Fitch Affirms Topaz Solar Farms LLC Senior Notes at 'BBB'; Outlook Stable
KEY RATING DRIVERS
The 'BBB' rating affirmation and Stable Outlook reflect completion of the project within budget and ahead of schedule, with stable operating performance to date. The long-term financial profile is anchored by a fixed price power purchase agreement (PPA) with an investment grade counterparty as well as modest leverage, resulting in a debt service coverage ratio (DSCR) profile consistent with the 'BBB' rating level.
Long-Term Revenue Contract Secures Cash Flows - Revenue Risk (Price): Midrange
The revenues of Topaz are anchored by an investment grade utility off-taker, Pacific Gas & Electric Company (PG&E, 'BBB+'; Outlook Stable), under a long-term, fixed price power purchase agreement (PPA) that provides a one-month cushion beyond the expected debt maturity.
Stronger Resource Assessment - Revenue Risk (Volume): Stronger
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, average debt service coverage ratios (DSCR) average 1.51 times (x) with a minimum of 1.40x, providing ample cushion above 1.0x coverage, commensurate with the current rating.
Operating Reserve and Contingency Mitigate Cost Risk - Operating Risk: Midrange
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 the Fitch 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.
Adequate Liquidity and Typical Debt Structure - Debt Structure: Midrange
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 a six-month O&M reserve provides additional liquidity over the life of the debt.
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.
Peer Comparison
Topaz Solar Farms rating case financial profile is consistent with Fitch's investment grade criteria and higher than Solar Star Funding, LLC's ('BBB-'/Stable Outlook), which has an average rating case DSCR of 1.32x.
RATING SENSITIVITIES
--Negative: Energy output or solar resource persistently below P90 projections;
--Negative: Operating costs exceeding a 10% increase above sponsor projections when combined with lower output;
--Positive: Stable operating and financial performance consistently above base case projections.
SECURITY
Security for both series A and B of the rated debt is a first-ranking security interest in all of the assets of the issuer including: equity interests, real property, personal property, accounts receivable, Project accounts, rights under all Project contracts and equity contribution agreements, permits, letters of credit and other credit support, intellectual property, and all of the proceeds of the foregoing.
CREDIT UPDATE
Completion risk has been removed as a key rating driver for Topaz due to the fully operational nature of the project following early completion under the PPA. The project reached substantial completion on Nov. 6, 2014, roughly six months head of the EPC guaranteed date. The project reached the commercial operation date under the PPA with PG&E in October 2014 following the turnover the final block of the 550 MW project. Final completion was reached on Feb. 28, 2015.
Fitch views positively the completion of the project within budget and only minor draws on the contingency. Less than 10% of the \$90 million contingency funds will be drawn to fund installation of a security system and bonus payments to First Solar for early completion of the project. The IE has confirmed that there is sufficient liquidity to fund the remaining final completion costs. Overall, the project's cumulative draw amounts remain in line with the budget and sufficient funds remain to successfully achieve final completion within the anticipated timeline.
Operations to date indicate strong performance at Topaz after accounting for the increased generation as a result of early completion. The project has been generating more than 3,000 MWh per day with availability of 99.5% since achieving commercial operation on October 27. Total insolation at the site for fiscal year 2014 exceeded modelled insolation at 2,356.1 kWh/m2 compared to 2,198.7 kWh/m2. During the first two months of 2015, insolation totalled 309 kWh/m2 compared to 245.4 kWh/m2 for the same modelled period.
Total production for 2014 was more than 8% above modelled at roughly 1.1 GWh while year to date 2015 is 25.1% above modelled generation at 182,607 MWh. The increase compared to original projects is due largely to the early turnover of power blocks at the project site, however, insolation remains above budget as well. The project has experienced moderate curtailment by PG&E but is reimbursable under the PPA and not a risk to the project. Revenues earned to date have been deposited into the construction accounts and will flow through the waterfall to equity once all requirements have been met.
TRANSACTION SUMMARY
Topaz is a 550 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.
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