DBRS Morningstar Confirms Credit 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 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 China Longyuan Power Group Corporation Limited. All energy is sold directly into the Independent Electricity System Operator (the IESO; rating of IESO does not constrain the overall credit rating) 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 $127.46 million is currently outstanding.

Since achieving the Commercial Operations Date (COD) under the IESO FIT Contract on December 1, 2014, the Project has had eight and a half years of reported operating results, achieving an average of approximately 12.5% above the one-year P90 rating case, which is 3.2% below the P50 generation levels, for the eight full years ended December 31, 2022. In 2022, the Project generated 275.7 gigawatt hours (GWh) at an average realized price of $151.44 per MW hour. This generation level is 14.1% above the one-year P90 rating case of 241.6 GWh, 1.2% above the P50 plan of 272.43 GWh, and 7.1% higher than the 2021 generation level of 257.43 GWh, because of a higher wind resource than expected. Generated electricity in 2022 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 FY2022 is 2.00 times (x), well above the expected 1.62x in the rating case, as in all prior years since COD. For H1 2023, the Project generated 129.6 GWh (versus 151.7 GWh in H1 2022) and revenue of $19.9 million (versus $23.0 million in H1 2022), resulting in a six-month DSCR of 1.71x. The weather resource has been lower than expected in the first half of 2023. In comparison, as of June 2023, Dufferin Wind’s production is approximately 15% below the same six-month operating period in 2022. DBRS Morningstar believes the generation decrease in 2023 compared with 2022 is common in the wind power industry because of the weather patterns, and the overall generation fluctuation is still within normal range. DBRS Morningstar expects the Project to be in line with the P90 rating-case DSCR for FY2023.

The credit 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 credit 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 credit rating action.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and 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/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

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

DBRS Morningstar applied the following principal methodology: Global Methodology for Rating Wind Power Projects (September 12, 2023; https://www.dbrsmorningstar.com/research/420440)

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

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

This is a solicited credit rating.

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 credit ratings are under regular surveillance.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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