News Column

Fitch Affirms OrCal Geothermal's Senior Notes at 'BB'; Outlook Revised to Stable

February 28, 2014

Fitch Ratings has affirmed OrCal Geothermal's $165 million senior notes ($63 million outstanding) due in 2020 at 'BB'.

In a release on February 25, Fitch noted that the Rating Outlook is revised to Stable from Negative as a new power purchase agreement (PPA) stabilizes long-term revenue.

Key Rating Drivers

Production Dependent on Plant Enhancements: 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 could vary from budget. (Supply Risk: Weaker).

Revenue Strengthened by New Contract: OrCal signed a new PPA with Southern California Public Power Authority (SCPPA). As a result, all of OrCal's capacity is now under contract through debt maturity, significantly reducing revenue risk. Nevertheless, there remains some price volatility, as one-third of total capacity is exposed to Short Run Avoided Cost (SRAC) energy prices (tied to natural gas pricing) through debt maturity. (Revenue Risk: Midrange).

Continued Stable Operations: OrCal has maintained a stable cost profile over the past few years (not including sponsor-funded capital expenditures). The operator is a subsidiary of the project sponsor and has significant experience operating geothermal assets. (Operation Risk: Midrange).

Fully-amortizing Debt Structure: OrCal's fully amortizing debt faces no refinancing risk and contains features typical of project finance structures, such as a 6-month debt service reserve. (Debt Structure: Midrange).

Financial Coverage to Improve: Before the new SCPPA PPA takes effect, OrCal's financial coverage remains exposed to price volatility, with a Fitch rating case DSCR average of 1.25x through 2015. From 2016 - 2020, the fixed energy pricing of the new contract is expected to stabilize revenues, resulting in a DSCR average of 1.58x and minimum of 1.29x.

Rating Sensitivities

--SRAC pricing below projections in Fitch's rating case could result in negative rating action.

--Material deterioration in operating performance or a significant rise in operating costs and capital expenditures could result in negative rating action.

--Following completion of the Heber 1 enhancements, stable production levels that meet sponsor projections could result in positive rating action. Conversely, enhancements that do not meet sponsor projections, or resource declines that exceed expectations, could result in negative rating action.


The senior notes are collateralized by a first priority lien on the accounts, revenues, project agreements, real and personal property or OrCal, and all the equity interests in the project.

Credit Update

The rating affirmation reflects the expectation that OrCal's operational profile will remain stable through debt maturity. The 'BB' rating indicates that OrCal's financial profile is vulnerable to changes in resource production levels or market-based energy prices. The Outlook revision to Stable reflects a significant reduction in price risk through the addition of a new fixed-price PPA.

OrCal recently signed a new PPA with Southern California Public Power Authority (SCPPA) for the Heber 1/Gould 1 capacity (approximately 50 percent of OrCal's total capacity). SCPPA is considered a strong PPA counterparty, as the revenue obligations of the participating members are highly rated. The two SCPPA participating members are Los Angeles Department of Water and Power (LADWP, 'AA-'/Stable) and the Imperial Irrigation District (IID, 'A+'/Stable).

Under the current SCE contract, which continues through December 2015, Heber 1/Gould 1 earn SRAC energy pricing, and Fitch had previously assumed OrCal would earn merchant pricing on this capacity beyond 2015. However, the shift to the SCPPA PPA introduces fixed energy pricing from 2016 to 2025, significantly reducing exposure to variable merchant pricing.

In 2014, OrCal expects to complete major enhancements to Heber 1 that include the installation of a new rotor, generator, and control system to go along with new recently drilled wells. This effort is expected to increase system reliability and increase OrCal's overall production by over 10 percent from 2013 levels.

To fund these enhancements, OrCal drew on funds committed to the project through a subordinate loan by owner Ormat Nevada. Under the terms of the loan, OrCal can borrow up to $140 million ($110 million has been borrowed to date) and the loan is repaid with cash available after debt service and is ultimately due in 2023 (three years after maturity of the Fitch rated notes). Management indicated that the remaining $30 million under the loan will be enough to cover remaining capital needs and maintain production at expected levels through debt maturity. If further capital is needed, Fitch notes that the project would either require a further financial commitment from Ormat Nevada or would need to fund capital expenditures out of project cash flow.

In developing a base case for long-term expected performance, Fitch incorporated the new SCPPA PPA, as well as sponsor expectations for production levels following the Heber 1 enhancements. In the resulting financial profile, DSCRs average 2.02x, with a minimum of 1.46x. The minimum occurs in 2014, when two- thirds of OrCal's capacity is still subject to SRAC pricing.

Under the Fitch rating case, financial projections consider a combination of stresses, including a 2.5 percent annual production decline, 5 percent increase in operating expenses, and a low case for SRAC price projections. In this scenario, DSCRs average 1.53x, with a minimum of 1.20x. OrCal is particularly sensitive to low SRAC prices over the next two years. However, a steeper than expected production decline would erode cash flow over the long term, placing emphasis on the importance of adequate capital expenditures to maintain operational performance.

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 at ''.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);

--'Rating Criteria for Thermal Power Projects' (June 17, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance report_frame.cfm?rpt_id=682867

Rating Criteria for Thermal Power Projects report_frame.cfm?rpt_id=710786

Additional Disclosure

Solicitation Status solicitation?pr_id=821635

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