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

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 its Commercial Paper rating at R-1 (low). All trends remain Stable. The rating confirmations reflect the Issuer’s continuing robust performance for fiscal 2018. The Stable trends reflect DBRS’s expectation for credit metrics to remain stable over the next 12 months under a cost-of-service (COS)-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) until 2064.

For fiscal 2018 ended December 31, 2018, the debt service coverage ratio (DSCR, based on deemed principal amortization) of 2.15 times (x) was higher than the forecast 2.04x in the rating case, which only considers the revenue floor under the HESA. The stronger DSCR was driven by higher-than-expected EBITDA, which in turn was a result of several favourable adjustments, including the lower-than-expected operating cost. As at December 31, 2018, LMELP and LMLP had a combined debt-to-capital ratio of 62% (based on the annual compliance certificate), which is lower than the targeted 65%. The seven-tranche Bonds of $1,595 million are well staggered with maturities ranging between 2021 and 2052. All currently outstanding bullet Bonds mature within the initial HESA term subject to refinancing. If the refinancing term is well within the initial HESA term with reasonable contractual tail, the refinancing risk is considered low because debt service still relies on highly predictable contracted cash flow. There is also a $400 million Commercial Paper program, backstopped by credit facilities to further liquidity support in an event of market disruption at any refinancing point. If the refinancing term of future debt goes beyond the initial HESA term, the credit quality of such debt would likely be negatively affected due to the potential merchant exposure. For the time being, it is estimated that approximately one-third ($600 million) of the original Bonds ($1,795 million) will remain outstanding in 2064 when the HESA expires. This type of 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 COS-style HESA, which essentially eliminates hydrology, electricity prices and the majority of operating cost and capex risks; (2) the reliable and low-cost nature of the underlying hydro assets; and (3) the experience and strength of OPG as the 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 to be negligible as a result of the COS-style HESA. DBRS expects the current ratings to remain Stable for the next 12 months; however, a rating downgrade of the IESO or a sustained and material deterioration of key credit metrics could trigger negative rating actions.

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

The principal methodologies are Rating Project Finance, Rating Companies in the Regulated Electric, Natural Gas and Water Utilities Industry, DBRS Criteria: Guarantees and Other Forms of Support, and DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, 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.

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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