OREANDA-NEWS. Fitch Ratings has placed Solar Star Funding, LLC's (Solar Star) 'BBB-' $1.323 billion senior secured notes due June 2035 on Rating Watch Negative.

KEY RATING DRIVERS

The Rating Watch Negative on the bonds reflects the impact of the second outage experienced at the project. Fitch expects a 2016 base case DSCR of 1.13x due to revenue shortfalls following two severe outages from transformer failures. The replacement transformer has been procured and installed with a scheduled in-service date of July 27, 2016. Resolution of the Negative Watch is contingent upon completion of repairs and recovery of operational performance within forecasts with no further disruptions.

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.

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-'; Stable Outlook by Fitch). The energy production requirement is consistent with the project's capabilities. The midrange assessment is based on the PPA generally matching the maturity of the debt and the project's modest exposure to small short-term revenues losses from potential grid curtailment.

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

Fitch projects base case debt service coverage ratios (DSCR) average 1.51x with a minimum of 1.44x over the life of the debt. 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'/Stable Outlook), which has an average rating case DSCR of 1.58x.

RATING SENSITIVITIES

Positive/Negative - Recovery of Operations: Successful completion of repairs by the end of July 2016 with monthly availability consistently at or above Fitch's rating case of 96% would result in a return to Stable Outlook. Extensive delays in completing repairs or persistent operational instability would result in further negative rating action.

Negative - Inadequate Operating Results: Energy production persistently underperforming long-term projections or expenses persistently higher than the forecast that result in DSCRs below 1.30x could result in a negative rating action.

Positive - Favourable Performance: Unlikely in the near term although longer term demonstrated stable operating and financial performance consistently above base case expectations may result in a rating upgrade.

CREDIT UPDATE

Year to date, the project has experienced a material reduction in revenues due to forced outages that result in average monthly availability of 81%, significantly lower than its short historic performance of over 99%. The project had experienced an initial outage in 2016 lasting from Feb. 9, 2016 to March 29, 2016 that affected approximately 144MW, equivalent to 25% of the project's total capacity. An inspection determined the transformer bushing failed and as a result, preventative measures were taken with the remaining three operating transformers.

Inspections were performed and two transformers had their bushings replaced due to suspect readings. At the same time the project awaited receipt of bushings from an alternative vendor and planned for full replacement of all bushings in the fall/winter period when generation are at seasonal lows. The replacement work generally results in minimal downtime taking approximately nine days to complete for each transformer. The bushing replacements and transformer repair costs are fully covered by the equipment warranties and O&M agreement.

On May 29, 2016, the project experienced a catastrophic failure on one of the transformers and as a result, Solar Star 1, totalling 310MW was taken offline. It is suspected the bushings may have been the cause and as a result, the remaining three transformers had their bushings replaced with bushings from an alternative vendor. Bushing replacements are complete and the project is operating at approximately 431MW or approximately 74% of total capacity. The current downed transformer affects 155MW of the project. A replacement transformer has been procured and installed with a scheduled in-service date of July 27, 2016 resulting in around two months of total downtime.

Estimated revenue loss from the outages is approximately $27 million. Repair costs are borne by the O&M provider and transformer manufacturer which remain under the warranty. The project has procured two replacement transformers, which are estimated to cost a total of $5.75 million. An additional two transformers will be contributed by the Sponsor, Berkshire Hathaway Energy, at no cost to the project. In addition, the project will received a refurbished transformer from Siemens for the February bushing failure, which will be put back in-service in the fourth quarter with the transformer being replaced becoming the third spare. Also, the project will receive a fourth spare from Siemens in January 2017 to replace the transformer that catastrophically failed in the second outage event. The Siemens transformers are covered under the warranty. As such, Fitch expects once the installation is completed by the end of July 2016, operating metrics will rebound to original forecasts.

Total impact of the revenue loss and expenses result in Fitch's revised 2016 base case DSCR of 1.13x and rating case DSCR of 1.01x, a total of 31bps reduction from the previous review. If the outage permanently reduces capacity or affects expected long-term performance, then further rating action may be taken. The project is expected to have sufficient cash on hand and reserves absent further disruptions to support operating costs and debt payments for the remainder of 2016.

TRANSCATION SUMMARY

Solar Star is a portfolio of two adjacent crystalline, single-axis tracking photovoltaic plants totalling 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. Solar Star is owned by Berkshire Hathaway Energy Company ('BBB+'/Stable Outlook).