TEXT-Fitch affirms Orange Cogen Funding bonds at 'BBB'
June 19 - Fitch Ratings affirms the 'BBB' rating on Orange Cogen Funding Corporation's (OC Funding) $110 million ($86.8M outstanding) senior secured bonds due 2022 (the bonds). The Rating Outlook remains Stable. The ratings affirmation and Stable Outlook reflects cash flows which have been and are expected to remain stable under fixed-price contracts with investment grade counterparties. KEY RATING DRIVERS --Stable Historical Performance: Operating costs, heat rates, and availability for Orange Cogeneration (the project) have been generally stable and consistent with expectations. The project's ability to maintain adequate availability is necessary to earn capacity payments, which represent the primary source of revenue (75%). --Substantially Contracted Cash Flows: The project earns capacity and energy revenue under two power purchase agreements (PPAs) with Progress Energy Florida (PEF; rated 'BBB+' with a Negative Outlook by Fitch) and Tampa Electric Company (TECO, rated 'BBB+', Stable Outlook) through 2015 for 94% of total output. --Conventional Technology: The project utilizes conventional and proven combined-cycle natural gas-fired generation based on two GE gas turbine engines, along with an on-site spare engine. --Energy Revenue Risk: The project is exposed to price risk as the PPAs do not directly pass fuel costs to the off-takers. Under the terms of the PPAs and supply contract, an increase in fuel costs may not be completely offset by an increase in energy revenues. As a result, energy production may yield negative operating margins for OC Funding. WHAT COULD TRIGGER A RATING ACTION -- Availability below the level required to receive full capacity payments. --A significant reduction in energy prices, not offset by a reduction in fuel costs. --A downgrade to one of the project's counterparties below OC Funding's rating. SECURITY Collateral includes all real property owned by the parent guarantor, Orange Cogeneration Limited Partnership (OCLP); all material project documents at OCLP; security interest in all personal property owned by OCLP and OC Funding; a security interest in all funds established under the Indenture; a pledge of all partnership interests in OCLP and all outstanding capital stock of OC Funding, as well as a pledge of stock of the general partner of OCLP. CREDIT UPDATE Cash flows have been and are expected to remain stable under fixed-price PPAs with investment grade counterparties. The project earns nearly all of its revenues from two PPAs. The primary off-taker is PEF, which currently contracts most of the project's capacity and will absorb the project's full capacity once the second PPA, with TECO expires in 2015. PEF's PPA extends three years beyond maturity of the bonds. The project's ability to maintain on-peak availability above required PPA benchmarks is vital to cash flow. The PPAs require a minimum 12-month rolling on-peak availability of 90% under PEF and 80% under TECO to earn the full capacity payment. The project has consistently exceeded the required benchmarks to earn full payments under both contracts. The project is exposed to price risk as it relates to the change in energy prices compared with the change in fuel costs. Under the terms of the PPAs and current fuel supply contract, the change in the avoided cost of coal (at the off-takers' affiliated coal plants) determines the change in on-peak energy prices as well as the change in natural gas costs. This creates a risk that in a falling coal price environment, energy revenues would shrink, while fuel costs would continue to rise under a minimum 2% annual escalation. This mismatch in revenues and fuel prices has resulted in negative margins in energy production for the project. The sponsor actively manages the facility's on-peak availability to minimize energy production when it is uneconomic. This is done while still maintaining a safe margin above the availability benchmark required to earn full capacity payments. Under the terms of the new supply contract, beginning in mid-2015, fuel costs will be indexed to gas prices, a feature which is expected to better reflect actual fuel price changes. Despite an unfavorable environment for power generation, OC Funding's debt service coverage ratios (DSCR) are strong and are expected to remain above 2.0 times (x) coverage over the remaining debt term. In Fitch's rating case, DSCRs will be at a minimum in 2012, at 2.18x. As gas contracts roll to more favorable terms and the project's full output is picked up by PEF, DSCRs are expected to increase over time even as yearly debt obligations increase. Overall, the rating case projected DSCR will average 2.72x. OC Funding was formed to issue the secured bonds, and is a 100% owned direct subsidiary of OCLP. The approximately 103 megawatt natural gas fired combined-cycle cogeneration facility located in Bartow, Florida, has been in commercial operation since 1995. The secured bonds were originally issued to repay loans to the original sponsors, to fund the debt service reserve account, to pay a development fee, and to pay transaction costs. Principal and interest are payable quarterly on each 15th of March, June, September, and December. Additional information is available at 'www.fitchratings.com' Applicable Criteria and Related Research: --'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2011); --'Rating Criteria for Thermal Power Projects' (June 20, 2011). Applicable Criteria and Related Research: Rating Criteria for Infrastructure and Project Finance Rating Criteria for Thermal Power Projects
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