Fitch Affirms Orange Cogen Funding's Senior Secured Bonds at 'BBB+'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings affirms Orange Cogen Funding Corporation's (OC Funding) $110 million ($77.5 million outstanding) senior secured bonds due 2022 at 'BBB+'. The Rating Outlook is Stable.

KEY RATING DRIVERS

The rating for this gas-fired cogeneration project is supported by OC Funding's high projected debt service coverage ratios (DSCRs) and low leverage consistent with the 'BBB+' rating. Cash flow remains resilient as the project earns fixed capacity revenues to support both operating expenses and debt payments. The financial profile additionally benefits from the impending transition to a more favorable gas purchase agreement.

Stable Historical Performance - Operation Risk: Midrange

Orange Cogeneration (the project) utilizes conventional and proven combined-cycle natural gas-fired generation based on two GE gas turbine engines, along with an on-site spare engine. Operating costs, heat rates, and availability have been generally stable and consistent with expectations. The project's ability to maintain adequate availability is necessary to earn capacity payments, which represent the primary source of revenue.

Substantially Contracted Cash Flows - Revenue Risk: Midrange

The project earns capacity and energy revenue under two power purchase agreements (PPA) with investment-grade counterparties through 2015 for 94% of total output. Beyond 2015, the project will earn revenue for 100% of total output under one remaining PPA that extends for three years beyond debt maturity. The project is exposed to negative energy margins as fuel costs are not directly reimbursed by energy payments, but cash flow is resilient to considerable pricing stresses.

Adequate Fuel Supply - Supply Risk: Midrange

The project's natural gas purchase and transportation contracts convert to more favorable terms in 2015 and extend three years beyond the term of the debt. There are sufficient providers available should the current contract counterparties need to be replaced.

Typical Project Debt Structure - Debt Structure: Midrange

Project debt is fully amortizing with a six-month debt service reserve and high 1.30x equity distribution test.

Strong Financial Profile

Stable annual cash flows are expected to produce a rating case average DSCR of 2.93x that is consistent with the rating, mitigating the increasing levels of total debt service in the final six years of the term. Leverage is low with a 2015 debt-to-cash flow ratio of 2.42x under Fitch rating case conditions.

Peer Comparison

OC Funding benefits from more stable cash flow and stronger debt service coverage compared with other cogeneration peers. These peers, such as Midland Cogeneration Venture LP ('BBB-'/Negative Outlook), are more exposed to price and volume risk, or are more highly levered.

RATING SENSITIVITIES

Negative: Availability below the level required to receive full capacity payments that results in material erosion of project cash flow.

Negative: A downgrade to one of the PPA counterparties below OC Funding's rating.

Negative: Loss of the project's status as a qualifying facility (QF) could result in PPA termination.

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 UPDATE

The project's ability to meet its availability benchmarks is necessary to earn full capacity payments under the PPAs. Since the project is currently earning negative margins when producing energy, the operator is actively managing its on-peak dispatch. In order for the project to earn full capacity payments, it must meet minimum 12-month rolling on-peak availability benchmarks of 90% under Duke Energy Florida (DEF, 'BBB+'/Stable Outlook) and 80% under Tampa Electric Company (TECO, 'BBB+'/Stable Outlook). Historically, the project is able to maintain availability above benchmarks except for 2013 when it experienced a major outage for one of the turbines. The issue was corrected and has since met the requirements with no major outages reported in 2014 and YTD March 2015. Availability in 2014 for the DEF was 91.9% and for TECO was 84.4%, above the respective PPA minimum requirements.

Despite negative energy margins, cash flow improved in FYE2014 due to escalating capacity prices and plant availability above the minimum capacity payment requirements. Capacity payments historically accounted for approximately 80% of total revenues and are contracted with investment grade counterparties through the debt term. The project has demonstrated the ability to maintain minimum capacity requirements to receive full capacity payments. The payments are sufficient to cover the plants fixed operating costs and debt service along with providing strong mitigation against volatility in energy margins.

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 the long-term gas purchase agreement, the change in the avoided cost of coal generation (at the off-takers' affiliated coal plants) determines the change in on-peak energy prices while fuel costs are incurred at market-based natural gas prices with a minimum reservation fee. This mismatch in revenues and fuel prices has resulted in negative margins in energy production. Favorably, in 2015 the gas purchase agreement will convert to new terms, eliminating the fixed fuel reservation and minimum fuel cost escalator to partially mitigate the pricing mismatch.

Overall, despite the continued negative energy margins, the strong capacity revenues along with a more favorable gas supply contract provide resilience to the cash flows. Under Fitch's rating case, DSCRs are expected to average 2.93x over the remaining debt term.

TRANSACTION SUMMARY

OC Funding was formed to issue the secured bonds, and is a 100% owned direct subsidiary of OCLP. The approximately 103 megawatt natural gas fired combined-cycle cogeneration facility located in Bartow, Florida, has been in commercial operation since 1995. 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' (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=984266

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Contacts

Fitch Ratings
Primary Analyst
Andrew Joynt
Director
+1-415-732-5622
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Yvette Dennis
Senior Director
+1-212-908-0668
or
Committee Chairperson
Gregory Remec
Senior Director
+1-312-606-2339
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Andrew Joynt
Director
+1-415-732-5622
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Yvette Dennis
Senior Director
+1-212-908-0668
or
Committee Chairperson
Gregory Remec
Senior Director
+1-312-606-2339
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com