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Coso’s credit rating downgraded

June 30, 2011

Coso Operating Company’s geothermal power-generating facility in southern Inyo County has had its credit rating lowered due to weak product or energy output. File photo

The geothermal project in Southern Inyo County has had its credit rating reduced due to lowered energy capacity and output, and mounting debt.
Fitch Ratings has downgraded Coso Geothermal’s rating from a “B+” to “B.”
According to Standard and Poor’s, another credit rating firm, “credit ratings are not investment advice, or buy, hold, or sell recommendations. They are just one factor investors may consider in making investment decisions.”
Credit ratings for a business are very much like credit ratings for consumers. The worse the rating, the more difficult it is for that entity to get a loan and the higher the interest to be paid.
In a report published May 27, Fitch listed the rationale for its decisions:
“Capacity at the Coso geothermal project declined 5 percent in 2010 from 2009 levels, and Fitch’s projections are based on currently depressed levels of energy output;
“Average net capacity has declined in each month since December 2010, whereas Fitch expected capacity to stabilize or improve following its rating action in November 2010 …
“The financial profile is particularly vulnerable through the next eight months, as the January 2012 rent payment represents the peak of Coso’s debt repayment profile;
“Favorably, Coso revealed this week that it was able to amend the terms of its power purchase agreement, postponing a capacity test and increased collateral requirement that would have otherwise pressured credit quality;
“The Negative Outlook reflects the potential for further declines in energy production from the geothermal resource and other operating risks that could negatively affect output.”
In response, Joe Greco, senior vice president for Coso, said in an e-mail, “Coso continues to manage the geothermal resource as efficiently as possible and is working toward stabilizing the generation output from the site.
“Over the past few years we completed millions of dollars of capital improvements at the Coso geothermal facility and used the 3,000 acre-feet of supplemental water from our Hay Ranch property which was the full 2010 permitted amount set by Inyo County. In 2011 we plan to utilize the full Hay Ranch allocation of 4,839 acre-feet/year set by the Inyo County Water Department. We will use this additional water to continue to augment the geothermal field in an environmentally responsible manner.”
Fitch says that the capital improvements “have proven largely ineffective.” Fitch added it recognizes various enhancements to the plant and the use of additional injection water from Hay Ranch may raise or at least maintain output. “However, at this time output is the overwhelming risk to this credit, and its continued decline has brought debt service coverage ratios close to breakeven levels.”
For years, Coso Operating Company had been in negotiations with the county to get permission to pump water from the valley floor to the plant as supplemental injection water.
A 30-year Conditional Use Permit approved in March 2009 by the Inyo County Planning Commission allowed the company to pump water from its fallowed Hay Ranch property in Rose Valley for injection into its geothermal field located within the China Lake Naval Weapons Center.
Water would be extracted at an average rate of 3,000 per minute, or 4,800 acre-feet per year, and piped from Hay Ranch, adjacent to and east of U.S. 395, just north of Coso Junction, to the geothermal facility nine miles to the east.
The water is needed, according to Coso, to supplement the diminishing geothermal reservoir and was the only economically viable way to keep the plant in operation.

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