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 and SLI Hydro Service Provider BC Inc. (the Service Provider) have during operation to mitigate unexpected maintenance needs.

The Service Commencement Date was achieved on June 6, 2019, which triggered the commencement of the service phase. Total Completion was achieved on May 22, 2020. Total Completion Deficiencies, which initially amounted to $0.7 million, have been completed, and the letter of credit provided by ProjectCo as security to BC Hydro (initial sum of $1.5 million) was reduced to $0 on April 7, 2022.

On February 4, 2022, ProjectCo was transferred to the SNC-Lavalin Infrastructure Partners LP, an infrastructure fund where SNC-Lavalin holds a 20% interest (80% owned by BBGI SICAV S.A.'s Canadian subsidiary) and acts as the general partner and partnership manager. This transfer is part of SNC-Lavalin's plan to monetize its infrastructure assets and to reinvest capital back into new development opportunities. ProjectCo has informed DBRS Morningstar this has no implications to the project with no changes to staff or ProjectCo's representatives.

On February 4, 2022, ProjectCo and the Service Provider executed an amendment to the Service Agreement whereby ProjectCo passes down all maintenance and lifecycle obligations it had retained at financial close (Excluded Services and Excluded Rehabilitation Obligations) to the Service Provider on a back-to-back basis, that assumes the risks, including the cost and pricing risks associated with the Excluded Services and Excluded Rehabilitation Obligations, for a fixed price (subject only to inflation). Hence, ProjectCo retains no risks or responsibilities post-execution of the Service Agreement amendment, and there is no change in costs for ProjectCo, as payments to the Service Provider will match inflows from BC Hydro and will be paid based on the amount set out in the original budget, provided the work is performed as planned.

ProjectCo reports water seepage levels since Total Completion have been largely stable and it continues to monitor the levels, as required under the PA. Compared with the 270 litres-per-minute (L/min) threshold in the amended Schedule 7 (Services) of the PA, the average seepage levels during October 2021 to March 2022 is estimated to be in the order of 275 L/min (plus/minus an estimated accuracy of up to 20%) as per the design-build contractor’s (DB Contractor) winter inspection. The highest flow rate (318 L/min) was recorded during the month of March, and the flow rate stayed above 300 L/min between January and March. The lowest flow rate (198 L/Min) was recorded during the month of October. No new seepage locations were observed during the period, and as expected the majority of seepage continued to be observed from the powerhouse south wall. DBRS Morningstar notes ProjectCo is required to take remedial measures if the seepage levels are higher than 270 L/min 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 availability to BC Hydro was over 98% in H1 2022. ProjectCo is eligible for certain days of planned maintenance, and the associated outages do not incur any availability deductions. There were nine unplanned outages in 2021 and six in H1 2022 (ProjectCo is allotted six Nominated Forced Outages, which provide for relief from deductions for a fixed period of time). A deduction of approximately $0.2 million was made during the period, which was passed down to the Service Provider. There were no deductions for nonperformance event points as they were within the thresholds provided in the PA. As of August 17, 2022, the project is undergoing a major inspection of the tunnel and turbines, which is required at year 4 under the PA.

ProjectCo reports good relationships with BC Hydro’s operations team and fluid communications to coordinate operation and maintenance 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, 2022, the DSCR was 1.25x.

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 and Service Provider have during operation to mitigate unexpected maintenance needs.

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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.

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

The principal methodology is Rating Public-Private Partnerships (August 19, 2021; https://www.dbrsmorningstar.com/research/383244), 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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.

DBRS Morningstar 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@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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