DBRS Morningstar Removes Kingston Solar LP’s Ratings from Under Review With Negative Implications, Confirms Ratings at BBB with Stable Trends

DBRS Limited (DBRS Morningstar) removed Kingston Solar LP’s (ProjectCo or the Issuer) Issuer Rating as well as the ratings of its 3.571% Series 1A-2016 Senior Secured Notes and 3.571% Series 1B-2016 Senior Secured Notes (together, the Notes) from Under Review with Negative Implications where they were placed on January 7, 2022. (Please refer to the DBRS Morningstar press release published on January 7, 2022.) DBRS Morningstar confirms the Issuer Rating as well as the 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 Project) in the City of Kingston and Loyalist Township, Ontario. The rationale of the rating actions is based on the following: (1) the on schedule and on budget remedy of the December Event (Please refer to the DBRS Morningstar press release published on January 7, 2022, for the details.); (2) the steady operation of the Project without any outage after the site was re-energized on February 1, 2022; and (3) all the unplanned outages since 2019 that have affected the ProjectCo were one-time events, with no connection with one another. DBRS Morningstar has no reason to believe that such outages will continue on a regular basis.

The cause of the December Event shutdown was the damaged bushing within the main switchgear due to eddy currents as the root cause. ProjectCo is in discussions with its contractors and original equipment manufacturers (OEMs) to determine options for modifications that can be made to the bushing mounting material in order to address the root cause. Discussions on a technical solution are ongoing, but the OEMs have confirmed that there is no short-term risk to the site’s operation. The rationale is that it took almost seven years for the bushings to be damaged due to eddy currents. That is why replaced bushing should conservatively last for another year. ProjectCo plans to replace bushing mounting material before the end of 2022. ProjectCo has replaced the damaged bushing, and the December Event has qualified as an insurable event. An insurable event means that ProjectCo is entitled to receive insurance payments associated with the December Event. It includes casualty insurance to cover the repair costs and business interruption insurance to cover the lost revenue due to shut down of over 30 days. The total amount and the timing of the insurance payments are still unclear, although ProjectCo has received some interim payment as of April 13, 2022.

ProjectCo’s underperformance for the last 12 months (LTM) December 31, 2021, and LTM April 30, 2022, compared with the rating case was the result of (1) the outages related to the main transformer replacement in March 2021, (2) snow buildup on the solar panels during the winter season, (3) low insolation levels across Ontario, and (4) planned outages. ProjectCo’s operating expenses were largely consistent with the budgets. The debt service amount was taken for the periods ended January 31, 2021, to match underlying cash flow, which resulted in adjusted debt service coverage ratios (DSCRs) of 1.28 times (x) and 1.31x (based on the compliance certificates) for LTM December 31, 2021, and LTM April 30, 2022, respectively. Excluding the effect of the outages, ProjectCo would have posted an adjusted DSCR at or above 1.35x for LTM April 30, 2022. DBRS Morningstar noticed that ProjectCo’s actual generation has been below the P90 level for the past few years, which resulted in a DSCR below the expected 1.40x, even if the outage events are excluded.

DBRS Morningstar maintains 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 outage events, operational challenge, and/or continuing subpar generation (versus the rating case) could cause a negative rating action in the future. DBRS Morningstar notes that a positive rating action is unlikely in the near to medium term.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
The principal methodology is Rating Solar Power Projects (August 18, 2021; https://www.dbrsmorningstar.com/research/383184), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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.

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

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