DBRS Morningstar Confirms H20 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. (Watergen; 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 9.5 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.

On December 5, 2019, H2O sold 49% undivided ownership interest in substantially all of its property and assets, including eight hydroelectric power-generating facilities in Ontario, to Watergen. Please refer to DBRS Morningstar’s press release “DBRS Morningstar Comments on H2O Power Limited Partnership’s Sale of 49% Undivided Ownership Interest to Watergen Canada Holdings Inc.” published on December 17, 2019. Accordingly, DBRS Morningstar changed the name of the issuer to "H2O Power Limited Partnership and Watergen Canada Holdings Inc." from "H2O Power Limited Partnership." In addition, the Issuers upsized the Senior Secured Bonds (initial issuance of $400 million) with $60.05 million incremental pari passu Bonds on June 13, 2019. The 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. Please refer to the DBRS Morningstar press release published on June 13, 2019, for more information.

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 expenditures (capex) and operations and maintenance and facility upgrade risk.

In 2019, the financial performance met expectations and remained robust with a debt service coverage ratio (DSCR) at 2.01 times (x). Overall hydrological conditions in 2019 met expected levels, resulting in generation above the long-term average generation by approximately 2.5%. Following debt upsizing in June 2019, DBRS Morningstar expects the minimum DSCR to be 1.65x which is consistent with the DSCR range required for the assigned rating. Most of the planned Facility upgrades are now complete. In May 2019, the Co-Borrowers completed upgrades at the Kenora Generating Station. Upgrades at the Island Falls Generating Station, though slightly delayed, are proceeding as planned and will likely be done within the first half of 2020. Following completion of all upgrades, the Issuers expect the capacity of the Facilities to be approximately 151 megawatts.

DBRS Morningstar may take a positive rating action if the financial performance is materially above 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 operating and maintenance 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 and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodology is Rating Project Finance (August 21, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

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.

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