Morningstar DBRS Confirms InPower BC General Partnership at BBB (high), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and the $299.2 million Senior Secured Bonds credit rating of InPower BC General Partnership (ProjectCo) at BBB (high) with Stable trends. ProjectCo is the special-purpose entity created to design, build, finance, and maintain a replacement hydroelectric plant, the John Hart Generating Station Replacement Project, on the Campbell River of Vancouver Island under a 19.75-year project agreement with the British Columbia Hydro and Power Authority (BC Hydro; rated AA (high) with a Stable trend by Morningstar DBRS).

KEY CREDIT RATING CONSIDERATIONS
The BBB (high) credit ratings are primarily supported by the high credit quality of the availability-based service payment from BC Hydro, as well as a comparatively short service phase, limiting ProjectCo's exposure to lifecycle risks and relatively sound pro forma financial metrics. Although Morningstar DBRS does not view the service requirements as particularly complex, the credit ratings are constrained by the lifecycle obligations due to the nature of the project. The obligations are somewhat more risky and technical than those encountered in highway or hospital projects, particularly the responsibilities pertaining to the generating units and the tunnel. ProjectCo or SLI Hydro Service Provider BC Inc. (the Service Provider) will have access to limited resources during operation to mitigate relevant risks.

CREDIT RATING DRIVERS
Although not expected, incurrence of material noncompliance points or weak service performance could lead to a negative credit rating action. Morningstar DBRS considers a positive credit rating action unlikely because of the more risky and technical lifecycle obligations and the limited resources ProjectCo and the Service Provider have during operation to mitigate relevant risks.

FINANCIAL OUTLOOK
The project has a minimum debt service coverage ratio (DSCR) of 1.26 times (x) and supports a 111% increase in the total lifecycle budget, a 128% increase in the total routine maintenance budget, or a 100% increase in the Service Provider's contract price. For the 12 months ended June 30, 2024, the DSCR was 1.30x, which is higher than expected because of higher interest income.

CREDIT RATING RATIONALE
The credit ratings reflect the Project's financial outlook, underpinned by strengths that include (1) low public-sector counterparty credit risk, (2) shorter-than-typical service phase, and (3) very robust breakeven ratios. The main challenge is related to the lifecycle obligations due to the nature of the project, which are considered somewhat more risky and technical than those encountered in other social availability-based public-private partnerships projects, and the limited resources ProjectCo and the Service Provider have during operation to mitigate relevant risks.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of ProjectCo, the relative weighting of the BRA factors in the availability-based section was approximately equal.

(B) Weighting of FRA Factors
In the analysis of ProjectCo, the following FRA factor in the availability-based section was considered more important: DSCR.

(C) Weighting of the BRA and the FRA
In the analysis of ProjectCo, the FRA carries greater weight than the BRA.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Public-Private Partnerships (June 28, 2024),
https://dbrs.morningstar.com/research/435169

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186 which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following criteria has also been applied:
DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024), https://dbrs.morningstar.com/research/437781/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-factors-in-credit-ratings

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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-DBRS@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

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

These are solicited credit ratings.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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