Fitch Affirms Orange Cogen Funding Corp's Sr Secured Bonds at 'BBB'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'BBB' rating on Orange Cogen Funding Corporation's (OC Funding) $110 million senior secured bonds due 2022 (the bonds). The Rating Outlook remains Stable.

Key Rating Drivers
--Investment-grade financial performance: Projected debt service coverage ratios (DSCRs) under base and rating case scenarios are indicative of the 'BBB' rating category. In the Fitch rating case, which places stress on availability, production, energy prices, and project costs, the debt service coverage ratio
(DSCR) falls to a minimum of 1.68 times (x) in 2011 and averages 2.56x.

-- Gas supply risk: The recent extension of gas supply and transmission contracts has reduced supply risk. The contracts are substantially equivalent, and in fact a marginal improvement, to the existing contracts and now extend through Dec. 31, 2025, three years beyond maturity of the bonds;

-- Revenue Risk (Capacity): The project operates under two fully-contracted power purchase agreements (PPAs) with investment grade utility off-takers. The project has a long history of meeting its required availability levels and earning full capacity payments which make up over 70% of total revenue;

-- Revenue Risk (Energy): The project is exposed to price risk as it relates to fuel costs since the PPAs do not directly pass fuels costs through to the off-takers. Under the terms of the PPAs and current supply contract, an increase in fuel costs may not be completely offset by an increase in energy revenues. However, this risk has not resulted in significant cash flow reductions historically, and the risk is better mitigated by the terms of the new supply contract beginning in 2015.

-- Back-loaded amortization: While the senior secured bonds are fully amortizing at a fixed rate, the amortization profile is back-loaded so that debt payments are at their highest as the plant nears the end of its estimated economic life. Favorably, liquidity features include a six-month debt service reserve account and a maintenance reserve fund.

What Could Trigger a Rating Action
-- A reduction in energy prices, which would not be offset by a reduction in fuel costs;
-- Availability below the level required to receive full capacity payments;
-- A downgrade to one of the project's counterparties.

Security:
Collateral includes all real property owned by the parent guarantor, Orange Cogeneration Limited Partnership (OCLP); all material project documents at OCLP; security interest in all personal property owned by OCLP and OC Funding; a security interest in all funds established under the Indenture; a pledge of all partnership interests in OCLP and all outstanding capital stock of OC Funding, as well as a pledge of stock of the general partner of OCLP.

Credit Summary:
The ratings affirmation reflects Fitch's assessment of the ability of OC Funding to provide full and timely payment of the debt service obligations solely from operating cash flows. The approximately 103 megawatt (MW) natural gas fired combined-cycle cogeneration facility located in Bartow, Florida, has been in commercial operation since 1995. Cash flows have been and are expected to remain stable under fixed-price PPAs with investment grade counterparties.

The project earns nearly all of its revenues from two PPAs. The primary off-taker is Progress Energy Florida (PEF, rated 'BBB+', with a Stable Outlook by Fitch), which currently contracts most of the project's capacity and will absorb the project's full capacity once the second PPA, with Tampa Electric Co. (TECO, rated 'BBB+', Stable Outlook), expires in 2015. PEF's PPA extends three years beyond maturity of the bonds. The project's ability to maintain a high availability factor is vital to cash flow. The PPAs require a minimum 12-month rolling availability of 90% under PEF and 80% under TECO to earn the full capacity payment. The project has performed well in recent years, with average availability from 2006-2010 at 97.7% for PEF and 91.4% for TECO (which does not factor excess capacity or scheduled outage time into its availability calculation).

The project is exposed to price risk as it relates to the change in energy prices compared with the change in fuel costs. Under the terms of the PPAs and current fuel supply contract, the change in the avoided cost of coal (at the off-takers' affiliated coal plants) determines the change in energy prices as well as the change in natural gas costs. This creates a risk that in a falling coal price environment, energy revenues would decrease, while fuel costs would continue to rise under a 2% annual minimum escalation. Favorably, this potential mismatch in revenues and fuel prices has not significantly reduced cash flow. Additionally, under the terms of the new supply contract, beginning in mid-2015, fuel costs will be indexed to gas prices, a feature which is expected to better reflect actual fuel price changes.

Orange Cogen Funding Corporation was formed to issue the secured bonds, and is a 100% owned direct subsidiary of OCLP. The secured bonds were originally issued to repay loans to the original sponsors, to fund the debt service reserve account, to pay a development fee, and to pay transaction costs. Principal and interest are payable quarterly on each 15th of March, June, September, and December.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2010);
--'Rating Criteria for Thermal Power Projects' (Jun. 20, 2011).

Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
Rating Criteria for Thermal Power Projects
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=639073

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