Morningstar DBRS Confirms Northland Power Solar Finance One L.P. at A (low) With Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating and the Senior Secured Amortizing Bonds, Series A (the Bonds) credit rating of Northland Power Solar Finance One L.P. (ProjectCo or the Issuer) at A (low) with Stable trends. The Bonds, maturing on June 30, 2032, currently have an outstanding balance of approximately $136 million. The credit rating confirmations reflect ProjectCo’s continuing strong performance over the last 12 months ended on December 31, 2023.

ProjectCo’s debt obligations are guaranteed on a joint-and-several basis by the six project limited partnerships (Project LPs). The Project LPs are six operating solar photovoltaic power-generating facilities (together, the Project) with an aggregate capacity of 60 megawatts located across Ontario.

KEY CREDIT RATING CONSIDERATIONS
The Project has had more than 10 years of consistently strong performances. In 2023, the overall production was 13% and 5% higher than the P90 (credit rating case) and P50 forecasts, respectively. The higher-than-expected energy production was driven by (1) a high availability of 99.4% (versus the expected 99.0%) and lower-than-expected cumulated panel degradation, (2) strong solar insolation levels in the year, and (3) enhanced winter energy yield as a result of installing snow removal equipment since 2019. The debt service coverage ratio (DSCR) of 1.74 times (x) in 2023 was materially higher than the expected 1.53x in Morningstar DBRS’ P90 credit rating case. The better-than-expected DSCR was driven by strong production/revenue (versus the credit rating case), partially offset by higher-than-expected operating cost (including the capital expenditure). The higher operating cost includes some one-time items for preventative maintenance work. The operating cost is expected return to the forecast level in 2024.

CREDIT RATING DRIVERS
Morningstar DBRS expects the credit ratings to remain stable for the next 12 months; however, a material and sustained underperformance (versus the credit rating case), albeit unlikely, could trigger a negative credit rating action. A sustained outperformance (versus the credit rating case), with a positive revision to the forecast P90 energy level, can result in a positive credit rating action.

FINANCIAL OUTLOOK
Morningstar DBRS continues to project a minimum DSCR of 1.53x for the remaining period of the Bonds, based on the forecast P90 production level. We have, however, recognized that the Project has been consistently generating energy at or above the P50 level, resulting in higher-than-expected DSCR. Morningstar DBRS may consider revising the forecast if this trend continues into the future.

CREDIT RATING RATIONALE
The A (low) credit ratings are underpinned by (1) the strength of the 20-year fixed-price feed-in-tariff contracts with the Independent Electricity System Operator, a high credit-quality offtaker; (2) the consistently strong operating and financial results; (3) an enhanced project finance structure; and (4) Northland Power Inc. as an experienced owner-operator. The credit ratings are constrained by (1) the long-term solar panel degradation risk and (2) potential revenue volatility driven by the variable solar insolation levels and the performance ratio.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

RATING DRIVER AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of Rating Driver Factors
In the analysis of the Issuer, the Rating Driver factors listed in the methodology are considered in the order of importance.

(B) Weighting of FRA Factors
In the analysis of the Issuer, the following FRA factor: DSCR (the only applicable FRA) listed in the methodology was considered more important.

(C) Weighting of the Rating Driver and the FRA
In the analysis of the Issuer, the FRA carries greater weight than the Rating Driver.

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

PXX = 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 Morningstar DBRS, considering degradation and other factors.

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Solar Power Projects (September 12, 2023), https://dbrs.morningstar.com/research/420439
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023), https://dbrs.morningstar.com/research/411694

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

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 credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for the credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at [email protected].

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