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Fitch Downgrades Coso Geothermal Power Holdings LLC's 2007 Pass-Through Trust Certificates to 'C'

August 25, 2014

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has downgraded the rating on Coso Geothermal Power Holdings LLC's (Coso) $629 million ($455 million outstanding) pass through certificates due 2026 from 'CC' to 'C'.

The rating downgrade to 'C' is based on Fitch's expectation that the project will fail to meet a pari passu reimbursement obligation under a drawn letter of credit (LC) due in November 2014. Failure to meet the LC obligation would trigger a technical default of the pass-through trust certificates, and a payment default shortly thereafter appears imminent.

KEY RATING DRIVERS

Impending Technical Default

On July 31, 2014, CoBank issued a notice declining the request from Coso to extend the LC facility commitment termination date under the credit agreement. This notice indicates that the PPA performance security and debt service reserve LCs under the LC facility are scheduled to expire Nov. 30, 2014. If Coso is not able to replace the LC facility with another provider, the PPA LC and debt service reserve LC will be drawn into cash, creating a reimbursement obligation that Fitch expects Coso will be unable to meet from its operating cash flow and will result in a technical default under the LC facility that may result in cross default to the lease and lease indenture.

Geothermal Resource Depletion - Supply Risk: Weaker

Underperformance of the geothermal resource has lowered net operating capacity at the project's three interlinked geothermal power plants. With the decline in the geothermal resource, energy revenues have fallen to levels that are not sufficient to meet debt obligations.

Expected Payment Shortfalls - Debt Structure: Midrange

Fitch's projections indicate that cash available for debt service will result in shortfalls for future payment obligations on the fully amortizing certificates. These obligations are supported by approximately $27.6 million of remaining funds in the LC-funded senior rent reserve.

Limited Price Risk - Revenue Risk: Midrange

Southern California Edison (SCE, rated 'A-' with a Stable Outlook) is committed to purchase Coso's entire energy output under long-term, mostly fixed-price power purchase agreement (PPA) through 2030. Variable pricing on energy sales is limited to one-fifth of total revenues between July 2014 and March 2019.

Lack of Dedicated Operating Reserves - Operation Risk: Weaker

The project has no dedicated operations and maintenance or major maintenance reserve, leaving little cushion to protect against increased operational costs.

Peer Comparison

Coso's geothermal assets have suffered worse resource depletion than those within the CE Generation LLC ('BB-'/Outlook Negative) portfolio and OrCal Geothermal Inc. ('BB'/Outlook Stable), leading to more pressured financial performance.

RATING SENSITIVITIES

Negative: A technical default on the pari passu LC repayment obligation would accelerate payment of the certificates resulting in default.

TRANSACTION SUMMARY

Coso is pursuing a replacement for the PPA security LC, but if it is unable to secure one by Oct. 30, 2014, appropriate notices to relevant parties (including the offtaker) will be issued. If the PPA security LC is drawn, it would trigger the reimbursement obligation to be immediately due to CoBank. Since Fitch does not expect Coso will have any excess cash flow to meet this obligation, there would likely be a default on this obligation. This would be a technical default under the lease indenture and would lead to acceleration of payment of the certificates. The lack of sufficient operating cash flow to meet accelerated payments due on the certificates would lead to a payment default, likely around mid-November 2014.

Note that the cross default provision only exists for the reimbursement obligation of the PPA LC. Failure to pay reimbursement obligations under the debt service reserve LC does not cross default to the lease.

Even if Coso is able to replace its PPA security LC, a payment default on the certificates still appears probable. 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. Fitch expects Coso to operate below breakeven levels for the remainder of the debt tenor, with a DSCR average of 0.77x. Based on this profile, and the availability of liquidity in the reserve, default could occur between 2015 and 2017.

Coso makes its rent payments semi-annually with a large payment in January and smaller payment in July of each year. As of August 2014, Coso has twice tapped its senior reserve to meet payment shortfalls; in January 2013 and January 2014. The remaining rent reserve balance is $27.6 million, and future draws on the reserve are expected for forthcoming January payments. Reserve funds will eventually be exhausted, leading to default on the certificates.

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. Each tranche of the certificates represents an undivided interest in a related pass-through trust, which holds the lessor notes issued by the owner lessors. The notes are the sole collateral and source of repayment of the certificates.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

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

--'Rating Criteria for Thermal Power Projects' (July 30, 2014).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Thermal Power Projects

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753208

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=856895

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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE 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 WEBSITE.



Fitch Ratings

Primary Analyst

Andrew Joynt, +1 415-732-5622

Associate Director

Fitch Ratings, Inc.

650 California St.

San Francisco, CA 94108

or

Secondary Analyst

Christopher Joassin, +1 312-368-3166

Director

or

Committee Chairperson

Gregory Remec, +1 312-606-2339

Senior Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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