Fitch downgrades rating of Coso Geothermal Power to B+/ Negative Watch

Coso China Lake geothermal plant

Alexander Richter 17 Kas 2010

Reported already yesterday, but now with ratings by Fitch and a bit more details.

“Fitch Ratings has downgraded the rating of Coso Geothermal Power Holdings, LLC’s (CGP) pass-through trust certificates due 2026 to ‘B+’ from ‘BBB-‘, and placed it on Rating Watch Negative.

Fitch was notified recently that CGP has experienced significant production declines due to a more accelerated rate of decline in reservoir pressure since mid 2010 compared to original expectations. The increase in the decline rate has more than offset the gains expected from the Hay Ranch water injection program and an extensive capital improvement program. In aggregate, production in 2010 is forecasted to be 1,611 GWh which is approximately 26% below original production estimates in 2007 of 2,184 GWh at the same time. The average net capacity of the facility is now forecasted to be approximately 195 MW with the benefit of the capital improvement program at the end of 2010 compared to the original capacity expectation in 2007 of 249 MW at the same time which was without the benefit of the capital improvement program. In addition, an eight-day transmission related force majeure event in October 2010 has contributed to the shortfall in production with a corresponding impact on the revenues.

Fitch’s analysis of the sponsor’s updated projections indicates that CGP’s financial performance could fall below breakeven under reasonable stress conditions, such as an increase in capital expenditure requirements, or further acceleration in the rate of geothermal resource decline. CGP’s exposure to forced outages and other event risks is heightened given the anticipated reduction in cash flow. It is unclear whether the geothermal resource will stabilize over the long term, and the prospects for potential improvements in energy output are uncertain, reliant upon the efficacy of budgeted capital expenditures.

The Rating Watch Negative reflects CGP’s reliance on the sponsor for capital expenditure funding in the near term, and Fitch’s expectation that operating cash flow will be insufficient to meet the project’s upcoming debt service payments absent sponsor support or a draw on the debt service reserve. Resolution of the Rating Watch Negative is linked to the continuation of and extent of sponsor support, and the stabilization of energy output over the short term. Fitch expects to receive additional information from CPG in the coming months that will further clarify the stability of the geothermal resource and the operational performance of the project.

CGP recently provided Fitch with updated financial results that indicate a continued decline in energy output despite the operation of Hay Ranch and the ongoing execution of a $135 million capital improvement program. To date, Terra-Gen Power, LLC, a wholly owned affiliate of Arclight Capital Partners and Global Infrastructure Partners (the sponsor), has contributed nearly $90 million of equity support. CGP expects a cash shortfall of approximately $6 million ahead of the January 2011 rent payment, which would be funded with either a draw from the debt service reserve or additional sponsor support. In 2011, CGP will rely upon the sponsor for an additional $18 million to complete the current capital expenditure program. Furthermore, Fitch believes CPG will find it challenging to provide an additional $8 million to meet its purchase power agreement collateral requirement in late 2011 without support from the sponsor. Although the sponsor has not made a firm commitment to provide additional equity, the sponsor has indicated its intention to continue supporting the project.

CGP’s long-term financial projections indicate debt service coverage ratios (DSCRs) could remain at or below 1.1 times (x) through 2014, thereafter improving to the 1.1x-1.2x range as scheduled debt service declines. The projections assume capital expenditures budgeted for 2011 will be mostly funded with sponsor-provided liquidity and sufficient to achieve expected production levels. Fitch’s stress analysis indicates that a 5%-10% reduction in revenues or a 10%-15% increase in expenses could drive DSCRs below 1.0x in any given year.”

For the full release see link below.

Source: Fitch release via Business Wire