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 through 2023.

Energy production in the last 12-month period ended Q2 2011 was 164 GWh, slightly below the expected long-term average of 179 GWh but significantly above the minimum level of 100 GWh necessary to achieve 1.0 times coverage for the Bond payments. The interest coverage ratio, close to two times, remained solid for the current rating category. As a fairly recently-built facility with reasonably stabilized operating performance, the Project requires negligible capital expenditures in the near to medium term.

The rating continues to be constrained by hydrology risk and operating risk, although performances in both areas have been close to or above the baseline levels in the past few years. 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 any fluctuation in flow level could restrict power generation. The seasonality of run-of-river operations would also put pressure on the plant’s operating performance in the four-month high-flow season; that is, a prolonged plant outage during the May to July period 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 out of service for the entire summer. The PPA with BC Hydro has no requirement of minimum energy delivery, which helps mitigate the potential 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.

Pingston’s operating performance is adequate for the current rating category and has been stable in the past few years. The independent engineer’s study was updated in 2010, with the results supporting the current performance level. The base case hydrology and production levels were confirmed at 179 GWh, supported by performance data compiled since commercial operation. The report will be updated again in 2013, as required by the indenture.

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.

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.