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Global Credit Research - 12 Aug 2010
Toronto, August 12, 2010 -- Moody's has assigned an A2 issuer rating with stable outlook to
Lower Mattagami Energy Limited Partnership (LMELP). LMELP's
debt is guaranteed by Lower Mattagami Limited Partnership (LMLP),
an affiliated entity. LMELP and LMLP will redevelop or expand,
finance and operate four hydroelectric generating stations located on
the Lower Mattagami River in north-eastern Ontario which are currently
owned by Ontario Power Generation Inc. (OPG). LMELP will
hold the existing assets (three existing generating stations) while LMLP
will hold the incremental assets resulting from the expansion and/or redevelopment
of the stations (a third unit for each of the existing three generating
stations and a fully redeveloped fourth generating station).
The rating reflects the very predictable cash flows expected over the
life of the financing through the operation of the hydroelectric energy
supply agreement (HESA) executed between LMLP, LMELP and the Ontario
Power Authority (OPA), a highly rated entity. The 50-year
agreement will provide LMLP and LMELP with a monthly payment which is
envisioned to be sufficient to cover all prudently incurred costs and
a return on equity similar to that received by regulated utilities in
Ontario. In addition, the contract allows LMLP and LMELP
to receive a minimum revenue only subject to minimum levels of availability
being achieved, thus insulating the project from hydrology risk,
and allows LMELP to keep most of the upside from market revenues above
the minimum revenue requirement (similar to what OPG would have been able
to receive from the LMELP assets in absence of the HESA).
The rating further reflects the fact that construction risk is borne by
OPG, which is owned by the province of Ontario, and that OPG
will unconditionally guarantee LMELP's debt obligations until the
recourse release date. OPG's long-standing operating experience
with the assets being transferred to LMELP and with hydroelectric facilities
in general as well as the proven technology associated with building and
operating the LMLP assets provide further support to the rating.
Moody's acknowledges that even though the cost per KWh for LMLP's incremental
assets will be above market prices, present Ontario electricity
spot prices do not support the construction of new power generation without
an agreement with the OPA. Moody's takes comfort in the fact that
the redevelopment/expansion of LMLP's assets takes place in the context
of the province of Ontario's broader objectives for new power generation
and in the OPA's unconditional right to recover from Ontario's electricity
customers the cost of the contracts it enters into.
The debt service coverage ratio is expected to average 1.90 times
with a minimum of 1.77 times (based on 65% debt to capitalization
and floor revenues). While these metrics are more typical of Baa
rated power projects, Moody's believes that they are fairly
resilient due to the structure of the HESA. In addition,
expected increases in Ontario power prices will result in debt service
coverage ratios which could improve compared to the minimum levels derived
from the floor revenues.
The rating also reflects LMELP's material exposure to refinancing
risk, which is more akin to that normally exhibited by a corporate.
However, LMELP expects to stagger the bond maturities in order to
avoid large maturities in any single year. As well, at maturity
of the HESA, there should be approximately $700 million of
the original debt left to repay (excluding debt associated with sustaining
capex and/or major rehabilitations). While the size of the refinancing
risk at maturity of the HESA is viewed as a credit negative, Moody's
believes that the refinancing risk is mitigated by a 10-year extension
option of the HESA, which only applies to the incremental assets,
and Moody's expectation that the unamortized project debt could comfortably
fully amortize well before the end of the HESA, if required.
Finally, Moody's further observes the potential for an increase
in leverage. While the Equity Support Agreement sets the maximum
debt to capitalization ratio at 65% for the initial two pricing
periods (with adjustments in subsequent pricing periods reflecting the
increased or decreased debt ratio in a sample of utilities regulated by
the Ontario Energy Board), the parties thereto could agree to a
different ratio (up to 80% on a debt incurrence basis).
An increase in leverage would result in weakening DSCR as well as increased
refinancing risk at the end of the HESA.
LMELP 's rating outlook is stable reflecting in the near-term the
manageable construction risk borne by OPG and very stable financial metrics
once the plants are fully operational.
The principal methodology used in rating LMELP is Moody's methodology
for Power Generation Projects, published in December 2008 and available
on www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
LMELP and LMLP are partnerships whose partners are, in the case
of LMELP, OPG and LM Energy Inc., a wholly owned subsidiary
of OPG and in the case of LMLP, OPG and LM Extension Inc.,
also wholly owned by OPG. It is expected that, ultimately,
the Moose Cree First Nation will hold up to 25% of LMLP.
Catherine N. Deluz
VP - Senior Credit Officer
Project Finance Group
Moody's Canada Inc.
Chee Mee Hu
MD - Project Finance
Project Finance Group
Moody's Investors Service
Moody's Canada Inc.
Moody's assigns A2 issuer rating to Lower Mattagami Energy Limited Partnership
70 York Street
Toronto, ON M5J 1S9
No Related Data.
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