DBRS Confirms Lower Mattagami Energy Limited Partnership at A (high) and R-1 (low)

DBRS has today confirmed Lower Mattagami Energy Limited Partnership’s (LMELP or the Issuer) Issuer Rating and Senior Secured Bond rating at A (high) and Commercial Paper rating at R-1 (low), all with Stable trends. LMELP and the associated Lower Mattagami Limited Partnership (collectively, the Lower Mattagami River Project or LMRP) are single-purpose limited partnerships established by Ontario Power Generation Inc. (OPG or the Sponsor; rated A (low) and R-1 (low)) for the redevelopment and expansion of the existing hydroelectric power generating facilities on the Lower Mattagami River (the Project). Construction is expected to achieve completion in 2015. Energy production is sold under a 50-year Hydroelectric Energy Supply Agreement (HESA) with the Ontario Power Authority (the Offtaker; rated A (high)). The ratings reflect robust project economics supported by the credit strength of the Offtaker and the offtaking agreement. Construction risk is at a manageable level and adequately mitigated. LMELP is expected to have the financial and structural flexibility to withstand potential downside scenarios during both construction and operating periods.

Risk during construction is considered consistent with the current rating based on modest complexity, proximity to established sites, experienced contractors and contractual protection under Design Build Agreement and HESA against construction delays and cost overruns. Additional credit protection is provided by OPG’s guarantee of LMELP debt through the construction period and until the Recourse Release Date, after which recourse will be limited only to LMRP.

Construction began in June 2010. Progress to date has been consistent with the approved budget and schedule. Costs of minor changes are expected to be absorbed with contingencies and reserves included in the budget. The Little Long station achieved commercial operation in January 2014. Design and engineering, as well as major civil works, including rock excavation, cofferdam, concrete pouring and powerhouse, are substantially complete. Overall, the Project is approximately 84% complete.

DBRS views LMELP as a hybrid entity having some of the characteristics of a traditional power project and a utility corporation. Post-construction credit quality, based on favourable cost-of-service treatment under the HESA, supports the current rating. The agreement covers all energy production from both the new and the existing assets and provides for robust project economics under cost recovery mechanisms. While the HESA can provide revenue upside above the revenue requirement floor, DBRS assumes a more conservative case that excludes the upside. All prudently incurred construction and operating costs are recovered through the HESA, which provides significant downside protection. Expected debt service coverage ratios are consistent with the rating category.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Project Finance (August 2013), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.