Morningstar DBRS Confirms Dufferin Wind Power Inc. at BBB (high) With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed Dufferin Wind Power Inc.'s (the Issuer) Issuer Rating and the credit 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 (CLYPG or the Project Sponsor). All energy is sold directly into the Independent Electricity System Operator (the IESO; the credit quality 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 $123.8 million is outstanding.

KEY CREDIT RATING CONSIDERATIONS
Since achieving the Commercial Operations Date (COD) under the IESO FIT Contract on December 1, 2014, the Project has had nine and a half years of reported operating results, achieving an average of approximately 10.4% higher than the one-year P90 rating case for the nine full years ended December 31, 2023. In 2023, the Project generated 226.9 gigawatt hours (GWh) at an average realized price of $153.52 per MW hour. This generation level is 6.1% less than the one-year P90 rating case of 241.6 GWh, 14.5% less than the P50 plan of 265.5 GWh, and 17.7% lower than the 2022 generation level of 275.7 GWh, because of a lower wind resource during the summer months and in December 2023. Generated electricity in 2023 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 Morningstar DBRS adjusted debt service coverage ratio (DSCR) for F2023 is 1.63 times (x), slightly above the expected 1.62x in the credit rating case, as in all prior years since COD and supportive of the current credit rating range. This was driven by the Project's ability to maintain cost discipline and by realizing higher energy prices, despite the lower generation. For H1 2024, the Project generated 132.4 GWh (versus 129.6 GWh in H1 2023) and revenue of $20.8 million (versus $19.9 million in H1 2023), resulting in a six-month DSCR of 1.89x. Morningstar DBRS 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.

CREDIT RATING DRIVERS
A credit rating upgrade is unlikely in the near term given the variation in the generation levels of the Project. A negative credit rating action could be triggered by sustained underperformance versus the credit rating case.

FINANCIAL OUTLOOK
Morningstar DBRS expects the Project's performance to be in line with the P90 rating case and achieve the projected DSCR of 1.62x for 2024.

CREDIT RATING RATIONALE
The credit rating is supported by (1) the IESO FIT Contract; (2) robust financial performance and rating-case financial projections demonstrating minimum DSCR of 1.61x; and (3) the operating and maintenance (O&M) arrangement with General Electric Canada Inc., the original equipment manufacturer. 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.

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 (13 August 2024), https://dbrs.morningstar.com/research/437781

RATING DRIVER 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 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 was 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 Driver.

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

PXX = exceedance probabilities. A P50-P90-P99 value describes estimated minimum electricity generation with a probability of 50%, 90%, or 99% in any given year (P50, one-year P90, and one-year P99). Unless otherwise specified, all PXX values in this press release are in reference to one-year PXX values, adjusted by Morningstar DBRS, considering degradation and other factors.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Wind Power Projects (15 April 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 ratings were initiated at the request of the rated entity.

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

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

These are solicited credit ratings.

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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