Rating Action: Moody's upgrades Lower Mattagami Energy LP's rating to A1 from A2 and affirms P-1 short term rating. Outlook remains stable.
Global Credit Research - 17 Dec 2020
Approximately C$400 million of commercial paper program and C$1,595 million of outstanding rated long-term debt affected
Toronto, December 17, 2020 -- Moody's Investors Service, ("Moody's") today upgraded Lower Mattagami Energy Limited Partnership's (LMELP) senior secured rating to A1 from A2 and affirmed the Prime-1 (P-1) short term rating for its commercial paper. The outlook remains stable.
The rating upgrade reflects the maturity of the project since 2014 when expansion and upgrades to the project's four hydro-electric generating stations were completed with availability performance consistently above the minimum required under the long-term Hydroelectric Energy Supply Agreement (HESA) between LMELP and the Independent Electricity System Operator (IESO, Aa3 stable). The rating action also recognizes the good working relationship between the parties that results in a predictable application of the HESA leading to revenues and cash flow that consistently translate into strong debt service coverage ratios (DSCR) in excess of 1.90x. Positively, the agreed upon revenue requirements for the 2020-2023 period already incorporate a material capital expenditure program (the Little Long Dam Safety program) that was approved by the IESO. The program will result in additional debt but also translate into higher revenues once the new asset facilities are expected to be placed in service in 2022 and 2023 so that the DSCR should be largely maintained through the period. While the capital expenditure program is material, it is well within the issuer and its owner's capability to complete on time and budget.
The A1 rating is further underpinned by the supportive aspects of the HESA that allows LMELP to recover operating costs (with a four year budgeting cycle), depreciation on the approved rate base, interest expense on the deemed debt component (65%) of the capital structure, a deemed tax component and a return on equity component. This formula equates to an availability payment from a credit worthy counterparty being the IESO since the revenues are not exposed to any resource or demand risk. The minimum availability requirements are easily met because only the new assets held by LMLP need to meet a minimum availability of 80% on a rolling 36-month basis. With four separate generating stations, there is diversity in the assets, a feature that mitigates the risk of a single long outage having catastrophic consequences on the project's revenues. The assets are simple to operate and Ontario Power Generation Inc. (OPG, A3 stable) is an experienced operator of the assets. From a credit metrics point of view, the minimum revenue requirements as calculated in the HESA result in predictable debt service coverage ratios of 1.90x or above, a metric that is very strong in view of the nature and reliability of the revenues. Finally, LMELP benefits from strong liquidity through a CAD400 Million commercial paper program that is used to bridge the financing of capital expenditures in the debt capital markets and to manage the 65% limit on the debt to capitalization ratio.
The rating is constrained by the potential for increased leverage and the relatively high cost of the new facilities.
The stable outlook incorporates our expectation that the facilities will consistently generate the expected DSCRs based on the HESA and that the Little Long Dam Safety Project will be completed approximately as scheduled and on budget.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
What Could Change the Rating -- Up
A rating upgrade is unlikely owing to the rating of the IESO that acts as a cap for a further upgrade of LMELP.
What Could Change the Rating -- Down
The rating could face downward pressure if there was a downgrade of the IESO issuer rating or a material change in the OPG rating; if the availability of the generating stations approaches the minimum availability levels stipulated in the contract with the IESO or if a decrease in the cash flow profile limits LMELP's ability to meet the projected DSCRs.
LMELP, the issuer, is a limited partnership between OPG and LM Energy Inc., a wholly owned subsidiary of OPG. LMLP, the guarantor, is a limited partnership between OPG (75%) and Moose Cree First Nation (25%), through its subsidiary the Amisk-oo-Skow Finance Corporation. OPG is wholly-owned by the Province of Ontario (Aa3 stable) and is the largest power generator in Ontario with approximately 18,876MW of in-service capacity, more than 40% of which is hydroelectric generation capacity through 66 stations in Canada. Together, LMELP and LMLP have entered into a long-term HESA with the IESO. Under the HESA, LMELP and LMLP are required to operate four hydroelectric generating stations located on the Lower Mattagami River in northeastern Ontario. LMELP holds the existing assets while LMLP holds all incremental assets (a third unit for each of the existing three generating stations and a fully redeveloped fourth generating station). The combined capacity of the four facilities is almost 924 MW. The HESA will end approximately 50 years after the date the last incremental unit achieved commercial operation (2064).
The principal methodology used in these ratings was Power Generation Projects Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1236893. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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