Morningstar DBRS Confirms Brilliant Power Corporation’s Ratings at A (high) With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and the Series A Bonds, Series B Bonds, and Series C Bonds (collectively, the Project Bonds) ratings of Brilliant Power Corporation (BPC or the Company) at A (high) with Stable trends. All three tranches of the Project Bonds of $174.2 million (outstanding balance: $35.0 million) in total 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 or the Province; rated AA (high) with a Stable trend by Morningstar DBRS). BPC owns and operates a 149-megawatt (MW) 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 performances over the 18-month review period ended September 30, 2023. The Stable trends reflect Morningstar DBRS' expectation that the performance will continue to be stable under a cost-of-service revenue contract. For F2023 (ended March 31, 2023) and the first six months of F2024 (ended September 30, 2023), debt service coverage ratios (DSCRs) remained strong for the current credit ratings at 1.88 times (x) and 2.00x, respectively.

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

FINANCIAL OUTLOOK
Morningstar DBRS expects the DSCR to stay at approximately 1.90x for the next 12 months to continue supporting the current credit ratings.

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 power purchase agreement (PPA), which transfers virtually all revenue and operating cost risks to FortisBC Inc. (FortisBC; rated A (low) with a Stable trend by Morningstar DBRS). The capital expenditures (capex) are 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 (CPA) to 2035 (beyond debt maturity).

(3) Additional support from a backstop PPA (the Backstop PPA) with Powerex Corp. (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) 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 the credit ratings are not constrained by the primary offtaker’s rating.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
There were no Environmental factors that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factors that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factors that had a relevant or significant 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 DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (July 4, 2023) https://dbrs.morningstar.com/research/416784/dbrs-morningstar-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings

RATING DRIVER AND FINANCIAL RISK ASSESSMENT (FRA)
(1) 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.

(2) Weighting of FRA Factors
In the analysis of the Company, the following FRA factor was considered more important: DSCR (the only applicable FRA factor).

(3) Weighting of the Rating Driver and the FRA
In the analysis of the Company, 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 Project Finance (September 12, 2023)
https://dbrs.morningstar.com/research/420425/global-methodology-for-rating-project-finance

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/397223.

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 dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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