DBRS Finalizes A (low) Provisional Rating on PSS Generating Station LP (New Post Creek)

DBRS Limited (DBRS) has today finalized the provisional rating of A (low), with a Stable trend, on the Series 1 Senior Secured Bonds (the Bonds) issued by PSS Generating Station LP (PSS GS or the Issuer). The Bonds were issued to partially finance the construction of the 28 megawatt hydroelectric run-of-river project on Abitibi River (the Project or the Facility). The Project also includes the construction of a seven-kilometre transmission line. The rating reflects the following main factors:

(1) Ontario Power Generation Inc. (OPG) has provided an unconditional and irrevocable guarantee for the Bonds until the Recourse Release Date. In addition, the Project’s potential cost overruns and delay risk will be shared between the Issuer and the DB Contractor (as defined below). OPG is currently rated A (low), with a Stable trend, by DBRS.

(2) The Issuer and the Independent Electricity System Operator (IESO) have entered into a Hydroelectric Energy Supply Agreement (HESA), which protects the Project from hydrology and power price risk for 50 years. Payments under the HESA will commence on the date that the first unit at the Project achieves Commercial Operation Date (COD). The IESO is rated A (high), with a Stable trend, by DBRS.

(3) The Project has a strong majority owner, OPG, which is a large and experienced power generation operator with significant hydroelectric operational expertise. This is particularly important in terms of operating and maintaining the Project to meet the availability as required by the HESA.

However, the rating is largely limited by potential merchant risk and refinancing risk following the end of the HESA. Post-HESA, the Project will be operating on a merchant basis should the HESA not be renewed, subjecting the Issuer to hydrology and price risk.

Based on the base case presented by the Issuer, the portion of the unamortized Bonds remaining at the end of the HESA is estimated to be approximately 20%. DBRS notes that the Project is designed and built to last approximately 90 years should it be properly maintained as opined by an independent engineering report and as required by the trust indenture. Further, DBRS acknowledges that generally hydroelectricity is low-cost generation. However, DBRS views that there will be significant uncertainty with respect to market conditions for a hydro merchant generation plant 50 years from now.

The Bonds were issued in the amount of $245 million. The Bonds are secured by the physical assets and material contracts of the Issuer. The Bonds have an interest-only feature for the first ten years and will be amortized in a fashion such that the Project will achieve a minimum debt service coverage ratio (DSCR) of 1.52 times (x), with 20% ($49 million) of the Bonds remaining at the end of the HESA. OPG will provide a guarantee until the Recourse Release Date (when COD is reached and certain other conditions are met). DBRS views that a minimum DSCR of 1.52x is supportive of the assigned rating.

The Project is owned and developed in partnership between OPG and Coral Rapids Power Corporation, which is 100% owned by the Taykwa Tagamou Nation (TTN). Prior to the start of the second term year, TTN must own, directly or indirectly, at least a 20% interest in the partnership as required by the HESA and has the right to own up to 33%. The Project is being built by reputable hydro project construction firms: a partnership between Peter Kiewit Infrastructure Co. and Aecon Construction Group Inc. (the DB Contractor). The Project's annual output will be averaging 129 gigawatt hours. The cost is estimated to be approximately $300 million.

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.

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

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