July 16, 2012 / 9:49 PM / 5 years ago

TEXT-Fitch expects to rate CE Oaxaca Dos notes 'BBB-(exp)'

July 16 - Fitch Ratings expects to assign a 'BBB-(exp)' rating to the
US$164.5 million CE Oaxaca Dos, S. de R.L. de C.V.'s (Oaxaca II) senior secured
notes due 2031. The Rating Outlook is Stable.

KEY RATING DRIVERS

--MIDRANGE FINANCIAL PERFORMANCE: The rating largely reflects the project's
expected financial performance. Under Fitch rating case conditions, which
contemplate higher O&M costs combined with reduced energy production, debt
service coverage ratio (DSCR) is expected to average 1.33 times (x) with a
minimum of 1.29x. Coverage levels are in line with Fitch's applicable criteria
and other similarly rated transactions.

--LOW VARIABILITY WIND RESOURCE: The non-diversified, single-site nature of the
project, is partially mitigated by its location at a region that benefits from
an attractive wind resource and where energy generation probability scenarios
were based on almost 10 years of long-term reference data on-site or nearby to
it. In its financial analysis, Fitch takes into account the potential for lower
wind conditions that could negatively affect output.

--FULLY CONTRACTED REVENUES: 100% of energy generated is contracted under a
20-year fixed-price Power Purchase Agreement (PPA) with an investment-grade
off-taker. There are no penalties in case production is lower than expected,
which effectively mitigates revenue risk. Mexico's Federal Electricity
Commission (CFE) is a large electric utility (Foreign Currency Long-term Issuer
Default Rating 'BBB' and Local Currency Long-term IDR 'BBB+'; both with
Stable Outlook by Fitch).

--MODERATE OPERATION RISK: The rating reflects the risks inherent to the
operation of a recent facility over a 19.5-year term. Favorably, it benefits
from proven turbine technology, and initial technical support from the
manufacturer. Given that the operation, maintenance and guarantees are provided
by Acciona Energia Mexico, S. de R.L. de C.V. (AEM), the project operational
performance is linked to its Sponsor's long term prospects.

--BACK-ENDED AMORTIZATION: The amortization schedule establishes that more than
40% of the debt will be paid in the final five years of the tenor, which could
potentially worsen a trend of rising costs or underperformance at the end of
project's life. Structural features such as distribution tests as well as
project's resilience to significant O&M cost increases contribute to mitigate
such risk.

WHAT COULD TRIGGER A RATING ACTION
--Wind resource volatility: cash flow stability could be threatened by greater
than expected wind resource volatility, or consistent performance below the P50
levels.
--O&M costs escalation: the project's financial profile could be weakened by
expenses that are persistently higher than expected especially if, all other
variables kept stable, costs constantly surpassing budget by double digits
deviations.
--Change in off-taker rating: A downgrade of CFE's current rating to a rating
level below 'BBB-'.

SECURITY
Among others, the notes are mainly secured by a first-priority interest in the
collateral, which includes the typical such as the capital stock of the Issuer,
the project documents' rights, all existing and future tangible and intangible
property, and Sponsor guarantees under the EPC and O&M agreements.

TRANSACTION SUMMARY

Oaxaca II expects to issue up to US$164.5 million of senior secured notes with a
legal maturity in 2031. The notes are to be structured under a scheduled
amortization scheme, with a fixed interest rate and fixed semi-annual principal
payments. There is a 6-month O&M reserve as well as a 6-month debt service
reserve fund. The structure contemplates covenants for additional leverage, and
a 12-month period forward/backward looking distribution test set at 1.20x.

Proceeds from the issuance are projected to: i) refinance the initial credit
facility used to partially pay project construction, ii) fully pay the remaining
part of the EPC contract, iii) cover financial expenses, and iv) fund reserve
accounts. Equity contribution represents approximately 25% of project's cost,
and will be completed prior to or at financial close.

Oaxaca II is a Mexican SPV created by the AEM to own and operate a 102 MW wind
farm located in the Isthmus of Tehuantepec in Oaxaca, at southern Mexico. It is
an indirect subsidiary of Acciona, S.A. (Acciona), one of the largest Spanish
private groups whose core businesses are infrastructure, water and renewables,
with presence in several countries. Current installed attributable capacity is
7,329 MW where 85% is from wind. Of this number, 557 MW are installed in Mexico,
and represent 65% of the country's operating wind.

