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 (the Issuer or LMELP) 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 (the Guarantor or LMLP) 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, which owns 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 System Operator (IESO; rated A (high) by DBRS). Construction was completed on time and under budget, and all units were in service as of December 31, 2014. OPG has guaranteed the debt through the construction, commissioning and testing phases until the Recourse Release Date, which is expected in Q3 2017. Nonetheless, DBRS’s assessment of the Project’s credit quality during operating phase is on a non-recourse basis.

The rating confirmation reflects the Project’s continuing strong performance for the review period. For the 12- month periods ended December 31, 2016, and March 31, 2017, the debt service coverage ratios (DSCR) of 2.20 times (x) and 2.17x, respectively, were higher than the forecast 2.04x in the rating case, which only considers the revenue floor under the HESA. The stronger performance was largely driven by lower-than-planned operating cost. The ratings are underpinned by (1) the highly predicable cash flow as result of cost-of-service-style HESA, which essentially eliminates hydrology, electricity price and the majority of operating cost and capital expenditure (capex) risks; (2) the reliable and low-cost nature of the underlying hydro assets; and (3) OPG as the experienced operator and primary sponsor. DBRS views the Project as a hybrid entity, combining the characteristics of a traditional project finance structure and a utility-like corporation. DBRS assigned the Issuer Rating equivalent to offtaker IESO’s rating, as the HESA has largely passed on the majority of risks to the IESO.

As at March 31, 2017, LMELP and LMLP collectively achieved a 63% debt-to-capital ratio (based on book value), close to the targeted value of 65%. The outstanding debt at March 31, 2017, consisted of eight tranches of staggered Bonds of $1.795 billion, maturing between 2017 and 2052, including $200 million due in October 2017. Management expects to use the Commercial Paper program (with a current limit of $500 million) to refinance this tranche of debt, which will then be gradually amortized over time to maintain a targeted debt-to-capital ratio of 65%. OPG intends to release its guarantee for the unsecured Commercial Paper program upon the Recourse Release Date. DBRS does not expect to change its R-1 (low) rating as long as the future Commercial Paper program continues to have appropriate and sufficient liquidity support that meets DBRS’s criteria.

DBRS notes that the Project is subject to two kinds of refinancing risk. During the HESA term, the refinancing risk is relatively low since debt payments are derived from the contractual cash flow. DBRS notes that the approximately ten-year HESA tail from the last bond maturity provides contractual cash flow cushion to fully amortize this tranche of debt if needed. Upon the HESA expiry, approximately one-third of the current Bonds are expected to remain outstanding, which increases the potential refinancing risk. This risk, however, is partially mitigated by the ten-year HESA extension option. Depending on the then merchant market and debt structure, the future debt rating toward the end of the HESA may be different than the current rating. DBRS expects the current rating to remain Stable for next 12 months; however, a rating downgrade of IESO, a sustained and significant decrease to availability or a significant increase to leverage could result in negative rating action.

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 methodologies are Rating Project Finance and Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.