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Got Bonds?

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

Fortnightly - June 2012

Solar’s experience building other plants, including the 20-MW Sarnia, Ontario, plant and its 60-MW expansion, plus the 10-MW El Dorado plant in Boulder City, Nev., and the 21-MW Blythe project in Riverside County, Calif., all using First Solar technology. According to the rating agency, the projects were built at a balance-of-plant cost less than budgeted and with no change orders. Further, it said that if First Solar is unable to meet its obligations, “there are sufficient alternate suppliers to complete the project at a cost and schedule that would not significantly erode cash flows.”

The milestones in the EPC agreement and PPA effectively mitigate potential delay risks. The EPC agreement includes guaranteed capacity milestones, as well as milestones for completion of each PV block, with sufficient liquidated damages (LD) due for failure to meet the prescribed targets.

In addition, the EPC agreement includes guaranteed capacity levels to reach substantial completion, largely mitigating a shortfall in the expected nameplate capacity. Under the PPA, the guaranteed commercial operation date provides a three-month cushion after the guaranteed substantial completion date in the EPC agreement, which Fitch views sufficient for a PV project. Fitch also considers the thin-film PV technology employed in Topaz, with CdTe as the semiconductor, commercially proven with relatively low technology risk.

Choosing bond financing, Kinross points out, brought MidAmerican numerous benefits. With debt at 5.75 percent, for example, the pricing is nearly 3.75 percent higher than Treasury bills, which satisfied investors. At the same time, 5.75 percent is lower than bank financing rates at 6 or 6.5 percent.

Further, Kinross says, lenders typically seek a debt service coverage ratio of 1.4 or above from a project finance candidate. “With Topaz, the base case coverage ratio is 1.4, but that’s based on conservative assumptions, so it could be 1.5.,” he says. “Many of the assumptions used in the analysis are conservative.” For example, they anticipate a 0.9-percent panel degradation figure vs. the typical 0.7 percent, and availability at 97 percent vs. the typical 98 to 99 percent. “So the project should be able to beat the numbers,” Kinross says. “If it operates above the base case the quality of the investment will be even higher.”

Building with Bonds

The Topaz offering isn’t without precedent with regards to renewable energy finance. For instance, some $1.2 billion in private debt and equity was raised to finance the nine SEGS concentrated solar projects in southern California back in the 1980s and 1990s. And, as Kinross pointed out, FPL Energy sold a $380 million bond offering in 2005 for seven wind projects totaling 697 MW in six states. S&P also assigned the senior secured debt associated with that project a BBB- rating.

More recently, bonds, in concert with the recently expired Financial Institution Public Partnership (FIPP) program, have been used to finance a number of PV and concentrated solar projects. The Genesis project, a 250 MW concentrated solar facility being developed by NextEra Energy Resources in Riverside County, Calif., used a $681 million federal loan guarantee to secure $852 million in financing in 2011.

NRG Energy’s 290-MW