Morningstar DBRS Confirms Plenary Justice Okanagan LP Ratings at A (low) With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and the rating of the Series A Senior Notes issued by Plenary Justice Okanagan LP (ProjectCo) at A (low) with Stable trends. ProjectCo is the special-purpose entity created to design, build, finance, and maintain the $185.5 million Okanagan Correctional Centre (the Project) under a 32.6-year Project Agreement signed between ProjectCo and the Province of British Columbia (the Province; rated AA (high) with a Stable trend by Morningstar DBRS). The credit rating confirmations reflect the solid experience of Honeywell Limited (Canada) (the Service Provider), the straightforward service obligations, and the supportive resiliencies.

KEY CREDIT RATING CONSIDERATIONS
The facility operations have continued smoothly during the eighth year without material deductions. The performance of the Year 8 Life Cycle items is being monitored according to the five-year Life Cycle Plan. For the fifth energy year, after an evaluation of energy usage against the Adjusted Energy Target, the overall consumption resulted in an energy gainshare of approximately $15,800, which was passed down to the Service Provider. The sixth energy year started from October 1, 2024.

The relationship between ProjectCo, the Service Provider, and the Province remains collaborative, with no material issues reported. According to the last technical review, the facility is in good to excellent condition and is being operated at a level consistent with industry standards and as stipulated in the facility services scope of work. The Project has reached steady state of operations.

CREDIT RATING DRIVERS
Material deductions and/or a Service Provider replacement could lead to a negative credit rating action. The potential for credit upside remains limited at the current credit rating given the fixed nature of the revenue stream.

FINANCIAL OUTLOOK
The actual debt service coverage ratio (DSCR) as of September 30, 2024, was 1.27 times (x) per the Compliance Certificate. The projected financial metrics remain unchanged and adequate for the credit rating, with a minimum and average DSCR of 1.21x. As per ProjectCo, there has been no change to the operations and maintenance (O&M) and lifecycle budgets, thus the expected O&M and lifecycle breakeven ratios remain 44% and 46%, respectively.

Overall, the key financial metrics and break-even results point to good flexibility to absorb unexpected shocks. While the service phase is marked by heavy security requirements, Morningstar DBRS takes comfort in the service standards, which are not viewed as unusually complex for a correctional centre; the mechanisms in place to limit erosion in lifecycle performance; and the allocation of FM obligations to a high-quality Service Provider with considerable experience on similar projects.

CREDIT RATING RATIONALE
The credit ratings are supported by strengths that include (1) a strong Service Provider, (2) minimal public-sector counterparty credit risk, (3) tight lifecycle inspection and reserving mechanism. The main challenge is contractor replacement risk.

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) https://dbrs.morningstar.com/research/437781

RATING DRIVERS AND FINANCIAL RISK ASSESSMENT (FRA)

A) Weighting of Rating Driver Factors
In the analysis of the Issuer, the relative weighting of the Rating Driver factors listed in the Part One - Rating Availability-Based PPP of the methodology was approximately equal.
B) Weighting of FRA Factors
In the analysis of the Issuer, the following FRA factor listed in the Part One - Rating Availability-Based PPP of the methodology was considered more important: lifecycle & O&M breakeven ratios.
C) Weighting of the Rating Driver and the FRA
In the analysis of the Issuer, the FRA carries greater weight than the Rating Driver.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Public-Private Partnerships (August 13, 2024)
https://dbrs.morningstar.com/research/437820

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria https://dbrs.morningstar.com/research/431186 (April 15, 2024), 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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