Fitch Ratings said April 28 that it has affirmed Orange Cogen Funding Corp.‘s (OC Funding) $110 million ($72.6 million outstanding) senior secured bonds due 2022 at ‘BBB+’.
The Rating Outlook remains 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. The financial profile benefits from the 2015 transition to a more favorable gas purchase agreement that has led to positive energy margins and prompted management to increase the project’s availability well above contracted minimum levels.
Orange Cogeneration (the project) utilizes conventional and proven combined-cycle natural gas-fired generation based on two General Electric 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.
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, Fitch pointed out. However, the recent implementation of a new fuel supply contract with index-based pricing has benefited the project and energy margins are currently positive.
The project’s natural gas purchase and transportation contracts converted to more favorable 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, Fitch noted.
The project’s ability to meet its availability benchmarks has been necessary to earn full capacity payments under the PPAs with DEF and Tampa Electric Co. (TECO). 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.
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, Fitch said.
OC Funding was formed to issue the secured bonds, and is a 100% owned direct subsidiary of OCLP. The approximately 104-MW natural gas fired combined-cycle cogeneration facility located in Bartow, Florida, has been in commercial operation since 1995.