DBRS Maintains InPower BC General Partnership Under Review with Negative Implications

DBRS Limited (DBRS) has today maintained the rating of BBB (high), Under Review with Negative Implications, on the $299.2 million Senior Secured Bonds of InPower BC General Partnership (ProjectCo), the special-purpose entity created to design, build, finance and maintain a replacement hydroelectric plant on the Campbell River of Vancouver Island (the John Hart Generating Station Replacement Project) under a 19.75-year project agreement with the British Columbia Hydro & Power Authority (BC Hydro).

The rating is primarily supported by the high credit quality of the availability-based service payment from BC Hydro, as well as the full pass-down of all design and construction obligations to the design-build contractor (DB Contractor), SNC Lavalin Inc., and a sizable security package provided by the DB Contractor. The security package includes a parent company guarantee from SNC-Lavalin Group Inc. (SNC), which carried a rating of BBB with Negative trend at financial close, although such trend on SNC’s rating was stabilized by DBRS on December 5, 2014. A relatively short service phase limiting ProjectCo’s exposure to lifecycle risks and relatively sound pro forma financial metrics are also positive considerations. The rating, however, continues to be constrained by the geotechnical challenges faced by ProjectCo in completing the extensive excavation works for the Project.

Alstom Renewable Power Canada Inc. replaced IMPSA as the project’s Turbine and Generators (T&G) supplier in October 2014, and the Lenders’ counsel, McMillan LLP confirmed in December 2014 that none of the documentary changes would give rise to any changes to the financial terms or conditions of the senior bonds or any alteration in the performance supports during both the construction phase and service phase. The Senior Creditor Technical Advisor (SCTA; Mott MacDonald) is of the opinion that the fabrication and delivery of T&G equipment is on schedule and is not expected to cause delays on the critical path basis and the replacement of the T&G supplier is not considered to represent a material adverse effect to the project.

Despite the successful replacement of the T&G supplier, the project has suffered material delays as a result of unforeseen ground conditions. While excavating the main access tunnel (L20), the DB Contractor encountered a void of about 40 to 53 metres in length, filled with boulders and accompanied by significant water inflow. The DB Contractor had originally believed that this would cause a 13-month delay, although since that time mitigation measures have been instituted, which the SCTA believes can reduce the estimated delay by 7.4 months. The DB Contractor also issued a supervening event notice to BC Hydro on May 26, 2015, seeking a time extension and increased cost coverage, on the basis of differing ground conditions. However, the referee’s decision was unfavourable for ProjectCo. It is still within the 90 day time window for ProjectCo to decide whether or not to refer this issue to an arbitrator. The SCTA has noted that the current critical path delay is 5.6 months; however additional mitigation measures are being implemented or considered by the project team in order to recover the remaining delays. ProjectCo is confident that these measures should allow it to achieve the Target Service Commencement Date, although the SCTA noted that it would not be in a position to gauge the effectiveness of these additional measures until around May 2016.

DBRS expects that if the SCTA is unable to confirm the effectiveness of the mitigation measures by summer 2016, negative rating action may result. Conversely, if the mitigation measures prove to be effective to achieve the Target Service Commencement Date, positive rating action can be expected.

All three generating units are expected to be operational by October 10, 2018 (Target Service Commencement Date), which will trigger the commencement of the 15-year service phase. This will be followed by the completion of the bypass system, the decommissioning of the existing powerhouse and structures, the decontamination of certain areas along the penstock route and the completion of minor roadwork, with Total Completion scheduled on August 13, 2019.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Rating Public-Private Partnerships, which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.