Citing high natural gas prices that have curtailed operations of the city-run 484 MW cogeneration power project, Fitch Ratings announced Thursday it decreased the credit rating of senior secured revenue bonds due in 2025 for the City of Klamath Falls, OR, cogeneration project and related assets. The rating was dropped to “B-” from “BB+,” and the rating watch was removed from “Negative.”

Fitch said its action incorporates its “expectation of continued depressed financial performance due to ongoing reduced plant use, attributed to high natural gas prices,” the rating agency said. “Specifically, high natural gas prices have led Klamath Cogeneration’s primary off-takers to reduce their dispatch of the facility, as allowed under their respective purchase power agreements.”

Fitch cited a 57% capacity factor for the power plant for the quarter ended Sept. 30, 2005, compared with 74% for the same quarter a year earlier, and the average capacity factor for the five months ended in November 2005 was 54%. As a result, project revenues have been insufficient to fund the Klamath Falls municipal facility’s maintenance reserve account and meet its Jan. 1, 2006 debt service payments on second lien electric revenue bonds.

Further uncertainty cited by Fitch is the fact that Klamath Falls begins the new year with two contracts totaling 150 MW collectively expiring in June this year, and there are no public prospects for extending them.

On the plus side, Fitch said, is the fact that the municipal cogeneration plant “continues to operate efficiently — in excess of 95% — over the past two years.” Project revenues have been sufficient to cover all plant operating expenses.

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