DBRS Confirms Arrow Lakes Power Corporation Series A Bonds at A (high) Stable; Assigns Provisional Rating for Planned Series B Bonds at A (high)

DBRS has today confirmed the rating on the Series A Bonds (or the Existing Bonds) of Arrow Lakes Power Corporation (ALPC or the Company) at A (high) with a Stable trend and has assigned a provisional rating for the planned new longer-term debt issuance (the Series B Bonds) at A (high) with a Stable trend. ALPC intends to fully pre-pay $46 million in Existing Bonds with the planned Series B Bonds – a $350 million, 30-year, fully-amortizing private placement. ALPC benefits from contracted prices under the 1998 Electricity Purchase Agreement (1998 EPA) with British Columbia Hydro & Power Authority (BC Hydro, rated AA (high) with a Stable trend) of $46/MWh in 2011 increasing by 3% per annum (p.a.) through 2015. The Company has entered into a higher-paying successor EPA (the 2010 EPA) commencing January 1, 2016, at improved contract prices (starting at $84/MWh in 2016 adjusted by half the change in CPI from January 1, 2010, and adjusted annually at half the annual change in CPI thereafter). Net proceeds after the Existing Bonds are pre-paid and the new reserves (a liquidity reserve and a debt service reserve totalling approximately $34 million) have been funded, will be distributed to the ALPC shareholders (approximately $265 million) and used to finance the construction of the nearby Waneta hydro project. The Province has authorized ALPC to issue the Series B Bonds.

The Series B Bonds and distribution of net proceeds significantly increases ALPC leverage. The rating continues to be supported by the AA (high) counterparty risk of BC Hydro, and the EPA contractual transfer of hydrology and market risk to BC Hydro. Higher leverage reduces base case debt service coverage ratio (DSCR) to a minimum of 1.18x during the remaining life of the 1998 EPA, when the Series B Bonds are interest-only. During that same period, two reserves are added – a liquidity reserve raising base case DSCR to 1.5x in each year and a funded debt service reserve raising the base case DSCR from 1.5x to 2.0x.

Under the 2010 EPA, the base case DSCR is generally above 2.0x for the remaining 25-year life (except for a couple of higher maintenance capex years).

The rating is constrained by the single-asset nature of ALPC, its operating risk and increased leverage due to the Series B Bonds. An unplanned, prolonged outage is the primary credit risk. However, DBRS notes that the Company was able to cope with the outage related to repair of an approach channel from 2004 to 2006 and generated adequate cash flow for debt service, including principal repayments. Insurance payments covered about 80% of the costs associated with both lost revenues and the expenses of repair and replacement, the difference representing about $10 million in asset improvements. Under both EPAs, the outage risk is managed by reserves, proven insurance protection and by the financial capability and liquidity of its provincially-owned shareholders and their continued interest in the policy and financial returns of the project.

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.