DBRS Confirms Arrow Lakes Power Corporation at A (high), Stable Trend

DBRS has today confirmed the rating on the Series B Project Bonds (the Bonds) of Arrow Lakes Power Corporation (ALPC or the Project) at A (high) with a Stable trend. The rating reflects the credit strength of British Columbia Hydro & Power Authority (BC Hydro; rated AA (high) with a Stable trend by DBRS) and its undertaking in the Project. ALPC benefits from relatively predictable cash flows with contract protections.

Hydrology risk is transferred to BC Hydro under the Entitlement Agreement dated June 1, 2000. BC Hydro delivers to ALPC a fixed monthly energy entitlement (estimated at 767 gigawatt hours per year), adjusted for any plant outages, and, in return, ALPC delivers to BC Hydro all of its electricity generation.

Payment to the Project is governed by two consecutive Electricity Purchase Agreements (EPAs) with BC Hydro. The first EPA expires at the end of 2015 after which the second EPA comes into effect until December 31, 2045 (post maturity of the bonds in April 2041). The primary difference between both EPAs is the increase in purchase price under the first EPA from $36.46/megawatt hour (MWh; indexed at 3% per annum and increasing to $52/MWh by 2015) to $84.30/MWh (indexed by 50% consumer price index) under the second EPA. The Bonds will also fully amortize within the term of the new EPA, so there is no refinancing risk. Both EPAs are structured as take-or-pay contracts; BC Hydro pays ALPC regardless of whether they take the electricity or not.

Until 2016, no principal repayments are due and additional reserves were put in place to support a coverage level that is in line with the current rating category. For the last 12 months ending December 31, 2013, EBITDA remained relatively stable at $27 million. The debt service coverage ratio (DSCR) was approximately 1.7 times (x), adequate for an “A” range credit rating. Starting 2016 with the improved pricing of the second EPA, the DSCR is expected to increase above 2.0x, provided the Company maintains the assets and executes its capital expenditure plan.

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, which can be found on our website under Methodologies.

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