Fitch Affirms CE Oaxaca Dos, S. de R.L. de C.V.'s Sr Secured at 'BBB-'; Outlook Revised to Positive
OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB-' rating on CE Oaxaca Dos, S. de R.L. de C.V.'s (Oaxaca II) USD148.5 million (USD140.5 million outstanding) senior secured notes due 2031. The Rating Outlook has been revised to Positive from Stable.
The rating reflects the project's robust cash flow generation supported by its location in an area that has proven high wind resources and by a strong fixed-price contract with an investment-grade counterparty. Rating case credit metrics of 1.36x are in line with applicable criteria for the rating category and with rated peers, while observed metrics have exceeded Fitch's base case scenario. Oaxaca II has similar coverage level and Key Rating Factor assessments as those of Peruvian wind project Energia Eolica, also rated 'BBB-'with a Stable Outlook.
The Positive Outlook incorporates the fact that operations and maintenance (O&M) costs have been considerably lower than those assumed in Fitch's base case for the last two years, leading to stronger than expected credit metrics. Should this continue to be the case, it will be possible to assume the project's long-term operational cash flow and debt coverage ratios will be significantly stronger than those of Fitch's original base case, thus commensurate with a higher rating.
KEY RATING DRIVERS
Operation Risk: Midrange
Moderate Operation Risk: The rating reflects the risks inherent to the operation of a relatively recently opened facility over the long term. In its favor, it benefits from proven turbine technology, and initial technical support from the manufacturer. Given that the project's O&M are provided by related company AE Mex Global, S. de R.L. DE C.V. (AEMex), Fitch considers there to be heightened incentives for the sponsor to ensure the facility's operational continuity.
Revenue Risk - Volume: Midrange
Low-Variability Wind Resource: The non-diversified, single-site nature of the project is partially mitigated by its location in 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. In its financial analysis, Fitch takes into account the potential for lower wind-speed conditions that could negatively affect output.
Revenue Risk - Price: Midrange
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 if production is lower than expected, which effectively mitigates revenue risk. Mexico's Federal Electricity Commission (CFE) is the government-controlled power utility in Mexico (foreign currency long-term Issuer Default Rating [IDR] 'BBB+'/Stable Outlook). The assessment of this attribute was changed to Midrange given that project rating is potentially constrained by the credit quality of CFE, if assessed as such.
Debt Structure: Midrange
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 the 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.
Metrics: The debt service coverage ratio (DSCR) is projected to remain consistent, with minimal deviations from the average over life of the debt. Under Fitch rating case conditions, which contemplate higher O&M costs combined with reduced energy production, DSCR is expected to average 1.36x, with a minimum of 1.33x. Coverage levels are in line with Fitch's applicable criteria and other similarly rated transactions by Fitch. If low cost figures continue in the long term, DSCR will be around 1.6x under rating case conditions.
Peers: Oaxaca II's credit metrics are closely comparable with Peruvian project Energia Eolica, also rated at 'BBB-', but with a Stable Outlook. Rating case DSCRs average 1.34x for Energia Eolica and 1.36x for Oaxaca II. Key rating factor assessments for the two projects are the same, all at midrange levels.
--Positive: Wind resource close to the P50 forecast coupled with O&M costs and expenses at sustainable levels generally in line with historical figures.
--Negative: Consistent performance below the P50 level.
--Negative: Expenses persistently higher than expected, especially if, all other variables kept stable, costs consistently surpass budget by double-digit deviations.
--Negative: Downgrade of CFE's current rating to below 'BBB-'.
SUMMARY OF CREDIT
Cash flow has been and is expected to remain solid. Revenues are solely derived from the electricity rendered under the PPA with exclusive off-taker CFE, at a fixed pre-defined price of USD72.9 per megawatt hour (MWh) in 2016, which increases annually up to USD112.1/MWh in 2031 and is partially readjusted by the U.S. Producer Price Index.
Operational and financial performance for 2015 was higher than Fitch's base case expectations, mainly due to good climatic conditions and efficient operation. Wind capacity factor slightly over the forecast (48.24% versus 47.46%) resulted in production and revenues that surpassed Fitch's base projection, while turbine average availability above expectations (99.48% versus 96.00%) and costs significantly lower than the budget contributed to higher than expected cash available for debt service.
In 2015, total expenses were USD5.4 million, compared to the USD9.3 million budgeted, and cash available for debt service reached USD27.3 million, resulting in a 2.16x coverage, higher than the 1.60x estimated under Fitch's base case.
According to management, the main difference between actual and expected costs is a result of a very conservative initial budgeted O&M expense and the fact that corrective maintenance has been required less than initially expected; no maintenance activity has been delayed to yield such an outcome.
O&M expense budget was designed in two parts: a fixed portion that is indexed to the CPI, and a variable amount that is determined by events such as corrective maintenance activities and contingencies. The second has costed much less than originally projected, accounting for USD0.4 million in 2015, against the USD4.1 million budgeted. This trend has been observed for the last two years and, according to management, is expected to continue in the future, unless extraordinary circumstances arise.
In 2014 and 2015, O&M costs were 58% and 55% lower than expected, respectively. If costs continue in line with the historical figures in the long term, project cash flows will be in much better shape to withstand periods of adverse climatic conditions that may negatively impact production, by compensating for the lost revenue, to some extent.
The current balance in reserve funds is USD6 million for the debt service reserve account and USD4.5 million for the O&M account, in line with the established target balances.
Fitch's base case considered IE's P50 10-year capacity factor, 96% turbine availability, 0% increase to O&M budget, and 3% net generation reduction to all years, in order to reflect the 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 1.44x minimum and 1.59x on average. The loan life coverage ratio (LLCR) is 1.65x.
Fitch's rating case adds additional stresses to the base case by including IE's P90 one-year capacity factor, 96% turbine availability with a 1% decrease every two years following year 15, 7.5% increase to O&M budget for years one to 15 and 12.5% for years 16 to 20, and 3% net generation reduction to all years. The results were a DSCR of 1.33x minimum and 1.36x average. LLCR is 1.43x.
If O&M costs remain at proportions similar to those observed in 2014 and 2015, DSCR will be around 1.8x and 1.6x in the base and rating cases, respectively.
Oaxaca II is a Mexican special purpose vehicle (SPV) created by Acciona Energia Mexico, S. de R.L. de C.V. (AEM) to own and operate a 102-megawatt (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.
The facility reached commercial operation on Feb. 6, 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), which has installed over 2,500 similar units reaching 3,750 MW with a global average fleet availability of over 98%.