Fitch Ratings has affirmed the ‘BBB-‘ rating on Solar Star Funding, LLC’s (Solar Star) $1.325 billion senior secured notes due June 2035, and describes the rating outlook as “Stable.”
Owned by Berkshire Hathaway Energy, Solar Star is a portfolio of two adjacent crystalline, single-axis tracking photovoltaic plants totaling 586 net MW at the point of interconnection. Solar Star 1 and Solar Star 2 represent 310 net MW capacity and 276 net MW capacity, respectively.
According to Fitch, the rating affirmation is based upon the project’s completion within budget and ahead of schedule with stable operating performance to date. The rating is supported by 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.
KEY RATING DRIVERS
Revenue Risk – Price: Midrange
Stable Contracted Revenues: 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
Sufficient Solar Resource: Total generation output in Fitch’s 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.
Operation Risk: Midrange
Proven Technology and Experienced Operator: 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
Conventional Debt Structure: The debt structure is typical for project financings with fully amortizing fixed-rate debt, a standard equity distribution test, and additional leverage controls.
Stable Initial Financial Performance
Base case debt service coverage ratios (DSCR) average 1.51x with a minimum of 1.44x. Fitch’s rating case includes increased expenses and reduced energy output, resulting in an average DSCR of 1.32x with a minimum of 1.31x, metrics that are 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’/Outlook Stable), which has an average rating case DSCR of 1.58x.
Negative – Inadequate Operating Results: Energy production persistently underperforming original projections or expenses persistently higher than the forecast that result 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.
Completion risk has been removed as a key rating driver for Solar Star due to the fully operational nature of the project following early completion under the PPA. The project reached commercial operation (COD) on July 1, 2015, approximately four months ahead of scheduled completion, and total construction costs remained approximately $60 million under budget. The completed project’s capacity totals 586 MW of capacity, providing an additional 7 MW of capacity compared to design specifications. Solar Star is permitted to sell the additional capacity under the two PPAs and large-generator interconnection agreements.
Operating performance was strong in 2015 with plant availability at or above 99% every month since COD. Energy production for the six months following COD has exceeded Fitch’s base case and rating projections by 5% and 12%, respectively. Actual monthly generation in 2015 since COD was above Fitch’s base case forecast every month except for the month of October as a result of inclement weather conditions. Higher energy production compared to Fitch’s projections is largely due to the project’s early commercial operation.
Fitch maintains its original base and rating case forecasts, which projects metrics supportive of the current rating, due to the project’s short operating history. Fitch will assess whether changes to financial stresses are warranted based on a more extensive history of actual energy production and operating costs. The additional 7 MW or 1.2% of capacity is not factored into Fitch’s financial analysis since the debt was sized to original design specifications, but this increased capacity could contribute modestly to additional cash flow for the project. 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.
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.
© 2016 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.