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

DBRS Limited (DBRS) has today confirmed the rating of BBB (high), Stable trend, 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 (PA) 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 uncertainties pertaining to the remaining excavation works and the design-build contractor (DB Contractor)’s ability to recover the delays caused by the unforeseen ground conditions in the main access tunnel.

The DB Contractor provided a revised schedule in December 2016 to the Senior Creditors’ Technical Advisor (SCTA) to reflect the then current progress on site and the delay mitigation measures implemented. The revised schedule confirms that the service commencement should be achieved on October 10, 2018, the same date as the original schedule at financial close. Having reviewed the revised schedule, the SCTA, in its latest report published on March 27, 2017, is of the opinion that the key activities on critical path are on schedule and the target service commencement date remains achievable.

The critical path currently runs through the power tunnel excavation and watering up of the tunnel prior to commissioning of the units. As per the DB Contractor, as of March 27, 2017, the excavation had progressed to approximately 1,220 metres from the powerhouse, entering into the mid earth-filled dam (MED) zone, essentially on time based on the revised schedule. The DB Contractor anticipates to complete the entire power tunnel excavation by July 2017. The critical path also runs through the concreting in the powerhouse and the commissioning of the bypass system and powerhouse units. The powerhouse excavation was completed in April 2016 and the overall progress of concrete works within the powerhouse are essentially on schedule. DRBS notes that the majority of concrete works are expected to be completed by August 2017. To date roughly 75% of all Turbine and Generator (T&G) components are already on site, with the remaining elements expected to be delivered by August 2017.

To date, there are no outstanding non-performance event (NPE) points between ProjectCo and BC Hydro. Minimal Service Disruption Payments were reported in 2016, but are not expected to be recurring and have been fully passed down to the DB Contractor. Based on the latest SCTA report, as of January 25, 2017, approximately 62.6% of DB works had been completed, measured by the value earned by the DB Contractor. This is slightly ahead of the time elapsed (56.5%) but approximately 10% (or $50 million) behind the scheduled payment profile from March 2015. Without assuming any extraordinary acceleration measures, the DB Contractor currently anticipates that the actual spending curve would converge with the scheduled profile by the end of 2017. ProjectCo is of the view that the Project is generally on track with the revised schedule. However, DBRS notes that if material delays were to accumulate or if significant geotechnical issues were encountered in tunnel excavation, a negative rating action may result.

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.

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

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