DBRS Places InPower BC General Partnership Under Review With Negative Implications

DBRS has today placed the rating of InPower BC General Partnership’s Senior Secured Bonds Under Review with Negative Implications. InPower BC General Partnership (ProjectCo) is the special-purpose entity created to design, build, finance and maintain a replacement hydroelectric plant on the Campbell River of Vancouver Island under a 19.75-year project agreement (PA) with the British Columbia Hydro & Power Authority (BC Hydro). The rating action results from the decision of SNC-Lavalin Inc. (SNC), the design-build contractor (DB Contractor) on the project, to replace the subcontractor responsible for the supply and installation of the turbines and for their maintenance of the units during the 15-year service phase under a joint venture with SNC. The subcontractor was unable to provide the performance security required under the supply contract within the prescribed time.

The details of the proposed arrangement remain confidential as negotiations between the parties are still underway. However, DBRS understands that the DB Contractor is in the process of terminating IMPSA and has since identified a preferred alternative supplier, with a replacement contract expected to be finalized over the next few weeks. The DB Contractor is confident that it will be able to maintain its schedule, as the new design is expected to be incorporated into the overall project design and schedule in a seamless manner. Furthermore, any potential cost overruns resulting from this change will be the responsibility of SNC in accordance with the fixed-price, date-certain contract with ProjectCo. DBRS notes that no payments were made to IMPSA during the period where no Performance Bond had been provided.

Despite the DB Contractor’s confidence in its replacement strategy, DBRS remains concerned by this material development, given the specialized nature of the equipment, their long lead time, the fact that their supply is on the critical path and the limited float originally included in the schedule. Therefore, despite the replacement of the subcontractor by a financially stronger turbine supplier, the risk of significant erosion in the schedule over the months to come remains high, especially if the DB Contractor fails to quickly integrate its replacement supplier into the team or struggles to bring it up to speed effectively as it relates to incorporation of the new turbine design. The construction work was already approximately four weeks behind schedule at the time of the last report of the lenders’ technical advisor (LTA), due to issues related to environmental and site conditions, although the LTA believes that the Target Commercial Operation Dates for each of the three turbines, as well as the Target Service Commencement Date, will still be achieved.

The replacement will be subject to the approval of the lenders and BC Hydro, which is expected to be sought over the coming three to four weeks. The proposal will also be scrutinized by the LTA when more details are available. DBRS expects the rating to remain under review for several months but intends to update investors once the new turbine supply contract is finalized. Failure by the DB Contractor to replace IMPSA in a timely fashion and integrate the replacement supplier under the turbine supply contract in a seamless manner, with no material impact to key contractual milestones, will likely result in further negative rating action.

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.