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Fitch Expects to Rate Coso Geothermal Power Holdings, LLC Pass-Through Trust Ctfs 'BBB-'

Posted on: Monday, 26 November 2007, 15:00 CST

Fitch expects to assign a rating of 'BBB-' to Coso Geothermal Power Holdings, LLC's (CGP) proposed issuance of $674.3 million pass through trust certificates due 2026. The proceeds of the proposed issuance will be used to fund the acquisition of the Coso geothermal projects (Coso) and repay existing indebtedness. CGP is an indirect, wholly owned subsidiary of ArcLight Energy Partners Fund III, LP and ArcLight Energy Partners Fund IV, LP.

CGP is a special-purpose company formed to lease and operate the Coso projects. Cash flows from both Coso and Beowawe, an affiliated geothermal project, will be available to service CGP's rent payments under CGP's lease. The owner lessors of the Coso project will collect rent payments from CGP and remit a portion of rent, equal to scheduled debt service on the certificates, to the Coso 2007 pass-through trust, which will be created solely to issue the certificates. The owner lessors will retain a scheduled portion of rent as a return on equity.

Coso consists of three interlinked 80MW geothermal power plants, their transmission lines, steam-gathering systems and other related facilities located at the Navy Weapons Center in Inyo County, California. 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 (PPAs), Coso's entire output will be sold to Southern California Edison Company (SCE) through January 2030. Pricing under the PPAs is largely fixed. Market price exposure is limited to 80MW of output, which will be indexed to natural gas prices between 2012 and 2019.

The Beowawe project consists of a nominal 17.7MW geothermal power plant located in Eureka County, Nevada. Beowawe sells its output to Sierra Pacific Power Company under a fixed-price PPA expiring in 2025. Beowawe is expected to contribute approximately 3% of the total annual cash flow available to service CGP's rent obligation. Beowawe will be indirectly owned by Terra-Gen Power LLC (Terra-Gen), a subsidiary of ArcLight and the indirect owner of CGP.

Fitch has evaluated CGP's credit quality on a standalone basis, independent of the credit quality of its owners. The expected rating is based on CGP's long term financial performance, which is subject to volumetric risk over the life of the debt, and limited price risk. In the Fitch base case, projected debt service coverage ratios (DSCRs) range from 1.6 times (x) to 2.0x between 2012 and 2019; DSCRs are otherwise level at approximately 1.5x. Fitch considers CGP's ability to service the debt portion of rent, given by the DSCR, as the appropriate measurement of the certificates' credit quality. The equity portion of rent has been excluded from the DSCR due to its relative subordination to the debt component of rent in the flow of funds.

The primary risk is that Coso's long-term energy output will fall below expectations. As the maturity of the debt approaches, a sustained reduction in energy output could strain cash flows. Coso's financial performance is closely linked to the success of the Hay Ranch program, which is expected to improve output and partially offset the gradual decline in steam production. Price risks are largely mitigated, as only one-third of Coso's output is exposed to market price volatility between 2012 and 2019. Outside of this exposure, both Coso and Beowawe benefit from fixed prices on all delivered output.

CGP ultimately derives approximately 97% of its cash flows under the PPAs with SCE. If SCE's credit quality falls below CGP's credit quality on a standalone basis, the increased counterparty risk could lead to a downgrade in CGP's expected rating. Fitch has assigned to SCE a long-term term issuer default rating (IDR) of 'A-' with a Stable Outlook.

Primary credit strengths:

-History of reliable operating performance;

-Stable geothermal resources;

-Long-term, fixed-price PPAs with an investment-grade counterparty.

Primary credit concerns:

-Reliance on the Hay Ranch augmentation program;

-Partial exposure to market price volatility.

Fitch has published a presale report with a detailed discussion of the transaction and rating rationale. The presale report, 'Coso Geothermal Power Holdings, LLC', is available on the Fitch Ratings web site at www.fitchratings.com under 'Global Infrastructure and Project Finance'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.

Source: Business Wire

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