The fact that the project -- near the community of Murdochville on the Gaspe Peninsula using Vestas 1.8 MW wind turbines -- is not yet complete was a key factor in S&P's assessment, says S&P credit analyst Lorenzo Sliusarev. Vestas is installing the turbines, which are expected to come online by March 2005, under a fixed-price engineering, procurement and construction (EPC) contract. "Clearly there is construction uncertainty. As much credit as we give to EPC contracts, we know you can never protect against all the risk," says Sliusarev.
The output of the wind power plant will be sold to Hydro-Quebec under a 21 year power purchase agreement. But over the short term, says Sliusarev, the project still has to show it can meet its performance expectations. "If you look at it as 21 year cash flow, the biggest risk to that cash flow with wind usually lies in the first three years," he says. "There is obviously going to be a break-in period for the project after it is complete -- and during that period there could be some variability, there could be some issues to deal with, just like any other generation."
Not cash rich
Sliusarev says S&P's concerns about construction and performance risk may have been less if the purchaser had been a corporate entity, rather than an income fund. Unlike corporations, which retain most of their cash flow to pursue other investment opportunities, income funds are designed to pass on as much as possible to their unit holders.
"An income fund is there to, basically, deliver a steady stream of cash flow to an investor and as such you would hope to see more mature and cash-rich projects going into it. I'm not saying that the wind project will not become that. All I'm saying is that at this point, it is not that. So clearly you have a gap to bridge."
The acquisition of Miller Mountain, says NPIF, represents an opportunity to increase the fund's assets and to provide diversification with respect to fuel type, technology, and location. Currently NPIF indirectly owns interests in four combined-cycle cogeneration plants in Ontario and the US, which have a combined capacity of 640 MW.
That S&P, while downgrading its outlook for NPIF, retained the funds' current "stable" rating, indicates that it accepts at least some of NPIF's reasoning. The shift in S&P's outlook, says Sliusarev, means that "in the future, the rating could be lowered or could stay the same depending on how the fund deals with this project."
NPIF bought Miller Mountain from its two developers, Montreal's 3Ci Inc and Northland Power Inc, a Toronto-based independent power producer that also owns NPIF. The total cost of acquiring and building the project is C$95 million, to be financed using the proceeds of a C$65 million offering of 6.5 % convertible unsecured subordinated debentures and a $40 million non-recourse construction and term loan.
For Vestas, the sale is a bright spot in a North American market depressed by the failure of the US Congress to extend the production tax credit. "The order confirms Vestas' positive expectations for the growing Canadian market," says CEO Svend Sigaard.