DBRS Confirms Spy Hill Power L.P. at “A” with Stable Trends

DBRS Limited (DBRS) confirmed the Issuer Rating and the Series A Senior Secured Amortizing Bonds (the Bonds) rating of Spy Hill Power L.P. (the Issuer) at “A” with Stable trends. The Issuer is a special-purpose entity that owns a simple-cycle natural gas-fired 86-megawatt 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 (rated AA with a Stable trend by DBRS) transmission system. The Bonds are secured by the Project’s assets. The Bonds are fully amortizing with maturity 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, 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 2018, the financial performance was lower compared with long-term projections because of higher operations and maintenance costs incurred to replace the stage #1 nozzle (S1N) assembly in one of the turbines and lost availability revenues caused by longer fall maintenance shutdown to replace the S1N assembly. As a result, the debt service coverage ratio (DSCR) for 2018 dropped to 1.63 times (x). Other than a low availability of 89.9% in Q4 2018, wherein the S1N assembly was replaced, availability over the first three quarters of 2018 was strong, averaging close to 99.6%, indicative of healthy overall Project performance. DBRS notes that this is the second straight year (2017 DSCR was 1.61x) in which the financial performance has been lower than long-term projections. The average DSCR in the five-year period between 2014 and 2018 was 1.66x, which is also slightly below projections but closer to the expected DSCR range of 1.67x to 1.70x over the life of the Bonds. A sustained under performance could cause DBRS to take an adverse rating action. In 2019 and beyond, the DSCR is expected to rebound to the 1.67x to 1.70x range, which is consistent with the current rating level and reflective of overall stable operational performance of the Project.

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 & 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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