Project Notes

Project notes are a short-term debt obligation issued to finance a project or endeavor past a specified milestone, or to fund multiple small projects on a short-term basis. Project notes are often used by municipalities to fund urban renewal programs and are guaranteed by the U.S Department of Housing and Urban Development.

Occasionally, organizations need funding for short-term projects that require one-time injections of cash to finance. Rather than issue long-term debt or seek alternative financing arrangements, short-term notes can be issued with the specific project written into the indenture so that the funds must be used for that purpose.

As an example of project funding, MidAmerican Energy Holdings issued bonds to finance its 550-megawatt Topaz Solar Farm, which was built by First Solar, and valued at more than $2 billion. The project began in 2011 and was completed in November 2014. During the construction, MidAmerican issued $1.1 billion of bonds in two rounds of funding. This project marked the first instance in several years that a renewable energy project tapped the capital markets for project finance, and it is the largest project ever to do so.

At the time of issuance, the Topaz bonds carried an interest rate of 5.75%, nearly 3.8% higher than U.S. Treasury Bills, which was an attractive yield in a low-interest environment. The bonds, which will reach maturity on Sept. 30, 2039, started paying out on March 30, 2012, as phases of the project were completed, and have continued to pay out on a semi-annual basis.

Investors showed quite a bit of interest in MidAmerican's bonds. At a time of the first issuance, one investment manager told The Wall Street Journal that 60 of its accounts ordered a total of $1.3 billion in project bonds, with about 90% of the orders from insurance companies.

The strong demand led MidAmerican to increase the original amount of bonds offered from $700 million to $850 million in the first offering, and then later issued an additional $250 million in bonds.

This was the first 500-megawatt plus solar farm to come on-line in the U.S. and the largest solar plant on-line in the world. The project includes nine million solar panels across 9.5 square miles in San Luis Obispo County on California's Carrizo Plain. Pacific Gas and Electric Co. purchases electricity from Topaz under a 25-year agreement. The plant is expected to provide enough renewable energy to power about 160,000 average California homes.