SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the rating on Coso Geothermal Power Holdings LLC's (CGP) $629 million ($462 million outstanding) pass through certificates due 2026 at 'CC'. The ratings affirmation reflects the continued expectation that default is probable, as Fitch expects that operating cash flows and reserve funds will be insufficient to meet long-term financial obligations.
KEY RATING DRIVERS
Geothermal Resource Depletion: Underperformance of the geothermal resource has lowered net operating capacity at the Coso geothermal project's (Coso) 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. (Supply Risk: Weaker)
Expected Payment Shortfalls: Fitch's projections indicate that cash available for debt service will result in shortfalls for future payment obligations on the fully amortizing certificates. These obligations are supported by the letter of credit (LC)-funded senior rent reserve. (Debt Structure: Midrange)
Finite Financial Support: Approximately $27.6 million in liquidity remains under the LC-funded senior debt service reserve, which Fitch expects to be exhausted between 2015 and 2017. Absent further dedicated liquidity to meet Coso's debt obligations, the certificates are likely to default.
Limited Price Risk: Variable pricing on energy sales is limited to one-fifth of total revenues between July 2014 and March 2019. Coso executed an amendment with off-taker Southern California Edison (SCE, rated 'A-' with a Stable Outlook by Fitch) to fix the energy price earned at the BLM plant through June 30, 2014. (Revenue Risk: Midrange)
Lack of Dedicated Operating Reserves: The project has no dedicated operations and maintenance or major maintenance reserve, leaving little cushion to protect against increased operational costs. (Operation Risk: Weaker)
--Accelerated resource depletion may further erode credit quality.
--Insufficient liquidity to meet upcoming payment obligations would result in a downgrade.
--Potential expiration of Coso's LC on Nov. 30, 2014 might lead to negative rating action.
Each tranche of the certificates represents an undivided interest in a related pass-through trust, which holds the lessor notes (notes) issued by the owner lessors. The notes are the sole collateral and source of repayment of the certificates.
The 'CC' rating is based upon the strong likelihood that Coso will default on its debt service obligations. Coso has been unable to reverse a steady decline in geothermal resource output, and reduced cash flow was insufficient to meet the debt portion of the lease rent payment that was due in January 2014 ($40.9 million).
Coso's LC facility includes a $40 million senior rent reserve. Coso drew $5.7 million from the reserve to make its January 2014 payment, marking the second time the reserve has been tapped to meet lease rent obligations. As a result, the remaining balance in the senior rent reserve is $27.6 million. Absent a significant improvement in net capacity levels, operating cash flow will continue to fall short of required payments. Reserve funds will eventually be exhausted, leading to default on the certificates.
On Feb. 14, 2014, LC provider CoBank issued an event of default letter due to insufficient repayment of drawn principal from the rent reserve. Coso's lease indenture contains specific provisions that indicate that this type of default cannot cause a cross-default of the lease or lease indenture, and has no impact on the availability of undrawn LC funds.
Coso's LC is set to expire on Nov. 30, 2014. In the event that the LC is not extended or replaced, it may be drawn down in the full remaining amount. Fitch concludes that default on the pass-through certificates could accelerate under this scenario.
In developing a base case for long-term expected performance, Fitch utilized recent performance as an assumption for Coso's net capacity and applied minimal additional stress. This scenario indicates a financial profile in which default is probable. Fitch expects Coso to operate below breakeven levels for the remainder of the debt tenor, with a DSCR average of
0.77x. Based on this profile, and the availability of liquidity in the reserve, Fitch expects default to occur between 2015 and 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.
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' (June 17, 2013).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Thermal Power Projects