DBRS Assigns BBB Ratings to Kingston Solar LP’s CAD $632.97 Million Senior Secured Notes, Stable Trends

DBRS Limited (DBRS) has today assigned a rating of BBB with a Stable trend to both the 3.571% Series 1A-2016 Senior Secured Notes and the 3.571% Series 1B-2016 Senior Secured Notes (collectively, the Notes) issued by Kingston Solar LP (ProjectCo). Both tranches are denominated in Canadian dollars and rank equally under the Trust Indenture. The fixed-rate Notes of $632.97 million in aggregate will fully amortize by the July 31, 2035, maturity date. Proceeds from the Notes issuance will be used to repay existing bank debt (including swap breakage fees), make equity distribution and pay transaction and other fees.

ProjectCo, a special-purpose vehicle, owns and operates a 100-megawatt alternating current ground-mounted solar photovoltaic generation facility in the City of Kingston and Loyalist Township, Ontario (the Project or the Facility). The Facility connects via a 200-metre generator tie line to Hydro One Networks Inc.’s electricity grid. ProjectCo sells all electricity generated to the Independent Electricity System Operator (rated A (high) by DBRS) under a 20-year, fixed-price power purchase agreement (PPA) expiring September 24, 2035, approximately two months after the Notes mature. No equity distribution will be allowed after November 1, 2034; as a result, the trapped cash effectively extends the two-month PPA tail (from the Notes’ maturity) to eight months’ equivalent debt service.

The rating is anchored by (1) the strength of the 20-year, fixed-price PPA with a highly rated offtaker; (2) the limited operating risk expected with proven technology; and (3) an enhanced project finance structure. The rating is constrained by (1) the long-term module degradation risk; (2) exposure to long-term warranty providers with relatively weak credit quality; and (3) revenue depending on a variable energy resource and the expected performance ratio. Nonetheless, these risks are partially mitigated by the conservative P90 rating-case projections and a reserving remediation mechanism in the event that modules degrade faster than expected.

DBRS projects a constant debt service coverage ratio (DSCR) of 1.40 times (x) in its P90 rating case for the term of the Notes. In contrast, the projected P50 DSCR is higher at 1.50x. The sensitivity analysis demonstrates reasonable cash flow resiliency to a variety of risk factors such as lower-than-expected solar resource or plant availability, and higher-than-expected operating costs, inflation or degradation. Given a stressed P99 scenario, the DSCR is reasonably resilient at 1.33x.

The Project has 11 months of operating data to August 31, 2016, since achieving its commercial operation date on September 25, 2015. The overall performance meets the P90 rating-case expectations. Actual generation represents 105.2% and 98.9% of the projected P90 and P50 levels, respectively. The implied DSCR is 1.48x versus 1.40x in the rating case, assuming on-budget operating costs. Nonetheless, DBRS cannot predict with certainty whether the Project’s long-term performance can match expectations given its short operating history and Ontario’s volatile winter weather conditions.

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 this press release are in reference to one-year PXX values, adjusted by DBRS, considering availability, degradation and curtailment 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.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.