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

DBRS has today confirmed Lower Mattagami Energy Limited Partnership’s (LMELP) Issuer Rating and Senior Secured Bonds at A (high) and Commercial Paper at R-1 (low), all with Stable trends. The ratings reflect robust project economics supported by the credit strength of the offtaker and the offtaking agreement. LMELP is expected to have the financial and structural flexibility to manage primary risks and withstand potential downside scenarios during both construction and operating periods.

DBRS views LMELP as a hybrid entity having some of the characteristics of a traditional power project and a utility corporation. The sponsor, Ontario Power Generation Inc. (OPG; rated A (low) and R-1 (low) by DBRS), formed LMELP and Lower Mattagami Limited Partnership (LMLP; collectively, the Lower Mattagami River Project, or LMRP) to redevelop existing OPG hydroelectric generating assets on the lower Mattagami River in northern Ontario. OPG contributed the 434-megawatt (MW) existing generating assets to LMELP, while LMLP will hold the incremental 490 MW of new construction generating assets. Construction began in June 2010. According to OPG, work was proceeding consistent with the approved budget and schedule as of December 31, 2012. OPG is a significant and experienced power producer and hydro operator with about 19,000 MW of generating capacity and $4.9 billion in revenues for the 12-month period ending September 30, 2012. The Province of Ontario (rated AA (low) by DBRS) has been closely involved in the LMRP redevelopment.

Post-construction risks are considered low and manageable based on favourable cost-of-service type treatment under the 50-year Hydroelectric Energy Supply Agreement (HESA) with the Ontario Power Authority (OPA; rated A (high) by DBRS). The agreement covers all energy production from both the new and the existing assets and provides for robust project economics under cost pass-through mechanisms. While the HESA can provide revenue upside above the revenue requirement floor level, DBRS assumes a more conservative case that excludes the upside. All prudently incurred construction and operating costs are flowed through the HESA, which provides significant downside protection and is the primary driver for the ratings.

Risk during construction is considered reasonably low based on modest complexity, proximity to established sites, experienced contractors and Design Build Agreement and HESA protections against construction delays and cost overruns. Additional credit protection is provided by OPG’s guarantee of LMELP debt through the construction period and until the Recourse Release Date (after which recourse will be limited only to LMRP). Expected debt service coverage ratios are consistent with the rating category and the HESA revenues have limited downside, transferring hydrology and market price risk to OPA, a highly rated counterparty.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Project Finance (April 2011), which can be found on our website under Methodologies.