Morningstar DBRS Confirms Lièvre Power Holdings LP's Issuer Rating and Series A and Series B Bonds Ratings 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 its credit ratings on 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 owns and operates a portfolio of four hydroelectric-generating facilities of 263 megawatts on the Lièvre River in Québec (the Project). 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 2023 and the first nine months of 2024. The Stable trends reflect Morningstar DBRS' view that the contracted cash flow will sustain stable performance. For 2023 and the 12 months ended September 30, 2024 (LTM 2024), the consolidated debt service coverage ratio (DSCR) was 1.43 times (x) and 1.45x, respectively. If including the release from the liquidity reserve in the financial model, DSCR was 1.63x for both 2023 and LTM 2024, higher than the forecast DSCR of 1.40x in the rating case. It was primarily driven by (1) strong generation at levels higher than long-term average generation; (2) higher-than-expected renewable energy certificates revenue; and (3) lower capital expenditure (capex) than the forecast level.

The credit ratings are constrained by the refinancing risk after 2061. The Project appears to be well positioned for re-contracting at debt maturity because of its competitive advantage with significant storage capacity and transmission flexibility. Nonetheless, Morningstar DBRS believes that future re-contracting uncertainty with potential merchant exposure increases the refinancing risk. Morningstar DBRS' base refinancing case conservatively assumes a non-PPA renewal scenario. Under such a scenario, the base-case project life coverage ratio (PLCR) of more than 2.0x at the P90 generation level indicates ample cash flow to support a successful refinancing. However, this level of PLCR constrains the credit ratings to the BBB category, according to Morningstar DBRS' "Global Methodology for Rating Project Finance." Morningstar DBRS does not assign credit ratings beyond the term of the debt, but merely assesses the probability of a successful refinancing based on the Project's remaining economic value at the refinancing point.

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, Morningstar DBRS does not consider this risk material because of the small debt amount at the 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.

CREDIT RATING DRIVERS
A credit rating upgrade is unlikely unless satisfactory renewal 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 in credit metrics and/or asset quality.

FINANCIAL OUTLOOK
Morningstar DBRS expects the 2024 and 2025 consolidated DSCRs to align with the rating case, which is supportive of the BBB credit ratings.

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; and (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.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/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) at https://dbrs.morningstar.com/research/437781.

RATING DRIVERS AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of Rating Drivers
In the analysis of the Issuer, the Rating Driver factors listed in the principal methodology "Global Methodology for Rating Project Finance" are considered in the order of importance.

(B) Weighting of FRA Factors
In the analysis of the Issuer, the following FRA factor listed in the principal methodology "Global Methodology for Rating Project Finance" was considered more important: DSCR. The PLCR constrains the credit ratings to the BBB category.

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

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Project Finance (December 10, 2024), https://dbrs.morningstar.com/research/444393

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

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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