OREANDA-NEWS. Fitch Ratings has affirmed Coso Geothermal Power Holdings LLC's (Coso) $629 million ($430 million outstanding) pass through certificates due 2026 at 'C'.

The rating affirmation is based on Fitch's expectation that default appears imminent. Default could occur as early as mid-July 2015 if Coso fails to meet certain rent payments required under the facility lease. The potential October 2015 expiration and subsequent repayment of the letter of credit (LC) backing Coso's collateral obligation under its revenue contracts presents another near-term default risk. Cash flow projections and remaining reserves indicate that a payment default is likely by early 2017.

KEY RATING DRIVERS
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. A senior debt reserve, funded with cash from a drawn LC facility, supports these obligations when needed, though the remaining reserve balance equates to less than 50% of annual debt service.

Limited Price Risk - Revenue Risk: Midrange
Variable pricing on energy sales is limited to one-fifth of total revenues between July 2014 and March 2019. Coso earns the majority of its revenue for its energy output through various power purchase agreements (PPA) with off-taker Southern California Edison (SCE, rated 'A-' with a Stable Outlook by Fitch).

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 Stable) portfolio and OrCal Geothermal Inc. ('BB'/Outlook Stable), leading to more pressured financial performance.

RATING SENSITIVITIES
Negative - Failure to meet certain obligations this year under the facility lease or revenue contracts could result in near-term technical default.

Negative - Payment default could occur in early 2017 if operating cash flow and remaining reserves are insufficient to meet debt obligations.

SUMMARY OF CREDIT
The rated certificates could be pulled into default as early as July 2015 if Coso fails to make certain equity rent payments, an obligation under the facility lease. Fitch expects a $3 million shortfall on the upcoming equity rent payment due July 15, 2015. The senior debt reserve may not be used to make up for any equity rent shortfalls, but the owner lessors do have the option to cure. If not cured within 10 days of the due date, Fitch expects the rated debt will be pulled into default.

Default could also occur if Coso fails to secure an extension or replacement of the LC backing a $15 million collateral posting required under its PPA with SCE. Coso currently satisfies this requirement with an LC with Citibank, N.A. ('A+'/Outlook Stable), which expires in October 2015. SCE would draw on the LC if it is not extended or replaced. If Coso is unable to meet subsequent LC repayment obligations, this may lead to a technical default that could cross default to the lease and lease indenture of the rated certificates.

Based on Fitch's projections, operating cash flow and remaining debt service reserves are expected to be sufficient to repay obligations through 2016. In Fitch's view, reserves are likely to be exhausted and a payment default is likely to occur in early 2017 due to weakened operational performance. As of June 2015, Coso has tapped its senior reserve three times over the past three years to meet debt payment shortfalls. Coso drew the senior debt reserve portion of its LC into cash in November 2014 and continues to meet rated debt obligations using a combination of operating cash flow and the remaining reserves. Coso utilized $10 million of the senior debt reserve to meet the most recent January 2015 payment, leaving a reserve balance of $17.6 million. Coso has defaulted on its obligation to repay principal on the LC's drawn funds, but this does not constitute a default under the lease indenture for the rated 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.