DBRS Confirms Arrow Lakes Power Corporation Series B Project Bonds 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 Bonds – a $350 million, 30-year, fully amortizing private placement – prepaid the Series A Project Bonds in May 2011. The rating reflects the credit strength of British Columbia Hydro & Power Authority (BC Hydro; rated AA (high) with a Stable trend) and its undertaking in the Project, which results in relatively predictable cash flows with contract protection.

Under Electricity Purchase Agreements (EPAs), BC Hydro pays ALPC fixed prices with inflation adjustments for energy delivered. Under the current EPA, BC Hydro pays ALPC approximately $46 to $50 per megawatt hour (MWh) through 2015. After 2015, a new EPA entered into in 2010 will replace the current EPA and improve the price to $84/MWh. The Bonds are to be fully amortized within the terms of the EPA and thus are not exposed to refinancing risk.

Hydrology risk is also transferred to BC Hydro, under an Entitlement Agreement. ALPC receives a predetermined energy and capacity entitlement adjusted for forced outage. The EPA payments are based on the adjusted entitlement, which is estimated to be 767 gigawatt hours (GWh) per year and is not affected by hydrology.

For the interim period between 2012 and 2016 before the higher-priced EPA, no principal repayments are due and additional reserves are in place to support a coverage level that is in line with the current rating category. For the 12 months ended September 30, 2012, EBITDA has remained stable at $27 million, and the debt service coverage ratio (DSCR), as defined in the bond documents, was 1.7 times (x). Starting in 2016 with the improved EPA prices, the DSCR is expected to increase toward historical levels of approximately 2.0x.

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.

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

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