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

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and the Series 1 Senior Bonds (the Bonds) rating of Lièvre Power Financing Corporation (the Issuer or OpCo) at BBB. Both trends remain Stable. The remaining interest-only Bonds of $99.7 million will mature on October 6, 2025. 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).

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect the Project's satisfactory operating and financial performances for the past 18 months ended September 30, 2023. The Stable trends reflect Morningstar DBRS' view that Lièvre's performance will continue to be stable under the PPA for the next 12 months.

In 2022, the first full year under the PPA, financial performance was strong, with debt service coverage ratio (DSCR) at 3.40 times (x). The generation was 10% higher than the forecast long-term average generation (LTAG) and lower-than-expected capital expenditure (capex). For the nine months ended September 30, 2023 (9M 2023), the DSCR was also strong at 2.60x. The strong performance was driven by (1) strong hydrology resulting in higher generation compared with the LTAG; (2) higher renewable energy certificates (RECs) revenue than the minimum amount forecast in the model; and (3) lower-than-expected capex. However, Morningstar DBRS notes that O&M cost and capex represent a significant percentage of the total revenue, which tends to exacerbate the DSCR in either a positive or negative direction when a project's cash flow exceeds or falls short of the rating-case projection. As a result, the DSCR has to combine with other quantitative factors, such as cost and revenue resilience, to provide a full picture of this Project's financial profile.

CREDIT RATING DRIVERS
A credit rating upgrade is unlikely, given ProjectCo's relatively weak resilience to potential increase to O&M cost and capex. A negative credit rating can be triggered by a material and sustained deterioration of the operating and financial performances or asset quality.

FINANCIAL OUTLOOK
The minimum projected DSCR is 1.40x based on the LTAG. This level of DSCR is supportive of the BBB credit rating, among the contracted hydro generating projects rated by Morningstar DBRS.

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; 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.

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 following FRA factor is considered more important: DSCR (the sole FRA factor).

(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
• DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023);
  https://dbrs.morningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support

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 [email protected].

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 [email protected].

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