NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Coso Geothermal Power Holdings LLC's (Coso) $629 million ($401.5 million outstanding) pass through certificates due 2026 at 'C'.
KEY RATING DRIVERS
The rating affirmation is based on Fitch's expectation that default appears imminent. Technical default could occur as early as July 2016 if Coso fails to meet certain rent payments required under the facility lease. The potential October 2016 expiration and subsequent repayment of the letter of credit (LC) backing Coso's collateral obligation under its revenue contracts presents another near-term default risk. Cash flow projections and remaining reserves indicate that a payment default is likely by early 2017.
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. Approximately $5.4 million in liquidity remains under the senior debt service reserve, which Fitch expects to be exhausted by early 2017, if not earlier. Potential near-term events of default under the facility lease or power purchase agreements could cause a cross default of the certificates.
Limited Price Risk - Revenue Risk: Midrange
Variable pricing on energy sales is limited to approximately 10% of total revenues through March 2019. Coso earns the majority of its revenue for its energy output through various power purchase agreements (PPA) with off-taker Southern California Edison (SCE, rated 'A-'/Stable Outlook by Fitch).
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.
Coso's geothermal assets have suffered worse resource depletion than those within the CE Generation LLC ('BB-'/Outlook Stable) portfolio and OrCal Geothermal Inc. ('BB'/Outlook Negative), leading to more pressured financial performance.
Negative - Failure to meet certain obligations this year under the facility lease or revenue contracts could result in near-term technical default.
Negative - Payment default could occur in early 2017 if operating cash flow and remaining reserves are insufficient to meet debt obligations.
SUMMARY OF CREDIT
The rated certificates could be pulled into technical default as early as July 2016 if Coso fails to make certain equity rent payments (equity B rent), an obligation under the facility lease. Fitch expects a $5.8 million shortfall on the upcoming equity B rent payment due July 15, 2016. The senior debt reserve may not be used to make up for any equity rent shortfalls, but the owner lessors do have the option to cure. If not cured within 10 days of the due date, Fitch expects the rated debt will be pulled into default.
Default could also occur if Coso fails to maintain collateral posting required under its PPA with SCE. Coso currently satisfies this requirement with a $15.2 million LC with Citibank, N.A. ('A+'/Outlook Stable), which expires in October 2016. However, the collateral requirement is increasing and must be sized to $31.3 million by January 2017. Failure to extend the LC beyond the October expiration or failure to provide the incremental collateral by January 2017 may lead to a technical default that could cross default to the lease and lease indenture of the rated certificates.
Based on Fitch's projections, operating cash flow and remaining debt service reserves are expected to be sufficient to repay debt rent obligations through 2016. In Fitch's view, reserves are likely to be exhausted and a payment default is likely to occur in early 2017 due to weakened operational performance. As of June 2016, Coso has tapped its senior reserve four times over the past four years to meet debt payment shortfalls. Coso drew the senior debt reserve portion of its LC into cash in November 2014 and continues to meet rated debt obligations using a combination of operating cash flow and the remaining reserves. Coso utilized approximately $12.1 million of the senior debt reserve to meet the January 2016 payment, leaving a reserve balance of $5.4 million. Coso has defaulted on its obligation to repay principal on the LC's drawn funds, but this does not constitute a default under the lease indenture for the rated certificates.
Coso Geothermal Power Holdings, LLC is a special-purpose company formed to lease and operate three interlinked geothermal power plants located in Inyo County, CA. Per the lease, cash flows from both the Coso plants and Beowawe, an affiliated geothermal project in Nevada, are available to service rent payments. 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 on www.fitchratings.com.
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
Rating Criteria for Thermal Power Projects (pub. 23 Jun 2015)
Dodd-Frank Rating Information Disclosure Form