DBRS Confirms Rating of A (low) to North Battleford Power L.P. Bonds, Stable

DBRS has today confirmed the Series A Senior Secured Amortizing Bonds (the Bonds) issued by North Battleford Power L.P. (ProjectCo or the Issuer), a limited partnership wholly owned by project equity sponsor Northland Power Inc. (NPI), at A (low) with a Stable trend. NPI is an experienced owner and operator of power assets with net economic interest in 22 operating facilities and a combined generating capacity of 1,345 megawatts (MW). ProjectCo is a special-purpose entity that owns and operates a combined cycle 260MW base load power generation facility, in operation since June 5, 2013.

The facility benefits from a 20-year baseload power purchase agreement (PPA) with Saskatchewan Power Corporation (SaskPower; rated AA, Stable), expiring in June 2033. The project is located approximately 150 kilometres northwest of Saskatoon on land owned by the Issuer. The senior secured Bonds which were issued in September 2013 (current outstanding at June 30, 2014 = $655.5 million) fully amortize six months prior to PPA expiry.

The rating continues to be supported by: (i) a long-term PPA that transfers demand and price risk to SaskPower, (ii) the cost for the fuel supply and transportation being largely a pass-through under the PPA, (iii) the achievable availability levels and heat rate assumptions, (iv) the proven and mature technology of General Electric Company’s (GE) 7FA turbine-generator, (v) a long-term services agreement with General Electric Canada (GEC), (vi) good operating performance albeit with limited history, and (vii) a minimum senior debt service coverage ratio (DSCR) of 1.81 times (x), considered consistent with a rating of A (low). Actual DSCR as disclosed in the quarterly compliance certificate dated June 30, 2014, was 1.83x (which included three quarters of actual results from Q4 2013 and one quarter of projections).

The primary risk for the Issuer is performance risk. Less than minimum load capacity production levels during peak periods (on peak and off peak, as calculated in the PPA) lowers revenues and the project may be exposed to liquidated damages. Performance therefore 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. Given the project is a single combustion turbine configuration, if the machine fails and there is a prolonged outage revenue impact is far more significant than when there are multiple turbine configurations. This constrains the rating.

Based on results to date, the project has met production levels and was in line with revenue projections. DBRS’s estimate for 2014, the first full year of operations, is expected to exceed the 2014 operating plan by over 4% cash flow available for debt service (to $94.5 million from $90.5 million), and subsequently DSCR levels (from 1.85x to 1.93x). The project economics are also resilient to extreme downside shocks including higher unplanned outages, lower-than-expected availability, higher inflation and higher non-fuel O&M costs.

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.