DBRS Morningstar Confirms Ratings on Kingston Solar LP at BBB with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Kingston Solar LP's (ProjectCo or the Issuer) Issuer Rating as well as its 3.571% Series 1A-2016 Senior Secured Notes and 3.571% Series 1B-2016 Senior Secured Notes ratings at BBB with Stable trends. ProjectCo is a special-purpose vehicle that owns and operates a 100-megawatt alternating-current ground-mounted solar-photovoltaic generation facility (the Facility) in the City of Kingston and Loyalist Township, Ontario. The rating confirmations reflect ProjectCo’s resiliency to adverse events with relatively stable operations for the past 12 months to 18 months. DBRS Morningstar views the unexpected outage events (Forced Outages) in 2019 as one time in nature. The Stable trends reflect DBRS Morningstar’s view that the Issuer will likely perform as expected in the next 12 months.

For the last 12 months ended December 31, 2019 (LTM 2019), and the last 12 months ended June 30, 2020 (LTM 2020), generation was 92.0% and 93.3% of the one-year P90 rating-case forecasts, respectively. Lower-than-expected generation was largely driven by (1) Forced Outages in May, July, and August of 2019 as discussed in last year’s review; and (2) higher-than-usual snow buildup on the solar panels during the 2019–20 winter season. As a result, the debt service coverage ratios (DSCRs) were 1.30 times (x) and 1.34x for LTM 2019 and LTM 2020, respectively. Notwithstanding the lower cash flow resulting from the Forced Outages, DBRS Morningstar believes that these DSCR levels are a testament to ProjectCo’s ability to handle unexpected adverse events. Excluding the Forced Outages’ impact, the adjusted DSCRs were 1.40x and 1.39x for LTM 2019 and LTM 2020, respectively.

In recent months, management at the Facility has identified an issue with the main transformer (the Transformer) that requires regular oil changes leading to four- to five-day shutdown in a three- to six-month interval. To permanently resolve this issue, management has decided to replace the existing Transformer in January 2021, which will likely cause a two- to three-week Facility shutdown. Management chose January to minimize the generation loss because of its low insolation level. DBRS Morningstar does not expect this shutdown to have any material impact on the Issuer’s debt service capacity in July 2021 as DBRS Morningstar calculated the pro forma LTM June 2021 DSCR to be around 1.35x (P-90) assuming that the Facility does not experience any other unexpected outage. DBRS Morningstar also notes that the Issuer plans to hold back sufficient funds in October 2020 to fund the new Transformer.

DBRS Morningstar maintains its rating-case projection of a constant DSCR of 1.40x for the remaining debt term beyond 2021 and expects the trends on the ratings to remain Stable for the next 12 months. However, frequent forced outages as well as material and sustained underperformance (versus the rating case) could cause a negative rating action in the future. A positive rating action in the next 12 months is unlikely, given the operational issues and low insolation levels experienced over the past few years. Nevertheless, future positive rating action could 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.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
The principal methodology is Rating Solar Power Projects (September, 1, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

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].

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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