DBRS Confirms Rating on North Battleford Power L.P.’s Series A Senior Secured Amortizing Bonds at A (low) with Stable Trend

DBRS Limited (DBRS) confirmed its rating of A (low) with a Stable trend on the Series A Senior Secured Amortizing Bonds (the Bonds) of North Battleford Power L.P. (ProjectCo or the Issuer), a limited partnership wholly owned by Northland Power Inc. ProjectCo is a special-purpose vehicle that owns and operates a combined cycle 260-megawatt baseload power generation facility that has been in operation since June 5, 2013. The facility benefits from a 20-year baseload power purchase agreement (PPA) with Saskatchewan Power Corporation (SaskPower; rated AA, Stable by DBRS), expiring in June 2033. The project is located approximately 150 kilometres northwest of Saskatoon on land owned by the Issuer. The Bonds are fully amortized and mature six months prior to the PPA expiration date.

ProjectCo’s operating results for 2017 and the last 12 months (LTM) to June 2018 met projections. The senior debt-service coverage ratio (DSCR) of 1.88 times (x) and 1.85x for 2017 and the LTM to June 2018, respectively, exceeded projections for the period. Plant availability ratio of 94.1% in 2017 also surpassed projections. The LTM to June 30, 2018, plant availability ratio of 94.5% indicates that ProjectCo is on track to meet or exceed projections.

The rating continues to be supported by (1) a 20-year PPA that transfers demand and price risks to SaskPower; (2) the fuel supply and transportation costs being largely a pass-through under the PPA; (3) achievable availability levels and heat-rate assumptions; (4) the proven and mature technology of General Electric Company’s (GE) 7FA turbine-generator; (5) a long-term services agreement with General Electric Canada (GEC), guaranteed by GE; (6) robust early operating results; and (7) a minimum senior DSCR of 1.73x, which is consistent with the A (low) rating.

In June 2017, ProjectCo and GEC amended the existing contractual service agreement (CSA), which hitherto covered parts and maintenance services for the combustion turbine-generator (CT), to include parts and maintenance services for the steam turbine-generator (ST) and the heat recovery steam generator (HRSG). DBRS considers this as a positive development, as it provides additional cost certainty going forward. The amendment also resulted in reduction of ST and HRSG maintenance costs on a cumulative basis as compared to projections; however, it did cause a change in timing of expenses as payments under the amended CSA are front-end loaded. DBRS has changed its financial projections to reflect these timing differences. DBRS has also changed its projections, employing an updated exchange rate of 1.31 CDN/USD as the current foreign-exchange hedge will expire in mid-2020 and there is exchange rate uncertainty beyond that period. As a result of variation in timing of maintenance expenses because of the amended CSA and updated exchange rate impacting periodic maintenance expenses, the Project minimum DSCR decreased to 1.73x from 1.81x. The DSCR is projected to be in the 1.73x to 1.82x range (2019 onwards) over the life of the Bonds, which is consistent with the current rating. DBRS views the modest decrease in minimum DSCR to be credit neutral as the future cost certainty mostly offsets the slight drop in DSCR.

The performance risk is considered one of the primary risks for rating considerations. Performance depends primarily on the reliability of the turbine-generator equipment, the long-term service agreement and the experience of the owner-operator. Nonetheless, the Project’s better-than-expected availability, albeit still in its early operation phase, is encouraging. However, if the project experiences sustained deterioration in its performance and/or increase in operations and maintenance expenses with significant impact on the DSCR, an adverse rating action may be considered by DBRS. On the other hand, even though considered unlikely at this time, if financial performance shows a continued improvement especially in the years in which DSCR is relatively constrained, DBRS may take a positive rating action.

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.

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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