DBRS Confirms St. Clair Holding, Inc. at BBB, Stable

DBRS has today confirmed the rating of BBB with a Stable trend of the Senior Secured Notes of St. Clair Holding, Inc. (ProjectCo or the Issuer). ProjectCo indirectly owns Moore Solar, Inc. (Moore) and Sombra Solar, Inc. (Sombra), each a separate solar power project site consisting of approximately 320,000 panels with nameplate generation capacity of 20 megawatts (MW), located in St. Clair, Ontario (the Project).

The Project benefits from attractive contracted power prices, under four 10 megawatt (MW), 20-year power purchase agreements (PPA) with Ontario Power Authority (OPA; rated A (high), Stable). The PPA represents specific government policy support for solar projects under the Renewable Energy Standard Offer Program (RESOP), which pays 42 cents/kilowatt hour (kWh) for electricity generated until contract maturity in February 2032. This is an above-market price for power (required to support the higher cost of solar energy) and considered positive for project credit quality, although the PPA price is not adjusted for inflation over the life of the contract.

The Project achieved Commercial Operation Date (COD) on February 29, 2012, and the OPA began purchasing power under the PPA at that time. Final construction completion was achieved on June 22, 2012, and there are no construction-related issues outstanding. NextEra Energy Resources, LLC (NEER) acquired the project through wholly owned subsidiaries in February 2012 from the engineering, procurement and construction (EPC) contractor, First Solar Development (Canada) Inc. Acquisition costs were funded by a bridge loan facility and equity contribution from NextEra. On September 21, 2012 (Financial Close), the project was recapitalized with $171.8 million of senior secured notes and $23.0 million of equity, which were used to retire the bridge loan facility and further fund other related transaction costs. The debt accounted for approximately 88% of the capital structure.

The rating is constrained by the solar resource forecasting risk, the panel degradation risk and the single-purpose nature of project assets. Solar resource forecasts are based on site data, correlated with multiple related solar databases and their reasonableness, assessed and confirmed by the Independent Engineer (IE or Luminate Consulting LLC). Despite some modest variance observed during the first year of operation, the solar resource has performed generally in line with the base case forecast. Solar resource forecasting risk is considered moderate.

The project uses cadmium telluride photovoltaic (PV) thin film panels and Xantrex inverters to produce power that is delivered to the Ontario transmission grid through the Hydro One Inc. distribution system. The panels were supplied by First Solar, Inc. (First Solar), which provides a warranty of panel performance at an annual degradation rate of 0.8% per annum (p.a.). The warranty is considered reasonable by the IE and falls within an indicative range of panel degradation rate studies.

The degradation risk is also mitigated by a panel degradation reserve that would trap distributions otherwise payable in accordance with the permitted distribution test, using these funds to replace/add panels or reduce outstanding debt should the actual panel degradation during the year exceed anticipated degradation of 0.8%. The Energy Performance Warranty Test carried out for the period beginning on February 27, 2012, through February 27, 2013, was completed successfully. The test determines whether the production capacity and panel degradation are in line with the base case forecast. The test result was positive and did not trigger any warranty claims or any other actions required by the Trust Indenture. No contribution towards the degradation reserve was required thus far. Break-even resilience for panel degradation, giving effect to the reserve, is relatively high, at 3.2% p.a. As such, panel degradation risk is largely mitigated by the panel degradation reserve.

The project structure and key contract terms remain unchanged and are consistent with the rating category. The project also features a six-month debt service reserve and a six-month operating expenses reserve, both of which support credit quality. Low-risk, high-severity events that are mainly related to extreme weather (e.g., hurricanes, hail and lightning) are covered by the project’s insurance program. While insurance coverage includes physical damage from volcano events, it does not cover reduced irradiance that may have been caused by such an event. However, the projected minimum one-year P90 DSCR of 1.4x and six-month debt service reserve should help to withstand such a low probability event. Since Financial Close, the actual DSCR, adjusted to reflect a full year of debt service, was calculated to be around 1.5x, slightly higher than the base case forecast, as the result of the almost-on-target production, combined with much lower operating and maintenance (O&M) expenses, and is considered consistent with the rating.

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

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 Project Finance, which can be found on our website under Methodologies.

This rating is endorsed by DBRS for use in the European Union.