Morningstar DBRS Confirms Brilliant Power Corporation's Issuer Rating and Series A, B, and C Bonds at A (high) With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Brilliant Power Corporation's (BPC or the Company) Issuer Rating and Series A Bonds, Series B Bonds, and Series C Bonds (collectively, the Project Bonds) at A (high) with Stable trends. All three tranches of the Project Bonds of $174.2 million in total (outstanding balance: $21.8 million) will fully amortize by the maturity date of May 31, 2026. BPC is a nontaxable single-purpose Crown corporation indirectly owned by the Province of British Columbia (British Columbia; rated AA (high) with a Stable trend). BPC owns and operates a 149-megawatt hydroelectric generation facility and the Brilliant Terminal Station transmission assets (together, the Project) in the Kootenay -- Columbia region of British Columbia.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect the Company's consistently strong operating and financial performance over the 18-month review period ended September 30, 2024. The Stable trends reflect Morningstar DBRS' expectation that performance will remain stable under a cost-of-service revenue contract. For F2024 (ended March 31, 2024) and the first six months of F2025 (ended September 30, 2024), debt service coverage ratios (DSCRs) of 2.03 times (x) and 1.95x, respectively, continued to be strong for the current credit ratings.

CREDIT RATING DRIVERS
Morningstar DBRS expects the credit ratings to remain stable for the next 12 months. A credit rating upgrade is unlikely in the near term. Although unlikely, a downgrade could be driven by (1) a weakening in the British Columbia Hydro and Power Authority's (BC Hydro; rated AA (high) with a Stable trend) credit support as a result of decoupling Powerex Corp. (Powerex) from its corporate structure, or (2) a substantial and protracted deterioration of BPC's operating and financial metrics.

FINANCIAL OUTLOOK
Morningstar DBRS expects revenue and EBITDA will continue to stay stable because of the cost-of-service-type power purchase agreement (PPA). Morningstar DBRS expects the sustaining capital expenditure (capex) to rise over the next few years; however, the moderately decreasing DSCR driven by the relatively high capex is still appropriate for the credit ratings given the nature of the PPA and the debt's upcoming maturity. Morningstar DBRS notes that all sustaining capex will be recovered with revenue increases over time.

CREDIT RATING RATIONALE
The Company's strong and stable credit fundamentals are driven by the following factors:

(1) Highly predictable cash flow underpinned by the cost-of-service-type PPA, which transfers virtually all revenue and operating cost risks to FortisBC Inc. (FortisBC; rated A (low) with a Stable trend). The capex is funded by BPC's operating cash flow but recoverable under a return-on-capital payment pursuant to the PPA over 30 years.

(2) Hydrology risk is contractually transferred to BC Hydro under the Canal Plant Agreement to 2035 (beyond debt maturity).

(3) Additional support from a backstop PPA (the Backstop PPA) with Powerex, a wholly owned subsidiary of BC Hydro. A project's credit rating is usually constrained by the primary offtaker's credit rating -- in this case, FortisBC's A (low) credit rating. However, Morningstar DBRS believes the Project benefits from the credit quality of the higher-rated BC Hydro through the Backstop PPA, given its 100% ownership in Powerex and the interlocking board and management structures. Furthermore, Morningstar DBRS expects the PPA will likely survive a hypothetical FortisBC default scenario because of the Project's strategic importance as one of FortisBC's primary energy-supply sources. As such, Morningstar DBRS determines that the credit ratings are not constrained by the primary offtaker's credit rating.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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) at https://dbrs.morningstar.com/research/437781.

RATING DRIVER AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of Rating Driver Factors
In the analysis of the Company, the Rating Driver factors listed in the methodology are considered in the order of importance.

(B) Weighting of FRA Factors
In the analysis of the Company, the following FRA factor listed in the methodology was considered more important: DSCR (the sole FRA factor).

(C) Weighting of the Rating Drivers and the FRA
In the analysis of the Company, the FRA carries greater weight than the Rating Drivers.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Project Finance (December 10, 2024), https://dbrs.morningstar.com/research/444393

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 methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024),
https://dbrs.morningstar.com/research/437781

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 rating was initiated at the request of the rated entity.

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

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