DBRS Places InPower BC General Partnership Under Review with Negative Implications

DBRS Limited (DBRS) placed the BBB (high) Issuer Rating and Senior Secured Bonds rating of InPower BC General Partnership (ProjectCo) Under Review with Negative Implications. This rating action is mainly driven by the delay in obtaining Service Commencement certification and the very limited time ProjectCo has before the Senior Creditors’ Service Commencement Longstop Date of July 10, 2019, which is three months prior to the corresponding longstop date under the Project Agreement (PA). The Design-Build (DB) Contractor and ProjectCo presently expect Service Commencement to be achieved in May 2019.

All three generating units are operational and in line with expectations. While the conditions precedent to Service Commencement are not considered to be onerous and the informal performance results seem promising for a successful completion of the remaining guarantee tests, the ability of the Project to sustain unexpected delays has become significantly constrained. If it becomes apparent that Service Commencement will be further delayed and materially encroach on the Senior Creditors’ Service Commencement Longstop Date, a negative rating action may result. Conversely, if the Service Commencement is successfully achieved in May 2019 and if no material delay is anticipated in achieving Total Completion, the Under Review status can be resolved.

Commercial operations with respect to the three generating units were achieved essentially on time, enabling ProjectCo to receive 70% of availability payments. The bypass system was completed almost three months ahead of schedule, leading to the receipt of another 10% of the availability payments. However, because of delays in certain civil works, Service Commencement has not been officially achieved, and British Columbia Hydro and Power Authority (BC Hydro; rated AA (high) with a Stable trend by DBRS) has been withholding the remaining 20% availability payments, which totalled approximately $4.4 million as of the end of March 2019. Such foregone availability payments have been offset by the liquidated damages paid by the DB Contractor and higher interest revenues as a result of the delayed spending profile, as well as the avoided operating and maintenance costs and ProjectCo costs.

The remaining construction activities to achieve Service Commencement mainly include the installation and commissioning of the heating, ventilation and air conditioning and fire protection and detection systems in the service tunnel, main access tunnel and fanhouse structures. DBRS notes that ProjectCo and BC Hydro have agreed to amend Schedule 5 (Design and Construction Protocols) to the PA and introduce a newly defined term, Interim Service Commencement (ISC), which entails the completion of the bypass system, commercial operation of the low-level outlet (LLO) and all three generating units, as well as the substantial completion of the facility. Once achieved, it would allow ProjectCo to start receiving the full availability payments, subject to permissible PA deductions. The Senior Creditors’ Technical Advisor (SCTA) reported that the ISC has been achieved in principal and ProjectCo is currently working with the Independent Certifier for ISC certification, which is expected to be predated on March 29, 2019.

Service Commencement signals the transition of health and safety responsibility as well as the control of the remaining facilities to BC Hydro. According to the SCTA, the generating units, LLO and bypass operations have already been transferred to BC Hydro. Conditions precedent to Service Commencement mainly include (1) all conditions precedent for the commercial operation of the LLO and all three generating units remain satisfied, the occurrence of which is a conditional precedent to ISC, and (2) completion of the Performance Verification Tests, which will be conducted in two stages. Stage-one testing involves the verification of the Turbine Model Efficiency Guarantee, which has been successfully completed. Stage two is to verify the Common Conduit Head Loss Guarantee, Plant Capacity Guarantee, Plant Energy Guarantee and Generator Efficiency Guarantee. BC Hydro requested in 2018 a deferral of these tests due to inclement weather conditions. According to ProjectCo, these tests are currently being performed with an expected completion date of May 5, 2019. DBRS notes that, per the amended Schedule 5, if any of these tests cannot be performed because of restrictions on water use by BC Hydro, then such test will become a condition precedent to Total Completion. In addition to the conditions above, certain documentational milestones also need to be completed to achieve the Service Commencement.

Following the water-up of the power tunnel, water seepage was observed from several locations on the power-tunnel side of the powerhouse where the head pressure is. The volume of seepage materially exceeded the minimum specification requirement (20 litres per minute) under the PA, which the DB Contractor considers to be overly stringent. With only one of three drainage pumps on site, the DB Contractor had no problem redirecting the seepage to the existing drainage system and does not consider the seepage to affect the long-term integrity of the powerhouse. The DB Contractor is currently working with independent geotechnical engineers to prepare a report addressing potential mitigation measures. The SCTA notes that the seepage will be treated as a deficiency as part of Total Completion and will be addressed when the power tunnel is next dewatered following Service Commencement. The SCTA is expecting to receive the independent engineer report, which is approximately 75% complete, and will opine on the impact of the water seepage issue in more detail.

The target Total Completion Date remains August 13, 2019. As part of Total Completion, the DB Contractor is committed to decommissioning and demolishing the existing power station and penstocks and completing minor roadwork and landscaping works. Total Completion can be achieved with some deficiencies, the value of which shall not exceed 5% of the $25 million Decommissioning Payment. As measured by invoiced value, as of February 2019, approximately 27% of decommissioning works have been completed. DBRS notes that the Senior Creditors’ Total Completion Longstop Date remains May 13, 2020, which is three months prior to the Total Completion Longstop Date under the PA.

As of the end of March 2019, ProjectCo has incurred approximately $2.1 million in deductions from progress payments, mainly driven by the planned and unplanned outages of the pre-existing units, which have been fully passed down to the DB Contractor. Non-performance event points incurred by ProjectCo have been minimal.

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

The principal methodology is Rating Public Private Partnerships, which can be found on dbrs.com under Methodologies & Criteria.

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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