Fitch Affirms Orange Cogen Funding's Senior Secured Bonds at 'BBB '; Outlook Stable
The rating affirmation is supported by OC Funding's projected debt service coverage ratios (DSCRs) which are strong for the rating. Cash flow remains resilient as the project earns fixed capacity payments through a long-term agreement with Duke Energy Florida (DEF; 'BBB+'/Stable Outlook), which actively constrains the rating. The financial profile benefits from the 2015 transition to a more favourable gas purchase agreement that has led to positive energy margins and prompted management to increase the project's availability well above contracted minimum levels.
KEY RATING DRIVERS
Stable Historical Performance: Orange Cogeneration (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. Operating costs, heat rates, and availability 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. (Operation Risk: Midrange).
Substantially Contracted Cash Flows: The project earns capacity and energy revenues under a power purchase agreement (PPA) with Duke Energy Florida through 2025, three years beyond final debt maturity, for 100% of total output. Fuel costs are not reimbursed by energy payments, creating a mismatch that has exposed the project to negative energy margins in the past. However, the recent implementation of a new fuel supply contract with index-based pricing has benefited the project and energy margins are currently positive. (Revenue Risk: Midrange)
Adequate Fuel Supply: The project's natural gas purchase and transportation contracts converted to more favourable terms in mid-2015 and extends to 2025, three years beyond the term of the debt. There are sufficient fuel providers available should the current contract counterparties need to be replaced. (Supply Risk: Midrange)
Typical Project Debt Structure: Project debt is fully amortizing with a six-month debt service reserve and high 1.30x equity distribution test. (Debt Structure: Midrange)
Strong Financial Profile: Stable annual cash flows are forecasted to produce a rating case average DSCR of 3.13x that is consistent with the rating category, mitigating the increasing levels of total debt service in the final six years of the term. Leverage is low with a 2016 debt-to-cash flow ratio of 1.53x under Fitch rating case conditions.
Peer Comparison: Orange Cogeneration Limited Partnership's (OCLP) financial profile is consistent with the investment grade criteria and higher than Midland Cogeneration Venture LP's ('BBB-'/Stable Outlook) which is more exposed to volume and fuel price risk and has lower coverage ratios. Other privately rated cogeneration peers are exposed to partial price and volume risk with lower projected margins that are not consistent with investment grade ratings.
Negative: Availability below the level required to receive full capacity payments that results in material erosion of project cash flow.
Negative/Positive: A change to DEF's rating could result in a corresponding change to OC Funding's rating.
Negative: Loss of the project's status as a qualifying facility (QF) could result in PPA termination.
Collateral includes all real property owned by the parent guarantor, 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.
SUMMARY OF CREDIT
OC Funding's financial performance was strong in 2015 with a Fitch-calculated DSCR of 3.46x. The improved performance was largely driven by lower fuel costs following the implementation of the new gas purchase agreement in May 2015. Unlike the previous agreement, pricing under the new fuel supply contract does not include a reservation fee and gas costs are indexed to actual gas prices, resulting in significant savings for the project. Fuel supply costs were \\$7.7 million lower in 2015 compared to 2014 despite a 19% increase in net generation.
The project's ability to meet its availability benchmarks is necessary to earn full capacity payments under the PPAs with DEF and Tampa Electric Company (TECO; 'BBB+'/Stable Outlook). The TECO PPA expired at the end of 2015 and the DEF PPA increased to cover the project's full output. Under the contracts, the project must meet minimum 12-month rolling on-peak availability benchmarks of 90%, under the DEF PPA, and 80%, under the TECO PPA. The project exceeded both in 2015, recording on peak availability of 105.1% for DEF and 81.2% for TECO. The project has consistently maintained availability levels above benchmarks except for 2013 when it experienced a major outage for one of the turbines that was subsequently corrected.
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 DEF PPA (and under the now expired TECO PPA), the change in the avoided cost of coal generation (at the off-taker's affiliated coal plants) determines the change in on-peak energy prices. The energy price does not directly reimburse for the actual fuel costs incurred at the plant, creating a mismatch that can result in negative energy margins as experienced under the pre-existing fuel supply agreement.
Management had previously maintained the project's availability levels close to contract minimums to offset negative margins on energy production. Energy margins are currently positive, driven largely by more favourable pricing under the new fuel supply agreement. However, the rating reflects the project's dependence on fixed capacity payments (approximately 80% of revenues historically) to cover the plant's fixed operating costs and debt service along with providing strong mitigation against potentially volatile energy margins.
The project's strong and stable capacity revenues and more favourable gas supply contract provide resilience to cash flows. Under Fitch's rating case, DSCRs are expected to average 3.13x over the remaining debt term.
OC Funding was formed to issue the secured bonds, and is a 100% owned direct subsidiary of OCLP. The approximately 104 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.