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

DBRS Limited (Morningstar DBRS) confirmed Lièvre Power Holdings LP’s (the Issuer or HoldCo) Issuer Rating at BBB. Morningstar DBRS 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 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). 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.

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.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect the strong performance on a consolidated basis for F2022 and the first nine months of 2023. The Stable trends reflect Morningstar DBRS’s view that the contracted cash flow will sustain stable performance. For the year 2022, the adjusted consolidated DSCR (including release from Liquidity reserve but excluding one-time hedge gains, etc.) was 1.70x, and for the first nine months of 2023, the adjusted consolidated DSCR (including release from Liquidity reserve but excluding one-time hedge gains, etc.) was 1.62x, higher than the forecast 1.40x (including release from Liquidity reserves), primarily driven by (1) stronger generation at levels higher than long-term average generation (LTAG); (2) higher-than-expected renewable energy certificates (RECs) revenue; and (3) lower capital expenditure (capex) than the forecast level.

CREDIT RATING DRIVERS
A credit rating upgrade is unlikely unless satisfactory renewal of the PPA or replacement of the PPA occurs well before the debt maturity date. A negative credit 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.

FINANCIAL OUTLOOK
Based on the forecast LTAG, the projected minimum consolidated DSCR of 1.40x is consistent with that of contracted hydro assets rated by Morningstar DBRS at BBB level. Furthermore, the ratings are constrained by the refinancing risk after 2061. Morningstar DBRS’ 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 indicates ample cash flow to support a successful refinancing. However, this level of PLCR constrains the ratings to the BBB, according to our methodology.

CREDIT RATING RATIONALE
The credit ratings are supported by strengths that include (1) contracted stable cash flow primarily under a fixed-price PPA with a high investment-grade offtaker; (2) long-lived hydro assets with a stable operating history, significant storage capacity, and dispatch flexibility; (3) flexible transmission interconnections to multiple power markets; (4) The relevant merchant markets’ attractive fundamentals to help mitigate refinancing risk. The challenges include (1) refinancing risk; (2) capex risk; and (3) hydrology risk.

The HoldCo Bonds are structured as a typical project finance transaction with standard features. 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 material because of small debt amount at OpCo level and bifurcated cash flow streams to both HoldCo and OpCo under the PPA. A substantive nonconsolidated legal opinion was not provided on financial close. Morningstar DBRS relied solely on the separateness features and takes comfort that HoldCo and OpCo will remain legally and operationally separate and apart from the sponsor, and any of the sponsor’s affiliates.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (July 4, 2023), https://dbrs.morningstar.com/research/416784/dbrs-morningstar-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings.

RATING DRIVER AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of Rating Driver Factors
In the analysis of the Issuer, the Rating Driver factors listed in the methodology are considered in the order of importance.

(B) Weighting of FRA Factors
In the analysis of the Issuer, the relative weighting of the FRA factors is approximately equal (PLCR and DSCR).

(C) Weighting of the Rating Driver and the FRA
In the analysis of the Issuer, the FRA carries greater weight than the Rating Driver.

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

Morningstar DBRS applied the following principal methodology:
Global Methodology for Rating Project Finance (September 12, 2023)
https://dbrs.morningstar.com/research/420425/global-methodology-for-rating-project-finance

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

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-DBRS@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577