DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating as well as the Series A Bonds and Series B Bonds (together, the Bonds) ratings of MPT Finco Inc. (the Issuer or MPT Finco) at BBB with Stable trends. The rating confirmation reflects good operating and financial results over the past 12 to 18 months. The ongoing global Coronavirus Disease (COVID-19) pandemic has so far had no material impact on the Issuer's performance. DBRS Morningstar expects the Stable trends to be maintained over the next 12 months.
The 10-year fixed-rate Bonds of approximately $628 million 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 (MW) located on the Mississagi River in Northern Ontario (the MPT Portfolio or MPT Assets). On November 27, 2020 (the Second Closing Date), the existing MPT debt was repaid from proceeds from settling the delayed-draw Series B Bonds. Both tranches of Bonds (approximately $614 million outstanding) will 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 future refinancing.
In 2019 and the last 12 months (LTM) ending June 30, 2020, energy generation represented approximately 119% and 103% of the long-term average generation (LTAG), respectively. The higher-than-LTAG energy generation in both periods resulted in better-than-expected energy revenue. DBRS Morningstar’s adjusted debt service coverage ratios (DSCRs) of 2.29 times (x) and 2.02x in both periods were stronger than the forecast flat DSCR of 1.80x beginning from 2020. The adjusted DSCR assumes a pro forma 2021 debt service amount of approximately $41.5 million to $41.6 million to provide a better comparison. The actual DSCRs were much higher as the debt service burden only started to rise after the Series A Bonds were settled in November 2019. The robust DSCR was driven by a combination of better-than-expected energy and ancillary revenues, well-controlled operations and maintenance cost, and relatively low capital expenditures.
Debt service is underpinned by the fully contracted cash flow under two power purchase agreements (PPAs; the Master Power Purchase and Sale Agreement (MPSA) and the Mississagi Energy Revenue Support Agreement(MERSA)) with terms to match that of the Bonds. The effective offtakers are Brookfield Renewable Power Inc. (BRPI; through its guarantee) and Brookfield BRP Canada Corp. (BBCC), two entities affiliated with Brookfield Renewable Partners L.P. (BEP or the Sponsor; rated BBB (high) with a Stable trend by DBRS Morningstar). Although unrated, DBRS Morningstar’s Internal Assessment indicates that both BRPI’s and BBCC’s credit quality is consistent with that of BEP. DBRS Morningstar notes that as permitted under the Issuer’s Trust Indenture, MPT may eventually transfer, assign, or terminate the MPSA and related BRPI guarantee. In that event, BBCC will become the sole offtaker and MERSA will automatically close any revenue gap that may occur.
Based on the LTAG, the forecast minimum DSCR of 1.80x is consistent with that of the contracted hydro projects in DBRS Morningstar’s “A” rating category, without considering other factors. However, the ratings are constrained by the offtaker’s credit quality and refinancing risk. The MPT Portfolio appears to be well positioned for recontracting with the Independent Electricity System Operator (rated A (high) with a Stable trend by DBRS Morningstar) 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, DBRS Morningstar believes that future recontracting uncertainty with potential merchant exposure increases the refinancing risk. DBRS Morningstar’s base refinancing case conservatively assumes a non-PPA renewal scenario. Under such a scenario, the base-case project loan 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 DBRS Morningstar’s “Rating Project Finance” methodology. There has no revision to the base-case PLCR because the initial estimate in 2019 considered both the long-term fundamentals of electricity supply-demand and the short-term price volatility in the relevant wholesale market. DBRS Morningstar 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 MPT Portfolio’s strengths include (1) fully contracted cash flow with creditworthy offtaker(s); (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) refinancing risk, (2) constraint of the offtaker(s)’ credit quality, (3) relatively high interannual hydrological variability, and (4) future capex risk. 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. DBRS Morningstar 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. DBRS Morningstar notes that it does not receive a substantive non-consolidation legal opinion for this transaction.
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 further constrain the ratings, a material and sustained deterioration of credit metrics and/or asset quality, or heightened refinancing risk toward debt maturity.
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. For simplicity, the P50 value in this press release is assumed to be equal to the LTAG, despite the potential discrepancy between these two values.
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.
Separateness Covenants include, but are not limited to, the following: (1) maintenance of separate books, records, financial statements, and bank accounts; (2) business conducted solely in its own name; (3) the filing of its own tax returns as required by law; (4) no commingling of assets with those of other persons; (5) compliance with formalities to maintain its separate existence; (6) payment of its own liabilities from its own funds; and (7) fair and reasonable allocation of any overhead expenses shared with any affiliate. The Separateness Covenants are applicable to the Issuer and each Project Entity.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Rating Project Finance (September 1, 2020), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 2, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
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 email@example.com.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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