DBRS Confirms Lower Mattagami Energy Limited Partnership at A (high) and R-1 (low)

DBRS Limited (DBRS) 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 trends are Stable. The rating confirmations reflect the Issuer’s continuing stable and robust performance for 2017. The Stable trends reflect DBRS’s expectation that cash flow and credit metrics will remain stable over the next 12 months under a cost-of-service style contract.

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) with a Stable trend 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 is 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) with a Stable trend by DBRS). The construction guaranteed by OPG was completed on time and under budget, and all units were in service as at December 31, 2014. In Q3 2017, OPG’s construction guarantee was released after all required conditions were satisfied.

For the fiscal year ended December 31, 2017, the debt service coverage ratio (DSCR, based on deemed principal amortization) of 2.13 times (x) was slightly 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-expected operating cost. As at December 31, 2017, LMELP and LMLP had a combined debt-to-capital ratio of 61.8% (based on book value), which is close to the targeted 65%. The seven-tranche Bonds of $1.595 billion are well staggered with maturities ranging between 2021 and 2052. 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 service relies on highly predictable contracted cash flow. The $400 million Commercial Paper program backstopped by credit facilities provides further liquidity support in an event of market disruption upon any refinancing point. After the HESA expires, approximately one-third ($600 million) of the original Bonds ($1,795 million) is expected to remain outstanding. This refinancing risk, however, is partially mitigated by the ten-year HESA extension option.

The ratings are underpinned by (1) the highly predictable cash flow as a result of the cost-of-service-style HESA, which essentially eliminates hydrology, electricity prices 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 an 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-style corporation. The Issuer Rating is equivalent to offtaker IESO’s rating because DBRS considers the residual risk between the offtaker and the Issuer as negligible under the HESA’s cost-of-service nature.

DBRS expects the current ratings to remain Stable for the next 12 months; however, a rating downgrade of the IESO, or a sustained and significant decrease of availability or a significant increase to leverage could trigger negative rating actions.

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

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 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 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.

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.