DBRS Morningstar Confirms Ratings on Arrow Lakes Power Corporation at A (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating on Arrow Lakes Power Corporation (ALPC or the Company) and the rating on its Series B Bonds (the Bonds) at A (high) with Stable trends. The 5.516% $350 million Bonds, of which about $295 million are outstanding (as of December 31, 2022), 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 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 (the Province; rated AA (high) with a Stable trend by DBRS Morningstar). The rating confirmations reflect 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 2023 until Bond maturity, with an average DSCR of 2.08x. The ratings also consider the strong credit profile of British Columbia Hydro and Power Authority (BC Hydro; rated AA (high) with a Stable trend by DBRS Morningstar), which is the counterparty for the Entitlement Agreement and the EPA.

The Company’s DSCR for the fiscal year ended March 31, 2022, was modestly weaker compared with YE2021 because of higher than expected capital expenditures largely related to the multi-year intake gate refurbishment and stoplog refurbishment projects. The Company confirmed that the timing of these projects were essentially the same as originally projected, but the costs have increased compared with the original budget. DBRS Morningstar understands that the Company has already purchased all of the remaining parts to complete these projects to secure pricing and supply chain. Therefore, this should mitigate any unexpected future increase in cost to complete the projects. According to the Company, these projects are also expected to be complete in 2025–26.

For the YE2022, the Project realized a DSCR of 2.19x, which remains highly supportive of the current rating category. For the last 12 months (LTM) ended December 31, 2022, the DSCR remained strong at 2.25x as the facility continued to maintain low outage rates. DBRS Morningstar expects the current A (high) rating to remain stable in the absence of any major operating failure causing unexpected high outages and/or higher maintenance capital expenditure (capex).

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
General Considerations

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (May 17, 2022; https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings).

Notes:
All figures are in Canadian dollars unless otherwise noted.

DBRS Morningstar applied the following principal methodology
-- Global Methodology for Rating Project Finance (September 6, 2022; https://www.dbrsmorningstar.com/research/402400/global-methodology-for-rating-project-finance)

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 under Related Documents or by contacting us at info@dbrsmorningstar.com.

The rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577