NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to Solar Star Funding, LLC's (Solar Star) $325 million series B senior secured notes due June 2035. Financial close for the series B notes is scheduled for March 12, 2015. The series B notes principal increased to $325 million from $315 million since Fitch issued its expected rating due to lower financing costs, though the financial profile remains the same. In addition, Fitch affirms Solar Star's existing pari passu $1 billion series A senior secured notes, also due June 2035 at 'BBB-'. The Rating Outlook on both series is Stable.
KEY RATING DRIVERS
The ratings reflect stable cash flows anchored by contracted long-term revenues with an investment grade counterparty, conventional technology and expected financial performance consistent with an investment grade rating. The rating affirmation is based upon the project's continued construction progress, which is on track to reach the commercial operation by July 2015, ahead of the completion contractor SunPower's guaranteed substantial completion date of Oct. 31, 2015.
Completion Risk - Stronger
SunPower is an experienced contractor, as evidenced by its completion of other large-scale projects. The contractor's construction obligations are backed by liquidity to absorb potential delay penalties. Completion risk is mitigated by the project's advanced stage of construction and an 11-month scheduling surplus before the offtake agreement's completion deadline.
Revenue Risk (Price) - Midrange
Revenue risk is low with annually escalating, fixed-price, 20-year power purchase agreements (PPA) with Southern California Edison (SCE, rated 'A-'; Outlook Stable by Fitch). The energy production requirement is consistent with the project's capabilities, and PPA termination risk is low.
Revenue Risk (Volume) - Midrange
Total generation output in Fitch's combined stress rating case is based on a one-year P90 estimate of electric generation to mitigate the potential for lower-than-expected solar resource. The project can meet debt obligations under a one-year P99 generation scenario.
Operating Risk - Midrange
Crystalline technology has a long operating history, which mitigates plant performance risks. SunPower, as the plant operator, has a track record of high plant availability. Long-term agreements support routine and major maintenance needs. Fitch's financial analysis incorporates operating cost increases to mitigate unforeseen events including contractor replacement risks.
Debt Structure - Midrange
The debt structure is typical for investment-grade project financings with fully amortizing fixed-rate debt, standard equity distribution test, and additional leverage controls.
Adequate Financial Performance
Base case debt service coverage ratios (DSCR) average 1.51x with a minimum of 1.44x. Fitch's rating case of increased expenses and reduced energy output results in an average DSCR of 1.32x with a minimum of 1.31x, supportive of the rating.
Peer Comparison- Solar Star's projected rating case financial profile is consistent with Fitch's minimum investment grade criteria but lower than Topaz Solar Farms ('BBB'/Stable Outlook), which has an average rating case DSCR of 1.58x.
Negative - Completion Delays: A delay in project completion beyond the expected commercial operation date of Oct. 31, 2015 could result in negative rating action.
Negative - Inadequate Operating Results: Energy production persistently underperforming original projections or expenses persistently higher than the forecast resulting in DSCRs below 1.30x would result in a downgrade.
Positive - Demonstrated stable operating and financial performance consistently above base case expectations may result in a rating upgrade.
Security for the series A and B notes is a first-ranking priority over substantially all of the assets of the issuer and subsidiaries including real property, project accounts and pledge of equity interest.
Completion risk is significantly decreased based upon the project's advanced stage of construction, as well as the adequate funding and scheduling allowance it has to achieve commercial operation. As of January 2015, the contractor, SunPower, is ahead of schedule with roughly 97% complete compared to the guarantee of 86%. Of the total 579 MW design capacity, 495 MW have been installed, delivered and tested. Another 24 MW are in the testing phase and 60 MW are currently being installed. Moderate performance interruptions to tracker installations are manageable, as SunPower is absorbing the cost of additional unplanned work to fortify the trackers. Favorably, the independent engineer (IE) has opined that the modifications can be accomplished by no later than the guaranteed completion date. Substantial completion testing for the plant will occur upon satisfactory completion of the remaining construction activities at Solar Star 1 (SS1) and Solar Star 2 (SS2).
SS1 is 94% complete and SS2 is 99% complete based upon the IE's assessment. For SS1, SunPower completed approximately 224 MW of the 309 MW of design capacity. The remaining two blocks of 84 MW are estimated to be completed by May 2015, well ahead of the guarantee schedule. SS2's design capacity of 270 MW is fully installed and ahead of schedule with minor civil works remaining. Management reports that through January 2015, Solar Star has been operating at greater than 99% availability and generated $54 million in pre-completion cash flow, which is used to offset the sponsor's equity.
SunPower took steps to install a stabilizing mechanism (dampers) to resolve a few incidents of bending trackers under high, sustained wind conditions, which could modestly reduce energy production. While management reports the issue affected a few trackers (less than 0.2% of the plant), SunPower installed the dampers on trackers throughout the plant as a supplemental measure. There is no additional cost to the project as SunPower is absorbing the estimated $8 million cost of the modifications. SunPower field-tested the dampers and the IE has confirmed that the dampers should mitigate the tracker bending. Installation is expected to be fully completed by June 30, 2015, though SunPower has four months scheduling allowance between the July 1 expected completion date and the October 31 guaranteed completion date in the event of unforeseen delays.
Unspent funds totaling approximately $632 million (including $215 million in retainage) are primarily to support remaining direct construction activities ($471.6 million), financing and development costs ($76 million), and contingency ($84.4 million). The sponsor will draw about 11% of the contingency fund for contractor bonus payments, to enhance security with additional cameras and to construct a secondary building for equipment storage, and for additional staff. The progress of the construction activities has no impact on the project's rating, as the activities are supplemental and unrelated to its commercial operation.
Solar Star's projected financial profile remains consistent with the existing rating, which already considered the issuance of additional pari passu debt of approximately $281 million. The increase to $325 million for series B is due to lower than expected financing costs. Solar Star's debt is sized to 579 MW of capacity, though the completed project may result in 586 MW of capacity (310 for SS1 and 276 for SS2) as permitted under the PPA and large-generator interconnection agreement. The potential additional 7 MW or 1.2% of potential capacity is not factored into the financial analysis, but could contribute to additional cash flow.
Fitch's rating case financial analysis includes a combination of one-Year P90 electric generation, a 10% increase in costs, reduced output, and accelerated panel degradation resulting in an average DSCR profile of 1.32x and a minimum of 1.31x.
Total projected expenses have been reduced modestly by an average of 4% compared to Fitch's prior review based upon management's refinements to insurance, taxes, and sponsor overhead costs. Long term, these costs could demonstrate some variability, and Fitch has analyzed the project's sensitivity to operating cost increases. The project's cash flow remains resilient to potential cost stresses as a 10% increase reduces the average DSCR by only two basis points and the project could withstand a 205% increase in costs and still meet debt obligations, as reflected in a breakeven DSCR of 1x. Cash flow is more sensitive to, yet remains resilient to, reductions in generation output. A 1% reduction to total electric generation output reduces the average DSCR by two basis points and the project could withstand an output reduction of 29.5% and still achieve breakeven DSCRs.
Solar Star is designed to be a net 579 MW alternating current crystalline photovoltaic project and is currently under construction. The proceeds from the issuances will be used to fund a portion of construction, start-up, and transaction financing costs. Solar Star is owned by Berkshire Hathaway Energy Company ('BBB+/Stable Outlook).
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);
--'Rating Criteria for Solar Power Projects' (Feb. 27, 2014).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Solar Power Projects (Utility-Scale Photovoltaic, Concentrating Photovoltaic, and Concentrating Solar Power)