DBRS Confirms Melancthon Wolfe Wind LP at BBB, Stable Trend

DBRS Limited (DBRS) confirmed the BBB rating with a Stable trend on the 3.834% Series 1 Senior Amortizing Bonds due December 31, 2028 (the Bonds) issued by Melancthon Wolfe Wind LP (the Issuer). 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 (MW), located in Ontario (the Project). The Issuer is indirectly and wholly owned by Canadian Hydro Developers, Inc., which is in turn indirectly owned by TransAlta Corporation (TAC; rated BBB (low) with a Stable trend by DBRS). The rating confirmation reflects the Project’s strong financial performances in 2017 and H1 2018, which exceeded DBRS’s conservative P90* rating-case expectations.

The Project encompasses three wind farms — Wolfe Island, Melancthon I and Melancthon II — with a capacity-weighted average life of ten years by utilizing both General Electric (GE) 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 curtailment is fully compensated under the PPAs after a predetermined annual cap is reached. The Bonds, with an outstanding balance of approximately $354 million as of June 30, 2018, will fully amortize six months before the last PPA expires. The deemed or gross production** of 1,001.2 gigawatt hours (GWh) in 2017 and 515.4 GWh in H1 2018 exceeded the P50 levels by 5.1% and 2.3%, respectively. The debt service coverage ratios (DSCRs) were strong in 2017 at 1.65 times (x) versus 1.35x in the rating case and 1.79x in H1 2018 versus 1.83x in H1 2017. The strong performance was largely driven by stable wind resource and possibly incremental yield as a result of the power curve upgrade implemented in 2016. The operating cost in the review period remained consistent with the budget. For the full-year 2018, management expects a DSCR of 1.70x based on the P50 level. Nonetheless, DBRS is maintaining its rating-case P90 DSCR projection at 1.35x for the time being.

The BBB rating continues 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, TAC. The rating is constrained by potentially higher-than-expected future cost escalation as the facilities continue to age. The rating-case P90 DSCR of 1.35x is relatively low, but considered sufficient for the BBB rating, given the low uncertainty surrounding the wind resource assessment, derived from historical production data. Furthermore, the independent engineer indicated a 3.4% increase to the P50 level as a result of upgrading the Siemens turbines. DBRS may consider revising its rating-case projections upward once more production data are available in the coming years. A rating upgrade is possible if the Project continues to outperform versus the rating-case projection in the coming year(s); on the other hand, 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.

*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 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 had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

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