DBRS Morningstar Confirms MPT Finco Inc.’s Ratings at BBB With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating as well as the Series A Bonds and Series B Bonds (together, the Bonds) ratings of MPT Finco Inc. (the Issuer) at BBB with Stable trends. The rating confirmations reflect the satisfactory operating and financial results over the past 12–18 months. DBRS Morningstar expects Stable rating trends for the next 12 months notwithstanding the near-term hydrological volatility.

The 10-year fixed-rate Bonds of approximately $628 million are used to finance the operations of four cascading operational hydro-generating facilities owned by Mississagi Power Trust (MPT) with a total capacity of 488 megawatts on the Mississagi River in Northern Ontario (the MPT Portfolio or MPT Assets). On November 27, 2020 (the Second Closing Date), the existing MPT debt was repaid from proceeds from settling the delayed-draw Series B Bonds. Both tranches of Bonds (approximately $596 million outstanding) rank pari passu and partially amortize on a pro rata basis to mature on November 30, 2029, with an aggregate balloon amount of $350 million, subject to refinancing.

In 2020 and the last 12 months (LTM) ended June 30, 2021 (LTM 2021), energy generation represented approximately 122% and 96% of the forecast long-term average generation (LTAG), respectively. In 2020, DBRS Morningstar’s adjusted debt service coverage ratio (DSCR) of 2.36 times (x) was materially stronger than the forecast 1.80x, driven by better-than-expected hydrology, well-controlled operations and maintenance (O&M) cost, and relatively low capital expenditures (capex). For the LTM 2021, the DSCR of 1.80x was as expected as lower-than-anticipated revenue was largely offset by lower expenses. However, the MPT Portfolio, similar to other hydro plants in Ontario, recorded poor hydrology in Q2 and Q3 2021. It remains to be seen whether this marks the end of the hydrology upcycle over the past several years. DBRS Morningstar also notes that capex was relatively heavy in 2021 as the Sponsor is undertaking major refurbishment of Red Rock Unit 1. As a result, the DSCR in 2021 would most likely fall below the forecast base-case of 1.80x, which in itself provides a significant cushion for the current rating level.

Up until March 1, 2021, cash flow was supported by two power purchase agreements (PPAs; the Master Power Purchase and Sale Agreement (MPSA) and the Mississagi Energy Revenue Support Agreement (MERSA)). The effective offtakers were Brookfield Renewable Power Inc. (BRPI; through its guarantee) and Brookfield BRP Canada Corp. (BBCC), two entities affiliated with Brookfield Renewable Partners L.P. (the Sponsor; rated BBB (high) with a Stable trend by DBRS Morningstar). DBRS Morningstar notes that, as permitted under the Issuer’s Trust Indenture, MPT may eventually transfer, assign, or terminate the MPSA and related BRPI guarantee. In that event, BBCC will become the sole offtaker and MERSA will automatically close any revenue gap that may occur. On March 1, 2021, the MPSA was assigned to BBCC, and as a result, the MERSA has become the sole PPA going forward. This, however, will not affect the contracted cash flow in the future. DBRS Morningstar notes that BBCC went through some internal reorganization, which reduced its asset base in the past year. Although unrated, DBRS Morningstar’s Internal Assessment indicates that BBCC’s current credit quality does constrain the ratings.

Based on the LTAG, the forecast minimum DSCR of 1.80x is consistent with that of the contracted hydro projects in DBRS Morningstar’s “A” rating category, without considering other factors. However, the ratings are constrained by the offtaker’s credit quality and refinancing risk. The MPT Portfolio appears to be well positioned for recontracting with the Independent Electricity System Operator (rated A (high) with a Stable trend by DBRS Morningstar) at debt maturity because of its significant storage capacity as an emissions-free peaker, which is of great importance to Northern Ontario’s grid stability. Nonetheless, DBRS Morningstar believes that future recontracting uncertainty with potential merchant exposure increases the refinancing risk. DBRS Morningstar’s base refinancing case conservatively assumes a non-PPA renewal scenario. Under such a scenario, the base-case project loan coverage ratios (PLCRs) of 2.0x to 2.6x at P90 to P50 generation levels, respectively, still indicate ample cash flow to support a successful refinancing; however, this level of PLCR constrains the ratings to the BBB range, according to DBRS Morningstar’s Rating Project Finance (August 18, 2021) methodology. DBRS Morningstar notes that the spot and forward merchant power prices in the relevant markets have spiked in recent months, driven by the increased natural gas prices. Despite the positive movement of short-term merchant power prices, DBRS Morning has made no adjustment to the initial price assumption in the base-case PLCR calculation. This is because DBRS Morningstar believes that the long-term fundamentals of electricity supply-demand have not been materially changed since 2019, despite the short-term price volatility in the relevant wholesale markets. DBRS Morningstar does not assign ratings beyond the term of the Bonds, but assesses the probability of a successful refinancing based on the MPT Assets’ remaining economic value at the refinancing point.

The MPT Portfolio’s strengths include (1) fully contracted cash flow with a creditworthy offtaker, (2) a unique peaking hydro portfolio that is important to Northern Ontario’s grid stability, (3) high-quality assets with a reliable operating history, and (4) a highly experienced owner/operator with robust credit quality. The challenges include (1) constraint of the offtaker’s credit quality, which can be volatile, (2) refinancing risk, (3) relatively high interannual hydrological variability, and (4) future capex risk. The Bonds are structured as a project finance transaction with standard features, including a cash flow waterfall subject to blocked accounts. The key reserve accounts include a six-month debt service reserve account and a forward-looking capex reserve account to be funded by cash or nonrecourse letters of credit. The equity distribution lockup test is set at a minimum DSCR of 1.20x. The Issuer and each Project Entity are subject to customary Separateness Covenants in the Trust Indenture. DBRS Morningstar relied solely on the separateness features applicable to the Issuer and each Project Entity to take comfort that such parties will remain legally and operationally separate and apart from the Sponsor and any of the Sponsor’s affiliates. DBRS Morningstar notes that it has not received a substantive nonconsolidation legal opinion for this transaction.

A rating upgrade is unlikely in the near term unless satisfactory recontracting of the MPT Assets occurs well before the refinancing date. A negative rating action may be triggered by any of the following: a material deterioration of the PPA offtaker’s credit quality to constrain the ratings, a material and sustained deterioration of credit metrics and/or asset quality, or heightened refinancing risk toward debt maturity.

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/373262.

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

PXX means exceedance probabilities. A P50-P90-P99 value describes the estimated minimum electricity generation with a probability of 50%, 90%, or 99% in any given year. For simplicity, the P50 value in this press release is assumed to be equal to the LTAG, despite the potential discrepancy between these two values.

Project Entity means (1) prior to the Second Closing Date, each of MPT, Mississagi Property Inc. (MPI), Mississagi Power Trust Holdings LP, and Mississagi Power Trust Holdings Inc. and (2) from and after the Second Closing Date, each of MPT and MPI.

The principal methodology is Rating Project Finance (August 18, 2021; https://www.dbrsmorningstar.com/research/383185), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

Because the company is private and its financial statements are considered confidential by the Issuer, please note that DBRS Morningstar will not be publishing a rating report in addition to its press release with respect to the ratings.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577