NextEra Energy Resources has closed a C$171.8 million ($173 million) bond financing for its operational 40MW St. Clair solar photovoltaic plants in Ontario – the first Canadian bond deal for PV assets. RBC led the issue, which closed on 21 September, and attained one of the highest-ever unenhanced ratings for a PV plant, when DBRS rated it BBB. First Solar developed the project, is its panel supplier, and at one stage planned to include the projects in a US Ex-Im backed bond financing.

The inclusion of a degradation reserve in the financial structure was key to the BBB rating. The financing assumes there will be linear, stable degradation in the First Solar panels. But if the degradation exceeds.8% in a year – a conservative percentage, according to observers – the reserve will be available to fix or replace panels, and NextEra also would be expected to make a warranty claim against First Solar. The reserve is essentially a shadow warranty and comforted investors worried that utility-scale PV has a limited track record in North America.

Issuer St. Clair Holdings owns two operating 20MW plants located in the Ontario township of the same name. The assets have outperformed their base case forecast, according to DBRS. They use First Solar’s cadmium telluride PV thin-film panels.

The rating also benefited from a minimum debt service coverage ratio of 1.4x and above-market power prices under the Ontario Power Authority’s renewable energy standard offer programme. The OPA is the buyer of the two plants’ output under 20-year power purchase agreements. OPA is paying C$0.42 per kWh until the February 2032 maturity of the PPAs.

RBC was the sole bookrunner and sole lead, while TD, Scotiabank and CIBC were agents. RBC priced the issue on 18 September for a coupon of 4.881%. It has a tenor of 19 years, with a roughly 10-year average life. The C$171.8 million issue of senior secured notes represents 88.2% of the assets’ capital structure, and bond proceeds will principally be used to repay a corporate NextEra bridge loan that backed its acquisition of the two from First Solar in February.

NextEra agreed to buy the two plants about a year before the closing of the bond deal, and contemplated several financing options, including an unrated private placement.

At least one alternative was on offer but later abandoned: a private placement guaranteed by US Ex-Im. This structure would have involved a C$410.4 million Canadian issue for 90MW of First Solar-developed projects – the St. Clair assets and another 50MW that First Solar planned to sell to GE Energy Financial Service and Alterra Power. A holding company would have made 18-year loans to each project company with proceeds of the US Ex-Im-guaranteed bonds.

NextEra, however, decided to finance the acquisition on-balance sheet, as is common for cash-rich US utilities and their unregulated subsidiaries. The buyers avoid paying a premium for shifting construction risk to lenders, typically the risk for which project lenders charge the most. And that assumes lenders will touch a newer technology at all. Such a strategy enables well-capitalised sponsors to push through developments or acquisitions without suffering from the vagaries of credit markets.

At commercial operations these sponsors will then increase the leverage on the acquired assets by refinancing the balance sheet funding, redeploying this on their next wave of projects in development. The assets involve no construction risk, which institutional investors cannot even be paid to assume, and may have established a limited record of performance. Sponsors have toyed with including delayed draw, or delayed issue, tranches in greenfield deals, but the structuring can be cumbersome and often requires educating potential investors.

For NextEra, St. Clair was the right asset to go to market without enhancement. The debt size is higher that the C$100 million standard minimum for the Canadian capital markets. Tenors are vastly longer in the bond market than in the bank market. Bond pricing has become competitive against bank debt, and does not require additional costly hedges against interest rate risk. And institutional investors in the bond and private placement markets have already financed or helped finance projects using First Solar technology, including financings for the Desert Sunlight and Topaz photovoltaic projects in California.

MidAmerican Energy, owner of the 550MW Topaz PV project in Central California, won BBB- ratings from Fitch & Standard & Poor’s for its $1.2 billion issue, which closed on 24 February 2012. The minimum DSCRs were comparable – 1.41x for Topaz, according to Fitch – but the Topaz bond deal incurred construction risk. St. Clair did not.

St. Clair Holding, Inc
STATUS
Financial close 21 September 2012
SIZE
C$171.8 million ($172.9 million)
DESCRIPTION
Two operational 20MW solar photovoltaic projects in St. Clair, Ontario
SPONSOR
NextEra Energy Resources
LEAD MANAGER AND BOOKRUNNER
RBC Capital Markets
AGENTS
TD, Scotiabank and CIBC
SPONSOR LEGAL COUNSEL
McCarthy Tétrault
LENDER LEGAL COUNSEL
Stikeman Elliot