DBRS Confirms Rating on Melancthon Wolfe Wind LP’s Series 1 Senior Amortizing Bonds at BBB, Stable Trend

DBRS Limited (DBRS) confirmed the BBB rating on the 3.834% Series 1 Senior Amortizing Bonds due December 31, 2028 (the Bonds), issued by Melancthon Wolfe Wind LP (the Issuer) with a Stable trend. The Issuer is a special-purpose entity created to own and operate a wind power portfolio with a total generating capacity of 397.3 megawatts located in Ontario (the Project). The Issuer is indirectly and wholly owned by Canadian Hydro Developers, Inc., which, in turn, is indirectly owned by TransAlta Corporation (TAC; rated BBB (low) with a Stable trend by DBRS). The rating confirmation reflects the Project’s stable operating and financial performances in 2016 and H1 2017 that met DBRS’s expectations.

The Project encompasses three wind farms — Wolfe Island, Melancthon I and Melancthon II — with a capacity-weighted-average life of nine years by utilizing both General Electric and Siemens turbines. All electricity generated is sold to the Independent Electricity System Operator (IESO; rated A (high) with a Stable trend by DBRS) under three separate 20-year inflation-adjusted fixed-price power purchase agreements (PPAs). The Bonds will be fully amortized six months prior to the last PPA’s expiry date.

The operating performances in 2016 and H1 2017 exceeded the rating case projections, which are based on P90* generation levels. Actual generation in 2016 was consistent with the P75 level, while generation was 8% higher than the P50 level in H1 2017. The debt service coverage ratios (DSCRs) were satisfactory at 1.43 times (x) (versus 1.35x in rating case) in 2016 and 1.83x in H1 2017 (versus 1.39x in H1 2016). Historically, the Project site has had relatively stable wind resource with generation generally matching P50 forecasts. The lower-than-P50 production in 2016 was largely driven by lower availability resulting from conducting several capital programs, which include Siemens power curve upgrade at the Wolfe Island production site. This investment is expected to generate incremental production. Management affirmed the DSCR target of 1.66x by 2017 year end as the Project year-to-date production and operations and maintenance cost generally track P50 levels and budget, respectively. Nonetheless, DBRS is maintaining the rating-case DSCR projection at 1.35x for 2017 based on conservative P90 level. Forecasting revisions are possible in the future years based on additional generation data.

The BBB rating continues to be underpinned by the strength of the fixed-price PPAs with the IESO, the Project’s good and consistent operating track record and the experienced owner-operator, TAC. The rating is constrained by potential cost increases as the facilities continue to age and because of generation variability. The rating-case DSCR of 1.35x is relatively low but is considered sufficient for the BBB rating, given the low uncertainty surrounding the wind resource assessment derived from historical production. Furthermore, incremental production as a result of upgrading the Siemens turbines is expected to increase the production by approximately 3.4% from the P50 level. An Independent Engineer analysis is planned to validate the effectiveness of the upgrade by the end of 2017.

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

PXX means exceedance probabilities. A P50-P75-P90-P99 value describes 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.

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 dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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