DBRS Confirms Pingston Power Inc. at A (high), Stable Trend

DBRS has today confirmed the rating on the Senior Secured Bonds (the Bonds) of Pingston Power Inc. (Pingston or the Project) at A (high) with a Stable trend. The rating is supported by a power purchase agreement (PPA) with British Columbia Hydro & Power Authority (BC Hydro, rated AA (high) with a Stable trend), under which Pingston sells all its energy production to BC Hydro at an inflation-adjusted fixed price until 2023.

Energy production in the last 12-month period ended Q1 2010 was 163 GWh, slightly below the expected long-term average (LTA) but significantly above the minimum level of 100 GWh necessary to achieve 1.0 times coverage for the Bond payments. The interest coverage ratio, approximately 1.8 times, remained solid for the current rating category. As a fairly recently-built facility with reasonably stabilized operating performance, the Project requires minimal capital expenditures (capex) in the near- to medium-term.

The rating continues to be constrained by hydrology risk and operating risk. As a run-of-river hydroelectric plant, Pingston’s energy production and PPA cash flow are subject to the seasonal and yearly variability of water flow. This risk is mitigated by plant capacity being sized to only need a fraction of the historical level of summer water flow, giving sufficient cushioning before fluctuation in flow level could restrict power generation. The seasonality of run-of-river operation also would put pressure on the plant’s operating performance in the four-month high-flow season; i.e., a prolonged plant outage during May to July would have a more significant impact on the Project’s cash flow and financial performance. However, the Project’s summer production and cash flow are sufficiently robust to ensure that Bond payments would not be affected if one unit were to go out of service for the whole summer. The PPA with BC Hydro has no requirement of minimum energy delivery; this helps contain the cash flow impact of low water flow and energy production. The debt service reserve, equal to six months of payments on the Bonds, adds further protection for the bondholders.

Refinancing risk due to the non-amortizing structure of the Bonds is mitigated by the long-term value of the Project’s low-cost energy production, as well as the PPA with a strong off-taker and a term extending eight years beyond the maturity of the Bonds.

DBRS notes that Pingston’s operating performance is adequate for the current rating category and is trending toward more stabilized levels after the first few years of commercial operation. A new hydrology study to be carried out by an independent engineer in 2010 and again in 2013, as required by the indenture, is expected to provide more insight and added reliability to the hydrology and production forecast.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Project Finance, which can be found on our website under Methodologies.

This is a Corporate (Project Finance) rating.