronavirus Disease (COVID-19) pandemic contributed to a sharp demand decline, causing the 2020 average power price in ISO-NE to decline to the lowest level in the last 20 years. However, ProjectCo had approximately 40% of the actual merchant production hedged at much higher prices, which significantly mitigated the very low merchant power prices experienced in the ISO-NE market. DBRS Morningstar believes such a hedging strategy provides a certain degree of short-term cash flow stability.

In 2020, ProjectCo's debt service coverage ratio (DSCR; essentially the interest coverage ratio) was 2.88 times (x), which was significantly higher than the minimum 1.50x required for investment-grade rated merchant hydro projects by DBRS Morningstar. The negative impact of lower merchant power prices in the ISO-NE market on the 2020 financial performance was mitigated by (1) approximately 20% higher generation than long-term average generation, (2) approximately 40% of the actual generation hedged at a much higher price, and (3) stable operating costs (excluding transmission costs) and maintenance capital expenditure.

For 2021 and 2022, using conservative assumptions, DBRS Morningstar projects market-based P90 DSCRs in the range of 1.70x and 2.00x, which is supportive of the current rating. DBRS Morningstar also notes that the significant price hedging is expected to support cash flow stability for the next two years. DBRS Morningstar’s price forecast after 2022 does not account for future hedges, which is conservative. Before or upon the maturity date of October 6, 2025, the IO bonds need to be refinanced. DBRS Morningstar has tested ProjectCo’s ability to hypothetically amortize the Bonds over a 25-year period. By using reasonably conservative assumptions, the project life coverage ratio (PLCR) is within the 1.5x to 2.0x range. This level of PLCR caps the rating in the BBB category, in accordance with DBRS Morningstar’s “Rating Project Finance” methodology.

A rating upgrade is unlikely in the near term because of continuing depressed merchant power prices. A negative rating can be triggered by either of the following: (1) a material and sustained deterioration of the relevant wholesale power prices, which causes the market-based P90 DSCR forecast or actual DSCR to fall below 1.50x required for the BBB (low) rating level for a protracted period; or (2) a material deterioration of the operating performance and asset quality. Because the Project’s market-based cash flow is more volatile than the one contracted in the past, it is possible that future rating movements could become more frequent.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Project Finance (September 1, 2020; https://www.dbrsmorningstar.com/research/366229/rating-project-finance) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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