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

DBRS Limited (Morningstar DBRS) confirmed Lower Mattagami Energy Limited Partnership's (LMELP or the Issuer) Issuer Rating and Senior Secured Bonds (the Bonds) credit rating at A (high), and its Commercial Paper credit rating at R-1 (low). All trends are Stable. The Bonds are guaranteed by Lower Mattagami Limited Partnership (LMLP). The credit rating confirmations reflect LMELP's and LMLP's continuing strong performance in 2024. The Stable trends reflect Morningstar DBRS' expectation for the credit metrics to remain stable over the next 12 months under a cost-of-service (COS)-style revenue contract-hydroelectric energy supply agreement (HESA).

KEY CREDIT RATING CONSIDERATIONS
LMELP 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 power generation facilities totalling 924 megawatts 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 (IESO) through 2064. Based on Morningstar DBRS' assessment, IESO's strong credit quality supports the Issuer's credit ratings.

The debt service coverage ratio (DSCR) of 2.12 times (x) for F2024 ended December 31, 2024, remained robust, driven by stable operating cash flow under the COS-style HESA. The debt-to-capital ratio of 63% as of December 31, 2024, is close to the targeted 65%. The Little Long Dam Safety Project has completed the vast majority of the construction. The Smoky Falls Dam Safety Project continues to advance, with 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 totalling $1.995 billion that are well staggered to mature between 2026 and 2054, 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 the event of a 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 refinancing in 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 credit rating action is unlikely given the level of the projected minimum DSCR and the refinancing risk; a negative credit rating action can be driven by (1) an adverse assessment of the offtaker's credit quality, (2) a sustained and material deterioration of key operating or credit metrics, or (3) a material increase in 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 credit ratings.

CREDIT RATING RATIONALE
The credit 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) a potential increase in leverage; and (3) any adverse effect from potentially lumpy capex toward the end of the HESA term.

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 (May 16, 2025) https://dbrs.morningstar.com/research/454196

CREDIT RATING DRIVERS AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of the Credit Rating Drivers
In the analysis of the Issuer, the credit rating drivers listed in the methodology are considered in the order of importance.

(B) Weighting of FRA Factors
In the analysis of the Issuer, the DSCR, the only applicable FRA, was considered more important.

(C) Weighting of the Credit Rating Drivers and the FRA
In the analysis of the Issuer, the FRA carries greater weight than the credit 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 (December 10, 2024), https://dbrs.morningstar.com/research/444393

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025, https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (February 3, 2025), https://dbrs.morningstar.com/research/447186
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025), https://dbrs.morningstar.com/research/454196

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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings.

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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