DBRS Morningstar Confirms Ratings on Mississagi Power Trust at A (low), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Mississagi Power Trust’s (MPT or the Issuer) Issuer Rating and the rating on its $175 million 6.917% Series 1 Senior Secured Bonds (the Bonds) at A (low) with Stable trends. The rating confirmations reflect MPT’s consistently strong performance over the past few years. In late 2019, the Issuer secured firm funding commitments with creditworthy lenders to refinance the interest-only Bonds due November 27, 2020, thereby essentially eliminating the refinancing risk.

MPT owns four cascading operational hydrogenerating facilities with a total capacity of 488 megawatts (MW) located on the Mississagi River in Northern Ontario (the Project or the MPT Portfolio). 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), both of which mature on November 30, 2029. 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; rated BBB (high) with a Stable trend by DBRS Morningstar). Although DBRS Morningstar does not rate BRPI or BBCC, DBRS Morningstar’s internal assessment indicates that both entities have credit quality that is consistent with that of BEP. The MPSA and MERSA essentially transfer the economic benefits of a PPA with the Independent Electricity System Operator (rated A (high) with a Stable trend by DBRS Morningstar), over which bondholders have no direct security; therefore, the credit quality of the cash flow rests with BRPI and BBCC as opposed to the higher-rated IESO.

In 2019, power generation represented 119% of the forecast long-term average generation. DBRS Morningstar estimates that the debt service coverage ratio (DSCR) after capital expenditure (capex) will be approximately 7.30 times, assuming stable operating costs. In addition to analyzing the contracted cash flow, DBRS Morningstar also evaluated the Project’s performance under a hypothetical merchant scenario. DBRS Morningstar continues to believe that the MPT Portfolio has a strong market-based competitive position, is not entirely reliant on the PPA counterparties, and would likely continue to service its debt obligations on a merchant basis. This allows a moderate rating uplift to A (low) for the Issuer over the offtakers’ credit quality. The ratings also consider other factors, such as hydrological volatility and capex risk, which are somewhat mitigated by strong contracted cash flow.

DBRS Morningstar will not likely consider upgrading the Issuer’s ratings, given that BRPI’s and BBCC’s credit quality is not in the “A” rating category. DBRS Morningstar may consider a negative rating action with (1) a deterioration in BRPI and BBCC’s credit quality, (2) a decline in the strength of MPT’s market-based competitive position, or (3) a material deterioration in its credit metrics and/or asset quality.

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

The DSCR, in this case, is effectively the interest coverage ratio because there are no mandatory principal payments.

The principal methodology is Rating Project Finance, which can be found on dbrs.com under Methodologies & Criteria.

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.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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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