DBRS Confirms Rating of Dufferin Wind Power Inc. Senior Secured Bonds at BBB with a Stable Trend

DBRS Limited (DBRS) confirmed its rating of BBB with a Stable trend on the 4.317% Series 1 Senior Secured Bonds (the Bonds) issued by Dufferin Wind Power Inc. (the Issuer). The Issuer is a special-purpose entity created to acquire, develop, own and operate the 91.4-megawatt Dufferin Wind Project located in Dufferin County, Ontario (the Project). The Issuer is indirectly and wholly owned by the Project Sponsor, China Longyuan Power Group Corporation Limited. All energy is sold directly into the Independent Electricity System Operator (IESO; rated A (high) with a Stable trend by DBRS) transmission grid under a feed-in-tariff contract (the FIT Contract) that expires on November 30, 2034, which is 12 months after the scheduled full repayment of the Bonds. The $200 million Bonds were issued on October 22, 2015, of which approximately $187.6 million is currently outstanding.

Since achieving the Commercial Operations Date under the IESO FIT Contract on December 1, 2014, the Project has had 30 months of reported operating results. In 2016, the Project generated 269.9 gigawatt hours (GWh) at an average realized price of $146.8 per megawatt hour, 11.7% above the one-year P90 rating case of 241.6 GWh, and 6.7% below the P50 plan. Generated electricity in 2016 includes 5.5 GWh of curtailment above the annual cap of 2.478 GWh. The Project is compensated for foregone energy sales in excess of an annual and cumulative cap where the Project is curtailed by the IESO from generating when otherwise able to do so. The resulting debt service coverage ratio (DSCR) for the full-year 2016 is 1.86 times (x), well above the expected 1.61x in the rating case.

For the first half of 2017, the Project generated 152.4 GWh (versus 132.2 GWh in H1 2016) and revenue of $22.1 million (versus $19.4 million in H1 2016), resulting in a six-month DSCR of 1.84x. DBRS expects the Project to exceed the P90 rating case DSCR for full-year 2017.

In September, the Issuer announced a series of three public information sessions in October, as it is seeking an amendment to its approved Renewable Energy Project in order to implement software upgrades to the wind turbine operating system to improve the operating efficiency of the wind farm. It also plans to add a 472-metre grounding line to the Project. While the Project has been performing well, the motive behind this upgrade is to improve efficiency and performance further. The total cost of the upgrade is minimal.

To take into account some additional uncertainties in the calculation methodology that DBRS considers prudent, the rating case for DBRS’s financial projections was set at an energy generation level 3% below the independent engineer’s one-year P90 level. The resulting financial projections are strong, demonstrating minimum and average semi-annual DSCRs of 1.60x and 1.64x, respectively. Taking the resulting DSCR forecasts together with other strengths of the Project would indicate a rating level of BBB (high). However, the limits on the quality and quantity of the collected on-site wind data (which nevertheless is more than sufficient for the assigned rating) currently precludes a higher rating than assigned. In the next annual review, DBRS would consider there to be sufficient operational and production data (three full years) to validate the wind resource and energy production forecasts, which will likely result in the rating being upgraded by one rating notch.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is Rating Wind Power Projects (December 2016), which can be found on our website under Methodologies.

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