DBRS Morningstar Confirms Credit Ratings on PSS Generating Station LP at A (low) With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed PSS Generating Station LP (New Post Creek)’s (PSS GS or the Issuer) Issuer Rating and Series 1 Senior Secured Bonds (the Bonds) credit rating at A (low) with Stable trends. The Bonds were issued to partially finance the construction of the 28-megawatt (MW) hydroelectric run-of-river project on the Abitibi River and a seven-kilometre transmission line (together, the Project or the Facility).

The $245 million Bonds are secured by the physical assets and material contracts of the Issuer. They have an interest-only feature for the first 10 years, amortizing starting October 2026, with a minimum debt service coverage ratio (DSCR) of 1.50 times (x), which excludes costs related to audit, financing, environmental monitoring, legal, and letter of credit, in the financial model at financial close.

The Project reached Commercial Operation Date (COD) on March 31, 2017, which was well ahead of the scheduled February 2018 target and within budget. Construction risk was covered by the unconditional and irrevocable guarantee from Ontario Power Generation Inc. (OPG; rated A (low) with a Stable trend by DBRS Morningstar) that covers all obligations, liabilities, and indebtedness of the Issuer under the Bonds. DBRS Morningstar understands that the Issuer continues to make progress in completing all the requirements for Recourse Release. At present, the OPG guarantee continues to be in place and will only fall away immediately following the Recourse Release Date.

The Project's financial performance in 2022 was relatively stable given that the Facility is still relatively new and the Project receives a fixed payment from the Independent Electricity System Operator (IESO) regardless of variation in generation output. DSCR for the year ended December 31, 2022, was 1.79x, which was slightly better than 1.77x in 2021. The Issuer indicated there were no major operational issues in 2022 and the Project's availability was well above the minimum contractual threshold in 2022.

In Q2 2023, the Project completed its biannual maintenance program on the turbine units, and it did not discover any material issues. Both turbine units have resumed operations since the beginning of Q3 2023 without experiencing any operating performance issues. For H1 2023, the Project's DSCR was 1.82x.

DBRS Morningstar does not expect a persistently high inflationary environment to negatively affect the Issuer’s financial performance. DBRS Morningstar believes the Project's exposure to inflation risk is mitigated despite the fact that only 20% of the Fixed Facility Support Payment (FFSP) is indexed (escalated at the Ontario CPI annually) and that the full amount of the fixed fee paid to OPG under the Operation, Maintenance, and Administration Agreement is escalated annually. This is because the base amount of the variable portion of the FFSP is considerably greater than the base amount of the annual fee paid to OPG. Therefore, the Project's DSCR profile should improve in a persistently high inflationary environment.

At this time, DBRS Morningstar is maintaining its inflation rate assumption of 2% in the base-case scenario, given the uncertainty surrounding the inflation outlook.

The credit ratings are further supported by the following:
(1) The Issuer and the IESO entered into a Hydroelectric Energy Supply Agreement (HESA), which protects the Project from hydrological and price risks for 50 years to 2067. The IESO has the option for a 10-year extension thereafter. Payments under the HESA commenced at COD.

(2) The Project has a strong majority owner, OPG, which is a large and experienced hydro power generation operator with significant related expertise.

(3) The Major Maintenance Reserve Account, in favour of the trustee, is funded on or prior to the 10th anniversary of the COD of both turbine units.

(4) The Project has strong coverage ratios with a minimum DSCR of 1.50x and an average DSCR of 1.55x.

The credit ratings are limited by potential merchant risk and refinancing risk following the end of the HESA. Post-HESA, if not renewed, the portion of the unamortized Bonds remaining is estimated to be approximately 20%. DBRS Morningstar sees refinancing risk mitigated by the asset’s long life of approximately 90 years, as estimated by the independent engineer, and proper maintenance, as required by the Trust Indenture. DBRS Morningstar believes the 20% remaining debt amount of approximately $49 million is modest and has a refinancing profile that would likely have investment-grade metrics.

As long as the Project continues to benefit from the OPG guarantee, DBRS Morningstar may take a positive or negative credit rating action in line with any changes to OPG's credit ratings. Upon the release of the OPG guarantee and provided that the operating and financial performance of the Project remain in line with expectations, the credit ratings are unlikely to change.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

Credit rating actions on OPG are likely to have an impact on this credit rating.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Project Finance (September 12, 2023) https://www.dbrsmorningstar.com/research/420425/global-methodology-for-rating-project-finance.

The following methodology has also been applied:
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023) https://www.dbrsmorningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 credit rating was initiated at the request of the rated entity.

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

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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