DBRS Confirms Mississagi Power Trust’s Series 1 Bonds at A (low) with a Stable Trend

DBRS Limited (DBRS) confirmed its A (low) rating with a Stable trend on the $175 million 6.917% Series 1 Senior Secured Bonds, due November 27, 2020, issued by Mississagi Power Trust (MPT). The rating confirmation reflects MPT’s continuing strong performance over the past two years. Generation in 2016 and 2017 was strong, representing 106% and 145%, respectively, of the long-term average generation (LTAG). The debt-service coverage ratios (DSCRs) after capital expenditure (capex) of 5.65 times (x) in 2016 and 8.05x (estimated) in 2017 were higher than expected as a result of stronger-than-expected generation and stable operating cost. DBRS continues to believe that the Project has a strong market-based competitive position, which allows a continuing rating uplift over the offtaker.

The A (low) rating is a testament to MPT’s high-quality hydro-generating assets (the Project), which was 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 compared with the contracted cash flow. The forecast average DSCR (after capex) of approximately 5.0x under the contract is strong, relative to the assigned rating. There is also a back-to-back power purchase and sale contract with the Independent Electricity System Operator (IESO; rated A (high) with a Stable trend by DBRS). However, this contract is not secured for the benefit of the bondholders.

The rating on a contracted power project is usually constrained by the credit quality of the offtaker 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 (BRP; rated BBB (high) with a Stable trend by DBRS). However, DBRS believes that MPPS counterparty credit quality is not entirely constrained by BRPI’s credit profile because of a back-to-back contract with a highly rated entity. In addition to analyzing MPT in a contracted scenario in the context of the offtaker’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 concluded this 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 premiums and ancillary revenue because of its intra-day storage and dispatch flexibility. DBRS also considers other challenges in assigning the rating, which include 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 will extend nine years after the debt maturity.

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

Notes:
All figures are in Canadian dollars unless otherwise noted.

The DSCR, in this case, is effectively interest coverage ratio because of no mandatory principal payments.

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 under Related Documents or by contacting us at info@dbrs.com.

The principal methodology is Rating Project Finance (February, 2018) which can be found on www.dbrs.com under Methodologies.

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

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