DBRS Confirms the Rating of Mississagi Power Trust’s Series 1 Bonds at A (low), Stable Trend

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, due November 27, 2020, issued by Mississagi Power Trust (MPT). The A (low) rating is a testament to MPT’s high-quality hydro-generating assets (the Project) based on the energy sales contracts, storage capacity, dispatch flexibility and reliable operating history. All electricity generated is sold under a 20-year, inflation-indexed, fixed-price Master Power Purchase and Sale Agreement (MPPS), expiring in 2029, to Brookfield Energy Marketing LP. The MPPS is guaranteed by Brookfield Renewable Power Inc. (BRPI). Both Brookfield entities are unrated by DBRS. MPT’s debt level is moderate relative to the contracted cash flow. The forecast average interest coverage ratio (ICR) after capital expenditure (capex) of 5.01 times (x) under the contract is considered to be strong. There is also a back-to-back power purchase and sale contract with the Independent Electricity System Operator (rated A (high) with a Stable trend by DBRS). However, this contract is not secured for the benefit of the bondholders.

The rating confirmation reflects the Project’s continuing strong performance over the past 12 to 24 months. For 2015 and 2016, generation fluctuated between 92% and 106% of the long-term average generation, which was well within the normal hydrological variability band. The ICRs of 4.84x in 2015 and 5.71x (estimated) in 2016 were strong and consistent with the forecast. DBRS continues to believe that the Project has a strong market-based competitive position, which allows a continuing rating uplift over the off-taker.

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 in the “A” rating category because its credit profile is largely driven by Brookfield Renewable Partners L.P.’s credit strength (rated BBB (high) with a Stable trend by DBRS). In addition to analyzing MPT in a contracted scenario in the context of the off-taker’s credit quality, DBRS also evaluated MPT’s performance under hypothetical merchant scenarios. DBRS continues to believe that MPT has a strong market-based competitive position, and would likely continue to service its debt obligations on a merchant basis. DBRS has come to this conclusion by weighing both the negative and positive factors. In recent years, the sharply declining wholesale power prices have negatively affected MPT’s competitive position. This trend, however, has been counterbalanced by other positives, including the Project’s increasing ability to capture peaking price premium and ancillary revenue because of its intra-day storage and dispatch flexibility. The DBRS rating also considers other challenges including hydrological volatility and capex risk, albeit both are somewhat mitigated by the strong contracted cash flow. The refinancing risk is manageable given that the MPPS extends nine years after the debt maturity.

RATING DRIVERS
An upgrade is unlikely, given that BRPI’s credit quality is not in the “A” rating category. Downward rating pressure could be driven by any of the following: deterioration of BRPI’s credit quality, the Project no longer demonstrates a superior market-based competitive position and material deterioration of the operating and financial metrics or the asset quality.

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 principal methodology is Rating Project Finance, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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.