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

DBRS Limited (Morningstar DBRS) 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 $151.7 million as of October 2024 (compared with the initial amount of $442.0 million) will fully amortize on December 31, 2028. The Issuer is a special-purpose entity created to own and operate a wind-power portfolio with a total capacity of 397.3 megawatts in Ontario (the Project). The three wind farms have a capacity-weighted average age of 16 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.

KEY CREDIT RATING CONSIDERATIONS
In 2023, the deemed energy production was 13.4% and 18.0% below our P90 and P50 estimates, respectively. This was primarily driven by poor wind resource and lower-than-expected availability associated with unplanned outages. The debt service coverage ratio (DSCR) of 1.21 times (x) in 2023 was lower than the rating case projection of 1.48x, as a result of lower generation and higher operating and maintenance (O&M) cost (including capital expenditures (capex)) incurred during this period in order to replace some aging components in the systems. The capacity-weighted availability improved to 92.3% in 2023 from 89% in 2022, but still lower than the historical average level of 94.7%. Morningstar DBRS noted that the generation decrease in 2023 was common for Ontario wind power projects because of the unfavorable wind resource.

For the first half of 2024 (H1 2024), energy production rebounded to align with our P90 estimate, leading to a six-month DSCR of 1.64x (versus 1.34x in H1 2023). This was driven by better wind resource and the improvements in availability, which returned to the historical average level after failing components were replaced. Based on the preliminary Q3 2024 performance, management indicates that the generation/availability is expected to keep the current level in the reminder of 2024 and slightly improve in 2025.

CREDIT RATING DRIVERS
A credit rating upgrade is unlikely in the near term given the projected minimum DSCR level of 1.48x and the subpar performances encountered over the past few years. A negative credit rating action could be triggered by material and sustained underperformance versus the rating case.

FINANCIAL OUTLOOK
Morningstar DBRS expects the Project's performance to be in line with the P90 rating-case DSCR for 2024.

CREDIT RATING RATIONALE
The credit ratings reflect transaction strengths include (1) fully contracted cash flow under inflation-indexed fixed-price PPAs with the IESO of high credit quality; (2) relatively good operating track record; and (3) experienced owner-operator, TransAlta Corporation (TAC; rated BBB (low) with a Stable trend by Morningstar DBRS). The main challenges include (1) monitoring of turbines, availability, and balance-of-plant issues; (2) increasing O&M cost profile; and (3) uncertainty in energy production estimates.

ENVIRONMENTAL, SOCIAL, AND 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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

RATING DRIVERS AND FINANCIAL RISK ASSESSMENT (FRA)
A) Weighting of Rating Driver Factors
In the analysis of the Issuer, the Rating Driver factors listed in the methodology "Global Methodology for Rating Wind Power Projects" are considered in the order of importance.

B) Weighting of FRA Factors
In the analysis of the Issuer, the following FRA factor listed in the methodology "Global Methodology for Rating Wind Power Projects" is considered more important: DSCR (the only applicable FRA factor).

C) Weighting of the Rating Drivers and the FRA
In the analysis of the Issuer, the FRA carries greater weight than the Rating Drivers.

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

All production/generation 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.

Morningstar DBRS applied the following principal methodology:

-- Global Methodology for Rating Wind Power Projects (April 15, 2024), https://dbrs.morningstar.com/research/431200

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024; https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@morningstar.com.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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