Northland Power closed a C$156.3 million ($157.3 million) private placement supporting its 86MW Spy Hill plant on 21 January. The 4.14% senior secured amortising series A bonds were 3.5x oversubscribed, thanks in part to A rating from DBRS. The bonds will fully amortise in March 2036, six months before the expiration of the project’s offtake agreement, and have an average life of 15 years.

The PPP bond market in Canada is the healthiest in the world, though it has suffered from a drop in volumes in recent months. But investment-grade bonds for generation assets Canada are rare, with the exception of hydro projects. Private placements for wind projects are a little more common, though these are essentially long-dated loans with institutions, and there are signs of an increase in activity in solar, but gas-fired generators are infrequent borrowers

Spy Hill’s solid performance and generous power purchase agreement with SaskPower, which is almost as friendly to lenders as a PPP contract, helped it attract an A rating. The 86MW peaking power plant started operations in October 2011 and is located in Saskatchewan, 230km east of Regina.

The availability component of the PPA tariff covers about 83% of the base case revenue, with the rest dependent on production levels. The 25-year PPA transfers market, fuel and volume risks to the utility, though Spy Hill retains performance risk and must meet minimum availability and heat rate requirements. Spy Hill has achieved 97.6% availability at its two LM6000-PF General Electric combustion turbines. “Effectively, the project’s profitability does not depend on how much electricity is produced but only that its generation is available if called upon by SaskPower,” according to the DBRS report.

The financing features a six-month debt service reserve backed by a letter of credit, two maintenance reserves, and has a minimum debt service coverage ratio of 1.7x, according to DBRS.

It will repay an existing C$110.5 million bank financing, which closed in April 2010, and settle almost C$33 million in interest rate swaps. Northland will receive a roughly C$5.6 million distribution, and distributions are allowed if Spy Hill’s reserves are fully funded and if it meets a 1.2x historical senior DSCR test. Since the original bank deal closed, the project has made C$15.6 million in distributions.

Casgrain & Company and CIBC, the leads on the Spy Hill issue, held road shows in Montreal and Toronto and a national call with investors. BMO Nesbitt Burns, National Bank Financial and Scotiabank rounded out the bond syndicate.

Casgrain, which is based in Montreal, helped bring in several Quebec participants, and Quebec institutional investors account for half of the issue. The debt attracted 26 accounts, among them pension funds, mutual funds and some small life insurance companies. “It’s the beginning of the year, so a lot of investors have funds available – and there’s a lot of pent-up demand for gas-fired bonds,” explains a market observer.

The mini-perm financing for the plant had four years remaining, giving the sponsors ample time and opportunity to refinance the debt. But Northland wants to reduce its refinancing risk, first with Spy Hill and soon on the bank debt for its 265MW North Battleford gas-fired combined-cycle project, also in Saskatchewan. “Our goal is to close the last open switch in the project created by the spread risk on the mini-perms,” says Paul Bradley, Northland chief financial officer in Toronto.

Spy Hill is Northland’s first-ever rated bond issue, though it has issued corporate convertible bonds, and has received a corporate income fund stability and sustainability rating in the past. The sponsor has relationships with the life insurance companies that offer placement debt to generation projects but the rated market typically offers cheaper pricing. A private placement will probably not work for the refinancing of North Battleford either, since that deal will be bigger and require a much broader investor base. Spy Hill will serve to introducer Northland’s fleet to the rated markets deeper pool of investors.

This wider bond market access will complement Northland’s efforts to expand its bank following. When it began the financing process for North Battleford, it wanted to attract international lenders to join their Canadian brethren, partly because it needed to find C$580 million in debt, but also because it wanted to build new relationships to support a planned C$1 billion slate of greenfield renewables financings.

Whereas Spy Hill was a strictly Canadian deal – CIBC, BMO and Scotiabank were the lead arrangers – North Battleford featured Union Bank as a lead alongside BMO and CIBC; participating banks included Allied Irish Banks, Mizuho, Siemens, Société Générale, Sumitomo Mitsui Banking Corporation, BayernLB, Helaba and Natixis. The North Battleford mini-perm, which closed in August 2010, has a tenor of construction plus seven years.

Northland expects North Battleford to begin operations in the second quarter of this year, and for a bond refinancing to follow soon afterwards – potentially before year-end. Its second batch of solar projects could come to market in the second quarter, and their financing will have a strong international presence. For the 30MW solar deal, Northland is asking banks for debt with an 18-year tenor, about eight years longer than Canadian banks prefer. In July 2012, Northland closed an 18-year C$227 million debt financing with Union Bank, Mizuho and CIT for 60MW of ground-mounted solar projects. 

Spy Hill Power LP
STATUS
Closed 21 January 2013
SIZE
C$156.3 million ($157.3 million)
DESCRIPTION
Refinancing of 86MW peaking power plant in Saskatchewan, Canada
SPONSOR
Northland Power
BOOKRUNNERS
Casgrain & Company and CIBC
DEALERS
BMO Nesbitt Burns, National Bank Financial and Scotiabank
SPONSOR FINANCIAL ADVISERS
Casgrain & Company and CIBC
SPONSOR LEGAL ADVISER
Borden Ladner Gervais
BOOKRUNNER LEGAL ADVISER
McCarthy Tétrault