DBRS Morningstar Confirms Ratings on Melancthon Wolfe Wind LP at BBB (high), Stable Trend

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the 3.834% Series 1 Senior Amortizing Bonds (the Bonds) rating of Melancthon Wolfe Wind LP (the Issuer) at BBB (high) with Stable Trends. The outstanding Bonds of approximately $253.5 million as of today (versus the initial amount of $442.0 million) will fully amortize on December 31, 2028. The rating confirmations reflect the Issuer's continuing strong operating and financial performances over the past 12 to 18 months.

The Issuer is a special-purpose entity created to own and operate a wind power portfolio with a total capacity of 397.3 megawatts in Ontario (the Project). All of the Project’s energy production is sold to the Independent Electricity System Operator (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.

In October 2020, DBRS Morningstar upgraded the ratings to BBB (high) from BBB because of the Project's consistently strong performance over a 12-year period. DBRS Morningstar also increased the P90 energy production estimate (see definition at the end of the press release) and the corresponding minimum debt service coverage ratio (DSCR) projection to 1.47 times (x) from 1.35x in the rating case for the remaining debt term. For 2020, deemed energy production was 6.9% higher than the revised P90 estimate and 1.2% higher than the P50 estimate. In H1 2021, deemed energy production was 7.6% lower than that in H1 2020, largely because of lower-than-expected wind resource. The corresponding DSCRs remained robust at 1.64x in 2020 and 1.58x in H1 2021. The solid performance was a result of stable wind resource (versus revised P90 forecast) 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, as well as 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, causing a DSCR consistently below 1.45x.

PXX 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 the rating report 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 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 Wind Power Projects (August 18, 2021; https://www.dbrsmorningstar.com/research/383183), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies includes the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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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