DBRS Comments on the Muskrat Falls Project and the Project Bonds’ Rating

DBRS Limited (DBRS) is today commenting on the troubled construction of the 824 megawatt Muskrat Falls hydro project and its impact on the associated AAA-rated Guaranteed Senior Bonds (the Project Bonds). On June 24, 2016, Nalcor Energy CEO, Stan Marshall, announced that the estimated project costs have increased substantially to $11.4 billion from an already revised amount of $7.65 billion in September 2015. The scheduled first power has also been pushed out further to fall 2019 from year-end 2017.

Based on its experience in rating multiple hydro projects, DBRS recognizes that the construction risk of building hydro facilities varies widely, depending on design complexity, construction duration, contractual arrangement, contractor’ experience and site conditions. Although the construction risk for small run-of-river projects is relatively low, the risk is substantially higher for large projects involving dam-building activities with complex site conditions. Unforeseen geotechnical conditions can often cause significant cost overruns and delays. Given the Muskrat Falls project’s complexity, mega scale, harsh construction environment, contractors’ inexperience and a contractual arrangement without full risk transfer, the reported cost overruns and delays are not entirely a surprise. DBRS also believes, given the project’s mega scale and high risk, that even a fully wrapped engineering, procurement and construction contract (EPC contract) would have challenges ensuring on-time and on-budget delivery; notwithstanding that, an EPC contract of this size would have been very difficult to secure in the first place.

In spite of the project’s troubled development, the current AAA rating of the $5 billion Project Bonds issued by Muskrat Falls/Labrador Transmission Assets Funding Trust and Labrador-Island Link Funding Trust will not be affected. The rating reflects the unconditional and irrevocable guarantee by the Government of Canada (Canada; rated AAA with a Stable trend by DBRS). Hence, the Project Bonds’ rating will move in lockstep with Canada’s, irrespective of the project’s underlying construction risk.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Project Finance and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on our website under Methodologies.