DBRS Limited (DBRS Morningstar) confirmed its rating of 'A' on Spy Hill Power L.P.'s (the Issuer) Issuer Rating and Series A Senior Secured Amortizing Bonds (the Bonds) rating and changed both trends to Stable from Negative.
The Issuer is a special-purpose entity that owns a simple-cycle natural gas-fired 86-megawatt power generation facility (the Project). The Issuer benefits from a 25-year peaking power purchase agreement (PPA) with Saskatchewan Power Corporation (SaskPower) to provide electrical power to the SaskPower's transmission system. At this time, DBRS Morningstar does not consider the current rating status of SaskPower as constraining either the Issuer Rating or the Bonds rating. The Bonds are secured by the Project's assets and are fully amortizing with a maturity date of March 31, 2036, six months prior to the PPA's expiry.
The PPA insulates the Issuer from electricity price and demand fluctuations as well as fuel price and supply risks because 100% of fuel supply costs are passed through to SaskPower. The remaining primary risk for the Issuer is performance risk. The Project must (1) meet an availability factor of at least 97%, (2) provide energy at the level requested by SaskPower, and (3) be able to start up within 15 minutes of a dispatch request or else pay liquidated damages, which are capped at $4 million per year, indexed. The Project must also meet specific heat rate requirements or pay a higher operating cost.
The ratings have been on a negative trend from 2020 because of the Project's underperformance since 2017. The debt service coverage ratios (DSCRs) in 2017, 2018, 2019, and 2020 were 1.61 times (x), 1.63x, 1.53x, and 1.51x, respectively, much below than the expected DSCR levels of around 1.70x. The average DSCR for the eight-year period between 2014 and 2021 is 1.64x. DBRS Morningstar is changing the trend to Stable from Negative based on the healthy operational and financial performance of the Project in 2021 and the expectations that the Project should perform without any major operational issues in the future. In 2021, the Issuer's DSCR is high at approximately 1.79 times (x) because of (1) high availability of 99.0%, (2) inclusion of an insurance settlement for a 2019 maintenance claim of $0.5 million (impact on DSCR is approximately 0.05x) and (3) lower deposits made by the Issuer to the major maintenance reserve account (MMRA). DBRS Morningstar notes that despite an uplift to the DSCR from the insurance claim and lower deposits to the MMRA, the resulting DSCR would have been healthy at around 1.68x.
In 2021, the amount of Project operating hours, at approximately 1,158 (13.2% annualized), was much lower compared with dispatch levels for the seven-year period between 2014 and 2020, which averaged approximately 2,635 (30.1% annualized) fired hours (FH). This is the second straight year in which the Project's operating hours are comparatively lower. The Issuer informed DBRS Morningstar that the decline in operating hours is potentially because of new electricity supply becoming available in Saskatchewan. However, this has no material impact on the Project's revenues as they are largely driven by availability rather than generation hours.
The Issuer also informed DBRS Morningstar that, based on its discussions with the SaskPower, it expects the Project to be dispatched at lower levels in the future as well. As such, the projected gas turbine major maintenance (scheduled at around 50,000 FH) will be potentially delayed from 2031 or may not be required at all if the Project continues to be dispatched at levels similar to the last two years. In the 2022 operating plan, the Issuer is not planning to make deposits to the MMRA on the expectation that the major maintenance on the gas turbines may not be needed. This increases the risk that, if the Project is dispatched at a higher level in the future, there could be a shortfall. DBRS Morningstar may take a negative rating action if it perceives that the MMRA is underfunded.
Further, in early May 2022, during the borescope inspection, a hole was discovered in the stage one nozzle (S1N) assembly on one of the gas turbines (Unit#1), and General Electric (GE), the turbine manufacturer, recommended it to be replaced as soon as possible. This is the same S1N assembly that GE replaced in 2020 with the latest model available at the time. The part failed after 2,800 hours instead of the expected life of 28,000 hours after GE discovered that the installed model was prone to leaf-seal failures, which can cause a burn hole, and issued a revised service bulletin on April 28, 2022. The issue was subsequently discovered because of the revised service bulletin. GE will be supplying parts and labour and the net additional operating expense to the Project will be around $0.1 million; the total financial impact is expected to be around $0.3 million-$0.4 million based on information provided by the Issuer. Although DBRS Morningstar changed the trends on the ratings to Stable, such operational issues that have a material impact on the DSCR may lead to a negative rating action. In 2022, the DSCR is expected to be in the 1.65x to 1.70x range. Beyond 2022, the DSCR is expected to be closer to original projections ranging between 1.64x and 1.85x (with the exception of one year in which the DSCR is projected to be lower at around 1.60x because of gas turbine major maintenance, which may not occur at all if dispatch levels remain similar to the last two years). The projected average DSCR from 2021 to debt maturity is expected to be around 1.70x.
DBRS Morningstar will continue to closely monitor Project performance in the near term and may take a negative rating action if operational issues continue, actual financial results are lower than expectations, and/or MMRA is underfunded. An upgrade is considered unlikely given the projected level of DSCR.
There were no environmental, social, or governance factor(s) 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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is Rating Project Finance (August 18, 2021; https://www.dbrsmorningstar.com/research/383185), 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 firstname.lastname@example.org.]
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.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.
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Date Issued Debt Rated Action Rating Trend Attributesi
US = Lead Analyst based in USA
CA = Lead Analyst based in Canada
EU = Lead Analyst based in EU
UK = Lead Analyst based in UK
E = EU endorsed
U = UK endorsed
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26-May-22 Issuer Rating Trend Change A Stb CA
26-May-22 Issuer Rating Confirmed A Neg CA
26-May-22 Series A Senior Secured Amortizing Bonds Trend Change A Stb CA
26-May-22 Series A Senior Secured Amortizing Bonds Confirmed A Neg CA