DBRS Assigns Provisional Rating of A (low) to North Battleford Power L.P. Bonds

DBRS has today assigned a provisional rating of A (low) with a Stable trend to the Series A Senior Secured Amortizing Bonds (the Bonds) to be issued by North Battleford Power L.P. (ProjectCo or the Issuer), a limited partnership wholly owned by project equity sponsor Northland Power Inc. (NPI), an experienced owner and operator of power assets. ProjectCo is a special-purpose entity formed in July 2010 to own, build and operate a combined cycle 260 megawatt (MW) base load power generation facility, which commenced operations June 5, 2013 (COD), under a power purchase agreement (PPA) with Saskatchewan Power Corporation (SaskPower; rated AA, Stable), expiring 20 years from COD. The project is located approximately 150 kilometres northwest of Saskatoon on land owned by the Issuer.

Bond proceeds of [$673] million will be used to repay a $542 million construction period bank facility, cover a swap breakage cost of [$76] million, pay expected transaction costs of $5.5 million, and provide a distribution of $50 million to the equity sponsor. Remaining equity is approximately 6.8% of the capital structure. The Bonds benefit from two reserves, including (i) a six-month debt service reserve funded by cash or Letter of Credit (LC) (non-recourse to the Issuer), and (ii) a major maintenance reserve funded by project cash flows according to a three-year look-forward mechanism. The Bonds fully amortize six months prior to PPA expiry.

The project rating benefits from (i) a long-term PPA that transfers fuel, price and demand risk to SaskPower, (ii) achievable availability and heat rate assumptions, (iii) General Electric Company (GE) 7FA turbine-generator technology, (iv) a long-term services agreement with General Electric Canada (GEC) and (v) a minimum senior debt service coverage ratio (DSCR) of 1.77 times (x), considered consistent with the provisional rating of A (low).

The Project is exposed to performance risk mainly during on-peak hours (defined in the PPA as non-holiday weekdays from 6 a.m. to 10 p.m.) when the facility is obligated to run at full load. Under the PPA, revenues decline if power generation is lower than forecast due to higher outage rates and lower plant availability, which is assumed to be 93% (verified by the Independent Engineer (IE)), based on a forced outage rate of 3% in the base case. With a base case minimum DSCR of 1.77x, the project can sustain an extreme downside forced outage scenario of 17% in a single semi-annual period before breakeven debt service.

The IE has opined that a forced outage rate greater than 10% for a year is a low risk, and two consecutive years of 10% forced outage has, in their own experience, only been observed once when two consecutive 100-year floods caused the shutdowns. Most forced outages are minor stoppages lasting less than a day. Catastrophic failures that cause 10% forced outages are typically caused by force majeure events and covered by the project’s insurance, subject to the related deductibles.

The project operates a GE 7FA combustion turbine (CT), under a long-term services agreement (CSA) with GEC and also a steam turbine with a heat recovery steam generator unit provided by Alstom. It is the CT’s performance that is more critical to achieving expected availability at full load production during on-peak hours. The CT is based on a mature technology with over 750 units installed globally. The IE has reviewed 7FA performance and has opined that the facility is expected to meet availability and heat rate requirements and have a useful life beyond the term of the Bonds. In DBRS’s opinion, the operation of a gas-fired power plant based on well-understood, mature technology and the proven track record of the turbine-generator model type, managed according to manufacturer guidelines by experienced personnel, entails low to moderate risk.

The primary risk for the Issuer is performance risk. Less than full load production during peak periods lowers revenues and, below approximately 93% availability, the project begins to incur liquidated damages (LDs). Performance depends primarily on the reliability of the turbine-generator equipment, the long-term service agreement for the turbine-generator and the experience of the owner-operator. The project relies on a single combustion turbine configuration, so that if the machine fails and there is a prolonged outage, the revenue impact is greater than it would be for a multiple turbine configuration. This constrains the rating. Based on results since COD, the project has delivered availability above plan exceeding production and revenue projections and incurring no LDs. At a minimum DSCR of 1.77x, the project economics are resilient under very extreme downside projections of high unplanned outages and lower-than-expected availability.

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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.