DBRS Assigns Clover Limited Partnership BBB Ratings, Stable Trends

DBRS Limited (DBRS) assigned BBB ratings with Stable trends to the Series A Senior Notes and the Series B Senior Notes (collectively, the Notes) issued by Clover Limited Partnership (the Issuer), an indirect, wholly owned subsidiary of Canada Pension Plan Investment Board (CPPIB or the Sponsor; rated AAA with a Stable trend by DBRS) through wholly owned subsidiaries Clover FinanceCo LP and Cordelio Clover Inc.. The Issuer is a special-purpose vehicle created to own a 49% interest in Enbridge Canadian Renewable LP (the Joint Venture (JV) or JV Partnership), with the remaining 51% owned by Enbridge Pipelines Inc. (EPI; rated “A” with a Stable trend by DBRS) and Enbridge Income Partners Holdings Inc. (together, with EPI, Enbridge). The debt issuance in the amount of $677.5 million includes two tranches of Notes: (1) Series A Senior Notes in the amount of $348.5 million, maturing on March 31, 2034, and (2) Series B Senior Notes in the amount of $329.0 million, maturing on June 30, 2034 (together, the Notes). The two tranches of Notes rank pari passu with each other. The main purpose of the Notes issuance is to refinance the bridge loan that was used to finance the purchase of the 49% interest in the JV.

The JV owns an approximately 74% interest (1,035 megawatts (MW)) in a 1,403 MW portfolio (the Portfolio) of 11 operating wind-power-generating facilities (with a total capacity of 1,303 MW) and three operating solar-power-generating facilities (with a total capacity of 100 MW; collectively, the Facilities or the Assets) located across Canada. The Issuer’s interest amounts to 507.4 MW (the Issuer Portfolio), approximately 36% of the Portfolio. The JV wholly owns seven Facilities, with the remaining partially owned. The average age of the Portfolio is approximately seven years, putting it below its midlife point assuming a 20- to 25-year useful asset life. The Portfolio is contracted under power purchase agreements (PPAs) and/or swap (hedging) agreements for delivery of electricity and renewable energy credits with creditworthy counterparties. The PPAs/swap agreements feature fixed energy pricing, insulating the Issuer from energy price risk, but the Facilities are subject to wind and solar resource risk. The Facilities have historically maintained healthy levels of production and availability.

Debt service of the Notes will rely on dividends up-streamed from the JV, and therefore Noteholders only have an equity interest in the JV Partnership instead of having direct security over the underlying assets and cash flows. This structure is inherently weaker than a typical project finance structure where an Issuer has full and direct control over the underlying assets and cash flows. However, the structural weakness (or structural subordination) is effectively mitigated through a robust governance framework and debt covenants that grant Noteholders certain veto powers over key financial decisions.

The debt covenant package also provides the Noteholders with credit protection akin to a traditional project finance transaction, with features including a security package pledging the Issuer’s interest in the JV to the Noteholders, blocked accounts, a cash flow waterfall, a debt service reserve account (DSRA), an additional Liquidity Reserve Account and a restricted payment test requiring a minimum trailing 12-month debt service coverage ratio (DSCR) of 1.20 times (x).

The ratings are supported by (1) long-term contracted revenues with highly creditworthy offtakers, (2) a good operating track record with cash flows supported by a regionally diversified asset base, (3) upside potential from merchant revenues and (4) an experienced owner-operator. The primary rating constraints include (1) wind/solar resource and energy production uncertainty, (2) operations and maintenance (O&M) and capital expenditure risk and (3) a weaker-than-standard security package because of partial ownership interest nature.

DBRS’s rating case is based on one-year P90 portfolio generation sculpted to achieve a minimum contracted DSCR of 1.34x. PPAs/swap agreements expire at different times over the course of the debt term. Accordingly, the contracted DSCR includes only contracted/hedged cash flows at any given time. There is further upside potential to DBRS’s rating case from merchant revenues that are not included in the contracted DSCR profile. The minimum consolidated DSCR (combined contracted and merchant cash flows) is projected to be 1.35x, with an increasing profile rising to around 2.0x toward the debt tail, based on conservative merchant power price assumption. DBRS notes that the contracted DSCR of 1.34x is at the lower end of the BBB rating range. However, the assigned ratings are supported by additional benefits and risk mitigants, which include (1) a geographically and technologically diversified asset base with a history of strong actual performance, (2) upside potential from merchant revenues, (3) higher DSCR resiliencies in case of catastrophic events and (4) potential for some operational benefits, such as centralized O&M cost management. A rating upgrade is unlikely in the near to medium term given the relatively low minimum contracted DSCR. A negative rating action can be triggered by consistent and material operating underperformance that causes the future DSCR to drop below the rating-case projections.

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

The principal methodologies are Rating Wind Power Projects (October 2018), Rating Solar Power Projects (October 2018) and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (December 2017) which can be found on dbrs.com under Methodologies.

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

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.