DBRS Confirms Rating on Arrow Lakes Power Corporation’s Series B Bonds at A (high), Stable Trend

DBRS Limited (DBRS) has today confirmed its rating on the Series B Bonds (the Bonds) of Arrow Lakes Power Corporation (ALPC or the Company) at A (high) with a Stable trend. The 5.516% $350 million Bonds will be fully amortized by the maturity date of April 5, 2041. ALPC is a single-purpose entity that owns and operates a 185 megawatt (MW) hydroelectric power station and associated transmission line (the Project). The Company is a tax-exempt Crown corporate, indirectly owned by the Province of British Columbia (rated AA (high) by DBRS). The rating confirmation reflects the Project’s highly predicable cash flow and debt service coverage ratio (DSCR), underpinned by (1) the Entitlement Agreement and the two consecutive Electricity Purchase Agreements (EPAs), essentially eliminating the hydrology and price risks; (2) reliable and low-cost characteristics of the underlying hydro assets; and (3) a material improvement of the average DSCR to 2.10 times (x) after 2016. The rating also considers the strong credit profile of British Columbia Hydro and Power Authority (rated AA (high) by DBRS), which is the counterparty for the Entitlement Agreement and the EPAs.

The Project has continued to perform well for the past 12 to 18 months. During that period, the interest-only DSCR of between 1.52x and 1.60x met expectations and the facility’s outage rate* of 0.7% to 1.6% was minimal. Effective January 1, 2016, the cash flow will show considerable improvements because of the increased power purchase prices under the second EPA. As a result, the minimum and average DSCRs are expected to improve to 1.84x and 2.10x, respectively, even with the increased debt service burden as the Bonds start to amortize in October 2016. Future DSCRs are very robust considering the minimum revenue risk. The six-month debt service reserve will no longer be funded after December 31, 2016, unless the trailing 12-month DSCR falls below 1.40x. This structural feature is considered to be a credit weakness, but is partially mitigated by the strong DSCR. DBRS expects that the Project will continue to perform as expected in the near to medium term. DBRS also expects the current A (high) rating to stay stable for the next 12 to 18 months in the absence of any unexpected adverse event(s).

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.

*The outage and availability rates presented in the rating report are adjusted by generation (GWh). The availability rate is the actual annual entitlement accounting for outages, relative to the nominal entitlement (767 GWh).

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