DBRS Limited (DBRS Morningstar) confirmed PSS Generating Station LP (New Post Creek)'s (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 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 1.51 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. At present, 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.
The Project's financial performance in 2021 was relatively stable. DSCR for the year ended December 31, 2021, was 1.77x, which was slightly below the forecast DSCR of 1.80x calculated based on the model at financial close. The lower DSCR was related to the incurrence of additional operations, maintenance, and administration (OM&A) fees, such as environmental monitoring fees. The Issuer indicated there were no major operational issues in 2021 and OPG performed maintenance as planned. For H1 2022, the Project's DSCR was 1.79x.
DBRS Morningstar does not expect a persistently high inflationary environment to negatively affect the financial performance of the Issuer. 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 OM&A 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 improves in a persistently high inflationary environment compared with DBRS Morningstar's base-case scenario.
At this time, DBRS Morningstar is maintaining the inflation rate assumption of 2% in the base-case scenario, given the considerable uncertainty surrounding the inflation outlook.
The ratings are further supported by the following:
(1) The Issuer and the Independent Electricity System Operator (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 1.51x and an average DSCR of 1.56x.
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.
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 changes to OPG's credit rating. Upon the release of the OPG guarantee, DBRS Morningstar will reassess the factors that may change the ratings.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.
Rating actions on OPG are likely to have an impact on this rating. ESG factors that have a significant or relevant effect on the credit analysis of OPG are discussed separately at https://www.dbrsmorningstar.com/issuers/874.
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/396929 (May 17, 2022).
All figures are in Canadian dollars unless otherwise noted.
The principal methodologies are Global Methodology for Rating Project Finance (September 6, 2022; https://www.dbrsmorningstar.com/research/402400) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022; https://www.dbrsmorningstar.com/research/394683), which can be found on dbrsmorningstar.com under Methodologies & Criteria.
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/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.
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 firstname.lastname@example.org.
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.
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 ratings are under regular surveillance.
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