DBRS Morningstar Confirms Ratings on Melancthon Wolfe Wind LP at BBB (high), Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and the rating on the 3.834% Series 1 Senior Amortizing Bonds (the Bonds) of Melancthon Wolfe Wind LP (the Issuer) at BBB (high) with Stable trends. The outstanding Bonds of approximately $186.3 million as of October 2023 (compared with the initial amount of $442.0 million) will fully amortize on December 31, 2028. The rating confirmations reflect the Issuer's relatively resilient debt service coverage ratio (DSCR) despite subpar power generation levels for the past 12 to18 months. The Stable trends reflect the anticipated improvement in performance in 2024 and beyond as availability is expected to return to historical norms.

The Issuer is a special-purpose entity created to own and operate a wind-power portfolio with a total capacity of 397.3 megawatts (MW) in Ontario (the Project). The three wind farms have a capacity-weighted average age of 15 years since commencing operations. All of the Project’s energy production is sold to the Independent Electricity System Operator (IESO) under three separate 20-year inflation-adjusted, fixed-price, power purchase agreements (PPAs). The credit quality of the IESO is considered robust and does not constrain the Project’s rating. The curtailment is fully compensated under the PPAs after a predetermined annual cap is reached. The Bonds will fully amortize six months before the last PPA expires. The ratings are underpinned by the strength of the fixed-price PPAs, the Project’s relatively robust operating track record, and the strength of the owner-operator, TransAlta Corporation (rated BBB (low) with a Stable trend by DBRS Morningstar). The ratings are constrained by potential cost escalation and lower-than-expected availability in the future as the assets age.

In 2022, the Project’s performance improved from 2021, with 4.5% increase in deemed energy production, although this generation level was still 2.3% and 7.5% below the P90 and P50 estimates, respectively. This was primarily driven by lower-than-expected availability associated with unplanned outage because of icing and IESO relay testing. The resultant DSCR of 1.44 times (x) in 2022 was slightly lower than the rating-case projection of 1.48x as a result of slightly lower generation and higher operating and maintenance costs (including capital expenditures ) incurred during this period in order to replace some aging components in the systems. In H1 2023, energy production was negatively affected by poor wind resource and lower-than-expected availability. However, based on the preliminary Q3 2023 performance, management indicates that generation/availability is expected to improve in the reminder of 2023 and into 2024. The capacity-weighted availability is forecast to return to historical average levels after failing components are replaced.

A rating upgrade is unlikely given the projected minimum DSCR level of 1.48x and the subpar performances encountered over the past few years; a negative rating action could be triggered if the underperformance continues into 2024, causing the DSCR to be below 1.45x.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/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 (July 4, 2023).

Notes:
All production/generation in the rating report refers to the deemed or gross production/generation (actual + compensated curtailment) unless otherwise specified.

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.

All figures are 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.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

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

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