DBRS Morningstar Confirms Melancthon Wolfe Wind LP at BBB, 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 with Stable trends. The Bonds of approximately $319 million outstanding 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, located in Ontario (the Project). The rating confirmations reflect the Project’s continuing robust performance, with debt service coverage ratio (DSCR) consistently and materially exceeding the rating-case P-90* DSCR of 1.35 times (x).

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 deemed production** in 2018 was 7.8% higher than the P-90 level (rating case) but 2.7% lower than the P-50 level, largely driven by the slightly higher forced outage rate; in H1 2019, deemed production matched the P50 level. The corresponding DSCRs remained robust at 1.49x in 2018 (versus 1.35x in the rating case) and 1.76x in H1 2019. The solid performance (compared with the rating case) in the past 18 months was largely driven by stable wind resource matching the independent engineer’s (the IE) predictions and cost consistent with the budget. Nonetheless, DBRS Morningstar is maintaining its rating-case P90 DSCR projection at 1.35x by excluding potential incremental yield from the 2016 power curve upgrade.

The ratings continue to be underpinned by the strength of the fixed-price PPAs, the Project’s solid and consistent 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 the potentially higher-than-expected future cost escalation as the facilities reached a capacity-weighted average life of 11 years, and the relatively low P90 DSCR of 1.35x. This DSCR level is at the lower end of the BBB rating category, but is considered sufficient, given the low uncertainty surrounding the wind resource assessment, which was primarily derived from the historical production data. Furthermore, the IE indicated a 3.4% increase to the P50 level as a result of upgrading the Siemens turbines in 2016, subject to potential operational constraints. DBRS Morningstar may consider revising its rating-case projections upward once more production data become available and the uncertainty surrounding the operational constraints related to the upgrade is eliminated. A rating upgrade is possible if the Project continues to materially outperform versus the rating-case projection; on the other hand, a negative rating action could be triggered by material and sustained underperformance versus the rating-case projection.

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

The principal methodology is Rating Wind Power Projects, which can be found on dbrs.com under Methodologies & Criteria.

*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. Unless otherwise specified, all PXX values in this report are in reference to one-year PXX values, adjusted by DBRS Morningstar that considers availability, curtailment and other factors.

**The deemed or gross production means actual production plus the curtailment.

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.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.

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

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