DBRS Finalizes Provisional Rating of BBB (high) on InPower BC General Partnership

DBRS has finalized its provisional rating of BBB (high) with a Stable trend to the $299.2 million Senior Secured Bonds of InPower BC General Partnership (ProjectCo), the special-purpose entity created to design, build, finance and maintain a replacement hydroelectric plant on the Campbell River of Vancouver Island (the John Hart Generating Station Replacement Project) under a 19.75-year project agreement (PA) with the British Columbia Hydro & Power Authority (BC Hydro). The rating is primarily predicated on the high credit quality of the availability-based service payment from BC Hydro, with no exposure to hydrology or electricity price risk, as well as the pass-down on a back-to-back basis of all design and construction obligations to a very experienced team (DB Contractor) and the sizeable security package provided by the latter, which includes a guarantee from SNC-Lavalin Group Inc. (SNC; rated BBB with a Negative trend by DBRS). A short service phase limiting ProjectCo’s exposure to lifecycle risks and relatively sound pro forma financial metrics are also positive considerations. Constraining the rating, however, are the customary risks pertaining to the construction phase and, more particularly, the geotechnical uncertainty related to the extensive excavation work required for the project. Investigations conducted to date point to reasonably good geotechnical conditions and BC Hydro has agreed to retain geotechnical risk along the power tunnel alignment, but ProjectCo and its contractor remain exposed to considerable uncertainty pertaining to the balance of the tunnel network and the underground powerhouse, which, in DBRS’s view, places the project in the moderate complexity category. ProjectCo also retains all routine maintenance and lifecycle obligations except for mechanical and electrical systems, water conveyance systems and the generating units. While those assets are not expected to require much maintenance, any adverse development could materially affect coverage given the limited resources carried by ProjectCo.

The key project components include a 2,071-square metre underground powerhouse with three Francis turbines with a total capacity of 132 megawatts (MW) and the replacement of the existing penstocks and tailrace with an 8.1-metre diameter, 1.7-kilometre long power tunnel running along the current penstocks route to the new powerhouse. The project also includes a bypass system, as well as service and access tunnels. The 66-month construction phase is projected to start in February 2014 and will be led by SNC-Lavalin Inc., which will act as project manager and rely on specialists to undertake the key components of the project, including Industrias Metalurgicas Pescarmona S.A.C.I y F. (IMPSA) for the supply and installation of the turbines and Frontier-Kemper for the tunneling work. The three generating units are expected to be operational by October 10, 2018 (Target Service Commencement Date), which will trigger the commencement of the 15-year service phase. This will be followed by the completion of the bypass system, the decommissioning of the existing powerhouse and structures, the decontamination of certain areas along the penstock route and the completion of minor roadwork, with Total Completion scheduled on August 13, 2019.

No major issues have been identified by the Lenders’ Technical Advisor (LTA; Mott MacDonald), who takes comfort in the scale and expertise of the DB Contractor and views the construction strategy, budget and schedule as appropriate. Furthermore, considerable rating uplift is provided to the construction phase by the construction security package provided to ProjectCo, which is comprised of a letter of credit equal to 15% of the contract price and a performance guarantee from SNC.

The DB Contractor will be responsible for maintaining the new units as they become operational during the construction phase until Service Commencement is achieved. ProjectCo has passed down for the term of the service phase all routine and lifecycle maintenance of the generating systems to a joint venture of subsidiaries of SNC and IMPSA (the Service Provider) under a fixed-price contract with terms and requirements consistent with those in the PA. Service obligations pertaining to the general infrastructure, including the powerhouse and related systems, the tunnel network and the lands have been retained by ProjectCo and will be sourced from SNC subsidiaries and local trades as needed. BC Hydro retains responsibility for the dams and for operating the plant. It will also provide to the project at no fee a pool of qualified labour (8,580 man-hours per year) to perform the more technical maintenance of the generating units, which is under the Service Provider’s scope of services. DBRS notes that the operating standards outlined in the PA are extensive but well defined and standard for a hydro project. This view is shared by the LTA, who also notes that the allowances under the PA for forced turbine outages greatly reduce the risk of material payment deductions. Furthermore, provided the facility is correctly designed, built and operated, the main structural items and the generating systems are not expected to experience any material degradation.

The $835.3 million budget for the construction phase will be mostly funded with the $299.2 million Senior Secured Bond issue and monthly progress payments from BC Hydro totalling $403.6 million. A $63.2 million short-term construction facility will cover the remainder of the budget, repaid with a $25 million Decommissioning Payment and a portion of the $53.8 million equity injection. This results in slightly better than normal, though still high, gearing of 87:13 projected at financial close and a relatively stable DSCR of 1.26 times (x) throughout the service phase, which is viewed as adequate for a BBB-range hydro project with no hydrology or pricing risk. The debt-to-CFADS ratio is projected to start at 8.0x in Year 1 and will gradually decline thereafter. Due to the modest maintenance needs resulting from the project’s short service phase and long-life assets, breakevens are fairly high relative to other public-private partnership (PPP) projects. However, this comfort is dampened by the nature of the assets under ProjectCo’s responsibility, which normally require little maintenance, but, when underperforming, have the potential to lead to substantial unexpected maintenance needs.

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 Public-Private Partnerships, which can be found on our website under Methodologies.

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