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 (the Bonds) rating at A (high) and the Commercial Paper rating at R-1 (low), all with Stable trends. LMELP and Lower Mattagami Limited Partnership (LMLP or the Guarantor) are single-purpose limited partnerships established by Ontario Power Generation Inc. (OPG; rated A (low) and R-1 (low) by DBRS) for redeveloping and operating four hydroelectric generating facilities totalling 924 megawatts (MW) on the Lower Mattagami River (the Project). LMELP, owning the existing hydro assets of 434 MW, is the borrower and guaranteed by LMLP, which owns the incremental hydro assets of 490 MW. Energy generated is sold under a 50-year Hydroelectric Energy Supply Agreement (HESA) to the Independent Electricity Systems Operator (IESO; rated A (high) by DBRS). The construction was completed on time and under budget, and all units were in service as of December 31, 2014.

The rating confirmation reflects the Project’s highly predictable cash flow and robust rating-case debt service coverage ratio (DSCR) of 2.04x, underpinned by (1) the cost-of-service style HESA that essentially eliminates hydrology, price and the majority of operating cost risks; (2) reliable and low-cost nature of the underlying hydro assets; and (3) OPG as the experienced operator and primary sponsor. Approximately one-third of the Bonds are expected to remain outstanding upon the HESA expiry. The refinancing risk, a weakness, is partially mitigated by the ten-year HESA extension option. DBRS views the Project as a hybrid entity, combining the characteristics of a project finance structure and a utility-like corporation. The rating is capped by the offtaker IESO’s rating.

OPG has guaranteed the debt through the construction, commissioning and testing phases until the Recourse Release Date, which is expected by the end of this year. The Project performed well in its first 12 months of full operations. DSCR (based on deemed debt amortization) of 2.21x in 2015 exceeded the forecast 2.04x in DBRS’s rating case. Better-than-expected hydrology enabled LMELP to capture revenue upside from the spot markets under the HESA. DBRS’s rating case only considers the revenue floor.

As at December 31, 2015, LMELP and LMLP collectively achieved a targeted 65% debt-to-capital ratio (based on book value). The outstanding third-party debt at December 31, 2015 consisted of (1) seven tranches of staggered Bonds of $1.575 billion, maturing between 2017 and 2052; and (2) approximately $250 million short-term borrowings under the $500 million Commercial Paper program, backstopped by the $500 million bank credit facilities. The debt is expected to amortize over time to maintain the targeted debt-to-capital ratio. The Bonds and the bank credit facilities, ranking equally, are secured by the Project assets, while the unsecured Commercial Paper program is guaranteed by OPG. The funding needs from the Bonds maturities are expected to be bridged over time by the Commercial Paper facility. DBRS expects that the current ratings will remain stable for the foreseeable future, in the absence of any unexpected adverse event(s).

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 and Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, which can be found on our website under Methodologies.