DBRS Confirms Rating on Northland Power Solar Finance One L.P.’s Senior Secured Amortizing Bonds, Series A at BBB (high) with a Stable Trend

DBRS Limited (DBRS) has today confirmed the BBB (high) rating with a Stable trend on the Senior Secured Amortizing Bonds, Series A (the Bonds) for approximately $232 million, due June 30, 2032, issued by Northland Power Solar Finance One L.P. (ProjectCo or the Issuer). The obligations of ProjectCo under the Bonds are guaranteed on a joint and several basis by the six project limited partnerships (Project LPs). The Project LPs are six operating solar photovoltaic (PV) power generating facilities with an aggregate capacity of 60 megawatts (MW), located across Ontario (together, the Facilities or the Project). The Facilities sell power to the Independent Electricity System Operator (IESO, rated A (high) with a Stable trend by DBRS) under six 20-year feed-in-tariff (FIT) contracts and are connected to Hydro One Networks Inc.’s (HONI) low-voltage distribution systems. This configuration is considered credit positive as the Facilities are not subject to curtailment risk. The Bonds fully amortize before the FIT contracts expire.

The Facilities have approximately three years of operating history since achieving commercial operation status between June 2013 and September 2013. The rating confirmation reflects the Project’s continuing strong performance over an 18-month review period to June 30, 2016. Total generation for this period exceeded the degradation-adjusted P90 level (DBRS rating case) by 14% to 18% and P50 level by 6% to 10%, respectively. The trailing 12 months debt service coverage ratio (DSCR) of 1.92 times (x) to June 30, 2016, was materially higher than the expected 1.58x in DBRS’s rating case. The strong financial performance results from a combination of several positive factors, including actual generation, consistently matching the predicted P50 production levels; slightly favourable irradiance levels experienced over the past 12 months to 18 months; and lower-than-budgeted operating cost. DBRS surmises that lower-than-expected degradation in the Project’s early operating years may have also contributed to the higher-than-expected production. DBRS will consider upgrading its rating-case projections if the positive trend continues in the coming year(s). Nevertheless, the rating is capped to BBB (high) according to DBRS’s methodology for rating solar power projects.

The rating is anchored by (1) the strength of the 20-year fixed-price FIT contracts with a highly rated offtaker, (2) limited operating risk and strong initial performance, (3) an enhanced project finance structure and (4) the strength of the Project sponsor and operator, Northland Power Inc. The rating is constrained by (1) the long-term panel degradation risk, (2) revenue depending on a variable energy resource and the expected performance ratio and (3) the uncertain future of panel warranty provider/guarantor SunEdison Inc. (SunEdison) who filed for Chapter 11 bankruptcy protection on April 21, 2016. Nonetheless, DBRS opined in an April 6, 2016, commentary that SunEdison’s pending bankruptcy filing would have no near-term adverse effect on the Project because (1) SunEdison’s panels are known to have sound quality; (2) the Facilities have high cash flow resilience to degradation with a breakeven DSCR at 3.22% annual degradation rate, which is significantly higher than the 0.7% projected in the rating case; and (3) such risk is further mitigated by a degradation reserving mechanism in the project finance structure.

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

PXX means 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, 1-year P90 and 1-year P99). Unless otherwise specified, all PXX values in the press release are in reference to one-year PXX values, adjusted by DBRS, considering degradation and other factors.

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Solar Power Projects, which can be found on our website under Methodologies.