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

DBRS Limited (Morningstar DBRS) 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. Morningstar DBRS also confirmed the BBB credit ratings of the Series A Bonds and Series B Bonds (together, the HoldCo 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 (MW) portfolio of hydroelectric generating assets comprising 21 units across 12 stations, three reservoirs, and four rivers (the Project or the GLPL Assets) near Sault Ste. Marie, Ontario. All electricity generated is sold to the Independent Electricity System Operator (IESO) under a power purchase agreement (PPA) that expires on November 30, 2029. Morningstar DBRS considers the offtaker to have a strong credit profile that does not constrain the assigned credit ratings.

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 on June 16, 2023, 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 had $706.7 million of principal outstanding as of September 30, 2024.

KEY CREDIT RATING CONSIDERATIONS
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 (LTAAG) level. The actual DSCR for 2023 and the last 12 months ended September 30, 2024 (LTM 2024) was 1.43x and 1.33x, respectively. Both were lower than the minimum DSCR of 1.60x projected in the Morningstar DBRS rating case, which was primarily due to unfavorable hydrological conditions and lower-than-expected availability. The availability for 2023 and year-to-date 2024 was in the 93%~94% range, negatively affected by the unplanned outages relating to the Clergue Unit 1 and Unit 2 failed operating rings. Clergue unit 1 has returned to service after the new operating ring installation in 2023, while Clergue Unit 2 is expected to return to service in December 2024. Morningstar DBRS expects the Project's availability to improve in 2025 following the ring refurbishment.

The generation in 2023 and LTM 2024 was 14.1% and 23.2% lower than the LTAAG of 1,584 gigawatt hours (GWh), respectively. Morningstar DBRS notes the lower generation compared with previous years is common in the hydroelectric generation industry because of interannual variations in hydrology. The annual generation fluctuation is still within normal range. Morningstar DBRS will continue to closely monitor the hydrological conditions to determine whether such volatility could lead to a negative credit rating action. Despite the low energy production in 2023 and LTM 2024, operating costs (opex) and capital expenditures (capex) were in line with Morningstar DBRS expectations.

The HoldCo Bonds are expected to be refinanced upon maturity on November 30, 2029, with potential merchant exposure. Based on our estimates of merchant electricity prices in 2029, the project life coverage ratio (PLCR) using the P90 generation would be greater than 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. Morningstar DBRS has not received a substantive nonconsolidation legal opinion for this transaction.

CREDIT RATING DRIVERS
Morningstar DBRS believes a positive credit rating action is unlikely in the near term as the credit ratings are constrained by the refinancing at maturity in 2029. A negative credit rating action may occur if there is a significant deterioration in merchant electricity prices at refinancing or if there is a material deterioration in operating performance.

FINANCIAL OUTLOOK
Morningstar DBRS expects the Project's 2024 DSCR to be in the low-1.30x range, largely because of the unfavorable hydrological conditions. The minimum DSCR is projected to be 1.60x for the remaining period of the Bonds, which is supportive of the BBB credit rating.

CREDIT RATING RATIONALE
Morningstar DBRS believes the credit ratings are supported by (1) strong contract price protection, (2) the Project's long and reliable operating history with good financial performance, and (3) an experienced owner and operations team. The credit ratings are constrained by (1) refinancing risk, (2) hydrology risk, and (3) unforeseen capex and operating 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) at https://dbrs.morningstar.com/research/437781.

RATING DRIVERS AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of Rating Drivers
In the analysis of the Issuer, the Rating Drivers listed in the principal methodology "Global Methodology for Rating Project Finance" are considered in the order of importance.

(B) Weighting of FRA Factors
In the analysis of the Issuer, the following FRA factor listed in the principal methodology "Global Methodology for Rating Project Finance" is considered more important: DSCR (the sole FRA factor).

(C) Weighting of the Rating Drivers and the FRA
In the analysis of the Issuer, the FRA carries greater weight than the Rating Drivers.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Project Finance (December 10, 2024), https://dbrs.morningstar.com/research/444393

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

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