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 are Stable. The interest-only (IO) Bonds of $225 million mature on October 6, 2025, subject to refinancing. 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). Prior to 2020, ProjectCo sold its power generation primarily to an affiliate, Brookfield Renewable Power Inc., under a fixed-price contract that expired by 2019 year end. Starting from 2020, ProjectCo sells approximately 95% of total power generation to ISO New England (ISO-NE) and/or New York ISO (NYISO) markets, introducing market price exposure. The balance is sold to Hydro-Québec (rated AA (low) with a Stable trend by DBRS Morningstar) under a fixed-price power purchase agreement, expiring on December 31, 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 2020 and 2021. Although the Coronavirus Disease (COVID-19) pandemic is causing the currently low electricity demand and wholesale prices, DBRS Morningstar does not expect Lièvre’s 2020 and 2021 financial performances to be significantly affected because close to two-thirds of the expected long-term average generation is hedged with relatively attractive prices. DBRS Morningstar acknowledges the uncertainty surrounding the coronavirus pandemic and will actively monitor ProjectCo’s ongoing performance.

In 2019, the reported debt service coverage ratio (DSCR; essentially the interest coverage ratio) of 8.07 times (x) under fixed-price contracts remained very strong. The hypothetical market-based DSCR, based on information provided by management, was considerably lower at 1.75x. This level of market-based DSCR was low in a historical context but consistent with the required minimum DSCR level for merchant hydro projects. The relatively weak hypothetical market-based DSCR reflects both the weak winter demand and prices in the ISO-NE market from the unusually mild winter weather and the NYISO market’s low-capacity revenue. For 2020 and 2021, DBRS Morningstar projects market-based P90 DSCR at 1.82x and 2.09x, respectively, which are relatively strong. The significant price hedging will likely support cash flow stability for the next two years. The DBRS Morningstar forecast minimum market-based P90 DSCR of 1.65x, expected in 2022, is still supportive of the rating. The price forecast after 2021 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 over 2.0x. This level of PLCR caps the rating in the BBB category, according to DBRS Morningstar’s “Rating Project Finance” methodology.

A rating upgrade is unlikely in the near term. A negative rating can be triggered by either of the following: (1) a material and sustained deterioration of the relevant wholesale power prices to cause market-based P90 DSCR to fall below the BBB (low) 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 contracted one in the past, it is possible that future rating movement would become more frequent.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

PXX means exceedance probabilities. A P50-P90-P99 value describes estimated minimum electricity generation with a probability of 50%, 90%, or 99% in any given year (P50, one-year P90, and one-year P99).

The principal methodologies are Rating Project Finance (August 21, 2019) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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 [email protected].

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.

DBRS Morningstar will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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