NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' rating on $1.1 billion senior secured notes due 2039 at Topaz Solar Farms LLC (Topaz, or the project). The affirmation is based on the appropriately managed completion efforts by the contractor, as well as the strong construction risk mitigation provided by the sponsor. The project is roughly 78% complete with more than 375 megawatts (MW) online and two to three months ahead of the original construction schedule. Overall costs remain in line with the initial budget and completion has been funded in line with the draw schedule. The Rating Outlook remains Stable.
--Limited Completion Risk: The first 375 MW have begun to produce power and the remaining construction is progressing ahead of schedule which substantially mitigates completion risk. The project also benefits from a completion guarantee backed by the sponsor, MidAmerican Energy Holdings (rated 'BBB+' with a Stable Outlook by Fitch) which is sufficient to cover cost overruns, replacement contractor costs and construction delays. (Completion Risk: Stronger)
--Long-Term Revenue Contract Secures Cash Flows: The revenues of Topaz are anchored by an investment-grade utility off-taker, Pacific Gas & Electric Company (PG&E; 'BBB+'; Stable Outlook), under a long-term, fixed-price power purchase agreement (PPA) that provides a six-month cushion beyond the expected debt maturity. (Revenue Risk- Price: Midrange)
--Stronger Resource Assessment: The solar resource assessment is based on 12 years of actual onsite ground data and is correlated to a long-term satellite dataset, which is considered strong under Fitch's solar criteria. Under a one-year P99 scenario, debt service coverage ratios (DSCR) average 1.51x with a minimum of 1.40x, providing ample cushion above 1.0x coverage, commensurate with the current rating. (Revenue Risk- Volume: Stronger)
--Operating Reserve and Contingency Mitigate Cost Risk: While the cost profile is unproven to date, the project benefits from a six-month operations and maintenance (O&M) reserve which helps to mitigate operating cost risk through debt maturity. Under its base case, Fitch evaluated operating costs under the fixed-price all-inclusive operating contract with First Solar, while the Fitch rating case considers a higher cost structure if First Solar is replaced as operator. (Operating Risk: Midrange)
--Adequate Liquidity and Typical Debt Structure: The debt is fully amortizing at a fixed rate with typical project finance features such as a six-month debt service reserve and a minimum distribution test of 1.20x. The addition of the six-month O&M reserve provides additional liquidity over the life of the debt. (Debt Structure: Midrange)
--Debt Service Coverage Consistent with 'BBB' Rating: Under Fitch's rating case which incorporates one-year P90 output, a 7% solar bias reduction, a 1% availability reduction and a 10%-15% O&M stress, DSCRs are commensurate with the current rating at an average of 1.58x and a minimum of 1.50x. The amortization profile is slightly front-loaded, providing rising DSCRs under the Fitch rating case.
Rating Sensitivities
--A delay in project completion beyond six months that affects the commercial operation date of the project;
--Energy output or solar resource persistently below P90 projections;
--Operating costs exceeding a 10% increase above sponsor projections when combined with lower output.
Project Update
Fitch views positively the accelerated completion efforts by construction contractor First Solar with no change orders and overall costs in line with the original budget. To date, 375 MW of the total 586 MW of the Topaz project have been constructed and are online, representing construction that is roughly two to three months ahead of schedule. The project has been generating more than 3,000 MWh per day from the completed blocks with the next chunk scheduled to be completed in April 2014. With over 78% complete and 6.6 million of the 8.4 million total modules installed, the project should have sufficient cushion to meet the baseline schedule date of February 2015 as well as the guaranteed completion date of May 2015. The independent engineer has confirmed this progress and has stated that there are no material issues with regard to meeting the projected timelines with the funds available to the project.
Draws under the engineering procurement and construction (EPC) agreement are in line with the original pro forma and there have been no change order costs under the EPC agreement. A contingency amount of $4.3 million was used as recognition of the early turnover of the various blocks under the bonus structure with First Solar. Since no distributions are permitted until completion, the $15 million of additional revenues earned for early completion during 2013 remain in the operating account in order to help fund construction. Interest payments due during 2013 were paid from the construction budget, consistent with the original review.
Topaz is a 586 MW AC solar photovoltaic (PV) facility under construction on 4,900 project-owned acres in San Luis Obispo County, California. Topaz employs PV modules designed and manufactured by First Solar Inc. using commercially proven thin film cadmium telluride PV cell technology mounted at a fixed tilt of 25-degrees with no tracking risks.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);
--'Rating Criteria for Solar Power Projects' (Feb. 17, 2014).
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826786
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