DBRS Confirms Mississagi Power Trust Senior Secured Bonds at A (low), Stable

DBRS Limited (DBRS) has today confirmed its A (low) rating with a Stable trend on the 6.917% $175 million Series 1 Senior Secured Bonds (the Bonds), due November 27, 2020, of Mississagi Power Trust (MPT). The rating reflects the high quality of MPT’s underlying hydro generating assets (the Project) based on the energy sales contracts, storage capacity, dispatch flexibility and reliable operating performance. All electricity generated is sold under a 20-year Master Power Purchase and Sale Agreement (MPPS), expiring in 2029, to Brookfield Energy Marketing LP. The MPPS, guaranteed by Brookfield Renewable Power Inc. (BRPI), provided an attractive contract price of approximately $104.5 per megawatt hour (MWh) in 2015. Both Brookfield entities are unrated by DBRS. MPT’s current debt level is moderate relative to contracted cash flow. Forecast average interest coverage ratio (ICR, after capex) of 4.89 times (x), based on above-market contract price and long-term average generation (LTAG), is at the high end of its rating category.

Hydrology is one of the main risks. Between 2003 and 2012, water flow and generation was frequently and materially lower than the LTAG. Nonetheless, higher-than-average hydrology for the past two to three years has improved the ten-year average annual generation to 94% of the LTAG. Better hydrology has also resulted in a higher-than-average ICR of 6.93x over the same period. The levelized capex budget of $4.0 million per annum for the next ten years is well within MPT’s annual cash flow capacity of $53 million (EBITDA minus interest). Capex can be volatile in a given year; however, significant deviation from the long-term spending plan on a cumulative basis will be cause for concern. DBRS will closely monitor MPT’s future capex levels to ensure the assets are properly maintained for the long run.

The rating on a contracted power project is usually constrained by the credit quality of the off-taker or its guarantor (in this case, BRPI) unless the project demonstrates a superior market-based competitive position without contract price protection. DBRS does not view BRPI to have a credit quality within the “A” rating category. BRPI’s credit profile is largely driven by Brookfield Renewable Energy Partners, L.P.’s credit strength (BREP; rated BBB (high), UR-Dev. by DBRS). Further, any negative change to BREP’s credit will also adversely affect BRPI. In addition to analyzing MPT in a contracted scenario with the strength of the off-taker’s credit, DBRS also evaluated MPT’s performance under hypothetical merchant scenarios. For the time being, DBRS believes that MPT still has a reasonably strong competitive market position, is not entirely reliant on BRPI and would likely continue to service its debt obligations on a merchant basis. Nonetheless, DBRS notes that continuing decline of relevant merchant power prices has placed considerable strain on MPT’s market-based competitive position. DBRS will take a negative rating action if (1) MPT is no longer considered to have a reasonably strong market-based competitive position or (2) BRPI’s credit quality, largely driven by BREP’s, deteriorates, or a combination of both.

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.

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

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

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.