DBRS Confirms Northwestern Hydro Acquisition Co Inc. at A (low), Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Secured Bonds (the Bonds) rating of Northwestern Hydro Acquisition Co Inc. (the Issuer) at A (low) with Stable trends. The Issuer is a taxable corporation that owns a 35% stake in Northwest Hydro LP, which in turn owns Coast Mountain Hydro Limited Partnership (CMHLP or ProjectCo), a special-purpose vehicle (SPV) created to own and operate three operational run-of-river hydro generating facilities in Northwest British Columbia. ProjectCo has been selling electricity to British Columbia Hydro and Power Authority (B.C. Hydro; rated AA (high) with a Stable trend by DBRS) under three separate 60-year Energy Purchase Agreements (EPAs) since the three facilities achieved commercial operating date status in 2014 and 2015. The EPAs feature fixed-energy pricing, which is indexed to B.C.’s consumer price index for the entire contract term.

From 2016, the first year of full operations, to June 2019, cumulative generation has been 13% below the estimated long-term average generation. Lower-than-expected generation and revenue have been driven primarily by low waterflows, which were on average approximately 10% below forecast in 2016 and 2017. Waterflows in 2018 were almost 20% below forecast in 2018, levels which are comparable with the P-99, or historically worse-case level. The excessively poor waterflows in 2018 were exacerbated by a dry August to October, depriving the project of precipitation-related spikes in water volumes that were anticipated to supplement generation as water from glacial melt decreased with cooling weather. However, DBRS does note that waterflows in 2015 and 2014, when the facilities were partially completed, were approximately 10% above projected long-term averages, indicative of the cyclical nature of hydrology and suggesting that recent underperformance could improve when the cycle heads into an upswing. In this respect, waterflows in the first half of 2019 do appear to have largely increased to levels closer to historic averages. In general, DBRS notes that hydrological variability in run-of-river projects can be large, and statistically significant changes in patterns are often only visible over longer periods of time.

Debt servicing of the Bonds relies on distributions upstreamed from ProjectCo, and DBRS will closely monitor the effect of the weak waterflows on ProjectCo’s cash generation and dividend distributions. The actual debt service coverage ratio (DSCR) achieved by the Issuer in 2018 was 1.78 times (x) because of the timing of cash distribution and pro-rated debt service based on the August 2018 issue date of the bonds. The Issuer’s forecasted 2019 DSCR of 1.31x is well below DBRS’s expectations of 1.51x despite the improvement in waterflow from January 2019 to date, owing to the timing lag in cash settlement between ProjectCo and B.C. Hydro, as well as certain one-time operational issues that reduced net productivity. Because the Issuer only holds a minority stake in ProjectCo, bondholders only have recourse to the equity interest in ProjectCo instead of having direct security over the underlying assets and cash flow. 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 flow. This weakness is mitigated by the Sponsor’s collective majority interest in Northwest Hydro and by strong contractual protections offered by the security package. DBRS may take negative rating action if the interest-only DSCR continues to materially underperform compared with the rating case.

Notes:
All figures are in Canadian unless otherwise noted.

The principal methodologies are Rating Project Finance and DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries, 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.

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