Fitch Ratings has affirmed the rating on Coso Geothermal Power Holdings LLC's (Coso) $629 million ($455 million outstanding) pass-through certificates due 2026 at 'C'.
The affirmation is based on Fitch's expectation that default is likely and may be accelerated if Coso fails to meet a pari passu reimbursement obligation that could arise if its letter of credit (LC) is not extended past its expiration date in late 2015. Default is otherwise likely to occur by 2017.
KEY RATING DRIVERS
Geothermal Resource Depletion - Supply Risk: Weaker
Underperformance of the geothermal resource has lowered net operating capacity at the project's three interlinked geothermal power plants. With the decline in the geothermal resource, energy revenues have fallen to levels that are not sufficient to meet debt obligations.
Expected Payment Shortfalls - Debt Structure: Midrange
Fitch's projections indicate that cash available for debt service will result in shortfalls for future payment obligations on the fully amortizing certificates. A senior debt reserve (funded with cash from a drawn LC facility) supports these obligations when needed.
Limited Price Risk - Revenue Risk: Midrange
Southern California Edison (SCE, rated 'A-' with a Stable Outlook) is committed to purchase Coso's entire energy output under long-term, mostly fixed-price PPAs through 2030. Variable pricing on energy sales is limited to one-fifth of total revenues between July 2014 and March 2019.
Lack of Dedicated Operating Reserves - Operation Risk: Weaker
The project has no dedicated operations and maintenance or major maintenance reserve, leaving little cushion to protect against increased operational costs.
Peer Comparison
Coso's geothermal assets have suffered worse resource depletion than those within the CE Generation LLC (rated 'BB-'; Outlook Stable by Fitch) portfolio and OrCal Geothermal Inc. ('BB'; Outlook Stable), leading to more pressured financial performance.
RATING SENSITIVITIES
Negative: A technical default on the pari passu LC repayment obligation could accelerate payment of the certificates, resulting in default.
Negative: Insufficient reserves to meet shortfalls on upcoming payment obligations.
SECURITY
Each tranche of the certificates represents an undivided interest in a related pass-through trust, which holds the lessor notes issued by the owner lessors. The notes are the sole collateral and source of repayment of the certificates.
TRANSACTION SUMMARY
In late November 2014, Coso's LC facility with CoBank expired. The remaining debt service reserve LC was drawn and now the balance of approximately $27.6 million is reserved in cash. The PPA performance assurance portion of the facility was replaced with an identical LC by Citibank, N.A. ('A'; Outlook Stable). The new PPA LC expires in late October 2015, and failure to extend this LC may lead to a technical default that could cross-default to the lease and lease indenture of the rated certificates. Fitch views late 2015 as the earliest likely timing of default.
Coso continues to meet debt obligations using a combination of operating cash flow and reserves. Management expects to utilize approximately $9.8 million of the senior debt reserve to meet the upcoming January payment, which would leave a reserve balance of $17.8 million. Based on Fitch's projections for operational performance, operating cash flow and remaining reserves are expected to be sufficient to repay obligations through 2016. In Fitch's view, reserves are likely to be exhausted and default is likely to occur in early 2017.
CGP is a special-purpose company formed to lease and operate the Coso project, which consists of three interlinked geothermal power plants located in Inyo County, CA. Coso provides royalty payments to the U.S. Navy and the Bureau of Land Management for use of the geothermal resource. Under a series of power purchase agreements, Coso's entire output will be sold to SCE through January 2030. Cash flows from both Coso and Beowawe, an affiliated geothermal project in Nevada, are available to service CGP's rent payments under the CGP lease. Rent payments are the sole source of cash available to pay debt service on the pass-through trust certificates. Each tranche of the certificates represents an undivided interest in a related pass-through trust, which holds the lessor notes issued by the owner lessors. The notes are the sole collateral and source of repayment of the certificates
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 Thermal Power Projects' (July 30, 2014).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Thermal Power Projects
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753208
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=966515
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