DBRS Morningstar Confirms Ratings on Lièvre Power Financing Corporation at BBB with Stable Trends

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. Both trends remain Stable. 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 from December 31, 2021, virtually all of the Project's power generation products have been sold to a high investment-grade offtaker primarily under an inflation-adjusted fixed-price power purchase agreement (PPA). The PPA term extends well beyond the maturity of the Bonds. The rating confirmations reflect the Project's satisfactory operating and financial performances for the past 21 months ending September 30, 2022. The Stable trends reflect DBRS Morningstar's view that Lièvre's performance will continue to be stable under the PPA for the next 12 months.

On December 29, 2021, $125.3 million of the original Bonds was exchanged for Series B Notes issued by Lièvre Power Holdings LP (HoldCo; rated BBB with Stable trend by DBRS Morningstar). The remaining interest-only Bonds of $99.7 million will mature on October 6, 2025, subject to refinancing. However, the refinancing uncertainty is substantially mitigated by the contracted cash flow under the new PPA, which extends well beyond the maturity of the Bonds. Year 2021 was the last year that ProjectCo was exposed to the volatile merchant power markets. In 2021, financial performance was strong with debt service coverage ratio (DSCR) at 3.61x. The lower generation (23% less than the 2020 level) was fully offset by the rising power prices (factoring in hedges) and the relatively stable operations and maintenance (O&M) cost and low capital expenditure (capex). For the nine months ending September 30, 2022, the adjusted DSCR (excluding hedge gains, etc.) was 4.45x under the PPA, which was significantly stronger than the forecast 1.40x. The stronger performance was driven by (1) strong hydrology resulting in generation almost 20% higher than the forecast nine-month, long-term average generation (LTAG); (2) significantly higher renewable energy certificates (RECs) revenue than the minimum amount forecast in the model; and (3) lower-than-expected capex. However, DBRS Morningstar notes that O&M cost and capex represents a significant percentage of the total revenue, which tends to exacerbate DSCR levels in either positive or negative direction when a project's cash flow exceeds or falls short of the rating-case projection. As a result, the DSCR level has to combine with other quantitative factors, such as cost and revenue resilience levels, to provide a full picture of this Project's financial profile.

The ratings are supported by strengths including (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; and (3) flexible transmission interconnections to multiple power markets. The challenges include (1) capex risk, (2) weak O&M and capex resilience levels, (3) hydrology risk, and (4) refinancing risk, albeit small. The cash flow under the PPA is bifurcated and distributed proportionally between the HoldCo and ProjectCo. ProjectCo's resulting minimum DSCR is 1.40x based on the LTAG forecast. This level of DSCR is also supportive of the BBB rating, among the contracted hydro generating projects rated by DBRS Morningstar.

A rating upgrade is unlikely given the relatively weak resilience to potential increase to O&M cost and capex. A negative rating can be triggered by a material and sustained deterioration of the operating and financial performances 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 methodologies applicable to the rating are Global Methodology for Rating Project Finance (September 6, 2022; https://www.dbrsmorningstar.com/research/402400) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683).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 [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.

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 [email protected].

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