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

DBRS Limited (DBRS) has today confirmed Lower Mattagami Energy Limited Partnership’s (LMELP or the Issuer) Issuer Rating and Senior Secured Bonds rating at A (high) and the Commercial Paper rating at R-1 (low), all with Stable trends. LMELP and the associated Lower Mattagami Limited Partnership (LMLP or the Guarantor; 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) with Stable trends by DBRS) for the redevelopment and expansion of the existing hydroelectric power-generating facilities on the Lower Mattagami River (the Project). Energy production is sold under a 50-year Hydroelectric Energy Supply Agreement (HESA) with the Independent Electricity Systems Operator (IESO; rated A (high) with a Stable trend by DBRS).

Construction on all six units has been completed with some punch lists items remaining before final completion can be achieved. The first generating unit of LMRP was placed in-service in January 2014 and all six units were in-service as of December 31, 2014 (six months ahead of the guaranteed in-service date of June, 2015). The Project cost was initially approved at $2.56 billion with current estimates for final completion coming in below budget. The remaining construction risks could result from additional costs related to unexpected subcontractor claims, final commissioning work and site restoration completion. The credit protection provided by OPG’s guarantee of LMELP debt through the construction period will remain in effect until the Recourse Release Date, which will occur after the Project has achieved Commercial Operation Date and has met certain requirements, including performance testes and other factors confirming adequate capacity, efficiency and reliable long-term operation targets.

DBRS views LMELP as a hybrid entity having some of the characteristics of a traditional power project and a utility-like corporation. The 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 any 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. Given the Project has been in operation since December 2014, DBRS does not have sufficient information to make its own evaluation of the actual performance of the Project to date. A more thorough analysis will be performed once sufficient data is available.

The Project costs are funded with a target to achieve a post-completion capital structure of 65% and 35% equity. OPG’s $1 billion equity investment includes a $400 million contribution of the existing assets (estimated 2015 value) and a $600 million equity cash injection. The expected $1.9 billion in debt is funded on an ongoing basis through a $600 million commercial paper (CP) program backstopped by $600 million bank facilities. Short-term debt balances are periodically repaid and refinanced with issuances of longer-term secured bonds. Approximately $1.575 billion in bonds have been issued to date, with various maturities. The senior bonds and the bank facility are secured by the physical assets and material contracts of LMRP, while the CP program is unsecured but fully backstopped by the secured bank line.

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 methodologies are Rating Project Finance (August 2014) and Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry (October 2014), which can be found on our website under Methodologies.

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

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.