DBRS Morningstar Confirms the Ratings on Lièvre Power Holdings LP at BBB with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Lièvre Power Holdings LP (the Issuer or HoldCo)’s Issuer Rating at BBB. DBRS Morningstar also confirmed the ratings of the Series A Bonds and Series B Bonds (together, the HoldCo Bonds) issued by HoldCo at BBB. All trends are Stable. The Issuer is a single-purpose vehicle (SPV) established to issue the HoldCo Bonds with proceeds to partially refinance Lièvre Power Financing Corporation's existing debt of $225 million (the OpCo Notes) and make advances to affiliates, for distributions, and for general corporate purposes. HoldCo directly and wholly owns Lièvre Power L.P. (OpCo or ProjectCo), which guarantees the OpCo Notes. On the First Closing Date of December 29, 2021, $1,014.7 million of Series A Bonds were settled, while $125.3 million of Series B Bonds were also settled to partially exchange for the OpCo Notes. On the Second Closing Date of October 6, 2025, the remaining OpCo Notes of $99.7 million are expected to be refinanced at the HoldCo level. The total amount of the HoldCo Bonds and OpCo Notes is $1,239.7 million. Both series of the HoldCo Bonds will rank pari passu and partially amortize over a 40-year period to mature on December 31, 2061, with an aggregate balloon amount of $400 million, subject to refinancing. The total debt amount is sized to a minimum consolidated debt service coverage ratio (DSCR) of 1.40 times (x).

The rating confirmations reflect the strong performance on a consolidated basis for the nine months ending September 30, 2022. The Stable trends reflect DBRS Morningstar’s view that the contracted cash flow will sustain stable performance. For the first nine months of 2022, the adjusted consolidated DSCR (including release from Liquidity reserve but excluding one-time hedge gains, etc.) was 1.94x, higher than the forecast 1.40x (including release from Liquidity reserves), primarily driven by (1) strong hydrology resulting in generation almost 20% higher than the forecast nine-month, long-term average generation (LTAG); (2) higher-than-expected renewable energy certificates (RECs) revenue; and (3) lower capital expenditure (capex) than the forecast level with stable operations and maintenance (O&M) cost.

ProjectCo/OpCo owns and operates a portfolio of four hydroelectric generating facilities of 263 megawatts (MW) on the Lièvre River in Québec (the Project or Lièvre). Starting on January 1, 2022, all of ProjectCo's power generation products are sold to a high investment-grade offtaker under primarily an annually escalated fixed-price power purchase agreement (PPA). The term of the PPA extends until at least the maturity of the HoldCo Bonds. Therefore, debt service is underpinned by the contracted cash flow. Based on the forecast LTAG, the minimum consolidated DSCR of 1.40x is consistent with that of contracted hydro assets in DBRS Morningstar's BBB-rating universe. Furthermore, the ratings are constrained by the refinancing risk after 2061. The Project appears to be well positioned for re-contracting at debt maturity because of its competitive advantage with significant storage capacity and transmission flexibility. Nonetheless, DBRS Morningstar believes that future re-contracting uncertainty with potential merchant exposure increases the refinancing risk. DBRS Morningstar’s base refinancing case conservatively assumes a non-PPA renewal scenario. Under such a scenario, the base-case project loan coverage ratio (PLCR) of more than 2.0x at the P90 generation level still indicates ample cash flow to support a successful refinancing. However, this level of PLCR constrains the ratings to the BBB range, according to DBRS Morningstar’s “Global Methodology for Rating Project Finance.” DBRS Morningstar does not assign ratings beyond the term of the debt, but merely assesses the probability of a successful refinancing based on the Project's remaining economic value at the refinancing point.

The HoldCo Bonds are structured as a typical project finance transaction with standard features, including a cash flow waterfall subject to blocked accounts. The key reserve accounts include (1) a six-month Debt Service Reserve Account (DSRA); (2) a forward-looking Capex Reserve Account; and (3) a Liquidity Reserve Account, all fully funded by letters of credit (LOCs). The equity distribution test is set at a minimum consolidated DSCR of 1.15x. Between January 1, 2022, and October 6, 2025, the HoldCo Bonds are structurally subordinated to the remaining OpCo Notes that are not exchanged. However, this risk is not considered significant because (1) the OpCo Notes only represents 8% of total debt; (2) the estimated ample residual cash flow and collateral provided to the HoldCo bondholders; and (3) bifurcated and equal rights to the cash flow are granted under the PPA through a Co-Ownership Agreement between OpCo and HoldCo on a proportionate basis. On the Second Closing Date, the structural subordination will be eliminated and the HoldCo bondholders will have the benefit of an OpCo guarantee secured by a first-ranking security package over the assets. HoldCo and OpCo are subject to customary separateness covenants in the Trust Indenture. DBRS Morningstar relied solely on the separateness features and takes comfort in that HoldCo and OpCo will remain legally and operationally separate and apart from the Sponsor, Brookfield Renewable Partners L.P. (BEP; rated BBB (high) with a Stable trend by DBRS Morningstar), and any of the Sponsor’s affiliates.

A rating upgrade is unlikely unless satisfactory renewal of the PPA or replacement of the PPA occurs well before the debt maturity date. A negative rating action may be triggered by heightened refinancing risk, especially toward debt maturity, and/or a material and sustained deterioration of credit metrics and/or asset quality.  

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

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

The principal methodology applicable to the rating is Global Methodology for Rating Project Finance (September 6, 2022; https://www.dbrsmorningstar.com/research/402400). The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions

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.

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

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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