DBRS Morningstar Confirms Kingston Solar LP at BBB with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating and 3.571% Series 1A-2016 Senior Secured Notes and 3.571% Series 1B-2016 Senior Secured Notes (together, the Notes) ratings of Kingston Solar LP (ProjectCo) at BBB with Stable trends. ProjectCo is a special-purpose vehicle that owns and operates a 100-megawatt alternating-current ground-mounted solar-photovoltaic (PV) generation facility (the Facility) in the City of Kingston and Loyalist Township, Ontario. The rating confirmations reflect ProjectCo’s relatively stable performance over the past few years and its resilience to unexpected outage events (see below for the details) over the past few months. The Stable trends reflect DBRS Morningstar’s view that ProjectCo will likely perform as expected, as the outage events are considered one time in nature.

The Facility was shut down for a few days during May 2019 as a precaution to replace certain components of the main transformer, causing overall availability to drop to 82.4% (the May Event). In another unrelated incident on July 10, 2019, the Facility experienced a total site trip, possibly caused by a bird coming into contact with one of the riser conductors (the July Event). A detailed investigation indicated that the Zone 1 and Zone 5 switchgears were damaged. After the July Event, 70% and 100% of the Facility’s capacity was brought on line by July 18th and August 11th, respectively. There has been no operational issue since then, as evidenced by strong September generation data. The transformer is still under warranty, and the vendor conducted further work in October to improve its long-term operational reliability. ProjectCo expects to receive some proceeds under its insurance coverage to partially compensate for the revenue loss. DBRS Morningstar does not expect that the Facility’s long-term operational reliability will be affected by these isolated one-time outage events.

For the last 12 months (LTM) ended December 31, 2018, and June 30, 2019, generation was 96.5% and 96.1% of the one-year P90 rating-case forecasts, respectively. Lower-than-expected financial performance was largely driven by harsh winter weather, unusually low insolation levels in fall 2018 and the further outage event experienced in May 2019. The debt service coverage ratios (DSCRs) were 1.38 times (x) and 1.35x, respectively, for the corresponding periods, which are moderately lower than the expected 1.40x of the initial forecast. Despite the revenue loss tied to the May and July Events, ProjectCo expects to meet its next January 31, 2020, debt service obligations without utilizing the debt service reserve account. In the absence of any future forced outage, no equity distribution lock-up is forecast to be triggered (DSCR < 1.20x). Another encouraging sign for the solar PV facilities in Ontario is the improving year-to-date insolation levels, after the unusually low insolation year experienced in 2018. Excluding the forced outage events, the Facility would track at around 99.3% of the P90 level (rating case) for the LTM ended September 30, 2019, while it only generated an amount of energy equivalent to 96.5% of the P90 forecast in 2018.

DBRS Morningstar is maintaining its rating-case projection of a constant DSCR of 1.40x for the remaining debt term and expects the trends on the ratings to remain Stable for the next 12 months. However, frequent forced outages and material and sustained underperformance (versus the rating case) could cause a negative rating action. A positive rating action in the next 12 months is unlikely given the operational issues and low insolation levels experienced over the past two years. Nevertheless, a future positive rating action could still follow if performance is consistently at or above the P50 levels, impelling the DSCR to increase to 1.50x or above for a sustainable period.

Notes:
The principal methodology is Rating Solar Power Projects, which can be found on dbrs.com under Methodologies & Criteria.

*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, one-year P90 and one-year P99). Unless otherwise specified, all PXX values in this press release are in reference to one-year PXX values, adjusted by DBRS Morningstar, 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 under Related Documents or by contacting us at [email protected].

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

DBRS Morningstar 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 [email protected].

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