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 $220.3 million as of October 2022 (compared with the initial amount of $442.0 million) will fully amortize on December 31, 2028. The rating confirmations reflect the Issuer's relatively resilient performance despite subpar wind resource and the unusually frequent transmission line outages for the past 12–18 months. The transmission line outages were outside the Issuer’s control. The Stable trends reflect the expected improved performance in 2022 and beyond.

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 (IESO) under three separate 20-year inflation-adjusted fixed-price power purchase agreements (PPAs). The credit quality of the IESO is considered robust and does not constrain the Project’s rating. 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.

For 2021, deemed energy production (see Notes) was 6.5% and 11.5% lower than the P90 and P50 (see Notes) estimates respectively, driven by a combination of lower-than-expected wind resource and the unusually frequent Hydro One outages, which was outside the Issuer’s control. Because of the increased Hydro One outages, the overall capacity-weighted availability was down to 92.8%, lower than the historical average of 95%–96%. However, the debt service coverage ratio (DSCR) of 1.43 times (x) in 2021 was only moderately lower than the expected 1.48x in the rating case as lower revenue was partially offset by lower operating and maintenance (O&M) cost (including capital expenditures). Adjusted to normalized availability, the DSCR would be in line with the rating case expectation. In H1 2022, deemed energy production was 4.9% higher than that in H1 2021, driven by improved wind resource, estimated at the P50 level. However, the year-to-date availability continued to be negatively affected by the Hydro One outages, and the planned outages associated with the substation and splice repair capital projects. Hydro One has been upgrading its transmission line in the area over the past two years, which caused frequent outages affecting many generating facilities in the region. Based on the year-to-date energy production to September 30, 2022, the full-year production in 2022 is expected to improve to the P90 level (factoring in low availability). The expected DSCR would improve to above 1.50x, higher than the rating-case expectation. Management expects that the availability level and DSCR will likely improve further in 2023 if wind resource is relatively normal. The rising inflation is not expected to have a material impact on the overall O&M cost and DSCR for the time being.

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.

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

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

Notes:

All production/generation in the rating report refers to the deemed or gross production/generation (actual + compensated curtailment) unless otherwise specified.

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 figures are Canadian dollars unless otherwise noted.

The principal methodology is Global Methodology for Rating Wind Power Projects (September 6, 2022; https://www.dbrsmorningstar.com/research/402407), 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 (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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