Fitch Affirms OrCal Geothermal's Sr. Secured Notes at 'BBB-'; Outlook Stable

CHICAGO--(Business Wire)--
Fitch Ratings has affirmed the 'BBB-' rating of OrCal Geothermal
Inc.'s (OrCal) $165 million senior secured notes due 2020. While
recent financial results have fallen short of Fitch's original
projections, the affirmation reflects Fitch's expectation that OrCal's
performance will not be permanently affected by current operational
challenges. The Rating Outlook is Stable, as OrCal's revenues are
derived from fixed-price power purchase agreements (PPAs) over the
next few years.

The rating is based on OrCal's long-term financial profile, when
OrCal will be vulnerable to fluctuations in Southern California
Edison's (SCE) short-run avoided cost (SRAC). OrCal is primarily
dependent upon SRAC-based energy payments received from SCE under two
PPAs, which were amended to fix the SRAC price through April 2012.
Once the fixed price period expires, the energy price received under
the PPAs will revert to the prevailing SRAC calculation. Though
OrCal's credit quality is enhanced during the fixed price period due
to the stability of cash flows, revenues remain subject to SRAC price
volatility over the long-term.

The anticipated revision of the SRAC formula will negatively
affect OrCal's financial performance. The California Public Utilities
Commission (CPUC) is currently considering significant changes to the
SRAC formula, which is indexed to the price of natural gas. If the
proposed changes are adopted by the CPUC, OrCal's debt service
coverage ratios (DSCRs) would exceed 1.5x in Fitch's current low
natural gas price stress of $4.00/mmbtu. The rating is viewed as
consistent with the projected level of debt service coverage in a low
gas stress.

OrCal's revenues could improve due to the additional generating
capacity provided by the Heber South project, which consists of new
production wells and generating equipment installed on the existing
geothermal field. Heber South achieved commercial operation in April
2008, and OrCal's parent funded the $40 million cost of the project
under a subordinated shareholder loan. Heber South is currently
producing below full capacity, but management expects the project to
generate 14 MW (net) once start-up issues have been resolved.

In May 2008, OrCal and its counterparties executed PPA amendments
which provide OrCal with the opportunity to earn additional energy and
capacity payments. The Southern California Public Power Authority
(SCPPA) agreed to increase contractual capacity and pay a higher rate
for energy deliveries exceeding a certain threshold. Under a separate
amendment to the PPA governing Heber 1's output, SCE will purchase an
extra 2 MW at the established SRAC price. Other contractual
modifications make it possible for OrCal to earn capacity bonus
payments; historically, Heber 1's output has been insufficient to meet
the bonus requirements. The CPUC has yet to approve the amendment to
the SCE PPA, though Fitch has no reason to believe the CPUC will
withhold its approval.

Taken together, the PPA amendments and the incremental generating
capacity of Heber South could provide higher revenues and enhance
OrCal's long-term credit quality. However, OrCal has not yet
demonstrated the capability to deliver output consistent with the
sponsor's original projections. Financial performance in 2007 was
sufficient to support a DSCR of only 1.44x, as calculated by the
sponsor, due to lower than originally projected energy production and
unexpected major maintenance costs.

Though it is uncertain whether aggregate net output will reach
originally projected levels in 2008, year-to-date operating
performance through June has been generally positive and reflects a
consistent pattern of improvement. Specifically, Heber 1's output has
increased after related capital improvements were completed in 2007.
The Heber South project is also providing additional output, though
OrCal is currently incurring unanticipated costs to bring the
project's capacity in-line with expectations. OrCal is also
implementing a capital improvement plan to replace aging equipment at
the Heber 2 project and prevent future degradation in performance.

While none of these capital expenditures were included in the
original projections, OrCal expects the improvements to stabilize
long-term output and does not anticipate significant further capital
expenditures after 2009. The fixed rates in the PPAs will provide
highly stable revenues over the next few years, mitigating the cash
flow impact of the expenditures. Fitch believes OrCal will have ample
opportunity to resolve operating issues in the medium term.

OrCal is a special-purpose company created to acquire and own the
Heber 1 and Heber 2 geothermal power facilities (the Heber projects)
located in Imperial County, CA. The Heber projects sell electric
energy and capacity to SCE under separate Standard Offer No. 4 PPAs
expiring in 2015 and 2023. OrCal also owns the Gould project, which
consists of a series of upgrades designed to enhance production and
operating efficiency at the Heber projects. The newly built Heber
South project supplies energy to SCPPA under a separate fixed-price
PPA. OrCal is an indirect, wholly-owned subsidiary of Ormat
Technologies, Inc., a vertically integrated owner and developer of
geothermal and other recovered energy projects.

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.

Fitch Ratings
Chris Joassin, 312-368-3166, Chicago
Doug Harvin, 312-368-3120, Chicago
or
Media Relations:
Cindy Stoller, 212-908-0526, New York

Copyright Business Wire 2008