S&P Global Ratings' two-notch ratings downgrade into junk status of Warren Buffett's huge 550-MW Topaz Solar Farm solar facility that supplies power to Pacific Gas and Electric Co., is one of the first visible knock-on effects of the utility's financial problems.
The credit ratings agency, which downgraded PG&E and its parent company PG&E Corp. to junk status on Jan. 7, said its downgrade from BBB- to B and the placing of Topaz Solar Farms on CreditWatch negative, is "capped" by its view of the credit quality of PG&E.
"Topaz Solar Farms receives all of its revenue from PG&E under a long-term power purchase and sale agreement," S&P Ratings said Jan. 10. "The CreditWatch negative listing reflects the increasing risk that we will downgrade PG&E by one or more notches over the next few months."
Such an action could spill over to Topaz. "Any degradation in PG&E's creditworthiness could lead us to downgrade Topaz," S&P Ratings said.
The ratings agency said that if PG&E Corp. files for Chapter 11, "this could, subject to it being a material adverse effect, trigger a cross default under Topaz Solar's financing documents unless the power contract is replaced within 90 days of the bankruptcy event."
Warren Buffett bought the Topaz project, along with its 25-year power purchase agreement with Pacific Gas & Electric, in 2009.
Buffett's MidAmerican Solar LLC brought the roughly $2.4 billion photovoltaic facility online in November 2014. It has often been described as the largest solar facility in the U.S., if not the world.
MidAmerican Solar is a business unit of Berkshire Hathaway Energy.
In separate but related actions on Jan. 11, S&P Ratings also downgraded the entity that owns the 412-MW Panoche Energy Center, a natural gas-fired plant whose output is also sold under contract to PG&E to B from BB due to the PG&E downgrade. Panoche is owned by the private equity firm Ares Owners Holdings LP. It also downgraded the operator of the 247-MW Crockett Cogeneration plant, whose output is under contract to PG&E until 2026, to B. The plant's primary owner is First Reserve Corp.
Clearway, Calpine also exposed
S&P Ratings first downgraded Topaz Solar's rating in November 2018 because of its contract with PG&E, raising concerns that other PG&E counterparties could be affected as well. On Jan. 9, S&P Ratings appeared to confirm those concerns, issuing a bulletin saying that PG&E's multi-notch downgrade poses risks to other long-term power suppliers.
It said that companies with material PG&E counterparty exposure, or cash flow available for debt service, or CFADS, include Clearway Energy Inc., NextEra Energy Partners, Atlantica Yield PLC, Apollo Infra Equity US Holdco and Calpine Corp.
Other companies with "smaller exposure," S&P Ratings said, include Pattern Energy Group Inc. and NRG Energy Inc.
"Our current view is that PG&E will likely continue to honor its contracts," S&P Ratings said in the bulletin. "As a result, we are not expecting any negative rating impact on these companies should PG&E's credit quality further decline."
California's aggressive renewables portfolio standard mandate cannot be met if investor-owned utilities start reneging on contracts, S&P Ratings said. In the "extreme stress scenario" in which PG&E provides no cash flow to these companies, S&P Ratings said it would not expect the performance for each to sustain their current rating level.
Stephen Byrd, Morgan Stanley's head of North American Utilities Research, said in an interview on Bloomberg TV Jan. 11 that, in the long term, canceling contracts could create a problem for California by driving up the costs for new solar, wind and energy storage projects and thus costing the consumer more.
In its investor note, S&P said that Clearway Energy, which is owned by Global Infrastructure Partners, is "the most exposed" to PG&E through its ownership or investment in the power plants including the 805-MW gas fired Marsh Landing Generating Station, 66-MW Alpine Solar facility and 250-MW California Valley Solar Ranch (High Plains II & III).
"We forecast that [Clearway's] financial ratios would deteriorate to 5x debt to EBITDA without PG&E's CFADS."
However, S&P Ratings went on to say that it expects the company to use its excess cash for debt reduction should such a situation arise.
Calpine has exposure to PG&E at its Geysers Unit 5-20 geothermal facilities, and the 306-MW Los Esteros Critical CC Plant and 648-MW Russell City Energy Center peaking facilities.
S&P Ratings noted, however, that debt at the Calpine projects that would experience impairment brought on by bankruptcy is non-recourse to Calpine.
Jeffrey Ryser is a reporter for S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.