DBRS Morningstar Maintains InPower BC General Partnership's Under Review with Negative Implications Status

DBRS Limited (DBRS Morningstar) maintained its Under Review with Negative Implications status on InPower BC General Partnership’s (InPower or ProjectCo) Issuer Rating and Senior Secured Bonds rating of BBB (high). The rating action is mainly driven by the delay in obtaining Total Completion certification scheduled on March 31, 2020, and the very limited time ProjectCo has before the Senior Creditors’ Total Completion Longstop Date of May 13, 2020, which is three months before the corresponding longstop date under the Project Agreement (PA). DBRS Morningstar expects the situation to be resolved in the next few weeks as InPower expects to achieve Total Completion during the first week of May 2020.

InPower achieved both Interim Service Commencement and Service Commencement on March 29, 2019, and June 6, 2019, respectively. All three generating units are operational and are producing energy in line with expectations, and ProjectCo is receiving 100% of availability payments. InPower is focused on finalizing project documentation and closing deficiencies to achieve Total Completion that it can achieve with some deficiencies, the value of which shall not exceed 5% of the $25.0 million Decommissioning Payment. ProjectCo is discussing these deficiencies with British Columbia Hydro and Power Authority (BC Hydro; rated AA (high) with a Stable trend by DBRS Morningstar), which will be completed during planned outages after Total Completion. The decommissioning works, which include decommissioning and demolishing the existing power station and penstocks as well as completing minor roadwork and landscaping works, were mostly complete as of December 2019. BC Hydro acknowledged these works and the parties negotiated an additional progress payment of $20.5 million, approximately 80% of the $25.0 million Decommissioning Payment, in December 2019 ahead of Total Completion in exchange for a $1.5 million letter of credit from ProjectCo as security until Total Completion. If it becomes apparent that Total Completion will be further delayed beyond the Senior Creditors’ Total Completion Longstop Date, DBRS Morningstar may take negative rating action. Conversely, if InPower successfully achieves Total Completion in May 2020, DBRS Morningstar can resolve the Under Review with Negative Implications status on the ratings.

The remaining activities to achieve Total Completion mainly include finalizing the Performance Verification Test report, which is a condition precedent. While an independent certifier has reviewed the test results and found no issues, there is an outstanding section from a subcontractor that ProjectCo expects to receive by the end of April 2020. ProjectCo and BC Hydro are negotiating a settlement agreement to document conditions regarding the acceptance of the conditions precedent to achieve a Total Completion certificate.

Following the water-up of the power tunnel, water seepage occurred from several locations on the power-tunnel side of the powerhouse where the head pressure is located. The volume of seepage initially materially exceeded the minimum specification requirement (20 litres per minute) under the PA, which the design-build contractor (DB Contractor) considers to be overly stringent. The DB Contractor has been working with independent geotechnical engineers and has taken some mitigation measures which, added to the self-sealing of seepage paths, have helped to considerably reduce seepage. BC Hydro is essentially satisfied with the information provided by ProjectCo and the parties are negotiating to amend Schedule 7 (Services) of the PA. DBRS Morningstar has only seen a preliminary draft of the document with revisions which aim to detail the monitoring obligations during the Service Period to identify the final total seepage level and to observe localized effects related to work environment hazards associated with moisture or mould in the powerhouse. ProjectCo will pass down these monitoring obligations to the Service Provider at no additional cost to ProjectCo.

ProjectCo and BC Hydro share operation and maintenance (O&M) responsibilities during the operating phase and ProjectCo will share its responsibilities with the Service Provider. Because of the Coronavirus Disease (COVID-19) pandemic, ProjectCo and BC Hydro have rescheduled nonessential works for the next few months and next outage from the spring to the summer. ProjectCo will continue to respond to critical works to ensure that the correct function of the powerhouse and payments are not affected. ProjectCo reports good relationships with BC Hydro’s operations team and fluid communications to coordinate O&M activities.

As of the end of March 2020, ProjectCo has not incurred any deductions from progress payments and nonperformance event points have been minimal.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating Public-Private Partnerships (August 23, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577