DBRS Confirms Northland Power Solar Finance One L.P. at BBB (high) with a Stable Trend

DBRS Limited (DBRS) confirmed the BBB (high) rating with a Stable trend on the Senior Secured Amortizing Bonds, Series A (the Bonds), with an outstanding balance of approximately $204 million, due June 30, 2032, issued by Northland Power Solar Finance One L.P. (ProjectCo or the Issuer). The rating confirmation reflects the continuing strong performance of the assets that have consistently exceeded rating-case expectations.

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), Stable 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, with no exposure to curtailment risk. The Bonds fully amortize before the FIT contracts expire.

The Project has had approximately four years of reliable operating history. The Facilities sustained a very high average availability ratio of 99.8% over an 18-month period to June 30, 2017. For the 12-month periods ended December 31, 2016, and June 30, 2017 (financial reporting dates), production was 19% and 14% higher than the one-year P90 rating-case forecasts, respectively; it also exceeded P50 levels by 11% to 6%, respectively. The trailing 12-month (TTM) debt service coverage ratio (DSCR) of 1.81 times (x) to June 30, 2017, was materially higher than the expected 1.58x in DBRS’s rating case. The stronger-than-expected results are driven by several factors, including actual generation consistently matching or exceeding the predicted P50 levels and lower-than-budgeted operating cost. The panel degradation in the early years of operations is not noticeable, also contributing to the higher-than-expected production. DBRS will likely upgrade its rating-case financial projections in the near term if the positive trend continues.

The rating continues to be underpinned by (1) the strength of the 20-year fixed-price FIT contracts with a highly rated offtaker, (2) consistently strong performance and relatively low operating risk, (3) an enhanced project finance structure and (4) Northland Power Inc. (NPI) as an experienced and capable owner-operator. 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) continuing uncertainty surrounding the panel warranty as a result of solar panel manufacturer SunEdison Inc. (SunEdison)’s bankruptcy proceedings. Nonetheless, DBRS continues to believe potential alterations to the warranty arrangement are unlikely to affect the Project adversely, because (1) SunEdison’s panels are known to have sound quality, which has been further validated by the Project’s robust early performance; (2) the Project cash flow is resilient to degradation risk, with a 1.0x DSCR at a 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. DBRS expects the rating to remain stable for the next 12 months and ProjectCo is on track to achieve an above 1.70x DSCR by YE2017; albeit unlikely, material and sustained underperformance (versus the rating case) could trigger a negative rating action, while a positive rating action for the moment is not possible since the rating for solar power projects is currently capped to BBB (high) according to DBRS’s methodology.

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

PXX means exceedance probabilities. P50, P90 and P99 values describe estimated minimum electricity generation with a probability of 50%, 90% or 99%, respectively, in any given year (P50, one-year P90 and one-year P99). Unless otherwise specified, all PXX values in the press release are in reference to one-year PXX values adjusted by DBRS, which considers availability and degradation 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 principal methodology is Rating Solar Power Projects, which can be found on dbrs.com 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.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.