DBRS Confirms Pingston Power Inc. Series 1 Bonds at A (high), Stable Trend

DBRS has today confirmed the rating on the Senior Secured Bonds Series 1 (the Bonds) issued by 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). The PPA provides for inflation-adjusted fixed pricing and has a term through 2023. Renewal of the PPA after 2023 is highly likely, based on the low operating cost, zero emissions nature of hydro projects and BC Hydro’s economic and policy demand for this type of load-serving resource.

The rating is constrained by hydrology risk. As a run-of-river hydroelectric plant, Pingston has energy production and PPA cash flow subject to the seasonal and yearly variability of water flow. The risk of low water flow is mitigated by three factors: (1) 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, (2) the PPA with BC Hydro has no requirement of minimum energy delivery, and (3) a debt service reserve equal to six months of debt service.

Long-term average generation (LTAG) of 179GWh is based on 25 years of hydrology data. Energy production in the 12-month period ended Q2 2013 was 180GWh. Actual water flow and production in the past ten years have shown variation within a narrow band, with results for the lowest year about 13% below LTAG. The lowest hydrology in 25 years was at 144GWh or 19.6% below LTAG representing a lower downside hydrology risk than seen for most projects. The breakeven production is 42% below LTAG and is well below the all-time trough demonstrating resilience consistent with the current rating. As a hydroelectric facility with only ten years of reliable operation, the Project requires relatively low capital expenditures in the near to medium term.

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 offtaker and a term extending eight years beyond the 2015 maturity of the Bonds.

Pingston’s operating performance is adequate for the current rating category and has been stable in the past few years. The independent engineer’s (IE) study was updated in 2010, confirming the base case hydrology and production levels at the LTAG of 179 GWh, supported by performance data compiled since commercial operation. The IE report will be updated again by the end of 2013, as required by the Bond indenture.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Project Finance (August 2013), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.