DBRS Morningstar Confirms Ratings on PSS Generating Station LP at A (low) with Stable TrendsProject Finance
DBRS Limited (DBRS Morningstar) confirmed PSS Generating Station LP (New Post Creek)’s (the Issuer) Issuer Rating and the rating on the Series 1 Senior Secured Bonds (the Bonds) at A (low) with Stable trends. The Bonds were issued to partially finance the construction of the 28-megawatt hydroelectric run-of-river project on the Abitibi River and a seven-kilometre transmission line (together, the Project).
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) in the forecast.
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. The OPG guarantee continues to be in place and will only fall away immediately following the Recourse Release Date. The Project was officially closed in December 2020. Most of the key requirements for Recourse Release have been met, and the Recourse Release Date is expected later in 2021 or in 2022. As long as the Project continues to benefit from the OPG guarantee, DBRS Morningstar may take a positive or negative rating action in line with any change to OPG’s credit rating. Upon the release of the OPG guarantee, DBRS Morningstar will reassess the factors that may change the rating.
The ratings are further supported by the following:
(1) The Issuer and the Independent Electricity System Operator (IESO; rated A (high) with a Stable trend by DBRS Morningstar) entered into a Hydroelectric Energy Supply Agreement (HESA), which protects the Project from hydrology 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; and
(4) Strong coverage ratios with a minimum DSCR of 1.50x and an average DSCR of 1.55x.
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 is estimated to be approximately 20%. DBRS Morningstar sees refinancing risk mitigated by the long asset life of approximately 90 years, as estimated by the independent engineer, and proper maintenance, as required by the Trust Indenture. DBRS Morningstar sees the 20% remaining debt amount of approximately $49 million as modest and with a refinancing profile that would likely have investment-grade metrics.
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/373262.
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is Rating Project Finance (August 18, 2021; https://www.dbrsmorningstar.com/research/383185), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424) and the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).
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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.
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