DBRS Confirms H2O Power Limited Partnership at A (low) with Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Secured Bonds rating (the Bonds) of H2O Power Limited Partnership (the Issuer) at A (low) with Stable trends. The Issuer, a special-purpose vehicle, owns and operates eight hydroelectric power generation facilities (the Facilities) in Ontario and sells virtually all 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 (approximately 10.5 years remaining) 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 the early 1900s. The Public Sector Pension Investment Board (rated AAA with a Stable trend by DBRS) acquired majority ownership of the Issuer in May 2011. The Bonds are partially amortizing during the term of the IESO Contract with a balloon repayment of 20% ($80 million) at bond maturity in November 2029. The Issuer has advised DBRS that it intends to issue additional debt in the amount of up to $65 million, permissible under the Common Terms and Intercreditor Agreement.

The ratings remain supported by (1) the strength of the 20-year fixed-price IESO Contract with a highly rated offtaker, (2) a strong operating history and hydrology record and (3) an experienced owner and operations team. The ratings are constrained by (1) hydrology risk, (2) refinancing risk and (3) capex/operations and maintenance (O&M) and facility upgrade risk.

In 2018, the financial performance of the Facilities was below expectations because of lower generation of approximately 6% compared with projections, due to unfavourable (dry) hydrological conditions in Q2 and Q3 2018. As a result, the 2018 debt service coverage ratio (DSCR) was lower than projected but remained robust at 2.03 times (x). The availability of the Facilities was 98.5%, in line with projections. The overall financial performance remains supportive of the assigned ratings. In addition, the majority of the planned Facility upgrades are now complete; remaining upgrades to two Facilities continue with completion projected by end of 2019. The final capacity of the Facilities, after completion of these upgrade projects, is expected to be approximately 151 megawatts. The Independent Engineer has slightly lowered the long-term average generation (LTAG) by approximately 1% because of updated turbine performance results following completion of the majority of the upgrades. With the lower LTAG and slightly revised O&M and capex, the minimum projected DSCR slightly decreased to 1.87x from the previous minimum DSCR of 1.89x. DBRS believes the projected DSCRs will continue to remain supportive of the current ratings. DBRS may take a positive rating action if the financial performance remains consistently strong and the refinancing risk is mitigated. However, if the project experiences a sustained increase in capex/O&M expenses and/or reduced availability with material impacts on the DSCR as well as increased refinancing risk, an adverse rating action may be considered.

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

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

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.

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

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