Fitch Affirms Abengoa Transmission Sur S.A.'s Sr secured Notes 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB-' rating on Abengoa Transmission Sur's $432 million series 2014-1 notes. The Rating Outlook is Stable.

The rating affirmation reflects the project's performance which has been in line with Fitch's base case expectations. The rating affirmation also reflects stable cash flows anchored by long-term contracted revenues with a consortium of good credit quality power generators within a highly regulated industry.

KEY RATING DRIVERS

--Operational Risk Mitigation [Operation Risk: Stronger]: Equipment and technology employed in ATS is widely utilized in transmission lines globally. The operating asset benefits from relatively low operating risk. Abengoa, the operator, has considerable experience in transmission lines globally. The project's exposure to rising long-term operating costs is partially mitigated with a fixed price operating contract.

--Predictable Revenue Stream [Revenue Risk: Midrange]: Cash flow is based on tariff payments supported by a strong contractual mechanism that provides full cost recovery for operating and maintenance costs. Tariff payments are indexed to inflation and tied to availability eliminating volumetric and price risk. A consortium of creditworthy power generators shares an implicit joint and several obligation for tariff payment. Contract termination risk is low.

--Infrastructure/Renewal [Infrastructure/Renew: Midrange]: The transmission project will provide power connectivity from Lima to south-western Peru, and is instrumental for the growing demand in the region. The limited flexibility in the hand back period is partially offset by scheduled maintenance covered under an O&M contract. The project is not likely to pose the same hand back risk as other more complex projects because of the straight forward nature of the asset and the long life expectation.

--Adequate Debt Structure [Debt Structure: Stronger]: The fully amortizing, fixed rate debt matures one year prior to the concession term. The structure includes six month reserve accounts for debt service and operation and maintenance. A cash-trap mechanism ensures debt is timely serviced if DSCRs fall below the equity distribution test of 1.20x.

--Sufficient Debt Service: Fitch's base case projected DSCR is 1.25x minimum and 1.38x average, while the loan life coverage ratio (LLCR) is 1.44x. Under a scenario of increased costs, Fitch's rating case projected DSCR is 1.16x minimum and 1.28x average, while the LLCR is 1.34x.

--Peers: Hudson Transmission and Steel River, rated 'BBB-' and 'BBB', respectively, with Stable Rating Outlook, are close peers to ATS. Similar to its peers, ATS operates in a stable regulatory environment with good credit quality counterparties. Like Steel River, ATS has adequate reserves for debt service and O&M, which compares favorably against Hudson Transmission which only has a debt service reserve. Each project includes an amortizing debt structure; however, ATS's financial coverages are notably lower than its peers.

RATING SENSITIVITIES

Positive: Unlikely given overall leverage and financial coverage relative to other similarly rated peers;

Negative: Lower revenue generation derived by a weaker regulatory framework that destabilizes current payment contractual mechanism;

Negative: Operating expenses and major maintenance substantially higher than projected could further pressure financial coverage ratios.

SECURITY

The notes are mainly secured all of the issuer's tangible and intangible assets (including concession agreement) and the equity interest in the issuer.

CREDIT UPDATE

In general, ATS performed operationally and financially as expected for 2014. Still, unexpected environmental contamination has had some impact to the availability indictors between the Chilca and Poroma substations. The O&M provider implemented an emergency and mitigation plan that included replacement of insulators around the affected areas. The measure has slowly improved the availability indicators. The O&M provider is evaluating the appropriate maintenance requirements to deal with the higher level of contamination to increase the availability indicator. The overall impact to operating expenses has not been material. It's too early to determine if the operator's action plan will be a long term fix to the availability indicators. Nevertheless, the contamination issues have not had a material adverse effect to the project's availability indicators which has been over 98% throughout 2014.

The Montalvo substation second bus bar reached commercial operation on Dec. 19, 2014. The bus bar was constructed in response to the government's request after the execution of the initial concession agreement. The objective of the second bus bar is to meet future demand growth of the system. Consequently, the original concession agreement was amended to address the delay in the integration of the Series Compensation Equipment and the Second Bus Bar as rectified. Additionally, the 2014 Base Tariff was adjusted to reflect cost associated with the Series Compensation and the Second Bus Bar, which together account for 1.6% of yearly ATS income.

ATS's first year of operations concluded in 2014 and recorded total revenues of USD42.9 million. This figure is marginally better than budget of USD42 million. On the operating expense front, actual expenses were USD4.7 million versus a budget of USD4.5 million. Overall, actual EBITDA came in at USD38.2 million versus budget USD 37.5 million.

ATS consists of three sequential 500kV transmission lines and three new substations, extending along 883 km (approximately 550 miles). The transmission line connects the Chilca substation, located nearly 60 km (approximately 37 mi.) south of Lima to the Poroma, Ocona, and Montalvo substations in southern Peru, along with two short 220 kV transmission lines linking to existing substations.

The project operates under a 30-year concession agreement, granted by the government of Peru through the Ministry of Energy and Mines (MINEM). The concession agreement was granted on April 30, 2010, executed on July 22, 2010 (the concession date), and commenced on Jan. 17, 2014 (commercial operation date).

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

--'Rating Criteria for Availability-Based Projects' (June 18, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Availability-Based Projects
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710784

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982959

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Contacts

Fitch Ratings
Primary Analyst
Benjamin Tano, +1-212-612-7822
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Alberto Santos, +1-212-908-0714
Senior Director
or
Committee Chairperson
Glaucia Calp, +011-571-326-9999
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Benjamin Tano, +1-212-612-7822
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Alberto Santos, +1-212-908-0714
Senior Director
or
Committee Chairperson
Glaucia Calp, +011-571-326-9999
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com