DBRS Upgrades Northland Power Solar Finance One L.P. to A (low), Stable Trend

DBRS Limited (DBRS) upgraded the rating on the Senior Secured Amortizing Bonds, Series A (the Bonds) issued by Northland Power Solar Finance One L.P. (ProjectCo or the Issuer) to A (low) from BBB (high). The trend remains Stable. The Bonds, with an outstanding balance of approximately $199 million, will fully amortize on June 30, 2032. ProjectCo is a special-purpose funding vehicle created to issue the Bonds to finance six operational ten-megawatt solar-photovoltaic-generating facilities located across Ontario (the Project).

The rating upgrade reflects (1) recent changes to the “Rating Solar Power Projects” methodology (see the press release as of today), which now contemplates “A”-range ratings for certain solar power projects (as discussed further below), and (2) the Project’s strong historical performance, which has consistently exceeded rating-case expectations. This press release also provides an update on the solar-module-warranty guarantor SunEdison Inc.’s (SunEdison) insolvency situation.

REVISED RATING METHODOLOGY
The recently published “Rating Solar Power Projects” methodology contemplates assigning “A”-range ratings to solar power projects provided the minimum rating-case P90 debt service coverage ratio (DSCR) is over 1.45 times (x) and certain other required conditions are met. In this particular case, the Project’s slightly revised minimum rating-case P90 DSCR of 1.63x and other attributes support an upgrade to A (low). DBRS also believes that the P50 and P99 DSCRs of 1.76x and 1.51x, respectively, are robust for the A (low) rating.

STRONG HISTORICAL PERFORMANCE
Since achieving commercial operation date (COD) status in late 2013, the Project has consistently and materially exceeded rating-case projections, which were based on conservative P90 production levels. Between 2014 and 2017, annual production consistently exceeded P90 levels by an average of 11%, while the DSCR ranged between 1.73x and 1.92x (versus the prior rating-case of 1.57x). The strong results are driven by several factors: (1) Actual production has generally matched or exceeded P50 levels, which are 7.5% higher than the P90 levels in the rating case. (2) As an experienced owner-operator, Northland Power Inc. (NPI) is able to consistently lower the Project’s operating cost and maintain high plant availability (99%). (3) Lower-than-expected panel degradation may have also contributed to strong performance.

REVISED PRO FORMA DSCR
Given the Project’s strong historical performance, DBRS has slightly revised its minimum DSCR projection to 1.63x by adjusting the following assumptions: (1) removing the 2.6% haircut previously applied by DBRS to the independent engineer’s P90 production forecast and (2) reducing the forecast future annual operating cost by approximately $400,000 from the original assumption, which is consistent with historical performance. These revisions have improved the minimum DSCR to 1.63x from 1.57x in the original rating case. The cash flow resilience levels, which reflect ProjectCo’s ability to withstand a variety of stressed cases, have also shown a moderate improvement as a result.

SUNEDISON WARRANTY UPDATE
The Project’s solar-module supplier, SunEdison, originally guaranteed the five-year materials and workmanship and 25-year degradation warranties. In April 2016, SunEdison filed for Chapter 11 and came out of bankruptcy proceedings as a going-concern entity in December 2017. As a result of the bankruptcy restructuring, SunEdison will be relieved from its unsecured obligations, including these warranties. Therefore, DBRS no longer assigns any value to SunEdison’s warranties. Nonetheless, DBRS does not expect that the absence of warranties will adversely affect the Project going forward given the following: (1) SunEdison’s modules are known to have sound quality, which has been validated by the Project’s robust performance in the early years of operations. (2) The Project’s cash flow is resilient to higher-than-expected degradation risk. The break-even DSCR corresponds to a 4.13% annual degradation, which is far greater than the normally assumed 0.70%. (3) The degradation risk is further mitigated by a springing degradation reserving mechanism in the financing structure, which will be triggered if the DSCR falls below 1.45x.

ADDITIONAL DEBT ISSUANCE
The Issuer informed DBRS of its intention to add a moderate amount of debt in the near future. Prior to issuing any additional pari passu debt, however, the Issuer is required, per the trust indenture, to seek DBRS’s rating opinion, which must demonstrate that there will be no adverse rating effect on the existing Bonds. The Issuer advised DBRS that it intends to maintain a pro forma P90 DSCR (considering the additional debt) that is consistent with the A (low) rating. Nonetheless, DBRS notes that this rating upgrade to A (low) has not taken into consideration any future debt issuance.

Based on the above, DBRS upgraded the rating to A (low) and expects the trend to remain Stable for the next 12 months. However, a sustained DSCR decline to below 1.45x can trigger a negative rating action; conversely, a further positive rating action, albeit unlikely in the near future, can be caused by significant and persistent outperformance (i.e., versus the rating case). The maximum rating is likely capped at “A,” which is one notch lower than the offtaker’s (Independent Electricity System Operator’s) A (high) rating.

The A (low) rating is underpinned by (1) the strength of the 20-year fixed-price feed-in-tariff contracts with a highly rated offtaker, (2) consistently strong performance, (3) an enhanced project finance structure and (4) NPI as an experienced 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) the absence of a module-performance warranty arrangement.

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 principal methodology is Rating Solar Power Projects, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.]

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.