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

DBRS Limited (DBRS) has today confirmed its rating of BBB with a Stable trend on the 4.881% Senior Secured Notes (the Notes) issued by St. Clair Holding, ULC (ProjectCo or the Issuer). The $171.8 million of notes issued fully amortize and mature on August 31, 2031 (current outstanding amount of $139.6 million). ProjectCo indirectly owns Moore Solar LP and Sombra Solar LP, two separate solar power sites located in St. Clair, Ontario (together, the Project), each with a nameplate generation capacity of 20 megawatts (MW).

ProjectCo benefits from attractive long-term fixed power prices under four 10 MW Renewable Energy Standard Offer Program power purchase agreements with the Independent Electricity System Operator (rated A (high) with a Stable trend by DBRS), maturing in February 2032, six months after the maturity of the Notes.

The Project has shown robust results since achieving commercial operations in early 2012. Electricity generation for full-year 2015 and for the last 12 months (LTM) to June 30, 2016, exceeded degradation-adjusted DBRS base-case estimates at P90 levels by more than 13%. (September 30, 2016, YTD generation was 56.9 gigawatt hours (GWh) versus the DBRS projected P90 base-case of 49.4 GWh. Q3 2016 financial statements are not yet available.) Generation also surpassed DBRS degradation-adjusted P50 levels by 7%. Total operating expenses were 24% below the DBRS base-case estimates for 2015 and 17% below base-case estimates for LTM to June 30, 2016. As a result, the Project’s debt service coverage ratio (DSCR) of 1.63 times (x) for LTM to June 30, 2016, and 1.62x for the year ending December 31, 2015, were higher than the DBRS base-case estimate of 1.38x.

DBRS may revise the rating case and take a positive rating action in the future if the Project continues to produce, on a sustainable basis, (1) electricity production at or above the degradation-adjusted P50 levels, (2) electricity production above a revised P90 forecast validated by an independent consultant and (3) better-than-expected financial results measured primarily by DSCR. A future rating action would also consider the additional cash flow headroom resulting from a corporate restructuring that was completed in June 2014 that placed the payment of principal and interest ahead of income taxes. This restructuring results in the base-case DSCR improving to 1.40x in 2023 and increasing every year to 1.89x in 2030, well above the pre-restructuring base case of a flat 1.38x DSCR.

The rating is constrained by (1) solar panel degradation risk and (2) the credit quality of the solar panel supplier providing a 25-year power output warranty; however, these risks are partially mitigated by (1) additional structural enhancements, including panel degradation reserve accounts; and (2) high break-even resilience for panel degradation at 2.6% per annum.

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 Solar Power Projects, which can be found on our website under Methodologies.