DBRS Morningstar Assigns Ratings of BBB with Stable Trends to Great Lakes Power Holdings LP, Canada Atlantis Hydro Holding LP and Algoma Hydro Holding LP

DBRS Limited (DBRS Morningstar) assigned an Issuer Rating of BBB to Great Lakes Power Holdings LP, Canada Atlantis Hydro Holding LP and Algoma Hydro Holding LP (collectively, the Co-Issuers or the HoldCo). DBRS Morningstar also assigned BBB ratings to the Series A Bonds and Series B Bonds (together, the HoldCo Bonds or the Bonds) issued by the Co-Issuers. All trends are Stable. The Co-Issuers respectively own Great Lakes Power Limited Partnership, Canada Atlantis GL Power LP, and Algoma Hydro Asset LP (collectively, the OpCo). The OpCo owns and operates a 350-megawatt portfolio of hydroelectric generating assets, which is composed of 21 units across 12 stations, three reservoirs, and four rivers near Sault Ste. Marie, Ontario (the Project). Currently all electricity generated is sold to a high investment-grade offtaker, which expires on November 30, 2029. DBRS Morningstar believes the offtaker has a strong credit profile that does not constrain the assigned ratings.

The Series A Bonds, with a total amount of approximately $346 million, are settled on the First Closing Date of December 19, 2022. The proceeds will be used to pay all expenses incurred in connection with the issuance of the Series A Bonds, to make loans to affiliates, to make distributions, to repay Indebtedness, and/or for any other corporate purposes. The Series B Bonds, with a total amount of approximately $440 million, will be settled on a delayed draw basis on the Second Closing Date expected on or before June 16, 2023. The proceeds will be used to repay the OpCo's existing debt (the OpCo Bonds). After June 16, 2023, the OpCo will not be permitted to incur any indebtedness outside of the Permitted Indebtedness. Both Bonds will partially amortize on a pro rata basis to a bullet amount of $400 million, maturing on November 30, 2029, which coincides with the maturity of the contract with the offtaker.

The Bonds will rank pari passu with each other and include a minimum consolidated debt service coverage ratio of 1.60 times (x) at the long-term average annual generation level. The Bonds are expected to be refinanced upon maturity on November 30, 2029, with potential merchant exposure. Based on DBRS Morningstar's estimates of merchant electricity prices in 2029, the project life coverage ratio using the P90 generation will be above 1.80x, which still indicates ample cash flow to support a successful refinancing.

DBRS Morningstar notes the HoldCo Bonds will be structurally subordinate to the OpCo Bonds until they are refinanced on the Second Closing Date (by June 16, 2023). DBRS Morningstar believes the risk of the structural subordination is not material because (1) the structural subordination is expected to last for about six months only; (2) the Series B Bonds have been priced simultaneously with the Series A Bonds prior to the First Closing Date, and the funding commitment of the Series B Bonds will represent a binding obligation to the investors; and (3) DBRS Morningstar noted the Bonds have been sold to institutional investors with a satisfactory credit profile to mitigate funding risk. The HoldCo Bonds include a typical project finance transaction with standard features, including a cash flow waterfall subject to blocked accounts, including standard reserves such as a six-month debt service reserve account and a forward-looking capital expenditures (capex) reserve account. DBRS Morningstar relied solely on the separateness features, and takes comfort in that HoldCo and OpCo will remain legally and operationally separate and apart from the sponsors and any other sponsors’ affiliates. DBRS Morningstar notes it will not receive a substantive nonconsolidation legal opinion for this transaction.

DBRS Morningstar views the ratings as underpinned by (1) strong contract price protection, (2) the Project's long and reliable operation history with good financial performance, and (3) an experienced owner and operations team. The ratings are constrained by (1) refinancing risk, (2) hydrology risk, and (3) unforeseen capex and operating risk. A positive rating action is unlikely in the near term as the ratings are constrained by DBRS Morningstar's view of refinancing at maturity in 2029. A negative rating action may occur if DBRS Morningstar believes there is a significant deterioration in merchant electricity prices at refinancing or if there is a material deterioration in operating performance.

ENVIRONMENTAL, SOCIAL, 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 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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodology is Global Methodology for Rating Project Finance (September 6, 2022; https://www.dbrsmorningstar.com/research/402400), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at [email protected].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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