DBRS Assigns Rating of A (low), Stable, to H2O Power Limited Partnership’s Senior Secured Bonds

DBRS Limited (DBRS) has today assigned a rating of A (low) with a Stable trend to the Senior Secured Bonds (the Bonds) of H2O Power Limited Partnership (the Issuer). The Issuer, a special-purpose vehicle, owns and operates eight hydroelectric power generation facilities (the Facilities) in Ontario and sells virtually all of the electricity generated to the Independent Electricity System Operator (IESO; rated A (high) with a Stable trend by DBRS) grid. The Issuer has a 20-year Contract for Existing Hydro-Electric Generation Facilities with the IESO (the IESO Contract) through November 2029. The IESO Contract tops up the revenue from physical energy sales, effectively providing a fixed price, thereby insulating the Issuer from energy price risk.

The main purpose of the Bond issuance is to refinance the existing term loan, expiring on March 31, 2017. The fixed-rate Bonds in the amount of $400 million have a maturity in line with the IESO Contract in November 2029. The Bonds will amortize partially over the life of the IESO Contract with a 20% ($80 million) balloon repayment at the maturity of the Bonds. Proceeds will also be used to make equity distributions, deposit funds in the Facilities Upgrade Account to upgrade and refurbish the hydroelectric generation facilities as well as pay transaction and other fees.

The rating is supported by (1) the strength of the 20-year, fixed-price IESO Contract with a highly rated offtaker; (2) robust financial metrics; (3) a strong operating history and hydrology record; and (4) an experienced owner and operations team. The rating is constrained by (1) hydrology risk; (2) refinancing risk; and (3) capital expenditure (capex) and Facility Upgrade risk. Nonetheless, these risks are partially mitigated by healthy resiliencies to hydrology variability, expected productive asset life beyond the maturity of the Bonds and a detailed long-term capex plan.

DBRS projects a minimum debt service coverage ratio (DSCR) of 1.93 times (x) in the rating case based on long-term average generation (LTAG) estimates of 868.6 gigawatt hours. The Project is subject to hydrology risk with projected P90 generation minimum DSCR of 1.68x. DBRS views the minimum DSCRs, under both LTAG and P90 generation projections, as supportive of the assigned rating. The Facilities have been in operation since around 1910 to 1920. The Public Sector Pension Investment Board (PSP) and BluEarth Renewables LP (together with PSP, the Sponsors) acquired the Issuer in May 2011. Since acquisition, the Issuer has developed a comprehensive capex program (sustaining maintenance and Facility Upgrade) to upgrade and refurbish generating equipment to improve reliability, increase capacity and efficiency, enhance overall operations and maintain the profitability of the assets. The sensitivity analysis demonstrates reasonable cash flow resiliency to higher-than-expected operating and capex costs but, given the age of the Facilities and despite having a capex plan in place, unforeseen expenditures could occur that may pressure DSCRs. As 20% of the Bonds will remain unamortized at the end of the IESO Contract, the Issuer will be operating on a merchant basis should the IESO contract not be renewed, subjecting the Issuer to price risk in addition to hydrology and capex/operating cost risks. Based on information provided, DBRS notes that the Facilities are expected to last for at least another 34 years (until 2050), given that they are maintained using good engineering and operating practices. Overall, DBRS views the Issuer as having strong projected financials with healthy resiliencies, a sustainable diversified asset base with the ability to optimize water flows and generation, a detailed capex strategy and operational expertise to service debt payments over the term of the Bonds.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

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

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