Fitch Rates OrCal Geothermal's Sr Secured Notes 'BBB-'

Business Wire, Nov 30, 2005

CHICAGO -- Fitch expects to assign a rating of 'BBB-' to OrCal Geothermal Inc.'s (OrCal) proposed issuance of $165 million senior secured notes due 2020. The purpose of the proposed financing is to repay existing project indebtedness. The project sponsors do not expect to receive a distribution from the issuance proceeds.

OrCal is a special-purpose company created to acquire and own the Heber 1 and Heber 2 geothermal power facilities (the Heber projects) located in Imperial County, California. OrCal will also own the Gould project, which will consist of a series of upgrades designed to enhance production and operating efficiency at the existing Heber projects. OrCal is a wholly owned subsidiary of Ormat Nevada, Inc. (Ormat Nevada), which is currently constructing the Gould project in addition to performing the operation and maintenance functions for the Heber facilities. Ormat Nevada is a wholly owned subsidiary of Ormat Technologies, Inc., a vertically integrated owner and developer of geothermal and other recovered energy projects.

The Heber projects sell electric energy and capacity to Southern California Edison Co. (SCE) under separate Standard Offer No. 4 power purchase agreements (PPAs) expiring in 2015 and 2023. The PPAs provide OrCal with fixed-price capacity and bonus payments and energy payments based on SCE's short-run avoided cost (SRAC). Energy payments are indexed monthly to the price of natural gas under the SRAC formula. The Heber projects wheel power to SCE through the Imperial Irrigation District service territory under several transmission and interconnection agreements. Upon commercial operation, expected in January 2006, the output from the Gould project will be sold to the Southern California Public Power Authority (SCPPA) under a long-term PPA. OrCal will receive a fixed, escalating price for energy under the SCPPA agreement.

Rating rationale is as follows:

--Fitch has evaluated OrCal's credit quality on a stand-alone basis, independent of the credit quality of its owners. The rating reflects OrCal's credit quality throughout the term of the proposed issuance.

In the Fitch base case, DSCRs range between 1.6 times (x) and 1.7x through 2009 and gradually rise to well over 2.0x by debt maturity in 2020. DSCRs average 2.1x until 2015, when DSCRs rise to 2.3x and increase steadily thereafter. In a low gas case, OrCal is most vulnerable to natural gas price volatility in 2008 and 2009, when DSCRs fall to 1.36x and 1.43x, respectively. In all other years, DSCRs remain above 1.45x. The results of the stress cases indicate that OrCal should have sufficient liquidity in a low gas scenario to meet both unexpected operational challenges and its senior debt service obligations.

Bondholder protection provided by the indenture is comparable to that of other investment-grade project finance transactions. Restrictions surrounding additional indebtedness are adequate, and the restricted payment test provides sufficient protection to the senior bondholders

at the current rating level. Subordinated lenders are junior in right of payment and lack any independent rights or remedies; a subordinated payment default would have no effect on the credit quality of the senior debt.

Primary credit strengths are as follows:

--The projects have a solid track record of reliable operating performance;

--The geothermal resource is considered stable;

--OrCal maintains a competitive position as a low-cost producer of electricity.

--The projects' advantageous position in the dispatch stack and qualifying facility status provide substantial assurance that uncommitted output will be sold in a competitive environment.

--The sponsor has extensive experience with geothermal projects and related technologies.

Primary credit concerns are as follows:

--OrCal is exposed to market price volatility, as a significant portion of revenues are indexed to natural gas prices;

--It is uncertain whether the SRAC formula will be altered following the expiry of the fixed energy price period in April 2007;

--Projected financial performance is dependent upon the successful operation of the Gould project.

Financial Analysis

The sponsor base case relies on an SRAC price forecast provided by DAI Management Consultants. Though cash flow varies with energy revenues, variations in coverages are driven primarily by the scheduled amortization of principal. Minimum DSCRs of 1.53x and 1.79x are projected to occur in 2006 and 2007, respectively, when OrCal's debt service burden approaches its peak. However, there should be minimal cash flow volatility since OrCal receives fixed energy prices in these years. Projected DSCRs are approximately 2.0x between 2008 and 2015, when debt services declines to $15 million. DSCRs increase to 2.6x in 2016, when the stepdown in capacity payments is more than offset by a greater than proportionate reduction in debt service. DSCRs improve thereafter with increasing revenues and level debt service of $10 million.

The Fitch base case employs Fitch's natural gas pricing assumptions in the calculation of SRAC prices. Whereas the O&M budget in the sponsor's base case includes a $2.4 million annual contingency, the Fitch base case excludes this contingency. OrCal will only incur these costs periodically, and Fitch believes that the required prefunding of major maintenance and capital expenditures with otherwise distributable cash mitigates the impact on liquidity. Furthermore, the magnitude of these expenditures is considered low relative to cash available for distribution in any given year, even in a reasonable stress case. Accordingly, Fitch believes it is reasonable to exclude the contingency from operating expenses. All other assumptions used in the sponsor's projections are incorporated in the Fitch base case, with the exception of certain working capital adjustments. The pattern of coverage ratios is generally similar to that of the sponsor base case with the exception of the 2008 to 2010 period, when the assumed natural gas prices fall considerably below those of the sponsor base case.