Moody’s Investors Service has cut the rating outlook from stable to negative on Coso Geothermal Power Holding‘s senior secured bonds rated Baa3. Cosco is indirectly owned by Terra-Gen Power LLC, which is a portfolio company of ArcLight Capital Partners.
Moody’s Investors Service changed the rating outlook to negative from stable on Coso Geothermal Power Holding’s (CGPH or Project) senior secured bonds rated Baa3.
The rating action reflects the delay in approvals for the Hay Ranch conditional use permit by over a year compared to expectations at the time of the financing in December 2007. The approvals necessary for the permit are still progressing and the Project currently expects to receive them in the first quarter of 2009. Without the permit, Moody’s expects CGPH will be unable to implement the planned water augmentation program to boost energy production to levels in the base case forecast. Moody’s notes that year to date energy production ended September 2008 is 11% below forecast due to various issues including problems in drilling for a new production well in addition to the delays in the Hay Ranch permit. That being said, the Project expects new production wells to come online in the near term that is expected to boost power generation closer to original expectations albeit still below the base case.
The negative outlook also considers the significantly higher than expected property taxes based on a new property value assessment by Inyo County. While the Project is having ongoing discussions with Inyo County regarding the new higher assessment, the timing and amount of beneficial changes to the Project regarding the property tax assessment are uncertain. The combination of higher property taxes and lower than originally projected generation could result in DSCR below 1.4 times if these issues are not resolved.
As part of the rating action, Moody’s also considered amendments to the transaction documents in August 2008 that provides the Project’s sponsor the option at its sole discretion to contribute additional equity to fund an accelerated capital program. The Project estimates that the accelerated capital program should increase total capital expenditures by at least $100 million compared to the base case and the Project expects the accelerated capital program will be implemented over the next several years starting in late 2008. If fully executed, the accelerated capital program should help boost generation output over both the near and long term. While most of the sponsor contributions are not committed, this amendment indicates some degree of sponsor support for the Project.
CGPH’s ratings could stabilize if the Project receives the Hay Ranch permit, achieves favorable resolution of the property tax dispute, is able to successfully implement its accelerated capital program and receives funds from the sponsor as expected under the August 2008 amendment. If Coso is unable to achieve these objectives over the next 6 to 12 months, the rating may be downgraded. A denial of any of the approvals needed for the Hay Ranch permit could result in a multi-notch downgrade of the Project.
Coso Geothermal Power Holdings LLC is a special purpose company formed to effectuate a sale-leaseback transaction of the Project. The Project comprises of three linked geothermal plants totaling 240 MW located in California and a 17.7 MW geothermal plant in Nevada. The California geothermal plants sell all its power to Southern California Edison (A3 sr unsec) while the Nevada based plant sells its power to Sierra Pacific Power (Ba3 sr unsec). Coso is owned indirectly by Terra-Gen Power LLC (Terra-Gen). Terra-Gen is owned by private equity funds managed by ArcLight Capital Partners (ArcLight).