Fitch Affirms OrCal Geothermal LLC's $165MM Sr. Notes at 'BB'; Outlook Remains Negative
Fitch Ratings has affirmed OrCal Geothermal LLC's (OrCal) $165 million
senior notes ($43.3 million outstanding) due in 2020 at 'BB'. The Rating
Outlook remains Negative.
KEY RATING DRIVERS
The 'BB' rating reflects Fitch's expectation of stable operations of
OrCal's geothermal projects under long-term revenue contracts with some
exposure to index-based price risk. The rating considers that stable
resource production remains dependent on sponsor-funded discretionary
The Outlook remains Negative due to ongoing uncertainty that the full
benefit of recent efforts to improve plant capacity and overall
efficiency will come to fruition. Operational performance below
expectations could suggest financial performance over the remaining debt
term is more consistent with a lower rating.
Production Below Expectations - Supply Risk: Weaker
The absence of substitute fuel supply leaves OrCal exposed to the risk
of declining geothermal resource production. Production is dependent on
an active, sponsor-supported capital plan that is funded at the
sponsor's discretion. Although the sponsor demonstrates a strong track
record of funding capital expenditures, annual production has generally
trended down over the last five years.
Diminished Price Risk - Revenue Risk: Midrange
At the beginning of 2016, 50% of OrCal's total capacity transitioned to
a power purchase agreement (PPA) with the Southern California Public
Power Authority (SCPPA). As a result, the proportion of capacity tied to
volatile energy pricing under the Short Run Avoided Cost (SRAC)
methodology has been reduced to one-third. OrCal's entire capacity is
contracted with PPA expirations ranging from three to 11 years beyond
Stable Operating Cost Profile - Operation Risk: Midrange
OrCal has maintained a stable cost profile over the past few years,
excluding sponsor-funded capital expenditures. 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 six-month debt
Vulnerable Financial Coverage
Underperformance of the geothermal resource or continued weakness in
SRAC pricing could impair OrCal's ability to service debt payments over
the remaining five-year debt term. Under Fitch's rating case, which
assumes 2.5% annual declines in resource production and SRAC energy
pricing averaging approximately $30/MWh, DSCRs average 1.14x with
particularly weak coverage in the final two years of repayment. OrCal
may rely on its parent company to absorb a portion of operating costs or
draw on its debt service reserve in the event that operational cash flow
is not sufficient to meet debt payments.
The geothermal assets within Coso Geothermal Holdings, LLC ('C') have
suffered substantially greater resource depletion than Orcal's plants.
CE Generation, LLC's (CE Gen, 'BB-'/Outlook Stable) portfolio has a
proportionally larger exposure to variable SRAC price risk than Orcal,
and its debt is structurally subordinate to project-level indebtedness.
Like OrCal, CE Gen relies on non-obligatory financial support from its
Negative - Production declines or low SRAC pricing in 2016 resulting in
a Fitch-calculated DSCR below the 2016 rating case of 1.30x would
trigger a downgrade.
Negative - A significant increase in operating costs or cessation of
sponsor support for operating expenses or capital expenditures could
lead to a downgrade.
Positive - Stable or improved production in 2016 and a Fitch-calculated
DSCR above the 2016 rating case of 1.30x could trigger a return to a
SUMMARY OF CREDIT
After significant downtime to implement capex investments in 2014,
annual production in 2015 returned to the level seen in 2013. This
suggests some success in stemming production declines. Nevertheless, the
substantial capex investment to improve overall system efficiency at the
Heber 1 complex fell short of expectations. Plant output averaged 36MW
in 2014 and 2015, below the sponsor expectation of 44MW, due to
lower-than-expected efficiency from the refurbished steam turbine.
The ongoing environment of low natural gas pricing dragged the average
Southern California Edison (SCE, 'A-'/Outlook Stable) SRAC price down
from $48/MWh in 2014 to just over $31/MWh in 2015, a 35% decline. As a
result, total revenue fell by 13% from year-ago levels, despite OrCal's
rebound in production. Operating expenses declined modestly in the past
year, as variable O&M normalized from higher levels associated with the
Heber 1 enhancements. Overall, Fitch calculates that operational cash
flow in 2015 reached approximately $12.5 million, generating a Fitch
calculated DSCR of 0.84x.
As it has done in the past OrCal's parent company, Ormat Nevada (Ormat),
stepped in to bolster operational cash flow. The plant operator is a
subsidiary of Ormat and, at Ormat's discretion, a portion of 2015
operating expenses (estimated at $8 million) owed by OrCal to the
operator were not collected. This resulted in a higher level of cash
flow available to service the debt, and a sponsor-calculated DSCR of
1.37x. The rating incorporates the expectation that parent Ormat would
continue its practice of relieving OrCal of some level of operating
expenses in order to ensure that there is sufficient cash available to
meet debt payments. However, Fitch's DSCR calculation does not include
the benefit of sponsor support, and accounts for all expenses as
presented in OrCal's income statements..
Looking forward, the impact of continued low natural gas pricing will
moderate. The Heber 1 complex has satisfied its performance testing
requirement under the SCPPA contract, facilitating the commencement of
the PPA beginning in January 2016. The SCPPA contract utilizes a fixed,
escalating energy price that begins at a significantly higher rate than
current SRAC pricing. This leaves one-third of OrCal's overall capacity
exposed to SRAC pricing under the PPA with SCE at the Heber 2 complex.
Under the base case, Fitch assumes that resource production declines at
the five-year historical rate of 1.9% per year while expenses grow by an
assumed inflationary rate of 2.5% per year. SRAC pricing, based on
Fitch's long-term assumption for gas prices, averages $36.80/MWh through
2020. The resulting financial profile demonstrates declining coverage
over the remaining debt term with an average DSCR of 1.34x and a minimum
of 1.19x in the final year of repayment (2020).
Under the rating case, Fitch assumes modestly steeper production
declines of 2.5% per year. The rating case does not assume any
additional stress on expenses beyond the 2.5% growth assumption in the
base case, in recognition of OrCal's proven ability to manage costs
historically. SRAC prices are based on Fitch's low natural gas price
deck, yielding an average price of $30.50/MWh through 2020. The
resulting profile suggests a declining DSCR profile, due to the
compounding effect of increasing costs and declining production. The
DSCR averages 1.14x through 2020 with coverage hovering around breakeven
in 2019 and 2020.
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 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
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
View source version on businesswire.com: http://www.businesswire.com/news/home/20160128006369/en/
Copyright Business Wire 2016