Morningstar DBRS Confirms Credit Ratings on H2O Power Limited Partnership and Watergen Canada Holdings Inc. at A (low) With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and the Senior Secured Bonds (the Bonds) credit rating on H2O Power Limited Partnership and Watergen Canada Holdings Inc. (the Issuers) at A (low) with Stable trends. The Issuers own and operate eight hydroelectric power generation facilities (the Facilities or, together, the Project) in Ontario with a total capacity of approximately 151 megawatts (MW). Morningstar DBRS notes that the Project's financial performance was below projections in 2024 largely because of unfavourable hydrology; however, the credit rating confirmations reflect Morningstar DBRS' expectation that financial performance should improve in 2025 to be generally in line with initial projections for the foreseeable future.

KEY CREDIT RATING CONSIDERATIONS
The Project's financial performance in 2024 was below projections largely because of poor hydrology. Generation in 2024 was 781 gigawatt hours (GWh), which is approximately 9% lower than the long-term average generation forecast of 857.6 GWh, resulting in a lower debt service coverage ratio (DSCR) of 1.36 times (x) versus an expected DSCR of 1.58x. Besides lower generation in 2024, the Project also had a high overall capital expenditure (capex) of $8.8 million because of various planned activities, including a one-time expense of approximately $1.2 million related to the Twin Falls generating station wall breach that occurred in 2023, which insurance partially reimbursed. Project availability in 2024 was high at 97.8%.

Based on information from the Issuers, hydrology was approximately 7% higher than budgeted for the first four months of 2025 but has been weak and highly volatile over the last few years which, if continued, could have a material impact on DSCRs. However, the benefits associated with the presence of multiple Facilities in the portfolio result in higher resilience than a single asset. In 2024, for example, hydrology for facilities in Eastern Ontario was better than those in Western Ontario that experienced near-drought conditions, which somewhat mitigated the impact of low hydrology.

The refinancing risk does not constrain the credit ratings based on Morningstar DBRS' analysis. Furthermore, the management team informed Morningstar DBRS that three Facilities have recontracted with the Independent Electricity System Operator (IESO) under its Small Hydro Program on similar contractual terms. Negotiations are ongoing for the recontracting of five additional Facilities under the IESO's Northern Hydro Program. Morningstar DBRS considers the potential recontracting of these Facilities to be highly credit positive, minimizing refinancing risk.

CREDIT RATING DRIVERS
Morningstar DBRS may take a positive credit rating action if financial performance is materially better than projections on a consistent basis and refinancing risk is largely mitigated. Morningstar DBRS may take a negative credit rating action if financial performance is materially lower than expected on a consistent basis (i.e., continued weak hydrology, operational issues) and/or if refinancing risk increases.

FINANCIAL OUTLOOK
In 2025, Morningstar DBRS expects the DSCR to be in the 1.55x to 1.60x range. Morningstar DBRS projects that the DSCRs will be around or above 1.60x beyond 2025.

CREDIT RATING RATIONALE
The credit ratings remain supported by the strength of the 20-year fixed-price contract with the IESO, a highly rated offtaker; a strong operating history and hydrology record; and an experienced owner and operating team. The credit ratings are constrained by hydrology risk, refinancing risk, and capex and operating and maintenance risks.

The Issuers own and operate eight Facilities in Ontario with a total capacity of approximately 151 MW and sell virtually all the electricity generated to the IESO grid. The Facilities have a 20.0-year contract (with approximately 4.5 years remaining) for existing hydroelectric generation facilities with the IESO through November 2029. The Facilities have been in operation since the early 1900s. The Bonds had an initial debt amount of $460.05 million and are partially amortizing during the term of the IESO contract with a balloon repayment of $92.01 million, representing 20% of the initial debt amount, at bond maturity in November 2029.

ENVIRONMENTAL, SOCIAL, AND 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 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

CREDIT RATING DRIVERS AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of Credit Rating Drivers
In the analysis of the Issuers, the Credit Rating Driver factors listed in the methodology are considered in the order of importance.

(B) Weighting of FRA Factors
In the analysis of the Issuers, the FRA factors listed in the methodology are considered in the order of importance.

(C) Weighting the RATING DRIVERS and the FRA
In the analysis of the Issuers, the FRA carries greater weight than the Credit 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 (February 3, 2025), https://dbrs.morningstar.com/research/447186 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.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

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

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