DBRS Confirms Rating of BBB (low) with Stable Trend of TS Energy Italy S.p.A. Senior Secured Notes

DBRS Limited (DBRS) confirmed the rating of BBB (low) with a Stable trend to the Senior Secured Notes (the Notes) issued by TS Energy Italy S.p.A. (the Issuer). The fixed-rate Notes of EUR 40.0 million will be fully amortized by June 30, 2032. The Notes were issued in August 2016 and are the first investment-grade-rated project bond for renewables in Italy. The Issuer owns 39 solar photovoltaic power generation installations (the Project) with a total electric capacity of 43.285 megawatt-peak (MWp; direct current capacity). The individual installations commenced operations between August 2012 and June 2013. The installations are located across 25 sites in Sicily, Italy; Sardinia, Italy; and on mainland Italy. One-third of the capacity is ground-mounted, and two-thirds are located on rooftops in 12 military barracks and on numerous commercial buildings.

The Project benefits from feed-in-tariff contracts (FiT Contracts) with Gestore dei Servizi Energetici GSE S.p.A. (GSE) under the Quarto Conto Energia (Conto 4) incentive program. DBRS does not rate GSE but views its credit strength as linked to Italy’s sovereign rating. (DBRS rates the Republic of Italy’s Long-Term Foreign and Local Currency Issuer Ratings at BBB (high) with a Stable trend.) The FiT Contracts are all 20 years in duration and expire between two and 12 months after the bonds have fully amortized. The contracts provide fixed, non-indexed prices covering the Project’s entire production capacity. The energy price for each installation ranges from EUR 143 per megawatt hour (MWh) to EUR 264 per MWh with a capacity weighted average of approximately EUR 200 per MWh. In addition to the FiT Contract revenue, 24.3 MWp of the installed capacity earns market-priced revenue. DBRS expects the market-priced revenue to account for 10% of projected revenues and remain stable, based on conservative assumptions. Overall, the Project does not have a material reliance on the market power prices in Italy.

The Project’s performance for the full year from mid-November 2016 to mid-November 2017 was 52.3 gigawatt hours (GWh), which was just above the P50 target of 51.5 GWh and approximately 10% above the P90 rating-case target of 47.7 GWh. Revenue reached EUR 10.2 million, which was approximately 10.5% below the P50 revenue target and slightly below the P90 target. The reason for the discrepancy in production compared with the revenue is that GSE estimates and pays 90% of the payment for the year based on the production of the previous year, while 10% is paid in June of the following year, together with the true-up balance based on actual production. Therefore, 2017 revenue appears lower because it was estimated based on a lower 2016 production, but 2018 revenue will be higher because it will be based on a higher 2017 production. Nonetheless, for the 12-months period, the Project achieved a debt-service coverage ratio (DSCR) of 1.73 times (x) compared with 1.64x in the rating-case forecast. Operating expenses were EUR 3.1 million, which was slightly below the P90 rating case target for 2017 of EUR 3.2 million, partly due to a reduction in the municipality tax for green energy producers under a late 2016 financial law that was implemented in 2017.

The rating is supported by a robust financial profile and structure, which generates a relatively steady DSCR throughout the rating-case forecast period with a minimum of 1.64x and an average of 1.70x. The DBRS rating-case scenario makes conservative assumptions on availability, performance ratios (efficiency), certain costs and market electricity prices.
DBRS may revise the rating case and take a positive rating action in the future if the Project continues to produce on a sustainable basis: (1) electricity production at or above the degradation-adjusted P50 levels; and (2) better-than-expected financial results measured primarily by DSCR, and the sovereign rating of Italy improves to A (high). A negative rating action could result if the Project underperforms due to persistent operational issues, is affected by a detrimental action by the government, such as a change to the FiT incentives or due to a downgrade of the sovereign rating of Italy to below BBB (high), which would impact the credit strength of GSE and therefore that of the Project.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is Rating Solar Power Projects, which can be found on dbrs.com under Methodologies

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.