The facility reached commercial operation in February 2012 with a demonstrated
capacity of 103.9 MW. It comprises 68 1.5-MW turbines manufactured by related
company Acciona Windpower, S.A. (AWP), who has installed over 2,500 similar
units reaching 3,750 MW with a global average fleet availability of over 98%. Of
that amount, 371 turbines that equal 557 MW are currently operating in Mexico.
Since AWP turbine technology is grounded in more than 15 years of operational
observations in varied terrains and climates across the globe, and including in
nearby project Eurus, Fitch assumes such technology is capable to correctly
operate in Oaxaca II using high capacity factors and the assessment regarding
technology risk is midrange.

The land where the project is located has been leased by the Sponsor to develop
other similar wind farm projects, and to keep some land reserves. AEM is
currently in an advanced stage to formalize the project's rights of way. All 119
local land owners have signed 22-year usufruct agreements that largely mitigate
the risk of land price increases. Currently, 88 contracts have been recorded in
the National Agrarian Register (RAN).

O&M, management and administrative services, and turbine maintenance are
performed by AEM upon 20-year contracts. Operation risk is considered midrange,
since Fitch believes that the Sponsor is adequately qualified to manage the
facility based on its experience developing this type of projects.

Oaxaca region has an important natural wind resource and the diversity of
projects in the area from major key players validates its attractiveness. The
region has consistent unidirectional and high-speed wind that provides high
capacity factors (40% - 50%) with speed averages in the range of 10-11 m/s. In
addition, wind data had been measured on site for almost a decade through 17
towers at a height similar to that of the turbines.

Revenue will solely come from the electricity rendered under the PPA at a fixed
pre-defined price starting at USD 65/MWh in 2012, that increases annually up to
USD 112/MWh in 2031. Payment is done in a monthly basis and partially readjusted
by U.S. Producer Price Index. CFE must acquire the whole net power output, and
Oaxaca II cannot sell its production to any other party. There is no minimum
capacity or energy requirements, so there are no penalties in case energy
produced is lower than expected. Fitch considers there is no price risk.
Delivery risk is borne by CFE as the national grid operator.

For the first two years of operations, costs will represent only about 10% of
revenues, since major maintenance is still covered under the EPC Contract.
Afterwards, costs range between 20 - 30% of revenue, where the lowest
percentages occur at the latest years of the projection when price increases on
a higher real basis. According to the Independent Engineer (IE), projected costs
are reasonable and compare well with similar projects. In addition, the O&M
reserve helps mitigate any unexpected requirements. Given that sensitivity
testing of O&M costs suggested the project can withstand significant increases,
cost risk is perceived as midrange.

According to the Mexican Wind Energy Association (AMDEE), installed capacity in
the country has significantly expanded in the past few years. This growth has
been spurred by a more supportive regulatory framework, the availability of new
transmission capacity in the Oaxaca region, significant turbine price
reductions, and more access to financing. Even though wind energy development in
Mexico started recently, industry risk is perceived as midrange.

Fitch created a diversity of projected scenarios to test the resilience of the
project under different situations. The Base Case represents Fitch's expected
performance for Oaxaca II, and its main assumptions included IE's P50 10-years
capacity factor, 96% turbine availability, 0% increase to O&M budget, and 3% net
generation reduction to all years, in order to reflect potential for additional
forecast error in the wind study and the impact of occasional reliability
issues. Under this scenario, debt is fully paid, and DSCR is 1.40x minimum and
1.53x in average. Loan Life Coverage Ratio (LLCR) is 1.52x.

Per applicable rating criteria, the Fitch Rating Case adds additional stresses
to the Base Case based on Fitch's risk analysis and discussions with the
independent consultants. The Fitch Rating Case included IE's P90 one-year
capacity factor, 96% turbine availability with 1% decrease every two years
following year 15, 7.5% increase to O&M budget for years 1 - 15 and 12.5% for
years 16 - 20, and 3% net generation reduction to all years. Main results were
DSCR is 1.29x minimum and 1.33x average. LLCR is 1.33x.

As for the first quarter of 2012, Oaxaca II registered a capacity factor
equivalent to 96.4% of IE's P50 wind resource projection, which positively
compares with Fitch's most projected scenarios.

Contact:

Primary Analyst
Astra Castillo
Director
+52 (81) 8399-9100
Fitch Mexico, S.A. de C.V.
Prol. Alfonso Reyes 2612, Edificio Connexity
Monterrey, N.L. 64920

Secondary Analyst
Alberto Santos
Senior Director
+1-212-908-0714

Committee Chairperson
Glaucia Calp
Senior Director
+57 (1) 326-9999


Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email:
elizabeth.fogerty@fitchratings.com.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2011);
--'Rating Criteria for Onshore Wind Farm Projects' (April 16, 2012).

Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Onshore Wind Farm Projects

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