DBRS Morningstar Confirms Ratings on Dufferin Wind Power Inc. at BBB (high) With Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Dufferin Wind Power Inc.’s (the Issuer) Issuer Rating and the rating on the 4.317% Series 1 Senior Secured Bonds due November 30, 2033 (the Bonds) at BBB (high) with Stable trends. The Issuer is a special-purpose entity (SPE) created to acquire, develop, own, and operate the 91.4-megawatt (MW) Dufferin Wind project (the Project), located in Dufferin County, Ontario. The Issuer is indirectly and wholly owned by the Project Sponsor, China Longyuan Power Group Corporation Limited (CLYPG or the Project Sponsor). All energy is sold directly into the Independent Electricity System Operator (the IESO; rated A (high) with a Stable trend by DBRS Morningstar) 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; approximately $133.74 million is currently outstanding.

Since achieving the Commercial Operations Date (COD) under the IESO FIT Contract on December 1, 2014, the Project has had seven and a half years of reported operating results, achieving an average of approximately 12.2% above the one-year P90 rating case, which is 3.7% below the P50 generation levels, for the seven full years ended December 31, 2021. In 2021, the Project generated 257.4 gigawatt hours (GWh) at an average realized price of $149.73 per MW hour. This generation level is 6.6% above the one-year P90 rating case of 241.6 GWh, but 6.6% below the P50 plan of 275.5 GWh and 6.6% less than the 2020 generation level of 274.3GWh, because of a lower wind resource than expected. Generated electricity in 2021 did not include any curtailment above the annual cap of 2.5 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 energy when it is otherwise able to do so. The resulting debt service coverage ratio (DSCR) for F2021 is 1.78 times (x), well above the expected 1.62x in the rating case, as in all prior years since COD. For H1 2022, the Project generated 151.7 GWh (versus 139.8 GWh in H1 2021) and revenue of $23.0 million (versus $20.9 million in H1 2021), resulting in a six-month DSCR of 2.05x. The weather resource has been back (with the data) in the first few months of 2022. In comparison, as of July 2022, Dufferin Wind’s production is approximately 9% above the same seven-month operating period in 2021, indicating that wind resources for the 2022 operating period will be in line with or potentially exceed historical levels. DBRS Morningstar believes the generation decrease in 2021 compared with 2020 is common in the wind power industry as a result of weather patterns, and the annual generation fluctuation is still within normal range. DBRS Morningstar expects the Project to exceed the P90 rating-case DSCR for F2022.

The rating is supported by (1) the IESO FIT Contract; (2) robust financial performance and rating-case financial projections demonstrating minimum and average semiannual DSCRs of 1.61x and 1.64x, respectively; and (3) the operating and maintenance (O&M) arrangement with General Electric Canada Inc. (GEC), the original equipment manufacturer (OEM). The rating is constrained by (1) the inherent uncertainty of wind forecasts and resource variability; (2) O&M cost management; and (3) some exposure to negative hourly Ontario energy price (HOEP). These risks are partially mitigated by the Project’s actual performance, ability to maintain cost discipline, and negligible exposure to negative HOEP. If the Project continues its strong performance, including cost discipline and adequate maintenance, consistently for the next several years, DBRS Morningstar could take a positive rating action.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 figures are in Canadian dollars unless otherwise noted.

The principal methodology is 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, which can be found at 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 [email protected].

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are 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 [email protected].

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