DBRS Morningstar Confirms InPower BC General Partnership’s Ratings, Removes from Under Review with Negative Implications

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. This rating action removes the ratings from Under Review with Negative Implications, where they were first placed on April 30, 2019, and maintained on May 1, 2020. 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). ProjectCo’s achievement of a Total Completion Certificate on May 22, 2020, is the driver for this rating action.

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 potentially constrained by the limited resources ProjectCo has during operation to mitigate unexpected maintenance needs in relation to the components under its responsibility.

Total Completion was achieved on May 22, 2020, with Total Completion Deficiencies amounting to $744,412, significantly below the 5% of the $25 million Decommissioning Payment threshold established in the PA. The deficiencies will be corrected during planned outages, in case an outage is needed, in 2020 unless otherwise requested by BC Hydro based on the ongoing Coronavirus Disease (COVID-19) pandemic. There are only three deficiencies that amount $70,000 or higher: (1) reperformance of the Sudden Short Circuit test (to be corrected before July 31, 2021), (2) installation of antisweat coating on turbine inlet valves and associated water piping (to be corrected before September 21, 2021); and (3) provision of a set of as-built drawings (to be provided before September 21, 2020). ProjectCo provided a letter of credit (LOC) as security to BC Hydro in the sum of $1,488,824, twice the estimate of cost to complete the remedial actions. As of July 24, 2020, the LOC was reduced to $1,390,024 as deficiencies were closed out. Total Completion triggered the payment of the remaining of the $25 million Decommissioning Payment (BC Hydro paid $22.37 million, approximately 80%, in December 2019 in acknowledgement of the works executed at that point), which ProjectCo received on June 15, 2020. Both the maintenance reserve and the debt service reserve account were fully funded as of June 18, 2020.

On June 1, 2020, because of the ongoing global coronavirus pandemic, design-build contractor (DB Contractor), SNC Lavalin Inc., issued a supervening event claim to ProjectCo requesting 10 days of schedule relief on the Total Completion Longstop Date. On July 20, 2020, BC Hydro and ProjectCo executed a settlement agreement to amend the PA by extending the Total Completion Longstop Date to August 23, 2020.

Following the water-up of the power tunnel, there was water seepage from several locations on the power-tunnel side of the powerhouse where the head pressure is. The volume of seepage materially exceeded the minimum specification requirement (20 litres per minute) under the PA, which the DB Contractor considered to be overly stringent. The Design-Builder completed work to redirect the seepage to the existing drainage system, and the Senior Creditors’ Technical Advisor as per its post total completion report on July 31, 2020, expects no impact to the long-term integrity of the project. Seepage has been decreasing gradually and appears to be continuing to do so (on January 28, 2019: 352 litres per minute; on July 19, 2019: 273 litres per minute; on March 27, 2020: 226 litres per minute; on June 25, 2020: 123 litres per minute). In advance of Total Completion, ProjectCo and BC Hydro agreed to modify Schedule 7 (Services) of the PA to change the acceptance criteria for the seepage to (1) 20 litres per minute or (2) 270 litres per minute considering it is not increasing overtime, plus a series of monitoring obligations during the Service Period to identify the final total seepage level and to observe localized effects related to work environment hazards associated with moisture, corrosion, or mould in the powerhouse. These monitoring obligations are passed down to the Service Provider at no additional cost for ProjectCo.

All three generating units have been operational since H2 2018 and are producing energy in line with expectations. Their availability to BC Hydro has consistently been between 97% to 100%, with only 1.7% of outages forced because local demands and water supply limited the capacity of the generators. Nevertheless, ProjectCo is eligible for and receiving 100% of availability payments. The Service Commencement Date, achieved on June 6, 2019, triggered the commencement of the 15-year service phase during which the project should be able to weather 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.

ProjectCo and BC Hydro share operation and maintenance (O&M) responsibilities during the operating phase and ProjectCo will share its responsibilities with the Service Provider. Because of the coronavirus pandemic, ProjectCo and BC Hydro have rescheduled nonessential works for the next few months and next outage from the spring to the summer. ProjectCo will continue to respond to critical works to ensure that the correct function of the powerhouse and payments are not affected. ProjectCo reports good relationships with BC Hydro’s operations team and fluid communications to coordinate O&M activities.

As of the end of March 2020, ProjectCo has not incurred any deductions from progress payments and nonperformance event points have been minimal. Material deductions on account of performance event points during the service period could lead to a negative rating action; however, this is neither currently an issue and DBRS Morningstar does not expect it to become an issue. A positive rating action is considered 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 and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating Public-Private Partnerships (August 23, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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.

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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