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

DBRS Limited (DBRS) confirmed the rating of TS Energy Italy S.p.A. (the Issuer) at BBB (low) with a Stable trend on the Senior Secured Notes (the Notes). 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 (PV) 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 Project benefits from feed-in-tariff contracts (FiT Contracts) with Gestore dei Servizi Energetici 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 the sovereign rating of the Republic of Italy (Italy; rated BBB (high), Stable by DBRS). 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 (WA) 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 2017 (January to December) was 53.046 gigawatt hours (GWh), which is 3.0% above the P50 target of 51.5 GWh and 11.2% above the P90 rating case target of 47.7 GWh. Revenue reached EUR 10.9 million, which was approximately 10% below the P50 revenue target and 2.9% above the P90 target. (Revenue is on a cash basis. GSE payment mechanism is such that installations are paid monthly based on 90% of estimated energy production, with a true-up to actual annual energy production paid by June 30 of the following year. As such, cash basis revenue differs from revenue on the financial statements.) 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. For 2017, the Project achieved a debt service coverage ratio (DSCR) of 2.13 times (x), compared with 1.64x in the rating case forecast, because of higher production and revenue as well as controlled expenses. Operating expenses were EUR 2.5 million, which is 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. In addition, the SPVs have a VAT credit in the range of EUR seven million, which now offsets the various tax payments, leading to higher than expected cash flow available for debt service.

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 (i.e., efficiency), certain costs and market electricity prices. The rating is constrained by the credit strength of the off-taker, GSE, which in turn is directly related to the sovereign rating of Italy. DBRS may take a positive rating action if the sovereign rating of Italy is upgraded to A (low). 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 the sovereign rating of Italy is downgraded to below BBB (high), which would have an impact on the credit strength of GSE.

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.