Canada's SaskPower Selects Northland Power to Build $666 Million Natural-Gas-Fired Power Plant

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Researched by Industrial Info Resources (Sugar Land, Texas)--Canadian income trust Northland Power Income Fund (TSX:NPI.UN) (Toronto, Ontario) will develop and own a 261-megawatt (MW) natural-gas-fired power plant, entailing an investment of $665.7 million, under a 20-year power purchase agreement (PPA) signed with state-owned Saskatchewan Power Corporation (SaskPower) (Regina, Canada). The power station will provide baseload power to the energy system of Saskatchewan.

The combined-cycle power plant will be developed near North Battleford, about 150 kilometers northwest of Saskatoon. The plant will operate on a GE (NYSE:GE) gas turbine along with the associated heat-recovery system and a steam turbine for power generation.

Construction of the plant is expected to begin in July this year, and commercial operations are scheduled to begin in 2013. Northland Power plans to fund the project primarily through non-recourse project debt, cash on hand, and its line of credit. The company has reportedly concluded arrangements with its banking syndicate to boost its committed line of credit for acquisitions and project investments to $123.6 million.

The entire output of the plant will be sold to SaskPower under the PPA. Payments, which will be made on a monthly basis, will cover all fixed costs and investment returns. Fuel costs will also be passed on to SaskPower, and the project will be shielded from any fluctuations in the price of natural gas feedstock. The PPA will assure Northland Power of stable and sustainable cash flows from the project.

The deal has come under criticism from Len Taylor, member of the legislative assembly representing The Battlefords constituency, and member of the Saskatchewan New Democratic Party. Although in favor of the proposed investment in the province, Taylor believes that SaskPower should have opted to develop and operate the plant itself instead of entering into an agreement with a private company for the project. According to Taylor, Northland Power's involvement in the project will cost the province additional money in the long run, an expense that could have been avoided had SaskPower opted to develop the plant itself, given that the firm is capable of such an undertaking.

Northland Power was selected to develop the North Battleford power project following a competitive bidding process conducted by SaskPower in 2008 to procure between 200 and 400 MW of intermediate to baseload power generating capacity, with a schedule for commencing operations by 2012-13.

With 3,641 MW of installed generating capacity scheduled to come up for retirement or refurbishment between 2013 and 2030, SaskPower is pursuing new business models, including private ownership of power generation facilities, to boost the province's electrical infrastructure.

Based on an earlier request for qualifications, SaskPower invited eight firms--ATCO Power Limited (Calgary, Alberta), EPCOR (Edmonton, Alberta), Husky Energy Corporation (OTC:HUSKF) (Calgary), Northland Power, NRGreen Power Limited (Calgary), Ormat Technologies Incorporated (NYSE:ORA) (Reno, Nevada), TransAlta Corporation (NYSE:TAC) (Calgary) and TransCanada Corporation (NYSE:TRP) (Calgary)--to respond to a request for proposals for the initiative.

In September last year, Northland Power was selected to develop an 86-MW natural-gas-fired power plant near Spy Hill in Saskatchewan to provide peaking power under a 25-year PPA with SaskPower. The cost of the project was estimated at nearly $138 million. Construction of the plant is expected to begin in June this year, with commercial operations scheduled to start no later than December 1, 2011. Northland Power announced that it would raise funds of about $133 million for the project through an offering of $57 million of trust units and $76 million of convertible debentures.

Northland Power Income Fund holds ownership or economic interests in 10 power plants in Canada, Germany and the U.S., with a combined generating capacity of more than 1,100 MW. The company announced its intention to merge with private power plant developer Northland Power Incorporated in April 2009.

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