DBRS Confirms Mississagi Power Trust at A (low) with Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and the rating of the $175 million 6.917% Series 1 Senior Secured Bonds, due November 27, 2020, issued by Mississagi Power Trust (MPT or Issuer) at A (low) with Stable trends. The rating confirmations reflect MPT’s stable performance for the past 12 months. In 2018, actual electric generation represented 101% of the forecast long-term average generation and the debt service coverage ratio (DSCR) after capital expenditure (capex) is expected to be approximately 5.31 times (x) (by DBRS estimates), assuming stable operating costs. DBRS continues to believe that the high-quality hydro-generating assets (the Project) have demonstrated a strong market-based competitive position, which allows for a moderate rating uplift over the off-taker’s.

The A (low) rating is a testament to the Project’s 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) to Brookfield Energy Marketing LP (BEMLP) until 2029. The MPPS is guaranteed by Brookfield Renewable Power Inc. (BRPI). Both BEMLP and BRPI are unrated by DBRS. MPT’s debt level is moderate relative to the contracted cash flow. The forecast minimum DSCR of approximately 4.82x under the contract is strong relative to the rating.

The rating of 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; however, DBRS believes that MPPS counterparty’s credit quality is not entirely constrained by BRPI’s credit profile because of a back-to-back power purchase agreement (the IESO-BRPI Contract) with a higher-rated entity, the Independent Electricity System Operator (IESO; rated A (high) with a Stable trend by DBRS). The Issuer informed DBRS that the residual economic benefit of the IESO-BRPI Contract would be further passed down to MPT through intercompany energy revenue support agreements executed in Q4 2018. The incremental cash flow is expected to strengthen the DSCR further if verified. Nonetheless, the IESO-BRPI Contract is not secured for the benefit of bondholders. Therefore, DBRS’s contract counterparty analysis is focused on BRPI as opposed to IESO.

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 believes that MPT continues to have a strong market-based competitive position, and would likely continue to service its debt obligations without contract protection. DBRS has come to this conclusion by weighing both the negative and positive trends in the merchant power market. In recent years, the sharply declining wholesale power prices have negatively affected MPT’s competitive position. However, the negativity is counterbalanced to a degree by the Project’s increasing ability to capture peaking price premium and ancillary revenue, driven by its intra-day storage and dispatch flexibility. This allows for the moderate rating uplift over the off-taker’s.

The A (low) rating also considers other factors, such as 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 and IESO-BRPI Contract will extend nine years after the debt matures in 2020. 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 (1) a deterioration in BRPI’s credit quality, (2) the Project no longer demonstrating a superior market-based competitive position or (3) a material deterioration in credit metrics and/or asset quality.

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

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

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

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 addi¬tional 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.

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