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

DBRS Limited (DBRS) confirmed 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 (TTN)) to construct and own the Project, which consists of two generating turbine units with annual output expected to average 129 gigawatt hours (GWh). The Project also includes the construction of a 7-kilometre (km) 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 (DSCR) of 1.50 times (x).

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 within the approved $300 million overall total budget. Construction risk was covered by the unconditional and irrevocable guarantee from OPG that covers all obligations, liabilities and indebtedness of the Issuer under the Bonds.

The OPG guarantee continues to be in place and will only fall away immediately following the Recourse Release Date. For the Recourse Release Date to occur, among other things, the Facility must complete all performance testing under the Hydroelectric Energy Supply Agreement (HESA) and the Independent Engineer (IE) must deliver a report for the benefit of Bondholders certifying that the Facility (1) has been constructed; (2) has reached COD in accordance with the HESA, with a nameplate capacity of at least 25 MW; and (3) is capable of generating 129 GWh of electricity annually (subject to available water flow) with a useful life of no fewer than 90 years for civil structures. Many of the key requirements for Recourse Release have been met, including an Operating and Maintenance Agreement between OPG and PSS, and PSS entering into all Connection Agreements. The remaining requirements include the IE’s performance testing and certification report, and the insurance consultant’s confirmation report. The Recourse Release Date is expected in 2019.

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 sees refinancing risk mitigated by the long asset life of approximately 90 years, as estimated by the IE and with proper maintenance, as required by the Trust Indenture. The 20% remaining debt amount is likely to be comfortably refinanced with an investment-grade rating.

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

The principal methodology is Rating Project Finance, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. 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.

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