DBRS Confirms Rating of A (low), Stable, on H2O Power Limited Partnership Senior Secured Bonds

DBRS Limited (DBRS) confirmed the A (low) rating with a Stable trend on 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, thereby insulating the Issuer from energy price risk. The Facilities have been in operation since around 1910 to 1920. The Public Sector Pension Investment Board (PSP; rated AAA with a Stable trend by DBRS) 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 rating remains 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, a detailed long-term capex plan and expected productive asset life beyond the maturity of the Bonds.

In the nine-month period from April to December 2017, the project performance has met expectations. Facility generation, availability and debt service coverage ratio (DSCR) remained in line with projections. A slight delay in the execution of upgrades at one of the generating stations following a change in the configuration of the turbines resulted in lower capex being spent in 2017; however, no cost overruns are expected. Accordingly, for the period of 2018 to 2020, DBRS has updated its projections to reflect the change in timing of these capex expenses. As a result, the minimum DSCR is projected to drop to around 1.89x, slightly lower than the previous minimum DSCR of 1.93x. DBRS believes that the projected DSCRs will continue to support the assigned ratings. The other major upgrade and sustaining maintenance projects are proceeding well with no major issues.

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 the 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. DBRS notes that the Facilities are expected to last for at least another 34 years (until 2050) as opined by the independent engineer, provided that it is maintained using good engineering and operating practices. DBRS may take a positive rating action if the Issuer successfully completes the upgrade program, financial performance remains consistently strong and the refinancing risk is mitigated. However, if the project experiences a sustained increase in capex/operations and maintenance expenses and/or reduced availability with significant impacts on the DSCR, an adverse rating action may be considered. 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 Documents or by contacting us at info@dbrs.com.

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

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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