Overview -- The outlook on Harper Lake Solar Funding Corp. has been revised to positive from stable. -- The positive outlook reflects the continued strong performance of the project and the expectation that debt service coverage ratios will remain high even following the expiration of the fixed-price energy payments. -- The rating on Harper Lake Solar Funding Corp. has been affirmed at 'BBB-'. -- The project is supported by high capacity revenues; 100% of its energy revenues are now tied to California's short run avoided cost (SRAC) pricing regime. Rating Action On Sept. 26, 2012, Standard & Poor's Ratings Services revised its outlook to positive from stable on Harper Lake Solar Funding Corp. In addition we affirmed our 'BBB-' rating on Harper Lake Solar Funding Corp. Rationale The rating affirmation and positive outlook reflect the increased certainty we have that the project will continue to perform strongly even with 100% of its energy revenues now derived from SRAC pricing. Harper Lake Solar is a funding corporation, the bonds of which, issued in 1998, were used to refinance the debt of two project partnerships: Luz Solar Partners Ltd. VIII (SEGS VIII) and Luz Solar Partners Ltd. IX (SEGS IX). Each project is an 80-megawatt (MW) net solar electricity generating system located in California's Mojave Desert. Output is sold to Southern California Edison Co. (SCE; BBB+/Stable/A-2) under standard offer No. 2 purchase power agreements (PPAs) through the term of the debt. Starting in May 2012, the project's energy revenues are now governed solely by California Public Utilities Commission-approved SRAC prices. Prior to May 2012, the project received a fixed energy price for 75% of its energy output while the remaining 25% of output was subject to SRAC pricing. Under the new SRAC pricing regime, the project's power price will be derived from a fixed heat rate through 2014 and will be subject to the market heat rate in 2015 and thereafter. Above-market capacity payments provide a stable source of cash to cover fixed costs and debt service. Even in light of the more variable energy revenues, we believe sound operations and strong capacity payments support the rating. We have updated our base case to include Standard & Poor's current energy pricing assumptions for the region, and we expect the project to achieve an average debt service coverage ratio (DSCR) above 1.6x through the life of the debt even with the greater volatility of its energy revenues. The project continues to perform well, with plant availability of 69.2% and 84.6% for SEGS VIII and SEGS IX, respectively, for the first half of 2012. This number includes planned outages, however. The project's unscheduled outage rate remains close to 0%. Energy generation during the first half of 2012 was 219,678 megawatt-hours (MWh) with average capacity factors of 28.7% and 34.2% for SEGS VIII and SEGS IX, respectively. The project DSCR continues to be strong, around 2.5x for both the trailing 12 months ended June 30, 2012 and the calendar year ended Dec. 31, 2012. The strong DSCR includes almost a full year of fixed-price energy pricing for 75% of the project's output. Under 100% SRAC pricing, we expect these coverage levels to fall but to remain in line or above the current rating. Liquidity The project maintains a six month debt service reserve in the form of a letter of credit provided by Wells Fargo N.A. (AA-/Negative/A-1+). Outlook The positive outlook reflects Standard & Poor's expectation of continually strong debt service coverage ratios even with ''Harper Lake's full exposure to SRAC pricing for its energy payments. We would raise the rating if the project demonstrates its ability to achieve sustained DSCRs above 1.6x under a full year of SRAC pricing, taking into consideration the current low gas price environment. We would revise the outlook to stable if the project were to financially underperform under the new pricing regime. Related Criteria And Research -- Updated Project Finance Summary Debt Rating Criteria, Sept 18, 2007 -- Project Finance: Key Credit Factors: Methodology And Assumptions On Risks For Concentrating Solar Thermal Power Projects, Oct. 27, 2009 Ratings List Ratings Affirmed; Outlook Revised To From Harper Lake Solar Funding Corp. Senior Secured BBB-/Positive/-- BBB-/Stable/-- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.