OREANDA-NEWS. S&P Global Ratings said today that it had affirmed its 'BBB-' issue-level rating on CE Oaxaca Cuatro, S. de R. L. de C. V.'s (CE Oaxaca IV or the project) $150.2 million, fixed-interest (7.25%) senior secured bond due December 2031. The outlook remains stable.

The rating affirmation reflects the strong operating and financial performance of the 102 megawatt (MW) wind farm project since it began operations in February 2012 and our expectations of a similar trend for the next 12-24 months. The rating considers the following strengths: A 20-year PPA with a creditworthy off-taker, CFE, which eliminates market risk, but not volume risk. A track record of wind availability based on an independent engineer's (IE; Alatec) assessment consisting of on-site data of more than five years and almost 10 years of long-term reference data on or nearby the project. A 20-year operations & maintenance (O&M) contract that matches the PPA's and bond's terms. O&M expenses lower than the IE's original projections. A proven turbine technology; Acciona has used these turbines since 2004 with an average availability on its wind projects of 98%.The mitigating factor is the cash flows' dependence on energy production that relies on wind resources, which are seasonal and beyond management's control.

Project has been operating since February 2012.

The PPA between the project and CFE is a take-or-pay contract for 100% of the wind farm's net energy production. The price for CE Oaxaca IV's output was originally set at $63 per megawatt hour (MWh) for the first year, and is adjusted monthly for changes in the U. S. producer price index (PPI). If the produced energy is lower than expected, there are no penalties, which we view as a rating strength.

CFE--the national grid operator--bears the wheeling and delivery risks. We believe the PPA with CFE provides CE Oaxaca IV with a strong contractual foundation and mitigates, in our view, market risk. However, volume risk remains, because the project depends on on-site wind availability.

The O&M costs were lower than expected in 2015--$6.9 million versus the $9.1 million budgeted. We have observed this trend since the project started operating. Therefore, given the positive track record, we revised our assumptions and expect better operating income margins for the rest of the bond's tenor: average margin of 74% (compared with the previous margin of 70%) starting in 2016. The change in our assumptions is also based CE Oaxaca IV's use of a proven technology, the Acciona Windpower AW 70 1.5 MW wind turbine, and potential economies of scale given that Acciona has other projects in the region with the same operator.

Moreover, in 2015, the project's average turbine availability was 99.37%, which was higher than our expectations of 96%. Additionally, the average load factor, which depends on wind availability, for 2015 was 54.35%, higher than the estimated 44.1%. These two factors resulted in energy generation of 484,965 MWh in 2015, compared with the expected 394,463 MWh, a 22.9% increase. Therefore, the project generated revenue of $33.4 million in 2015, up 21.4% from base-case scenario. CE Oaxaca IV posted a debt service coverage ratio (DSCR) of 2.09x, better than our expectations of 1.46x.

The stable outlook on CE Oaxaca IV reflects our expectation that it will generate stable revenues in the next 24 months due to the characteristics of its PPA with CFE--which mitigates energy price volatility--the wind availability in the state of Oaxaca and in the region where the wind park is located, and the project's use of proven technology. The stable outlook also reflects our expectation that O&M expenses will continue to be lower than what the IE originally projected, because the project's sponsor manages several wind parks around the globe. The latter translates into minimum and average DSCRs of 1.46x and 1.48x, respectively.

We could raise the rating on CE Oaxaca IV's debt if the project continues to experience a higher annual amount of hours of wind than in our base-case assumptions and if we believe those conditions will remain so in the future. Such a scenario, coupled with lower O&M expenses, could result in a minimum DSCR of 1.60x or above.

A downgrade could occur if wind availability is below our base-case assumptions and we believe those conditions will remain so in the future, resulting in the DSCR below a minimum of 1.4x. A downgrade of CFE to a rating level below the project's will result in a similar action on CE Oaxaca IV.