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

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the Senior Secured Bonds (the Bonds) rating of H2O Power Limited Partnership (H2O) and Watergen Canada Holdings Inc. (together with H2O, the Issuers or Co-Borrowers) at A (low) with Stable trends. The Issuers own and operate eight hydroelectric power generation facilities (the Facilities) in Ontario and sell virtually all the electricity generated to the Independent Electricity System Operator (IESO; rated A (high) with a Stable trend by DBRS Morningstar) grid. The Facilities have a 20-year contract (approximately 8.5 years remaining) for existing hydroelectric generation facilities with the IESO (the IESO Contract) through November 2029. The Facilities have been in operation since the early 1900s. The $460.05 million Bonds are partially amortizing during the term of the IESO Contract with a balloon repayment of 20% ($92.01 million) at bond maturity in November 2029.

The ratings remain supported by (1) the strength of the 20-year fixed-price IESO Contract with a highly rated offtaker, (2) a strong operating history and hydrology record, and (3) an experienced owner and operations team. The ratings are constrained by (1) hydrology risk, (2) refinancing risk, and (3) capital expenditure (capex) and operations and maintenance (O&M) risks.

In 2020, the debt service coverage ratio (DSCR) of 1.43 times (x) was below expectations of 1.68x because of poor hydrological conditions and repetitive forced outages at one of the generating stations resulting in approximately 16.6% lower generation when compared with the long-term average generation projections. DBRS Morningstar notes that the Issuer considers the above-mentioned forced outages as a one-off occurrence and received an insurance settlement for property damage and business interruption losses for the same. DBRS Morningstar expects the long-term DSCR projections to be around 1.65x, which is consistent with the assigned ratings. The Co-Borrowers have completed the remaining planned upgrades at the Kenora Generating Station and the Island Falls Generating Station, marking the completion of approximately 10 years of planned upgrades to the Facilities. The overall project availability remained in line with projections at around 98.6%. There is no change in DBRS Morningstar's assessment of the refinancing risk at this time.

DBRS Morningstar may take a positive rating action if the financial performance is materially better than projections on a consistent basis and the refinancing risk is mitigated. DBRS Morningstar may consider an adverse rating action if the project experiences a sustained increase in capex and O&M expenses, reduced availability (higher forced outages) with material impacts on the DSCR, and increased refinancing risk.

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/373262.

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

The principal methodology is Rating Project Finance (September 1, 2020; https://www.dbrsmorningstar.com/research/366229), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577