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TEXT-Fitch Expects to Rate CE Oaxaca Cuatro, S. de R.L. de C.V.'s Senior Secured Notes 'BBB-(exp)'
July 16, 2012 / 10:09 PM / in 5 years

TEXT-Fitch Expects to Rate CE Oaxaca Cuatro, S. de R.L. de C.V.'s Senior Secured Notes 'BBB-(exp)'

(The following was released by the rating agency)

MONTERREY/NEW YORK, July 16 (Fitch) Fitch Ratings expects to rate the US$167.5 million CE Oaxaca Cuatro, S. de R.L. de C.V.’s (Oaxaca IV) senior secured notes due 2031 ‘BBB-(exp)'. 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 1.32 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 rated with a ‘BBB’ Foreign Currency Long-Term Issuer Default Rating (LT IDR) and ‘BBB+’ Local Currency LT IDR, 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’s 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 the 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 surpass budget by double-digit deviations.

-- Change in off-taker rating: A downgrade of CFE’s current rating to a rating level below ‘BBB-'.

SECURITY

The notes are mainly secured by a first-priority interest in the collateral, which includes typical items 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 engineering, procurement, and construction (EPC) and O&M agreements.

TRANSACTION SUMMARY

Oaxaca IV expects to issue up to US$167.5 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 six-month O&M reserve as well as a six-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 the project’s cost, and will be completed prior to or at financial close.

Oaxaca IV is a Mexican special purpose vehicle (SPV) created by the AEM to own and operate a 102 MW wind farm located in the Isthmus of Tehuantepec in Oaxaca, in 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 March 2012 with a demonstrated capacity of 103.7 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 operate correctly in Oaxaca IV 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 of formalizing the project’s rights of way. Except for two, all local land owners (56) have signed 22-year usufruct agreements that largely mitigate the risk of land price increases. Currently, 35 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.

The 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 meters per second. In addition, wind data had been measured on site for almost a decade via 17 towers at a height similar to that of the turbines. Revenue will solely come from the electricity rendered under the purchase power agreement (PPA) at a fixed pre-defined price starting at USD63/MWh in 2012,that increases annually up to USD109/MWh in 2031. Payment is done in a monthly basis and partially readjusted by the U.S. Producer Price Index. CFE must acquire the whole net power output, and Oaxaca IV 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 25%-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 IV, 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 on 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 1-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 1.32x average. LLCR is 1.31x.

As for the first quarter of 2012, Oaxaca IV registered a capacity factor equivalent to 95.7% of IE’s P50 wind resource projection, which positively compares with Fitch’s most projected scenarios.

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