DBRS Confirms Spy Hill Power L.P. at “A,” Stable Trend

DBRS Limited (DBRS) confirmed the rating of “A” with a Stable trend on the Series A Senior Secured Amortizing Bonds (the Bonds) issued by Spy Hill Power L.P. (Spy Hill or the Issuer), which is a special-purpose entity (SPE) that owns a simple-cycle natural gas-fired 86 megawatt (MW) power generation facility (the Project). The Issuer benefits from a 25-year peaking power purchase agreement (PPA) with Saskatchewan Power Corporation (SaskPower; rated AA with a Stable trend by DBRS) to provide electrical power to the Province of Saskatchewan’s (Saskatchewan; rated AA with a Stable trend by DBRS) transmission system. The Bonds are secured by the Project’s assets. The Bondholders are protected from refinancing risk, as the Bonds mature on March 31, 2036, six months prior to the PPA’s expiry.

The PPA insulates the Issuer from electricity price and demand fluctuations as well as fuel price and supply risks, as 100% of fuel supply costs are passed through to SaskPower. The remaining primary risk for the Issuer is performance risk. The Project must (1) meet an availability factor of at least 97%, (2) provide energy at the level requested by SaskPower and (3) be able to start up within 15 minutes of a dispatch request, or else pay liquidated damages (LDs), which are capped at $4 million per year, indexed. The Project must also meet specific heat rate requirements or pay a higher operating cost.

In 2017, the financial performance was lower compared with long-term projections because of (1) additional expenses related to certain planned maintenance activities, as the Project achieved the 12,500 fired hours milestone; (2) reduced revenues caused by lower expected availability of 96.2% because of planned maintenance activities; and (3) a one-off expense related to Generator 1 maintenance. As a result, the debt service coverage ratio (DSCR) for 2017 dropped to 1.61 times (x). Other than a low availability of 85.9% in Q2 2017, wherein planned maintenance activities were undertaken, availability over the remaining three quarters was strong, averaging close to 99.5%, indicative of healthy overall Project performance. In 2018 and beyond, the DSCR is expected to rebound to the 1.67x to 1.70x range over the life of the Bonds, which is consistent with the current rating and reflective of the stable operational performance of the Project. A sustained drop in DSCR would cause DBRS to take an adverse rating action. Further, as per the Trust Indenture, every five years after the commercial operation date, the Issuer is required to retain an Independent Engineer to ensure the adequacy of the reserving requirements under the major maintenance reserve account. This review process is currently in progress and DBRS will provide an update upon completion of the review if the results indicate that there is a material impact on the DSCR going forward.

Notes:
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.

This rating is no longer endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did not participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

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