DBRS Morningstar Confirms InPower BC General Partnership at BBB (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the $299.2 million Senior Secured Bonds rating of InPower BC General Partnership (ProjectCo) at BBB (high) with Stable trends. ProjectCo is the special-purpose entity created to design, build, finance, and maintain a replacement hydroelectric plant, the John Hart Generating Station Replacement Project, on the Campbell River of Vancouver Island under a 19.75-year project agreement (PA) with the British Columbia Hydro and Power Authority (BC Hydro; rated AA (high) with a Stable trend by DBRS Morningstar).

The BBB (high) rating is primarily supported by the high credit quality of the availability-based service payment from BC Hydro, as well as a comparatively short service phase, limiting ProjectCo’s exposure to lifecycle risks, and relatively sound pro forma financial metrics. The rating, however, is constrained by the limited resources ProjectCo has during operation to mitigate unexpected maintenance needs in relation to the components under its responsibility.

The Service Commencement Date was achieved on June 6, 2019, and Total Completion was achieved on May 22, 2020. Total Completion Deficiencies, which amounted to $0.7 million initially, have reduced to an estimated amount of approximately $0.3 million with 22 items remaining, which are expected to be completed by the end of 2021. ProjectCo had provided a letter of credit (LOC) as security to BC Hydro in the sum of $1.5 million, twice the estimate of the cost to complete the remedial actions. The LOC has reduced to $0.8 million and is expected to be further reduced as deficiencies are closed out.

ProjectCo reports that water seepage levels since Total Completion have been largely stable and that it continues to monitor the levels, as required under the PA. Compared with the 270 litres-per-minute threshold in the amended Schedule 7 (Services) of the PA, the average seepage levels during November 2020 to February 2021 were higher at 310 litres per minute as per the design-build contractor’s (DB Contractor) winter inspection. ProjectCo views the seepage levels as higher during the winter months and expects levels to be below 270 litres per minute on average for the year. Seepage levels during recent months have trended downward and have been less than 270 litres per minute, and as of July 19, 2021, the seepage level was 216 litres per minute. DBRS Morningstar notes that ProjectCo is required to take remedial measures if the seepage levels are higher than 270 litres per minute and trending upward. Furthermore, the DB Contractor is required to correct any latent defect during the legislated limitation period of 10 years, which covers the majority of the Service Phase.

The Service Commencement Date triggered the commencement of the service phase, which ends in October 2033. The service performance to date has been good, with minimal noncompliance points and deductions. All three generating units have been operational since H2 2018 and are producing energy in line with expectations. ProjectCo has indicated that availability to BC Hydro was over 99% in H1 2021. ProjectCo is eligible for certain days of planned maintenance, and the associated outages do not incur any availability deductions. There were 10 unplanned outages in 2020 and four in H1 2021, of which five had an outage rectification allowance. A deduction of approximately $0.1 million was made during the period, which was passed down to the Service Provider. There were no deductions for Non-Performance Events (NPE) points as they were within the thresholds provided in the PA.

ProjectCo reports good relationships with BC Hydro’s operations team and fluid communications to coordinate operation and maintenance (O&M) activities, with no ongoing disputes. The project has a minimum debt service coverage ratio (DSCR) of 1.26 times (x) and supports a 111% increase in the total lifecycle budget, a 128% increase in the total routine maintenance budget, or a 100% increase in the Service Provider’s contract price, as per the original financial close model. For the 12 months ended June 30, 2021, the DSCR was 1.36x.

Although not expected, incurrence of material noncompliance points or weak service performance could lead to a negative rating action. DBRS Morningstar considers a positive rating action unlikely at this time because of the limited resources ProjectCo has during operation to mitigate unexpected maintenance needs in relation to the components under its responsibility.

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.

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

The principal methodology is Rating Public-Private Partnerships (August 19, 2020; https://www.dbrsmorningstar.com/research/365975), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 info@dbrsmorningstar.com.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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

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