Press Release

DBRS Assigns Provisional Rating of “A” to Spy Hill Power L.P. Bonds

Project Finance
January 08, 2013

DBRS has today assigned a provisional rating of “A” with a Stable trend to the Series A Senior Secured Amortizing Bonds (the Bonds) to be issued by Spy Hill Power L.P. (Spy Hill, ProjectCo or the Issuer), indirectly owned by project equity sponsor Northland Power Inc. (NPI), an experienced owner and operator of power assets, and secured by all assets of ProjectCo. ProjectCo is a special-purpose entity created to own, build and operate a simple-cycle 86 megawatt (MW) peaking facility, which commenced operations on October 19, 2011 (COD), under a 25-year peaking power purchase agreement (PPA) with SaskPower (rated AA, Stable trend). The project is located approximately 200 kilometres east of Regina on agricultural land leased from SaskPower under a separate 25-year agreement.

The project rating benefits from (i) a long-term PPA with a high credit quality counterparty in SaskPower, (ii) reasonable and independent engineer (IE) verified availability and heat rate performance requirements under the PPA, (iii) the proven track record of the LM6000 turbine-generator technology, (iv) a long-term services agreement with experienced and high-quality counterparties, (v) one year of operations that have outperformed the availability forecast and (vi) a minimum senior debt service coverage ratio (DSCR) of 1.70 times (x).

Bond proceeds of [$152.0] million will be used to repay $110.5 million in bank debt, to cover interest rate swap breakage of [$32.9] million, to pay expected transaction costs of [$3.0] million and to make a distribution of [$5.6] million to NPI. The financial structure benefits from several reserves, including (i) a cash (or letter of credit) funded six-month debt service reserve, (ii) a major maintenance reserve and (iii) an unplanned maintenance reserve. The Bonds will fully amortize six months prior to PPA expiry.
 
An availability tariff under the PPA with SaskPower represents approximately 93% of base case revenue (net of fuel) while the balance of revenue varies with hours of production and covers incremental operating costs. Effectively, the project’s profitability does not depend on how much electricity is produced but only that its generation is available if called upon by SaskPower. The contracted revenue is expected to generate a minimum and average DSCR of 1.70x, which is considered consistent with the provisional rating.

Peaking facilities provide system reliability by supplying incremental power as required during high-demand periods, and they operate infrequently, with capacity factors typically below 20%. Spy Hill’s availability tariff is effectively a capacity payment covering operating costs, debt service and an equity return. The payment is consideration for the option value of being able to dispatch additional peak-period power on short notice and with a rapid start from the project asset. So long as the project is available, the full payment is received whether or not the power plant runs.

The PPA transfers market, fuel and volume risk from the Issuer to SaskPower. The remaining primary risk for ProjectCo is performance risk: it must meet certain availability requirements or pay liquidated damages, as well as specific heat rate requirements, or pay a higher operating cost. Spy Hill’s performance depends primarily on the reliability of the turbine-generator technology, the long-term service agreement for the turbine generators and the experience of the owner-operator. Based on results since COD, the project has delivered 97.6% availability versus the 94% availability forecast for the first-year “teething period” and the 97% PPA requirement.

The project consists of two LM6000-PF combustion turbines, provided by GE Packaged Power, Inc. (GEPPI) and General Electric Canada Inc. (GEC), and associated equipment. The combustion turbines are based on a mature technology aircraft design with over 900 units installed globally and over 16 million fired hours collectively. The IE has reviewed LM6000 performance and has opined that the facility should meet availability and heat rate requirements and have a useful life beyond the term of the Bonds. Maintenance costs are fixed under a long-term services agreement with GEPPI and GEC – the General Electric (GE) gas turbine contractual service agreement.

The Issuer is a wholly owned subsidiary of NPI. NPI is the project operator and has a net economic interest in 1,005 MW of operating capacity and 320 MW of generating capacity in construction. This includes eight operating power projects that range in size from 21 MW to 265 MW and comprise 750 MW of gas-fired assets, all utilizing GE turbine technology. In addition to the project, NPI owns the 260 MW North Battleford Energy Centre in Saskatchewan, which is currently under construction. In DBRS’s opinion, the operation of a gas-fired power plant based on mature technology and the turbine-generator model type, managed according to manufacturer guidelines and with experienced personnel, is a low to moderate complexity task.

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 applicable methodology is Rating Project Finance, which can be found on our website under Methodologies.

Ratings

  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

ALL MORNINGSTAR DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AND ADDITIONAL INFORMATION REGARDING MORNINGSTAR DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES, RATING SCALES AND METHODOLOGIES.