DBRS Morningstar Confirms Credit Ratings at BBB with Stable Trends on Great Lakes Power Holdings LP, Canada Atlantis Hydro Holding LP, and Algoma Hydro Holding LP

DBRS, Inc. (DBRS Morningstar) confirmed the Issuer Rating of Great Lakes Power Holdings LP, Canada Atlantis Hydro Holding LP, and Algoma Hydro Holding LP (collectively, the Co-Issuers or the HoldCo) at BBB. DBRS Morningstar also confirmed the credit ratings on the Series A Bonds and Series B Bonds (together, the HoldCo Bonds) issued by the Co-Issuers at BBB. 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 comprising 21 units across 12 stations, three reservoirs, and four rivers near Sault Ste. Marie, Ontario (the Project). All electricity generated is sold to the Independent Electricity System Operator under a power purchase agreement that expires on November 30, 2029. DBRS Morningstar considers the offtaker to have a strong credit profile that does not constrain the assigned ratings.

CREDIT RATING RATIONALE/DESCRIPTION
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 capital expenditures (capex) and operating risk.

The Series A Bonds were issued on the First Closing Date of December 19, 2022, with a total amount of approximately $346 million; the Series B Bonds were issued on a delayed draw basis with a total amount of approximately $440 million. The OpCo is not permitted to incur any additional indebtedness outside of the Permitted Indebtedness. The HoldCo Bonds partially amortize on a pro rata basis to an aggregate bullet amount of $400 million, maturing on November 30, 2029, which coincides with the maturity of the contract with the offtaker.

The HoldCo Bonds rank pari passu with each other and include a minimum consolidated debt service coverage ratio (DSCR) of 1.60 times (x) at the long-term average annual generation level (LTAAG). The actual DSCR from December 19, 2022, through September 30, 2023 was 1.68x, exceeding the 1.60x projected DSCR for full-year 2023. Operations and maintenance costs have been in line with expectations.

Average historical generation has been consistent with the LTAAG of 1,584 gigawatt hours (GWh). Hydrology improved following weak 2021 conditions, supporting adequate generation of 1,530 GWh in 2022 and 1,556 GWh in the last 12 months ended September 30, 2023. DBRS Morningstar believes the Project’s hydrologic variability is average compared with other run-of-river hydro plants, indicative of sustainable cash flows.

The HoldCo 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.

The HoldCo Bonds are structured as a typical project finance transaction with standard features, including a cash flow waterfall subject to blocked accounts and standard reserves, such as a six-month debt service reserve account and a forward-looking capex reserve account. DBRS Morningstar has not received a substantive nonconsolidation legal opinion for this transaction.

CREDIT RATING DRIVERS
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 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 (July 4, 2023) at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Project Finance (September 12, 2023) https://www.dbrsmorningstar.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://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.

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 credit ratings are under regular surveillance.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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