MidAmerican Energy closed a $1.2 billion partial debt financing for the 550MW Topaz solar photovoltaic plant on 24 February. The deal is the largest solar financing in the US to close without a full or partial loan guarantee from the US Department of Energy. It is also one of the first widely distributed bond deals for a renewable project with construction risk without explicit government or sponsor guarantees.

Topaz will use alternating current thin film solar modules manufactured by First Solar, which developed and sold the project to MidAmerican on 31 January. It sells power to Pacific Gas & Electric (PG&E) under a 25-year power purchase agreement priced at more than $100/MWh. The utility could begin buying electricity once as little as 10MW of the plant, which is being built in 30MW blocks with the first scheduled to come online by the end of 2012, is completed. Topaz is located in eastern San Luis Obispo county, California.

The $850 million senior secured 144A bond issue priced at 379.9bp over 10-year US treasuries for an all-in interest rate of 5.75% and will mature in 2039. The coupon was significantly lower than the 7% on Terra- Gen’s Alta II-V bonds, which closed in July 2010, and the spread is in line with what could be achieved in the current bank market, but with the benefit of fixed-rate interest and a much longer amortisation period. Barclays Capital (left lead), Citi and Royal Bank of Scotland (RBS) ran the sale and were joined by co-managers Bank of Tokyo Mitsubishi UFJ, Lloyds, Mizuho and Royal Bank of Canada. The bookrunners are also providing $345 million in five-year letters of credit.

MidAmerican upsized the issue by $150 million from $700 million after it was 1.7x oversubscribed. The bookrunners received orders for about $1.2 billion from more than 60 investors and, according to reports, had interest from more than 100 during the roadshow. While this increased the issuer’s negative carry, it reduced the risk that adverse market conditions could affect a planned pari passu second senior issue of up to $430 million during the first year of operations.

The bonds received a Baa3 rating from Moody’s and a BBB- rating from both Fitch Ratings and Standard & Poor’s. These are based on MidAmerican providing $1.16 billion in equity to the project, which has remained the same even as the size of the bond issue increased. The average debt service coverage ratio is 1.55x and the minimum is 1.41x, according to Fitch.

Bonds are an increasingly viable source of debt financing for large renewables projects in the US. The DoE loan guarantee programme, which included a number of partially guaranteed solar and wind bonds, as well as the Topaz and Alta deals have helped bond investors become comfortable with the structures. The other key difference between Topaz and Alta, not to mention the bond deals that featured FIPP guarantees such as Caithness and Desert Sunlight, is that banks are only providing letters of credit, not term or cash grant bridge debt. Topaz had to do much more to deal with negative carry, making the contingent equity commitment from MidAmerican all the more important.

Investment grade sponsors will be able to guarantee their equity commitments while non-investment grade sponsors can use tools like letters of credit to back their equity contributions. Smaller renewables deals can be done in the private placement market. Chris Yonan, a director in project finance at Barclays Capital who worked on the Topaz bonds, says that he expects to see more bond issues for renewable energy deals and noted that the debt capital markets remain a “very attractive and deep source of financing” for such projects in the US.

First Solar originally planned to finance Topaz with a $1.93 billion partial loan guarantee from the DoE. RBS was the lender-applicant for the section 1705 FIPP application that received a conditional commitment from the federal agency in June 2011 but was unable to close before the 30 September deadline. The California Public Utilities Commission originally approved a 20-year PPA for Topaz in January 2009 but granted a fresh approval to the PPA in February 2010, after its term was increased to 25 years. PG&E awarded the offtake contract under its renewable portfolio standards solicitation in 2007. First Solar bought the project from OptiSolar in May 2009.

First Solar is the engineering, procurement and construction contractor as well as operations and maintenance provider for the project under a $1.9 billion fixed-price date-certain construction contract. Construction began in December 2011 and is expected to be complete by May 2015.

Topaz Solar Farms LLC

STATUS

Closed 24 February 2012

SIZE

$2.44 billion

DESCRIPTION

550MW solar photovoltaic plant, located in eastern San Luis Obispo county, California

SPONSOR

MidAmerican Energy

EQUITY

$1.16 billion

DEBT

$850 million senior secured bonds and $345 million in letters of credit (an additional $430 million in senior secured bonds are planned)

BOOKRUNNERS

Barclays Capital (left lead), Citi and Royal Bank of Scotland

CO-MANAGERS

Bank of Tokyo-Mitsubishi UFJ, Lloyds, Mizuho and Royal Bank of Canada

SPONSOR LEGAL Gibson Dunn

LENDER LEGAL Latham & Watkins EPC AND O&M CONTRACTOR First Solar