DBRS Rates Lower Mattagami Energy Limited Partnership at A (high), R-1 (low)

DBRS has today assigned a rating of R-1 (low) to Lower Mattagami Energy Limited Partnership’s (LMELP) Commercial Paper and an Issuer Rating of A (high). The trend on both ratings is Stable. The A (high) Issuer Rating is intended to apply to future issuance of LMELP secured bonds. The ratings reflect the minimal perceived credit risks both during and subsequent to construction; DBRS views LMELP as a hybrid entity having some of the characteristics of both a power project entity and a corporate utility.

Sponsor Ontario Power Generation Inc. (OPG, rated A (low) and R-1 (low)) formed LMELP and Lower Mattagami Limited Partnership (LMLP; collectively, the Lower Mattagami River Project, or LMRP) to redevelop existing OPG hydroelectric generating assets on the lower Mattagami River in northern Ontario. OPG has contributed the existing generating assets (486 megawatts (MW)) to LMELP, while LMLP will hold the to-be-constructed 438 MW of generating assets. OPG is a significant and experienced hydro operator, and there has been considerable involvement from the Province of Ontario (the Province) in the LMRP redevelopment.

Post-construction, risks are considered modest and manageable for the rating category, given LMRP’s favourable cost-of-service type treatment under the 50-year Hydroelectric Energy Supply Agreement (HESA) in place with the Ontario Power Authority (OPA, rated A (high)). The 50-year HESA is unlike a traditional power purchase agreement which would provide for a specific $/MWh payment for energy produced; instead, LMRP’s HESA provides a cost-of-service revenue requirement mechanism very similar in function to that of a utility. While the HESA does provide for some revenue upside above a floor level, DBRS’s analysis has largely focused on a more conservative case which ignores upside above the floor revenue levels. All prudently incurred construction and operating costs are flowed through the HESA, which provides significant downside protection below the floor levels and is the primary driver of the strong ratings.

Risk during construction is considered reasonably low, attributable to underlying characteristics which include modest complexity, experienced contractors, and contractual protections against construction delays or cost overruns as provided for in both the construction design build (DB) contract and the HESA. This modestly low construction period risk is further minimized by OPG’s guarantees of LMELP debt (bonds, bank lines and commercial paper) through the construction period and until the Recourse Release Date (at which time recourse will be limited only to LMRP).

Debt service coverage ratios are considered strong within the context of the HESA, with the floor revenue level-based ratios having limited expected downside largely due to the absence of both hydrological (production) and market price risk. Functionally, the HESA is a contract for differences under which LMRP will sell all energy produced to the Independent Electricity System Operator, with “true-up” payments, if needed, made on a monthly basis with the OPA.

The $3 billion LMRP complex will be funded to achieve a post-completion capital structure of 65% debt and 35% equity in order to match the capital structure under the HESA. OPG’s $1 billion equity investment will be in the form of the contribution of $400 million of existing assets and a back-ended $600 million cash injection. The $1.9 billion debt component is expected to be funded on an ongoing basis throughout construction through the $700 million commercial paper (CP) program (and/or the $700 million three-year bank facility) with short-term debt balances periodically termed out with longer-term secured bond issues. The secured bonds and the bank facility will be secured by the physical assets and material contracts of LMRP, with the CP unsecured but fully backstopped by the secured bank line. With only the $700 million bank line and CP program, and reliance upon periodic secured bond offerings, LMRP does not have its full debt requirements committed through construction. This risk is viewed as manageable and DBRS expects OPG to manage the timing of bond issues to maintain available liquidity for any potential short-term market disruptions. Additionally, OPG would have the ability to accelerate the timing of its cash equity injection in order to bolster LMRP liquidity, if needed. However, this funding risk is further mitigated by the OPG guarantees, wherein LMRP debt (bonds, bank lines and CP) is guaranteed until the Recourse Release Date (when construction is complete and certain other conditions are met).

DBRS notes that the ratings incorporate DBRS’s review of certain financial information, contractual arrangements and other relevant details that are not disclosed in this rating report due to the private nature of LMRP.

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

The applicable methodologies are Rating North American Energy Utilities (Electric, Natural Gas and Pipelines) and Rating Project Finance, which can be found on the DBRS website under Methodologies.