Fitch Ratings has revised the Outlook on
RATING RATIONALE
The revision of the Outlook reflects the increase in expected debt service coverage ratios (DSCR) following increased revenues under Dudgeon's Contract for Difference (CfD) as its strike price is inflated annually with
The FRC projects an average DSCR of 1.60x, consistently above the 'A-' threshold of 1.51x.
The rating continues to reflect favourable remuneration under the
KEY RATING DRIVERS
Remuneration from CfD - Revenue Risk, Price: 'Stronger'
The CfD regime ensures high revenue visibility with a fixed strike price of
Fitch considers the payment mechanism a system risk, given the obligation of the electricity suppliers to pay the CfD, their ability to pass the cost to end-consumers and the different regulatory mechanisms in case of supplier default, such as the supplier of last resort, LCCC's ability to mutualise defaulted amounts and the administration regime.
Exposure to Increased Costs - Operation Risk: 'Midrange'
Dudgeon uses 6MW direct drive technology wind turbines from
Dudgeon is exposed to transmission risk, which is a 'Weaker' feature but common in many offshore wind projects. Dudgeon provides O&M services to the offshore transmission owner (OFTO) under a comprehensive agreement, which should support the OFTO's high availability levels. However, this further exposes Dudgeon to potential cost increases.
Favourably, the opex budget includes a contingency of about 5% of total technical opex (technical opex excludes grid fees and government charges). Dudgeon also has a revolving working capital facility of
Adequate Resource Assessment - Revenue Risk, Volume: 'Midrange'
The original production forecast is well-supported, based on 2.5 years of data from an offshore met mast 40km from Dudgeon. Fitch believes that this approach and distance is common in the sector. In 2020, the technical advisor provided a revised wind study based on operational data, which reduces the uncertainty of the assessment. The difference of 10% between 1yP90 and P50 production forecasts of the revised wind study reflects moderate resource volatility.
Fully-amortising Fixed-Rate Debt - Debt Structure: 'Stronger'
The rated notes are senior secured, fixed-rate and amortise fully until maturity in
PEER GROUP
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
DSCRs consistently below 1.5x under Fitch's rating case
Deterioration of the overall credit profile of the liquidity facility and hedge providers below initial rating requirements of 'A-'.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive operating history and DSCRs consistently above 1.6x under the FRC.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
TRANSACTION SUMMARY
Dudgeon is a 402MW offshore wind farm comprising 67 6MW
In 2018, Dudgeon issued senior secured financing to refinance the debt raised to finance construction and to distribute a dividend to its shareholders.
CREDIT UPDATE
An independent technical advisor recently conducted a revised benchmarking exercise and highlighted that Dudgeon's annual technical opex is in line with other comparable projects in the market with recently re-negotiated O&M contracts. In line with this view, we now apply a 0% cost stress in the Fitch base case (FBC) compared with the sponsor case. For the FRC, we apply a 10% stress, in line with the renewable energy criteria approach for projects with Midrange Operation Risk.
In
Dudgeon's availability has been significantly affected by the generator cable outages. This is reflected in the availability of 92.57% in 1H22, which is below the FRC forecast (96.75%). However,
In line with Ofgem's recent announcement, balancing services use of system (BSUoS) charges will be completely removed from CfD contracts from
Both 2021 and 1H22 operating costs were above budget. This was primarily due to higher BSUoS charges than budgeted and fees paid to
Wholesale electricity prices have been very high over 1H22, exceeding the strike price. As a result, Dudgeon has had to repay the difference between the given market price and strike price. Given the discount to the market price under Dudgeon's PPA, this has had a slightly negative effect on the project cash flow. Additionally, Dudgeon was required to draw on its working capital facility due to the timing difference between debt service and the receipt of its revenues under the PPA. Consequently, actual DSCRs have been weaker than expected at 1.51x in 2H21 and 1.53x in 1H22.
FINANCIAL ANALYSIS
The FRC reflects the 1y-P90 resource assessment and a 3% haircut on production to reflect uncertainty related to production, as well as Fitch's view that availability may be lower than the level indicated by the technical advisor. Fitch assumes availability of 96.75%.
Fitch stresses the costs corresponding to activities performed by
Market prices reflect the average of the reference and high cases from
Under the FRC, the average annual DSCR is 1.60x compared with 1.52x at the last review with a profile that is consistently above the 'A-' threshold of 1.51x throughout the life of the debt. The minimum DSCR is 1.58x.
Fitch ran a sensitivity to reflect the near-term expected continued high electricity prices and found that the DSCR metrics weakened, mainly due to the structure of Dudgeon's revenue agreement.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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