DBRS Confirms PSS Generating Station LP (New Post Creek) at A (low) with a Stable Trend

DBRS Limited (DBRS) has today confirmed the rating of the Series 1 Senior Secured Bonds (the Bonds) issued by PSS Generating Station LP (New Post Creek) (the Issuer) at A (low) with a Stable trend. The Bonds were issued to partially finance the construction of the 28-megawatt hydroelectric run-of-river project on Abitibi River (the Project) in northeastern Ontario. The Project consists of two generating turbine units, and annual output is expected to average 129 gigawatt hours. The Project also includes the construction of a 7-kilometre transmission line.

The Bonds were issued in the amount of $245 million and 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 amortize thereafter, with the Project achieving a minimum debt service coverage ratio of 1.50 times.

Since DBRS first rated the Bonds in October 2015, the Project has been under construction. DBRS has reviewed the latest available monthly construction progress report (August 2016). Construction is 69% complete — well ahead of schedule — and under budget. The Commercial Operation Date (COD) is expected in March 2017. All major equipment is on site, and powerhouse, intake and spillway structure concrete pouring is almost complete. The main risk to the Project during the construction phase continues to be geotechnical conditions, which are being monitored and well reported in progress reports.

The rating reflects the following main factors:

(1) During the construction phase, the Issuer benefits from an unconditional and irrevocable guarantee from OPG that covers all obligations, liabilities and indebtedness of the Issuer under the Bonds. The guarantee continues until the recourse release date, which is when COD is reached and certain other conditions are met. The Project is being built in partnership by two reputable hydro project construction firms: Peter Kiewit Infrastructure Co. and Aecon Group Inc. In addition, the Project’s potential cost overruns and delay risk will be shared between the Issuer and the DB Contractor.

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

(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 in order to meet the availability required by the HESA.

The rating is 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, subjecting the Issuer to hydrology and price risks. 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 estimated by an independent engineering report and as required by the trust indenture. Further, DBRS acknowledges that, generally, hydroelectricity is a low-cost type of generation. However, DBRS notes that there will be significant uncertainty with respect to market conditions for a hydro merchant generation plant 50 years from today. The post-HESA risks are partially mitigated by the low operating cost and proven technology of hydroelectricity generation as well as OPG’s credit strength and operational expertise.

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 (June 2016), which can be found on our website under Methodologies.

DBRS will publish a full report shortly that will provide addi¬tional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.