Morningstar DBRS Confirms Muskrat Falls/Labrador Transmission Assets Funding Trust and Labrador-Island Link Funding Trust at AAA, Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the credit ratings of the 2013, 2017, and 2022 Guaranteed Senior Bonds (together, the Bonds) issued by Muskrat Falls/Labrador Transmission Assets (MFA/LTA) Funding Trust and Labrador-Island Link (LIL) Funding Trust (together, the Issuers) at AAA with Stable trends.

The Issuers were created as single-purpose financing trusts to facilitate the financing of the 824-megawatt (MW) Muskrat Falls hydroelectric generating facility and the associated transmission links (the Project), located in the Province of Newfoundland and Labrador (the Province; rated "A" with a Stable trend by Morningstar DBRS). The Issuers' sole business is to issue the Bonds and on-lend proceeds to the Project via back-to-back loans. Since November 2021, all four generating units have been in operation. In April 2023, the commissioning of the LIL was finalized after General Electric managed to fix the technical issue surrounding the bipole software. For the past 12 months, the performance of the Project has been steadily improving with material increase to the energy production and delivery. In May 2024, the Province announced the finalization of the rate mitigation plan, providing clarity in rate relief to the ratepayers until at least 2030. The Project's in-service cost (including financing cost and reserves) of $13.5 billion was finalized in June 2023.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings are based on three separate unconditional and irrevocable federal loan guarantees of substantially similar nature, provided by the Government of Canada (Canada or the Guarantor): the 2013 Federal Loan Guarantee (FLG1), the 2017 Federal Loan Guarantee (FLG2), and the 2022 Federal Loan Guarantee (FLG3; together with FLG1 and FLG2, the Guarantee). This credit rating action follows Morningstar DBRS' recent confirmation of Canada's sovereign rating at AAA with a Stable trend (see the related press release dated September 6, 2024).

CREDIT RATING DRIVERS
Morningstar DBRS expects the credit ratings of the Bonds will move in lockstep with Canada's sovereign rating, irrespective of the Project's performance. Any positive or negative credit rating action on Canada will trigger the same action on the Bonds.

CREDIT RATING RATIONALE
Morningstar DBRS notes that the Guarantee has met its criteria for a flow-through of Canada's sovereign credit rating to the Bonds. The Guarantee constitutes an irrevocable, unconditional, absolute, and continuing obligation of Canada. There is no requirement to exhaust recourse against the Issuers before bondholders are entitled to the payment from Canada; all defences are waived by the government, and subrogation rights are postponed as long as the guaranteed obligations are still outstanding; and no amendment of the Guarantee is permitted, except by agreement with the Indenture Trustee. Furthermore, release of the Guarantor is permitted only when all its obligations are fully repaid.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Credit rating actions on Canada are likely to have an impact on this credit rating.

There were no Environmental, Social, or Governance factors 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 Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

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

Morningstar DBRS applied the following principal methodology:

Morningstar DBRS Global Corporate Criteria (April 15, 2024)
https://dbrs.morningstar.com/research/431186.

The following methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

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/431153.

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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