DBRS Confirms Ratings on PSS Generating Station LP at A (low) with Stable Trends

DBRS Limited (DBRS) confirmed PSS Generating Station LP’s (PSS GS or the Issuer) Issuer Rating and Series 1 Senior Secured Bonds (the Bonds) 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 7-kilometre transmission line (together, the Project or the Facility). PSS GS is a limited partnership jointly formed by Ontario Power Generation Inc. (OPG; rated A (low) with a Stable trend by DBRS) and Coral Rapids Power Corporation (100% owned by Taykwa Tagamou Nation).

The Bonds were issued in the amount of $245 million and are secured by the physical assets and material contracts of the Issuer. The Bonds have an interest-only feature for the first ten years, amortizing thereafter, with a minimum debt service coverage ratio (DSCR) of 1.50 times (x) in the forecast.

The Project reached Commercial Operation Date (COD) on March 31, 2017, well ahead of the scheduled February 2018 target and within the approved $300 million overall total budget. Construction risk was covered by the unconditional and irrevocable guarantee from OPG that covers all obligations, liabilities and indebtedness of the Issuer under the Bonds. The OPG guarantee continues to be in place and will only fall away immediately following the Recourse Release Date. For the Recourse Release Date to occur, the Facility must, among other things, complete all performance testing under the Hydroelectric Energy Supply Agreement (HESA) and the Independent Engineer (IE) must deliver a report certifying that the Facility (1) has been constructed; (2) has reached COD in accordance with the HESA, with a nameplate capacity of at least 25 MW; and (3) is capable of generating 129 gigawatt hours of electricity annually with a useful life of no fewer than 90 years for civil structures. Most of the key requirements for Recourse Release have been met, including an Operating and Maintenance Agreement between OPG and PSS GS and PSS GS entering into all Connection Agreements. The Recourse Release Date is expected by 2020 after Project closeout.

In addition to the OPG guarantee, the rating is further supported by the following:

(1) The Issuer and the Independent Electricity System Operator (IESO; rated A (high) with a Stable trend by DBRS) have entered into an HESA, which protects the Project from hydrology and power price risks for 50 years to 2067. The IESO has the option for a ten-year extension thereafter. Payments under the HESA commenced on the COD.

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

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

(4) The coverage ratio is strong with a minimum DSCR of 1.50x and an average of 1.55x in the forecast.

The 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 at the end of the HESA is estimated to be approximately 20%. DBRS sees refinancing risk mitigated by the long asset life of approximately 90 years, as estimated by the IE, and with proper maintenance, as required by the Trust Indenture. DBRS sees the 20% remaining debt amount of approximately $49 million as modest and with a refinancing profile that would likely have investment-grade metrics.

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.

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.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada