Morningstar DBRS Confirms Ratings on Trillium Windpower, LP at BBB (high), Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and the rating on the Series 1 Senior Secured Amortizing Notes (the Notes) of Trillium Windpower, LP (the Issuer) at BBB (high) with Stable trends. The Notes, which fully amortize on February 15, 2033, had $184.3 million of the original $315.5 million principal outstanding as of September 30, 2023. The Issuer is a special-purpose entity created to finance and indirectly own the 22.9-megawatt (MW) Conestogo and 124.4-MW Summerhaven wind farms in Ontario (collectively, the Project). The Project benefits from long-term fixed-power prices under feed-in tariff (FIT) contracts with the Independent Electricity System Operator (IESO) for 20 years. The Project's Summerhaven facility is subject to economic curtailment but almost all curtailment is compensated for by the IESO, which estimates the forgone energy that would have been generated free of curtailment based on the wind resource and other assumptions.

KEY CREDIT RATING CONSIDERATIONS
In 2023, energy production (including compensated curtailment) was 10.5% and 17.8% lower than the Morningstar DBRS P90 and P50 estimates. This was primarily due to poor wind resource and lower-than-expected availability. There were unplanned repairs to turbines and the substation at Conestogo in Q1 2023, and an increased frequency of pitch cylinder replacements, oil cooling faults, and pitch system faults at both facilities in H2 2023. The debt service coverage ratio (DSCR) for 2023 dropped to 1.35 times (x), which is below the Morningstar DBRS rating case projection of 1.46x. The lower DSCR was primarily the result of lower generation and higher operating and maintenance (O&M) costs related to the timing of parts and materials purchases. Morningstar DBRS notes that the 2023 decrease in generation was common for Ontario wind power projects because of the unfavourable wind resource.

In Q1 and Q2 2024, generation rebounded slightly because of better wind resource and availability. In Q3 2024, the Project conducted proactive blade repairs, major component replacements, and planned Year 10 maintenance, leading to lower turbine availability and higher O&M costs in this quarter. For the last 12 months ended September 30, 2024, a combination of O&M costs exceeding the rating case projection by 30.8% and lower turbine availability of 96.2% at Summerhaven and 95.6% at Conestogo weakened the DSCR to 1.21x. The Project is staggering the Year 10 maintenance over two to three years to manage costs. However, the O&M costs were still significantly over the project budget, especially in Q3 2024. Management indicates that O&M costs in 2025 will still be high but lower than in 2024, and will align more closely with the rating case figures starting in 2026 when the Project completes proactive repairs and Year 10 maintenance. Although Morningstar DBRS does not view these repairs and planned maintenance as structural, the expected cost overruns have the potential to pressure the DSCR below the Morningstar DBRS rating case figures through 2025. Morningstar DBRS will continue to closely monitor O&M costs to determine whether such overruns become a longer-term trend that could lead to a negative rating action.

CREDIT RATING DRIVERS
A credit rating upgrade is unlikely in the near term. A negative rating action may be taken if material and sustained underperformance is likely to continue beyond 2025. Morningstar DBRS' concerns are related to lower availability factors, a longer-term downward shift in the wind resource, and continued O&M cost overruns over the project budget and Morningstar DBRS rating case.

FINANCIAL OUTLOOK
Morningstar DBRS expects the Project's 2024 DSCR to be in the low-1.20x range and be lower than the rating case figure in 2025, largely because of the O&M cost overruns. Starting in 2026, Morningstar DBRS expects the DSCR to return to the rating case figure following the completion of the majority of the proactive repairs and Year 10 maintenance.

CREDIT RATING RATIONALE
The ratings are supported by (1) the fixed-price FIT contract, (2) the Project's relatively strong and consistent operating track record, and (3) the strength of the sponsor-owner and operator. The ratings are constrained by (1) the inherent uncertainty with wind forecasts, (2) O&M cost management, and (3) some exposure to negative hourly Ontario energy price at the Summerhaven wind farm.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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.

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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