Morningstar DBRS Confirms Credit Ratings on DIM Wind, Limited Partnership & Co-Owners at "A," Stable Trends

DBRS Limited (Morningstar DBRS) confirmed DIM Wind, Limited Partnership & Co-Owners' (the Issuer) Issuer Rating and Senior Loan credit rating at "A." Both trends are Stable. The credit rating confirmations reflect the 350 megawatt Rivière-du-Moulin wind-power-generating facility's (the Project's) continued strong operating and financial performance, with a senior debt service coverage ratio (DSCR) of 2.80 times (x) in 2023 and 2.93x as of the last 12 months (LTM) ended June 2024.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations stem from the Project's stable operating and financial performance in 2023 and for the first eight months of 2024. The Project has generally performed well with availability at 98.5% in 2023 and 98.7% for LTM ended August 2024. The Project generated 92% of Morningstar DBRS' base-case generation (P90) in 2023 mainly because of the weaker wind resources and a one-off bushing replacement failure. For LTM ended August 2024, generation was 107% of P90 and 95% of P50.

EDF EN Canada Inc. (EDF) observed hair thin cracking in 100 foundations (out of a total of 175) and the construction contractor sealed the cracks by using a polymer. However, that was proven to not be enough and, after some studies, EDF and the rest of shareholders have decided to replace the foundations for the most damaged turbines. Works to build new foundations and move the turbines are expected to begin in July 2025. The Issuer has developed a plan to save cash to face this extraordinary cost and, starting September 2024, it has started blocking 75% of distributable cash every month in a reserved account, expecting to have saved the required amount by July 2025. Morningstar DBRS does not believe this issue with the foundations will have any material impact on the credit in the near to medium term given the strong coverage ratio, the proactive cash trapping, and phased approach for remediation.

The Senior Loan financed the development and operations of the Project, located approximately 130 kilometres north of Québec City. The Project sells all electricity generated to the offtaker, Hydro-Québec (rated AA (low) with a Stable trend by Morningstar DBRS), under a 20-year power purchase agreement (PPA) that expires in November 2034, at which time the Senior Loan will be fully amortized.

CREDIT RATING DRIVERS
Morningstar DBRS does not view a positive credit rating action as likely because the credit rating is constrained by the loan's structural features such as lack of debt service reserve account and equity lock-up test. A negative credit rating action can be taken if (1) the issue with the foundations were to become a permanent and prolonged problem; (2) DSCR drops below 1.80x on a sustained basis following additional debt or underperformance; or (3) the weakest co-borrower's credit profile meaningfully deteriorates, which could increase the probability of a cross-default occurring.

FINANCIAL OUTLOOK
The Project features a minimum P90 DSCR of 2.86x, which is exceptionally strong even for the "A" credit rating category. The base-case DSCR is highly resilient to stressed scenarios. For instance, the minimum P99 DSCR is high at 2.43x. The Project's actual financial performance has been strong for the credit rating category during the past nine years with actual DSCRs ranging from 2.80x to 3.66x.

CREDIT RATING RATIONALE
The credit ratings are anchored by (1) the strength of the long-term inflation-adjusted fixed-price PPA with a highly rated offtaker, (2) the proven wind turbine technology and appropriate operating and maintenance (O&M) arrangements with experienced wind turbine O&M providers, (3) the exceptionally strong minimum senior DSCR of 2.86x at P90 production levels (the Morningstar DBRS base case) for the term of the Senior Loan, (4) the reliable operating and financial results matching or exceeding the Morningstar DBRS base-case projections, and (5) the credit strength and technical expertise of the Project's major co-owners. The main challenges include (1) long-term O&M risk, because the facility operates in relatively complicated terrain, and (2) energy production volatility caused by extreme weather events. The credit ratings are also constrained, to a degree, by some substandard structural features embedded in the loan covenant package.

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 DRIVER AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of Rating Driver Factors
In the analysis of DIM Wind, Limited Partnership & Co-Owners, the Rating Driver factors listed in the methodology are considered in the order of importance.

(B) Weighting of FRA Factors
In the analysis of DIM Wind, Limited Partnership & Co-Owners, the following FRA factor listed in the methodology was considered more important: minimum DSCR.

(C) Weighting of the Rating Drivers and the FRA
In the analysis of DIM Wind, Limited Partnership & Co-Owners, the FRA carries greater weight than the Rating Drivers.

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

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 methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (August 13, 2024), 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 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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