Morningstar DBRS Confirms MPT Finco Inc.'s Ratings at BBB With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating as well as the ratings on the Series A Bonds and Series B Bonds (together, the Bonds) of MPT Finco Inc. (the Issuer) at BBB with Stable trends. The rating confirmations reflect the resilient financial performance notwithstanding the lower-than-expected hydrology and heavy capital spending over the past 24 months. The Stable trends are supported by the expected further improvement of financial ratios in 2025 and beyond following the completion of the Red Rock overhaul, assuming that the hydrology and capital spending levels return to historical averages.

The 10-year fixed-rate Bonds of approximately $628 million ($521 million outstanding as of September 30, 2024) are used to finance the operations of four cascading operational hydro-generating facilities owned by Mississagi Power Trust (MPT) with a total capacity of 488 megawatts on the Mississagi River in Northern Ontario (the MPT Portfolio or MPT Assets). Both tranches of Bonds rank pari passu and partially amortize on a pro rata basis to mature on November 30, 2029, with an aggregate balloon amount of $350 million, subject to refinancing.

KEY CREDIT RATING CONSIDERATIONS
In 2023, energy generation was 6% lower than 2022, mainly due to the lower availability of 84%, which was adversely affected by the outages associated with the Red Rock overhaul project. The MPT Portfolio generated energy at 86% of the forecast long-term average generation (LTAG) in 2023. For the last 12 months ended September 30, 2024 (LTM 2024), energy generation was at 82% of the LTAG, primarily driven by weak hydrology. The availability improved significantly to 96% in 2024, following the completion of Red Rock overhaul.

The operations and maintenance (O&M) cost were well controlled during the review period. Although heavy capital expenditures (capex) occurred in 2023, capex decreased significantly in 2024 following the completion of the Red Rock overhaul. Capex was partially funded by equity injections in 2023 and 2024. Management indicates that capital spending will better align with the Morningstar DBRS rating case starting in 2025. The resultant adjusted debt service coverage ratio (DSCR) was 1.62 times (x; including equity injections) for 2023 and 1.54x for the LTM 2024. The forward-looking capex reserves remain undrawn as the Sponsor has indicated and proved that it has the willingness and capacity to inject equity to bridge any potential capex funding shortfall. There has been no covenant breach despite the stressed cash flow in 2021 because of poor hydrology.

On and after March 1, 2021, the MPT Portfolio's cash flow was supported by one power purchase agreement (PPA): the Mississagi Energy Revenue Support Agreement (MERSA) with the effective offtaker being Brookfield BRP Canada Corp. (BBCC), an entity affiliated with Brookfield Renewable Partners L.P. (the Sponsor or BEP; rated BBB (high) with a Stable trend by Morningstar DBRS). Although BBCC is not publicly rated, Morningstar DBRS' assessment indicates that BBCC's credit quality does not constrain the Issuer's current rating. Based on the LTAG, the forecast minimum DSCR is consistent with that of the contracted hydro projects in Morningstar DBRS' "A" rating category, without the consideration of other factors. However, the ratings are further constrained by the refinancing risk. The MPT Portfolio appears to be well positioned for recontracting with the Independent Electricity System (IESO) at debt maturity because of its significant storage capacity as an emissions-free peaker, which is of great importance to Northern Ontario's grid stability. Nonetheless, Morningstar DBRS believes that future recontracting uncertainty with potential merchant exposure increases the refinancing risk. Morningstar DBRS' base refinancing case conservatively assumes a non-PPA renewal scenario. Under such a scenario, the base-case project life coverage ratios (PLCRs) of 2.0x to 2.6x at P90 to P50 generation levels, respectively, still indicate ample cash flow to support a successful refinancing; however, this level of PLCR constrains the ratings to the BBB range, according to Morningstar DBRS' "Global Methodology for Rating Project Finance". Morningstar DBRS notes that the spot and forward merchant power prices in the relevant markets spiked in 2021-22 but have declined significantly over the past 24 months, driven by the volatility of natural gas prices. Despite the significant movement of short-term merchant power prices, Morningstar DBRS has made no major adjustment to the key price assumption in PLCR calculation. It remains to be seen whether the long-term fundamentals of electricity supply-demand will change over the next few years. Morningstar DBRS does not assign ratings beyond the term of the Bonds but assesses the probability of a successful refinancing based on the MPT Assets' remaining economic value at the refinancing point.

The Bonds are structured as a project finance transaction with standard features, including a cash flow waterfall subject to blocked accounts. The key reserve accounts include a six-month debt service reserve account and a forward-looking capex reserve account to be funded by cash or nonrecourse letters of credit. The equity distribution lockup test is set at a minimum DSCR of 1.20x. The Issuer and each Project Entity are subject to customary Separateness Covenants in the Trust Indenture. Morningstar DBRS relied solely on the separateness features applicable to the Issuer and each Project Entity to take comfort that such parties will remain legally and operationally separate and apart from the Sponsor and any of the Sponsor's affiliates. Morningstar DBRS did not receive a substantive nonconsolidation legal opinion for this transaction.

CREDIT RATING DRIVERS
Morningstar DBRS believes a rating upgrade is unlikely in the near term unless satisfactory recontracting of the MPT Assets occurs well before the refinancing date. A negative rating action may be triggered by any of the following: a material deterioration of the PPA offtaker's credit quality to constrain the ratings further, a material and sustained deterioration of credit metrics and/or asset quality, or heightened refinancing risk toward debt maturity.

FINANCIAL OUTLOOK
Morningstar DBRS expects the 2024 DSCR to be 1.57x (including equity injections), largely because of the unfavorable hydrological conditions. The minimum DSCR is projected to be 1.80x for the remaining period of the Bonds, which is supportive of the BBB credit rating.

CREDIT RATING RATIONALE
The MPT Portfolio's strengths include (1) fully contracted cash flow with a creditworthy offtaker, (2) a unique peaking hydro portfolio that is important to Northern Ontario's grid stability, (3) high-quality assets with a reliable operating history, and (4) a highly experienced owner/operator with robust credit quality. The challenges include (1) constraint of the direct offtaker BBCC's credit quality¿which can be potentially volatile, (2) refinancing risk, (3) relatively high interannual hydrological variability, and (4) capex risk.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant 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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

RATING DRIVERS AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of Rating Drivers
In the analysis of the Issuer, the Rating Drivers listed in the principal methodology "Global Methodology for Rating Project Finance" 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 principal methodology "Global Methodology for Rating Project Finance" is considered more important: DSCR. The PLCR constrains the rating to BBB category.

(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.

PXX means exceedance probabilities. A P50-P90-P99 value describes the estimated minimum electricity generation with a probability of 50%, 90%, or 99% in any given year (P50, one-year P90, and one-year P99).

Project Entity means (1) prior to the Second Closing Date, each of MPT, Mississagi Property Inc. (MPI), Mississagi Power Trust Holdings LP, and Mississagi Power Trust Holdings Inc., and (2) from and after the Second Closing Date, each of MPT and MPI.

Morningstar DBRS applied the following principal methodology:

-- Global Methodology for Rating Project Finance (December 10, 2024),
https://dbrs.morningstar.com/research/444393

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186
-- Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781

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.

Because the company is private and its financial statements are considered confidential by the Issuer, please note that Morningstar DBRS will not be publishing a rating report in addition to its press release with respect to the ratings.

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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