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 secured 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 (four years before the expiry of the Electricity Purchase Agreement (EPA). 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 corporation indirectly owned by the Province of British Columbia (rated AA (high) by DBRS). The rating confirmation reflects the Project’s highly predictable cash flow and debt service coverage ratio (DSCR), underpinned by (1) the Keenleyside Entitlement Agreement (the Entitlement Agreement) and the EPA, essentially eliminating the hydrology and price risks; (2) reliable and low-cost characteristics of the underlying hydro assets; and (3) a projected minimum DSCR of 1.84 times (x) from 2016 until Bond maturity. 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 EPA.

Cash flow in 2016 has shown considerable improvement from the increased power purchase price under the EPA. The Project has continued to perform well with a trailing 12-month (T-12) December 31, 2016, DSCR of 2.43x and the facility’s outage rate of 1.1%, which are within expectation. The minimum and average DSCRs through the life of the Bonds are expected to continue to be strong considering the minimal revenue risk, at 1.84x and 2.10x, respectively, despite the increased debt service burden (the Bonds began to amortize in October 2016). The six-month debt service reserve fund is no longer funded as at December 31, 2016, unless the T-12 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 and that the current A (high) rating will remain stable 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 principal methodology is Rating Project Finance, which can be found on dbrs.com under Methodologies.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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