Morningstar DBRS Confirms Lièvre Power Financing Corporation's Issuer Rating and Series 1 Senior Bonds Rating at BBB With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Lièvre Power Financing Corporation's (the Issuer) Issuer Rating and Series 1 Senior Bonds (the Bonds) rating 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 credit rating confirmations reflect the Project's satisfactory operating and financial performance for the past 18 months ended September 30, 2024. The Stable trends reflect Morningstar DBRS' 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 were exchanged for the Series B Bonds issued by Lièvre Power Holdings LP (HoldCo; rated BBB with a Stable trend by Morningstar DBRS). 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. The cash flow under the PPA is bifurcated and distributed proportionally between the HoldCo and ProjectCo. The last year that ProjectCo was exposed to the volatile merchant power markets was 2021.

KEY CREDIT RATING CONSIDERATIONS
In 2023 and the 12 months ended September 30, 2024 (LTM 2024), although energy generation was 3.3% and 7.3% lower than the 2022 generation, respectively, it was still above the forecast long-term average generation of 1,560.8 gigawatt hours, mainly driven by strong hydrology and high levels of asset availability. Operations and maintenance (O&M) costs were well controlled during the review period, and capital expenditures (capex) were lower than expected. The resultant debt service coverage ratio (DSCR) was 2.05 times (x) for 2023 and 2.82x for the LTM 2024, higher than the minimum DSCR of 1.40x projected in the rating case. However, Morningstar DBRS notes that the O&M cost and capex represent a significant percentage of 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 the Project's financial profile.

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

FINANCIAL OUTLOOK
Morningstar DBRS expects the 2024 DSCR to be over 2.0x, which is supportive of the BBB credit ratings. For the long term, Morningstar DBRS expects the DSCRs to align with the rating case projections.

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 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 DRIVER AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of Rating Drivers
In the analysis of the Issuer, the Rating Drivers 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 sole FRA factor).

(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 of 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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577