Fitch Downgrades Coso Geothermal Power Holdings LLC's 2007 Pass-Through Trust Certificates to 'CC'
Fitch Ratings has downgraded the rating on Coso Geothermal Power Holdings LLC's (CGP) $629 million ($517 million outstanding) pass-through certificates due 2026 to 'CC' from 'CCC'. The ratings downgrade reflects Fitch's expectation that default is probable, as 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. As a result, energy revenues have fallen to levels that are not sufficient to meet debt obligations.
--Expected Payment Shortfall: Fitch's expectation for Coso's operating performance indicates a shortfall in cash available for the January 2013 debt service payment. Fitch projects that Coso will depend upon funds in the senior rent reserve to meet future debt obligations.
--Uncertain Financial Support: Letters of credit (LC) issued to support the power purchase agreement collateral posting and senior debt service reserve are set to expire on Nov. 30, 2012. If not renewed or replaced, the LCs could be drawn, substantially increasing Coso's financial obligations.
--Limited Price Risk: Variable pricing on energy sales is now limited to one-fifth of total revenues between July 2014 and March 2019. Coso executed an amendment with off-taker Southern California Edison (SCE) to fix the energy price earned at the BLM plant through June 30, 2014.
WHAT COULD TRIGGER A RATING ACTION
--If the geothermal resource depletion accelerates, revenues and cash flows will shrink more quickly, reducing already below breakeven coverages.
--Continuing reliance on reserve funds could exhaust project liquidity absent an improvement in Coso's revenue profile.
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 downgrade is based upon the strong likelihood that Coso will default on its debt service obligations in the near future. Coso has been unable to reverse a steady decline in geothermal resource output, and cash flow is expected to be insufficient to meet the debt portion of the lease rent obligation beginning with the January 2013 payment. Absent a significant improvement in net capacity levels, operating cash flow will fall short of required payments, and reserve funds will eventually be exhausted, leading to default on the certificates.
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 close to or below breakeven levels on its debt obligations for the remainder of the debt tenor, with a debt service coverage ratio (DSCR) average of 0.84 times (x) and minimum of 0.70x.
Despite continuing geothermal resource decline, CGP has not yet tapped its senior debt service reserve LC to support payment obligations. However, Fitch anticipates that there will be a shortfall for the upcoming $45.1 million rent payment due January 2013. Fitch projects that cash flow for all of 2013 will result in a debt service coverage ratio of 0.70x prior to reserve support.
Fitch projects that the reserve will be fully depleted between 2015 and 2017, leading to a payment default on the CGP certificates. This scenario assumes that Coso will extend or replace its current credit facility, which is set to expire on Nov. 30, 2012. If the facility is not extended or replaced, it is likely that Coso would draw on the existing LC, creating additional debt obligations that would accelerate default.
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'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2011);
--'Rating Criteria for Thermal Power Projects' (June 20, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Thermal Power Projects
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