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Got Bonds?

MidAmerican’s Topaz solar financing proves that bond investors have an appetite for green investments.

Fortnightly - June 2012

When MidAmerican Energy Holdings issued $850 million in bonds in February 2012 to finance construction of the massive 550-MW Topaz Solar photovoltaic (PV) farm, it raised more than a few eyebrows in the financial and renewable energy communities.

Not because Topaz, located in San Luis Obispo, Calif., will be one of the world’s largest solar PV farms when construction is completed in 2015; or that MidAmerican, a key energy component in Warren Buffet’s Berkshire Hathaway holding company, is itself investing roughly $1.2 billion, or 50 percent of the project’s cost.

No, the bond issue—structured as a rule-144a private placement—generated headlines for three reasons. First, it will fund the largest solar project ever to tap the capital markets for project finance without the backing of a government loan guarantee. Second, it was the first solar bond issue to be rated investment grade by the three big ratings agencies, Moody’s, Fitch, and Standard and Poor’s. And third, it was so heavily oversubscribed that MidAmerican plans to announce a follow-up issue worth roughly $400 million.

All of which has left a growing number of financial and power industry players asking: With an assortment of U.S. government supports falling by the wayside and European banks cutting back traditional project finance lending, might the bond markets become a more mainstream approach to renewable energy financing going forward?

Andrew Kinross, a Boston-based director of the energy practice at Navigant Consulting, certainly sees it that way. He observes that although FPL issued bonds as early as 2005 to finance wind project construction, no solar projects have been financed in the capital markets without a government loan guarantee. “The fact that the Topaz bonds were so heavily oversubscribed, and there are other solar projects currently under review by the rating agencies, demonstrates the appetite for solar projects,” Kinross says.

Beating the Numbers

From an investment standpoint, Topaz is about as good as it gets, which explains the appetite for the bond offering. Some of the rating agency highlights:

In terms of credit quality, MidAmerican Energy Holdings is part of Berkshire Hathaway and has a 50 percent equity stake in the project. In its rating report Fitch describes Berkshire as financially capable of contributing the full equity financing for the Topaz project, if required. In January MidAmerican created MidAmerican Renewables LLC to support the company’s move into the unregulated renewable energy market.

The power is being purchased by an investment grade utility, Pacific Gas and Electric (PG&E). The 25-year fixed-price power purchase agreement will help PG&E comply with California’s mandate that 33 percent of its power supply must come from renewable sources by 2020.

First Solar will construct the plant under a fixed-price, date-certain engineering, procurement, and construction (EPC) contract, and then operate the plant under a 25-year O&M agreement with termination provisions every five years at the option of Topaz.

Fitch found the project to have limited completion risk due to First