Morningstar DBRS Assigns Rating of A (high) with a Stable Trend to Lower Mattagami Energy Limited Partnership’s Newly Issued Senior Secured Bonds, Series 2024-1

DBRS Limited (Morningstar DBRS) assigned a rating of A (high) with a Stable trend to the $200 million Senior Secured Bonds, Series 2024-1 (the Series 2024-1 Bonds), issued by Lower Mattagami Energy Limited Partnership (the Issuer or LMELP; rated A (high) with a Stable trend by Morningstar DBRS). The rating assigned to this newly issued debt instrument is based on the rating of an already-outstanding debt series of the above-mentioned debt instrument.

The Series 2024-1 Bonds will be direct, secured, and unsubordinated obligations of the Issuer that will rank pari passu with and be secured equally and proportionately with other bonds and all future bonds issued by the Issuer from time to time pursuant to the Master Trust Indenture dated August 17, 2010. The Series 2024-1 Bonds are also guaranteed by Lower Mattagami Limited Partnership (LMLP), an affiliate of the Issuer.

KEY CREDIT RATING CONSIDERATIONS
The Issuer and LMLP are single-purpose limited partnerships established by Ontario Power Generation Inc. (OPG; rated A (low) with a Stable trend by Morningstar DBRS) for redeveloping and operating four hydroelectric generating facilities totalling 924 megawatts (MW) on the Lower Mattagami River (the Project). Energy generated from the Project is sold under a 50-year HESA to the Independent Electricity System Operator (the IESO) until 2064. Based on Morningstar DBRS' assessment, IESO's credit quality caps the Issuer's ratings to A (high).

The debt service coverage ratio (DSCR) of 2.15 times (x) for both F2023 (ended December 31, 2023) and the last 12 months (LTM) Q1 2024 (ended March 31, 2024), remained robust, driven by stable operating cash flow under the COS-style HESA. The debt-to-capital ratio of 63% as at March 31, 2024, is close to the targeted 65%. The Little Long Dam Safety Project has completed the vast majority of the construction with the completion scheduled in June 2024. The Smoky Falls Dam Safety Project continues to advance with the expected completion in December 2025. The capital costs of these two projects are expected to be fully recovered with incremental revenue under the HESA. Additional debt may be issued in the coming years to partially fund the remaining capital cost of this project.

There are currently eight tranches of bullet Bonds of $1.995 billion in total. These tranches of Bonds are well staggered during the HESA term, subject to refinancing. Morningstar DBRS considers two types of refinancing risk in the transaction structure. If the term of the refinanced debt is still well within the initial HESA term, such refinancing risk is considered low because of the remaining contractual cash flow. There is also a $400 million Commercial Paper program, fully backstopped by a credit facility, to provide liquidity support in an event of market disruption. If the term of the refinanced debt extends beyond the initial HESA term, the credit quality of such debt would likely be negatively affected by potential merchant exposure. Morningstar DBRS currently estimates that approximately one-third of the original Bonds will remain outstanding in 2064 when the HESA expires. For the time being, Morningstar DBRS is unable to quantify the hypothetical refinancing uncertainty because of many factors that could affect the refinancing in the distant future of 2064. This type of refinancing risk, however, is partially mitigated by the 10-year HESA extension option and longevity of the hydro assets.

CREDIT RATING DRIVERS
A positive rating action is unlikely given the ratings are capped by the offtaker—IESO’s credit quality; a negative rating action can be driven by any of the following: an adverse assessment of the offtaker's credit quality, or a sustained and material deterioration of key operating or credit metrics, or a material increase to the refinancing risk toward the contractual tail.

FINANCIAL OUTLOOK
The minimum DSCR is projected to be 2.04x for the remaining period of the Bonds, which is supportive of the ratings.

CREDIT RATING RATIONALE
The ratings are underpinned by (1) the COS-style HESA, which eliminates hydrology, electricity prices, and the majority of operating costs and capital expenditure (capex) risks; (2) the reliable and low-cost nature of the underlying hydro assets; and (3) OPG’s experience as the operator and primary sponsor. The challenges include (1) refinancing risk; (2) potential increase to the leverage; and (3) adverse effect from potentially lumpy capex toward the end of the HESA term. The Issuer Rating is on par with offtaker IESO’s credit quality because Morningstar DBRS considers the residual risk between the offtaker and the Issuer to be negligible.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
There were no Environmental factor(s) that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factor(s) that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factor(s) that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030

RATING DRIVER AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of Rating Driver Factors
In the analysis of the Issuer, the Rating Driver factors listed in the methodology are considered in the order of importance.

(B) Weighting of FRA Factors
In the analysis of the Issuer, the following FRA factor listed in the methodology was considered more important: DSCR (the only applicable FRA Factor).

(C) Weighting of the Rating Drivers and the FRA
In the analysis of the Issuer, the FRA carries greater weight than the Rating Drivers.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Project Finance (April 15, 2024),
https://dbrs.morningstar.com/research/431188

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024) https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:
Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030

Morningstar DBRS Global Corporate Criteria (April 15, 2024),
https://dbrs.morningstar.com/research/431186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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