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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the $299.2 million Senior Secured Bonds 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 (PA) with the British Columbia Hydro and Power Authority (BC Hydro; rated AA (high) with a Stable trend by DBRS Morningstar).

The BBB (high) 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 DBRS Morningstar does not view the service requirements as particularly complex, the ratings, however, are constrained by the limited resources ProjectCo and SLI Hydro Service Provider BC Inc. (the Service Provider) have during operation to mitigate unexpected maintenance needs.

The project is on its fifth year of the service phase, which started on June 6, 2019, and ends in October 2033. During 2022, the project performed well with no noncompliance points or deductions. As planned, a full four-year major inspection of the facility was conducted during 2022, including a complete dewatering of the tunnel. BC Hydro and an independent certifier also participated in the inspections. No significant issues were discovered in the integrity of the facility, and it was brought back into service without issues. Summer maintenance is currently under way, consisting of a sequential shutdown of all units. As of July 31, 2023, two of the three units have already been completed and the inspection is going as planned.

The service performance to date has been good, and all three generating units are producing energy in line with expectations with an availability to BC Hydro above 98% in H1 2023. ProjectCo is eligible for certain days of planned maintenance, and the associated outages do not incur any unavailability deductions. There were 11 unplanned outages in 2022 and three in H1 2023 (ProjectCo is allotted six nominated forced outages, which provide for relief from deductions for a fixed period of time). Deductions were passed down to the Service Provider. There were no deductions for nonperformance event points as they were within the thresholds provided in the PA.

On February 4, 2022, ProjectCo and the Service Provider negotiated an amendment to the Service Agreement whereby ProjectCo passes down all maintenance and lifecycle obligations it had retained at financial close (Excluded Services and Excluded Rehabilitation Obligations) to the Service Provider, which assumes the risks, including the cost and pricing risks associated with the Excluded Services and Excluded Rehabilitation Obligations, for a fixed price (subject only to inflation). Therefore, ProjectCo retains no risks or responsibilities postexecution of the Service Agreement amendment and there is no change in costs for ProjectCo, as payments to the Service Provider will match inflows from BC Hydro and will be paid based on the amount set out in the original budget, provided the work is performed as planned.

ProjectCo reports water seepage levels since Total Completion have been largely stable and it continues to monitor the levels, as required under the PA. Compared with the 270 litres per minute (L/min) threshold in the amended Schedule 7 (Services) of the PA, the average seepage levels observed during the last winter inspection (October 2022 to March 2023) is estimated to be around 268 L/min (plus/minus an estimated accuracy of up to 20%), which is lower than the 275 L/min observed last year. The highest flow rate (307 L/min) was recorded during the month of December and was the only data point above 300 L/min. The lowest flow rate (194 L/Min) was recorded during the month of March. There were no new seepage locations during the period, and as expected, the majority of seepage continued to be from the powerhouse south wall. DBRS Morningstar notes ProjectCo is required to take remedial measures if the seepage levels are higher than 270 L/min and increasing. Furthermore, the DB Contractor is required to correct any latent defect during the legislated limitation period of 10 years, which covers the majority of the service phase.

ProjectCo reports good relationships with BC Hydro’s operations team and fluid communications to coordinate operation and maintenance activities, with no ongoing disputes. 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, per the original financial close model. For the 12 months ended June 30, 2023, the DSCR was 1.30x, which is higher than expected because of higher interest income.

Although not expected, incurrence of material noncompliance points or weak service performance could lead to a negative rating action. DBRS Morningstar considers a positive rating action unlikely because of the limited resources ProjectCo and the Service Provider have during operation to mitigate unexpected maintenance needs.

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 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 https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Public-Private Partnerships (August 30, 2022) https://www.dbrsmorningstar.com/research/402155

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 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.

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 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. DBRS Morningstar trends and ratings are under regular surveillance.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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

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