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

DBRS Limited (DBRS) confirmed the rating on the Series 1 Senior Secured Bonds (the Bonds) issued by PSS Generating Station LP (New Post Creek) (PSS GS or the Issuer) at A (low) with a Stable trend. The Bonds were issued to partially finance the construction of the 28-megawatt (MW) hydroelectric run-of-river project on the Abitibi River (the Project or the Facility) in Northeastern Ontario. PSS GS is a limited partnership jointly formed by Ontario Power Generation Inc. (OPG; rated A (low) with a Stable trend by DBRS) and Coral Rapids Power Corporation (CRP; 100% owned by Taykwa Tagamou Nation) to construct and own the Project, which consists of two generating turbine units with annual output 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, amortizing thereafter, with the Project achieving a minimum debt service coverage ratio of 1.50 times.

DBRS first rated the Bonds in October 2015 when the Project was under construction. The Project reached the Commercial Operation Date (COD) on March 31, 2017, well ahead of the scheduled February 2018 target and under budget. The Project is 99% complete and forecast to be fully completed within the approved $300 million total budget. Moreover, construction risk is covered by the guarantee from OPG. The assigned rating thus reflects the following:

(1) The Issuer and Independent Electricity System Operator (IESO; 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. The IESO has the option for a ten-year extension thereafter. Payments under the HESA commenced at COD.

(2) The unconditional and irrevocable guarantee from OPG that covers all obligations, liabilities and indebtedness of the Issuer under the Bonds during the construction phase. The OPG guarantee will only fall away at the Recourse Release Date, which is the date construction is completed and the Facility is operating per the HESA. For the Recourse Release Date to occur, among other things, the Facility must complete all performance testing under the HESA and the Independent Engineer (IE) must deliver a report for the benefit of Bondholders certifying that the Facility (a) has been constructed, (b) has reached COD in accordance with the HESA with a nameplate capacity of at least 25 MW (89.3% contract capacity) and (c) is capable of generating 129 gigawatt hours of electricity annually (subject to available water flow) with a useful life of no fewer than 90 years for civil structures. The Recourse Release Date is expected in 2018.

(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 factor required by the HESA. In April 2017, CRP acquired approximately 33% equity interest of PSS GS, thereby meeting the HESA required minimum 20% participating equity interest in the partnership at or no later than one year post-COD.

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 should the HESA not be renewed, 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, as estimated by the IE, and with proper maintenance, as required by the Trust Indenture (the Indenture). Also, as required by the Indenture, the Issuer will have to (1) set up a Major Maintenance Reserve Account in favour of the trustee on or prior to the tenth anniversary of the COD of both turbine units and (2) provide projections regarding its 15-year major maintenance expenditure plan in favour of the trustee. The post-HESA risks are partially mitigated by the low operating cost and proven technology of hydroelectricity generation, as well as by 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 principal methodology is Rating Project Finance, which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.