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

DBRS Limited (DBRS Morningstar) 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 are Stable. The rating confirmations reflect the Issuer’s continuing robust performance in F2022 and Q1 2023. The Stable trends reflect DBRS Morningstar’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 are single-purpose limited partnerships established by Ontario Power Generation Inc. (OPG; rated A (low) with a Stable trend by DBRS Morningstar) for redeveloping and operating four hydroelectric generating facilities totalling 924 megawatts on the Lower Mattagami River (the Project). Energy generated from the Project is sold under a 50-year hydroelectric energy supply agreement (HESA) to the Independent Electricity System Operator (IESO) until 2064. Based on DBRS Morningstar's assessment, IESO's credit quality does not constrain the assigned ratings.

The debt service coverage ratios (DSCRs) of 2.15 times (x) and 2.08x for F2022 (ended December 31, 2022) and the last 12 months Q1 2023 (ended March 31, 2023), respectively, remained robust, driven by higher revenue, but offset by cost increases. The debt-to-capital ratio of 63% as at March 31, 2023, is now close to the targeted 65%. The Little Long Dam Safety Project has continued to progress well, with a targeted completion by the end of 2023. The project’s capital costs are expected to be fully recovered with incremental revenue under the HESA. Additional bonds 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 to mature between 2024 and 2052, subject to refinancing. DBRS Morningstar 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 credit facilities of the same amount, 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. DBRS Morningstar currently estimates that approximately one-third of the original Bonds will remain outstanding in 2064 when the HESA expires. For the time being, DBRS Morningstar 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.

The ratings are underpinned by (1) the COS-style HESA, which eliminates hydrology, electricity prices, and the majority of operating costs and capital expenditure 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 Issuer Rating is on par with offtaker IESO’s credit quality, because DBRS Morningstar considers the residual risk between the offtaker and the Issuer to be negligible.

DBRS Morningstar expects the current ratings to remain stable for the next 12 months; however, an adverse assessment of the IESO’s credit quality, or a sustained and material deterioration of key operating or credit metrics, can trigger a negative rating action.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929 (May 17, 2022).

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

DBRS Morningstar applied the following principal methodologies:
-- Global Methodology for Rating Project Finance (September 6, 2022; https://www.dbrsmorningstar.com/research/402400);
-- DBRS Morningstar Global Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (February 24, 2023; https://www.dbrsmorningstar.com/research/410196); and
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694).

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

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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@dbrsmorningstar.com.

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

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

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this 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. DBRS Morningstar trends and ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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