Fitch Affirms OrCal Geothermal LLC's $165MM Senior Notes at 'BB'; Outlook Revised to Negative

SAN FRANCISCO--()--Fitch Ratings has affirmed OrCal Geothermal LLC's (OrCal) $165 million senior notes ($50.1 million outstanding) due in 2020 at 'BB'. The Rating Outlook was revised to Negative from Stable.

KEY RATING DRIVERS

The rating reflects OrCal's fully contracted revenue with some susceptibility to index-based price risk and resource production that is dependent upon ongoing sponsor-funded capital expenditures (capex). The Outlook has been revised to Negative due to lower than expected production that could erode future cash flow.

Production Dependent on Plant Enhancements - Supply Risk: Weaker

OrCal is exposed to the risk of declining geothermal resource production. OrCal will continue to rely on capex to maintain plant efficiency and mitigate production declines.

Fully Contracted Revenue, Limited Price Risk - Revenue Risk: Midrange

OrCal's capacity is fully contracted with strong counterparties through debt maturity, significantly reducing revenue risk. However, there remains some price volatility, as one-third of total capacity is exposed to Short-Run Avoided Cost (SRAC) energy prices (tied to natural gas pricing) through debt maturity.

Continued Stable Operations - Operation Risk: Midrange

OrCal has maintained a stable cost profile over the past few years (not including sponsor-funded capex). The operator is a subsidiary of the project sponsor and has significant experience operating geothermal assets.

Fully-amortizing Debt Structure - Debt Structure: Midrange

OrCal's fully amortizing debt faces no refinancing risk and contains features typical of project finance structures, such as a 6-month debt service reserve.

Financial Coverage Subject to Resource Declines

OrCal's financial coverage remains exposed to SRAC price volatility, primarily in 2015 when the Fitch rating case debt service coverage ratio (DSCR) is expected to approach breakeven. Over the remaining term of the notes, DSCRs average 1.22x in the rating case and the profile is vulnerable to deterioration if production declines are worse than expected.

Peer Comparison

The geothermal assets within Coso Geothermal Holdings, LLC (rated 'C' by Fitch) have suffered substantially greater resource depletion than Orcal's plants. CE Generation, LLC's ('BB-'; Stable Outlook) portfolio has a proportionally larger exposure to variable SRAC price risk than Orcal and its debt is structurally subordinated to project-level indebtedness.

RATING SENSITIVITIES

Negative: Cessation of sponsor-funding of capital expenditures for future plant enhancements.

Negative: DSC in 2015 below Fitch's rating case due to material deterioration in operating performance, significant rise in operating costs, or SRAC pricing below projections.

Negative: Annual output below PPA minimum generation levels, resulting in the payment of liquidated damages.

SECURITY

The senior notes are collateralized by a first-priority lien on the accounts, revenues, project agreements, real and personal property of OrCal, and all the equity interests in the project.

CREDIT UPDATE

The Outlook revision reflects a heightened risk to the financial profile based on lower projected production levels. Deterioration below the Fitch rating case due to further production declines, higher operating costs, or lower SRAC pricing could trigger a downgrade.

The bulk of capex in 2014 was dedicated to improving overall system efficiency at the Heber 1 complex. The plant was projected to improve output capacity to 44MW but only achieved an average of 36MW for 2014. Capex in 2015 will continue to focus on plant enhancements to increase output, and Ormat is expected to provide funding with equity injections.

Annual production declined by 7.6% from 2013 to 2014 due to a combination of downtime for repowering of the Herber 1/Gould 1 plants and less than expected output improvements from capex investments. Total availability among the Heber plants declined to 89% from recent levels in the 96% range. Nevertheless, total revenue increased 7.7% from 2013 levels due to higher SRAC energy prices. Expenses grew modestly due to higher maintenance expenses associated with ongoing Heber 1 enhancements. As a result, based on operating cash flow of approximately $16 million, Fitch calculated a year-end DSCR of 1.12x.

Over the remaining six-year debt term, Fitch's financial analysis reflects production levels consistent with actual levels in 2014. Under the Fitch rating case, financial projections consider a combination of stresses, including a 2.5% annual production decline, 5% increase in operating expenses, and a low case for SRAC prices. In this scenario, DSCRs average 1.22x, with near breakeven coverage in 2015 when SRAC exposure is at its highest. However, a steeper than expected production decline would erode cash flow over the long term, placing emphasis on the importance of adequate capital expenditures to maintain operational performance.

OrCal is a special-purpose company that was created to acquire the Heber 1 and Heber 2 geothermal power facilities (the Heber power plants) located in Imperial County, CA. OrCal also owns the Gould 1 and Gould 2 plants, and the Heber South power plant, which became operational in 2008. OrCal is jointly owned by a tax-equity investor and Ormat Nevada Inc. Ormat Nevada is a subsidiary of Ormat Technologies, Inc., a vertically integrated owner and developer of geothermal and other recovered energy projects.

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=979545

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Contacts

Fitch Ratings
Primary Analyst
Andrew Joynt
Associate Director
+1-415-732-5622
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Chris Joassin
Director
+1-312-368-3166
or
Committee Chairperson
Gregory Remec
Senior Director
+1-312-606-2339
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Andrew Joynt
Associate Director
+1-415-732-5622
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Chris Joassin
Director
+1-312-368-3166
or
Committee Chairperson
Gregory Remec
Senior Director
+1-312-606-2339
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com