Fitch Affirms CE Generation, LLC's $400MM Senior Notes at 'BB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'BB-' rating for CE Generation, LLC's (CE Gen) $400 million senior notes ($109 million outstanding) due in 2018. The Rating Outlook is Stable.
The rating reflects operating cash flow insufficient to meet scheduled debt service payments, with continuing reliance on parent Berkshire Hathaway Energy Company's (BHE, rated 'BBB+' with a Stable Outlook by Fitch) track record of providing non-obligatory equity support to fund capex and meet debt service shortfalls. The Stable Outlook incorporates Fitch's expectation that BHE will continue to provide equity support as needed for the remaining three-year debt term.
KEY RATING DRIVERS
Operations Supported by Sponsor Investment - Operation Risk: Midrange
CE Gen's geothermal and natural gas projects have relatively stable operating histories that employ proven technologies. The parent, BHE, is contributing equity to fund a robust multi-year capital expenditure (capex) plan to support long-term operations.
Stable Resource, Adequate Supply - Supply Risk: Midrange
The geothermal resource has been relatively stable since the projects began commercial operation and is expected to remain viable beyond 2040, suggesting there is residual value for the parent beyond the term of the debt. The natural gas assets procure gas via tolling or marketing agreements.
Exposure to Volatile Energy Pricing - Revenue Risk: Weaker
Volume risk is mitigated through power purchase agreements (PPAs), primarily with Southern California Edison (SCE; 'A-'; Stable Outlook). However, the majority of energy revenues are exposed to variable Short-Run-Avoided-Cost (SRAC) pricing, introducing substantial price risk to cash flow. Many projects are also exposed to non-reimbursed curtailment by SCE or the transmission provider.
Subordinated Position - Debt Structure: Weaker
CE Gen's cash flow is reliant on distributions from the Salton Sea Funding Corporation (SSFC), a portfolio of geothermal projects which has semi-annually amortizing debt that is structurally senior to CE Gen. SSFC's distribution trigger is relatively high (1.50x) and has not been reached since 2013. Cash has remained trapped at SSFC, which is expected to continue through 2017, leading to financial pressure at CE Gen that has been largely offset through BHE's non-obligatory equity injections.
Weak Financial Profile
The consolidated debt service coverage ratio (DSCRs) from 2015-2018 are below breakeven levels in Fitch's base and rating cases, implying that non-obligatory sponsor equity injections or reliance on the debt service reserve will be needed to avoid default. The rating and Outlook incorporate Fitch's expectation that equity contributions will continue and that the debt service reserve will not be tapped during the remainder of the debt's tenor.
The assets within Coso Geothermal Holdings, LLC (rated 'C') have suffered substantially greater resource depletion than those within the CE Gen portfolio. OrCal Geothermal Inc. ('BB'; Negative Outlook) has less exposure to PPA price risk and has no structural subordination but is experiencing lower than expected production that could erode future cash flow. FirstLight Hydro Generating Company ('BB-'; Stable Outlook) is a portfolio of projects with revenue price risk and coverage ratios consistent with a lower rating, but buoyed by demonstrated sponsor support from a higher-rated owner.
Negative: A need to tap the debt service reserve would indicate a change from the sponsor's practice of providing equity support to meet debt obligations and would result in negative rating action commensurate with the project's standalone financial performance and prospects.
SUMMARY OF CREDIT
The rating affirmation and Stable Outlook reflect continued parent equity contributions to support capex and portfolio debt service. Parent BHE continues to provide equity in support of drilling and production enhancements to ensure long-term stable operations. While operational performance has been somewhat variable it has improved recently. However, the project's net operating income continues to be limited due to exposure to low PPA prices and on-going capital investments. Curtailment issues have hampered financial performance in the past but have not affected operations in 2015 year-to-date. Cash remains trapped at the SSFC level, as has been the case since 2013, and CE Gen will only be able to service the debt with equity support provided by BHE or by tapping the debt service reserve.
Debt service coverage at the CE Gen level was 0.10x in June 2015 and is expected to be 0.19x for the full year 2015, based on operating cash flow. Without BHE's equity support of approximately $26 million this year and the use of project cash on hand, CE Gen would need to access its letter of credit-funded reserve to meet debt obligations. Further equity support will be necessary for CE Gen to avoid default. Under Fitch's base and rating cases, DSCRs based on operating cash flow are below 1.0x annually through the debt's final maturity in 2018.
Fitch's rating assumes BHE will continue to fund capex and contribute equity as needed to meet debt service obligations over a relatively short remaining debt term. Including the expected equity contribution in December 2015, sponsors will have contributed $82 million to CE Gen from 2013 through the end of 2015 and a total of $140 million to CE Gen and SSFC combined over the same timeframe.
BHE has demonstrated its intention to retain the assets beyond debt maturity through its June 2014 purchase of TransAlta's 50% ownership interest in CE Gen and its ongoing efforts to re-contract portfolio assets under PPAs that extend well beyond debt maturity. While BHE has not provided an equity contribution agreement, these actions establish a track record of support and indicate that BHE is unlikely to allow CE Gen to default.
CE Gen is a special purpose holding company created solely to issue the senior secured notes and hold the equity interests in 13 generating assets with an aggregate net ownership interest of 784 megawatts. CE Gen's 10 geothermal facilities are located in the Imperial Valley near Calipatria, California, and its three gas-fired facilities are located in Plattsburg, New York (Saranac); Big Springs, Texas (Power Resources); and Yuma, Arizona (Yuma). CE Gen is 100% owned by BHE.