DBRS Morningstar Upgrades Melancthon Wolfe Wind LP to BBB (high), Stable Trend

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating and the 3.834% Series 1 Senior Amortizing Bonds (the Bonds) rating of Melancthon Wolfe Wind LP (the Issuer) to BBB (high) from BBB. Both trends remain Stable. The ongoing Coronavirus Disease (COVID-19) pandemic has so far had no material impact on the Issuer’s operating and financial performances. The outstanding Bonds of approximately $286.2 million as of today (versus the initial amount of $442 million) will fully amortize on December 31, 2028.

The Issuer is a special-purpose entity created to own and operate a wind power portfolio with a total capacity of 397.3 megawatts (MW) located in Ontario (the Project). All of the Project’s energy production is sold to the Independent Electricity System Operator (IESO; rated A (high) with a Stable trend by DBRS Morningstar) under three separate 20-year inflation-adjusted fixed-price power purchase agreements (PPAs). The curtailment is fully compensated under the PPAs after a predetermined annual cap is reached. The Bonds will fully amortize six months before the last PPA expires.

The ratings upgrade reflects the Project's (1) consistently reliable performance with a capacity-weighted average operating history of approximately 12 years and (2) strong average debt service coverage (DSCR) of 1.53 times (x) since the rating was initiated in 2015. This level of DSCR is materially higher than 1.35x in the initial P90-based rating-case projection. The strong DSCR is driven by (1) energy production consistently tracking at the P50 estimate, which is 10.8% higher than the initial P90 estimate and (2) well-controlled operating and maintenance (O&M) cost including capital expenditures, which runs at approximately 6.8% lower than the budget on average. DBRS Morningstar is now revising upward the projected minimum DSCR in the rating case to 1.47x from 1.35x for the remaining debt term. The revision is based on (1) DBRS Morningstar's modified P90 estimate, which considers the historically low standard deviation of actual production (there is no revision to the P50 estimate) and (2) a slight reduction to the future O&M cost profile because of favorable cost trajectory. The revised rating-case DSCR forecast is supportive of an upgrade.

In 2019, deemed energy production was 8.1% higher than the initial P90 estimate but 2.4% lower than the P50 estimate, largely because of a slight increase to the forced outage rate. This was primarily driven by a server failure at Wolfe Island site, which caused a complete shutdown for a few days; in the first half of 2020 (H1 2020), deemed energy production was essentially in line with the P50 estimate. The corresponding DSCRs remained robust at 1.55x in 2019 and 1.70x in H1 2020. The solid performance was a result of stable wind resource and well-controlled O&M cost.

The ratings are underpinned by the strength of the fixed-price PPAs, the Project’s reliable operating track record, and the strength of the owner-operator, TransAlta Corporation (rated BBB (low) with a Stable trend by DBRS Morningstar). The ratings are constrained by potential cost escalation and lower-than-expected availability in the future as the assets continue to age. The independent engineer indicated potentially increased energy yield because of the upgrade of the Siemens turbines at the Wolfe Island site in 2016. Nonetheless, DBRS Morningstar is not currently considering a revision to the P50 estimate as the effect of the upgrade is subject to further validation.

A rating upgrade is unlikely in the near future; a negative rating action can be triggered by material and sustained underperformance, resulting in a DSCR consistently below 1.45x.

PPX means exceedance probabilities. A P50-P75-P90-P99 value describes the estimated minimum electricity generation with a probability of 50%, 75%, 90%, or 99% in any given year.

All production/generation in this press release refers to the deemed or gross production/generation (actual + curtailment) unless otherwise specified.

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 Wind Power Projects (September 1, 2020), 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.

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrsmorningstar.com.

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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