A New Jersey solar project that was envisioned as a national model for public-private partnerships has been clouded with legal woes, but recent settlements could bring it back into the sunlight.
In 2011, $88 million in bonds were issued to finance solar panels on public buildings in Morris, Somerset and Sussex counties. The project eventually was grounded by cost overruns and lawsuits entangling the counties, the developer, SunLight General, and contractor, Power Partners Mastec.
The three counties recently accepted settlements for multiple lawsuits; Sussex and Somerset counties collectively plan to borrow $15.2 million to fund their part of the settlement, to get the projects back on track, according to Stephen Pearlman, special energy counsel for the three counties. Morris County will make its $7 million settlement payment from surplus funds.
The bonds were issued by the Morris County Improvement Authority and Somerset County Improvement Authority.
"This was a very unique way of doing a public project," said Irfan Bora, a professor of government accounting at the Rutgers University Business School. "The rest of the state was looking at this as a model to finance renewable energy projects."
The project's "Morris model" was designed with the expectation that revenue from electricity generated by the solar panels would pay off the debt issued to fund the solar installations.
The venture has been hampered by a market decline for solar-energy tax credits soon after the bonds were issued, leading to mounting costs followed by legal disputes, which included SunLight and Mastec disagreeing over payments that were owed for completed work. The solar projects were mostly competed in Somerset County, but about half the work remains in Morris and Sussex.
SunLight General Somerset Solar, LLC failed to make scheduled lease payments, according to material events notices the Somerset authority filed on the Municipal Securities Rulemaking Board's EMMA systems. The Morris authority, which also issued bonds for Sussex County, reported "events of default" by the lessee.
All the event notices emphasized the counties' guarantees of the bonds, and that the counties are making scheduled debt service payments pursuant to those guarantees.
The settlements are not yet reported on EMMA.
Despite obstacles the Morris model has encountered, bondholders are not at risk, according to Moody's Investors Service. The ratings agency issued a report last August saying that Morris, Somerset and Sussex counties are well-positioned to pay bondholders since they have sufficient liquidity. Morris and Somerset are rated Aaa while Sussex is Aa2.
"The bonds are guaranteed by the counties and the authorities are still very well positioned to make good on those guarantees," said Moody's analyst Josellyn Yousef. "The incremental amount of debt service shouldered should be quite modest."
Pearlman said that lessons learned over the last four years will help translate to the public finance model used for these solar projects working well in the future. He said Sussex and Somerset are committed to completing outstanding projects as soon as possible. Morris officials are determining whether to finish their solar developments or use the funds to take care of settlement payments.
"The model is still sound, but any time the public and private sectors get together for a P3 there are risks," said Pearlman. "It took a while to resolve itself, but I think the essence of the model holds and you can structure around these situations in the future."
Bora is concerned that the solar project delays from legal and market troubles have soured a vision that had much promise when it was first unveiled. He expects other municipalities in New Jersey and across the country to be more cautious when committing to a renewable energy P3 concept because of the challenges faced from the Morris model.
"I would think people will look at the difficulties that have arisen and they will consider this before they use these financing models," said Bora, a former chief financial officer for the New Jersey Meadowlands Commission. "It's very unique and forward looking, but it shows you what can happen when the market changes. Some of the project economics changed and they couldn't make it work."
While P3s can often encounter difficulties, renewable energy projects are not more at risk than other public financing initiatives, said Kim Magrini, an associate at Philadelphia-based law firm Ballard Spahr LLP. Magrini, who represents municipalities in P3 and other public finance transactions, has developed knowledge of green financing projects since arriving at Ballard Spahr in 2011.
"There is always an inherent risk in project finance due to many unforeseen factors, including cost overruns and contractual disputes," said Magrini. "However, these types of risks are not necessarily more prevalent with 'green' bonds over other types of financings and should not be seen as a deterrent for other public green initiatives."
The settlement in Somerset County will allow two of its remaining solar projects to move forward at the Bridgewater Township Municipal Complex and the Warren Township Public Works Facility. The county had issued a guarantee not to exceed $52 million in debt when the project was first authorized in 2011, but that number is now reduced to $35.19 million as a result of the settlement. A $23.6 million arbitration award entered against SunLight last year will be paid for utilizing existing project funds combined with a $6.75 million contribution from Somerset County, which will be financed over the life of the solar developments.
Somerset County Administrator Michael J. Amorosa said the county has consulted with the State Local Finance Board and with Moody's to ensure that the settlement can be achieved without any negative impact to its triple-A ratings. Somerset County officials estimated that the solar projects will help reduce electricity costs around 60% or $19 million.
"We were concerned that the arbitration award would jeopardize our completed solar-energy projects," said Amorosa, who also chairs the Somerset County Improvement Authority. "We therefore made a cost-benefit decision to end the potentially expensive continued litigation in favor of a global settlement."
Yvette Dennis, a senior director in Fitch Ratings' Global Infrastructure and Project Finance Group, said the Morris model delays could serve as a lesson for municipalities about challenges taking on renewable energy projects but does not expect it to deter bond investors since they are not at risk of losing out on debt repayments.
"Bond investors are hungry for opportunities that invest in renewable energy development," said Dennis, who previously served as a director in Fitch's Public Finance Group with a focus on municipal electric and water utilities. "They are open to making these types of transactions work."
Moody's senior analyst Lisa Heller also said enthusiasm for green projects in the bond community remains strong nationally.
"We have seen more interest for environmentally-focused projects," said Heller. "More municipalities are using the green bond approach to gain more interests for these projects."