-- U.S. solar power generator Topaz Solar Farms LLC has
issued $850 million senior secured notes due 2039.
-- We are assigning our 'BBB-' rating to the issue.
-- The stable outlook reflects our assessment of current
construction and operations phase arrangements and counterparty
On Sept. 17, 2012, Standard & Poor's Ratings Services
assigned its 'BBB-' rating to project finance entity Topaz Solar
Farms LLC's $850 million series A senior secured notes due 2039.
The outlook is stable.
Topaz is constructing a 586 megawatt (MW) solar power
project in San Luis Obispo County, near Bakersfield, Calif. The
total project cost is about $2.44 billion, funded initially with
$850 million in notes and an equity commitment from indirect
parent MidAmerican Energy Holdings Co. (BBB+/Stable) for the
remainder, with the commitment reduced to the extent other
permitted senior secured debt is issued and cash from operations
prior to completion is earned.
Under the pro forma forecast, in early 2013 Topaz plans to
issue another $430 million in senior secured notes maturing in
2039. We include both debt tranches in our analysis. Topaz began
construction in December 2011 and plans to achieve operations in
blocks at various dates, but is scheduled to achieve substantial
completion in February 2015 and final completion in May 2015.
The project's power purchase and sale agreement (PPA) requires
commercial operation from 550 MW by Aug. 18, 2015, giving
several months of construction cushion.
Factors mitigating business risk are: -- A 25-year power
purchase agreement (PPA) with investment-grade utility offtaker
Pacific Gas & Electric Co. (PG&E; BBB/Stable/A-2), with
performance requirements that -- Topaz will likely be able to
meet, -- A proven panel technology, -- A solar resource that is
fairly well characterized, -- Construction under an engineering,
procurement, and construction (EPC) -- contract with proven
contractor First Solar Inc. with incentives to -- achieve
completion and with a contingency equal to 44% of non-fixed --
costs, and -- Low operational and maintenance (O&M) risk
While the PPA contains well-above-market prices, the
California Public Utilities Commission has approved it and
related transmission upgrade costs, and PG&E needs green energy
from Topaz to meet California's aggressive renewable portfolios
standard. First Solar's cadmium telluride thin film panels are a
proven technology in our view, although with the drawback that
the historical performance record of about 15 years is well
short of the PPA term, which introduces the risk that panel
performance may fall below expectations in the final third of
the PPA's term.
We assume a 0.9% annual degradation in our rating. The solar
resource has a solid backing, including years of data collected
at a nearby site. However, we analyzed cash flows under a P90
(one-year) probability of exceedance to account for potential
variations. We note that performance at the P99 (one-year) level
is above what we typically see for resource risk projects.
First Solar is building Topaz and providing the panels under
a date-certain, fixed-price EPC contract that has some penalty
and liquidated damages provisions to keep First Solar motivated
to perform. There are several layers of milestone payments that
should help to ensure that the project keeps on schedule. The
construction is fairly simple--the modules are built in advance
and are merely assembled at the site. The PPA and EPC incentive
regimes are well aligned. First Solar will also perform O&M for
a fixed fee with availability incentives.
Adding to business risk at the rating category is reliance
on First Solar, which, as a firm in the highly competitive solar
panel manufacturing space, has a credit profile below Topaz's,
in our view, that could worsen over the three years of
construction. However, we conclude that Topaz can replace First
Solar and meet initial debt service and PPA requirements, and
so, under our counterparty criteria, we can rate Topaz above our
assessment of First Solar's creditworthiness. Topaz will issue
debt in two tranches, $850 million now and $430 million in early
2013, and we have factored the future tranche into the rating.
MidAmerican will contribute to Topaz as needed to fund
construction up to a cap of $2.44 billion--which is the total
estimated project cost, not just the EPC amount--with
obligations reduced to the extent Topaz issues the second
tranche of debt and earns the expected cash from operations
before full commercial operations under the PPA as blocks come
on line over time. This equity commitment meets our guarantee
requirements and ranks equal to MidAmerican's senior unsecured
We conclude that equity will be provided to the project as
needed in good and bad times and covers the modest risk that
revenues from operations during construction will be inadequate.
Importantly, we would view a failure of MidAmerican to
contribute equity to Topaz on demand for any reason as a
selective default by MidAmerican. Under the amortization
profile, average debt service coverage ratios are roughly in the
1.3x to 1.4x range, depending on the stress and, in concert with
the other business and financial risk exposures, adequate for
Compared with similar facilities, the sensitivity variation
is modest. Topaz is a single-purpose entity with adequate
operating and debt incurrence restrictions, but is not
bankruptcy remote from higher rated MidAmerican. The cash
management structure is essentially standard, with a trustee
collecting and allocating revenues according to an appropriate
waterfall and with distributions subject to forward and backward
looking tests, with the forward test stronger than peers.
However, MidAmerican can borrow funds from the construction
account at any time in exchange for a demand note--a mechanism
that is atypical of project financing and unfavorable to project
credit. Again, a failure of MidAmerican to repay borrowings on
demand would be a selective default by MidAmerican. MidAmerican
bought Topaz from First Solar, and Topaz is part of
MidAmerican's initial foray into the solar power market. To
mitigate risk, MidAmerican relies on First Solar to build and
maintain the project. First Solar is the world's second-largest
provider of such services.
We think MidAmerican has the ability to manage First Solar
to achieve completion given its extensive record of utility
scale construction management and deep experience with wind
power projects. Liquidity Topaz has a $345 million letter of
credit facility to provide credit support required under the PPA
and transmission build agreements with PG&E for permitting
obligations, and to provide debt service and O&M reserve
requirements. The debt service reserve is sized to the highest
six months obligation over a three-year look-ahead, an
above-average test. The O&M reserve is funded to expenses six
months forward. Outlook The outlook for the debt rating is
stable based on our assessment of current construction
arrangements and counterparty dependency assessments.
An improvement in the rating is not likely during
construction, even if counterparty ratings increase, based on
the construction, business, and financial risks. After
construction, an improvement in the rating would require comfort
that performance would well exceed our current expectations over
the debt's tenor. Factors that could lower the rating are major
construction problems that seem remote presently or a decline in
the creditworthiness of key counterparties.
Most exposure exists with First Solar; if our assessment of
its creditworthiness declines substantially, we could lower the
rating on the project based on our counterparty criteria.
Related Criteria And Research -- , Dec. 20, 2011 -- Key
Credit Factors: Methodology And Assumptions On Risks For --
Utility-Scale Solar Photovoltaic Projects," Oct. 27, 2009 -- ,
Sept. 18, 2007 Ratings List New Rating Topaz Solar Farms LLC
Senior Secured BBB-/Stable