Analysis of operating period risk includes the following elements:
contract, O&M contracts are often subject to renewal risk or may be established on a cost plus basis
and/or with an operator that is an affiliate of the equity sponsor. O&M costs for most power projects,
however, are a fairly modest percentage of the cost structure and even significant increases in O&M
costs generally have limited impact on debt service coverage. This is also generally the case for projects
with penalties for missing prescribed operating period performance thresholds, although the potential for
penalties is carefully reviewed to assess their likelihood and severity of impact. In general, breakeven resil-
ience for O&M cost increases (i.e., the ability of a project to absorb increases in operating costs) is high
and operating period contractors are easily replaced in the case of an operator default, with limited risk
to project bondholders. Origin will review the IE's opinion of the operator's experience and track record,
the ease with which the operator can be replaced and the resulting costs.
ability such that the retention of operating risk by ProjectCo is generally acceptable. This is not the case,
however, for management of the service phase risks of public-private partnership (PPP) facilities manage-
ment and lifecycle obligations. For PPP projects, the combination of substantial completion payments
from public authorities and return conditions requirements can make operating and maintenance costs
a much more material source of risk.
revenues and debt service coverage arise from: (1) a longer contract term; (2) fixed pricing; and (3) a close
match of revenues to capital, financing and operating costs. Origin notes that a low-cost project with a
proven revenue stream but no off-take contract, can still be favourable (e.g., an established hydro-
electric asset in a region where higher-cost power assets set the market's marginal price).
higher in risk than projects that sell output under a fixed-price, long-term contract. Origin will typically
require an independent market study to assess a project's competitive position and exposure to lower-
than-forecast prices. In general, ratings on merchant power projects will be rated two or more notches
lower than their fully contracted equivalents.
determinants in a project rating. Off-takers with a strategic need that is met by the siting, technology type,
capacity and load type of the project, are considered positive for the durability of the power purchase
contract and for credit quality. The rating of a project's debt is typically lower than the off-taker's rating,