S&P Affirms FPL Energy Caithness Funding 'BBB-' Rtg

Business Wire, Oct 13, 2000

Business Editors

NEW YORK--(BUSINESS WIRE)--Standard & Poor's

Oct. 13, 2000--Standard & Poor's today affirmed its triple-'B'-minus rating on FPL Energy Caithness Funding Corp.'s $150 million senior secured bonds due 2018. The outlook is stable.

The affirmation follows Standard & Poor's annual surveillance effort. FPL Energy, LLC and Caithness Energy LLC ("Sponsors") own the issuer. Luz Solar Partners Ltd., VIII (LSP VIII) and Luz Solar Partners Ltd., IX (LSP IX) own the project assets. Partnership interests are currently held by indirect, wholly owned subsidiaries of FPL Energy LLC and Caithness Energy LLC. FPL Energy is the independent power subsidiary of FPL Group Inc. (double-'A'-minus/CreditWatch Neg/--), the holding company for Florida Power & Light Co.

Of significance, in June 2000 the project's power offtaker, Southern California Edison Co. (SCE; single-'A'-plus/Negative/'A-1'), filed a petition with Federal Energy Regulatory Commission (FERC) requesting that FERC apply the November 1999 decision of the U.S. Court of Appeals for the District of Columbia Circuit in Southern California Edison Co. versus FERC, to qualifying small power production facilities certified prior to that decision, including SEGS VIII and SEGS IX. In the November 1999 case, the Court of Appeals ruled that FERC's interpretation of the allowability of use of fossil fuels under the "essential fixed asset" standard is inconsistent with the Federal Power Act. The essential fixed asset standard allows certain usage of fossil fuel not enumerated under sections of the Federal Power Act. FERC certified the Luz VIII and IX projects (now SEGS VIII and IX) as qualifying facilities (QF) in 1988 based upon the essential fixed asset standard. A decision in favor of SCE would invalidate the use of natural gas to supplement the power produced by the facility, and could also force the project to refund cash associated with such generation dating back to January 1995. The major question in this case is whether a litigation decision can be applied retroactively to a closed case, and whether a FERC order, relied upon by investors over a long period, can be overturned. The projects are operating, and are expected to continue operating normally pending the outcome of the petition. It is unclear when FERC will render a decision in this matter; and based on FERC's history of supporting QF contracts that have been relied upon by investors, Standard & Poor's views the likelihood of a decision in favor of SCE as low. However, it is less clear what the outcome of this case would be if FERC's decision were then appealed to the courts.

The projects estimate that the diminution in the amount of capacity and energy each facility would be capable of supplying should they no longer be permitted to utilize natural gas under the essential fixed assets standard could result in a loss of revenues of approximately $15 million per year going forward. Furthermore, if they are ordered to refund funds back to January 1995, the projects estimate that it could require a lump sum payment of $58.3 million. Based on current projections, the project would meet debt service requirements given current debt levels should they lose $15 million per year going forward in revenues, even assuming that there is no associated reduction in gas costs, but only at levels of 1.1 times (x) to 1.2x. These coverages are not appropriate for the rating category. The projects do not have the cash on hand to make a $58.3 million lump sum payment. Based on the above, Standard & Poor's would likely place the issue on CreditWatch Negative if it is brought to the Court of Appeals.

The projects continue to operate well, generating debt service coverages in line with projections. Availability for both units has been more than 96% for the 12 months ended July 2000; debt service coverage was 2.45x for the same period based on the actual amount of debt issued. The projects still have the right to issue an additional $60 million in debt, and debt service coverage for the 12 months ended July 2000 would have been 1.85x based on the additional debt.

The projects are each 80 MW net solar electricity generating stations (SEGS) located in the Mojave Desert, Calif. Solar energy is captured by parabolic mirrors which track the sun as it moves across the sky over the course of the day and focus the sun's energy onto a heat collection element containing a petroleum-based heat transfer fluid (HTF). When the HTF is sufficiently heated, it is run through heat exchangers to generate steam, which drives a conventional steam turbine/generator set. The projects use solar radiation as their primary source of energy for the production of electricity. They also use natural gas as a supplementary fuel, although the use of natural gas is limited by FERC requirements to 25% of the total annual heat input received by each of the projects. The projects have been in commercial operation since 1989 (SEGS VIII) and 1990 (SEGS IX).

OUTLOOK: STABLE