Fitch Affirms Energia Eolica, S.A.'s USD204MM Senior Debt at 'BBB-'

SAO PAULO--()--Fitch Ratings affirms Energia Eolica, S.A.'s (the project) USD204 million senior notes maturing in 2034 at 'BBB-'. The Rating Outlook remains Stable.

The affirmation reflects the project's satisfactory operational performance in 2015. Power production and operational expenses were in line with Fitch's base case expectations. Cash flow available for debt service (CFADS) and debt service coverage ratio (DSCR) have been lower than expected as a result of higher than anticipated power purchase agreement (PPA) premiums. Contractually, this revenue component can be paid over a 12 month period, generating a partial short-term lag in revenues' collection. The Stable Outlook incorporates the view that cash flows are expected to stabilize over time, supported by fixed-price contracts with an investment-grade off taker.

KEY RATING DRIVERS

Fitch's ratings are based on the following factors, among others:

--Moderate Operation Risk [Operation Risk - Midrange]: The rating reflects the risks associated with the operations of wind farm facilities over a 20-year term. Favourably, the project benefits from proven turbine technology and initial operating support from the manufacturer. Plant performance should experience low variability, as Vestas will initially operate the turbines under a 10-year agreement. A three-month operating and maintenance reserve provides short-term liquidity for unanticipated cost escalations.

--Fully Contracted Production [Revenue Risk - Volume - Midrange]: Two 20-year PPAs with the Peruvian electric grid as an offtaker account for 100% of the project's generated energy. The project is exposed to penalties to the extent annual energy production falls below a certain threshold through a tariff correction factor. As a partial offset, the concession allows for a one-time reduction in the threshold for energy production after the initial four-year period to minimize future penalties. Curtailment risk is low in the intermediate term but could rise as the country derives an increasing share of energy from renewable sources.

--Stable Tariffs [Revenue Risk- Price - Midrange]: Both Cupisnique and Talara benefit from 20-year fixed-price PPAs with the Peruvian electric grid as offtaker. Reasonable production requirements under respective concession agreements provide revenue stability through long-term PPAs for each project.

--Sufficient Wind Resources: Total generation output in Fitch's rating case is based upon a one-year P90 estimate of energy production to mitigate the potential of lower than expected wind resource. Additionally, the project is able to meet debt obligations in a scenario of one-year P99 generation.

--Manageable Debt Structure [Debt Structure: Midrange]: The project's fixed-rate, fully amortizing debt through 2034 with a six-month debt service reserve, three-month O&M reserve, and equity distribution lock-up trigger at 1.20x DSCR provide sufficient liquidity in stress scenarios.

--Adequate Financial Coverage: DSCR levels under the base case average 1.85x with a minimum of 1.76x. DSCRs under the rating case, average 1.34x with a minimum of 1.30x. The resulting coverages are consistent with investment-grade ratings.

--Peer Analysis: The project's leverage at 8x net debt-to-EBITDA is in line with its peers such as Oaxaca II and Oaxaca IV at 7.4x for both projects. Financial coverage ratios are comparable to the two Oaxaca projects as well, as rating case DSCR averages 1.34x for Inka while it is 1.36x for Oaxaca II and 1.35x for Oaxaca IV on average. Attributes for the three projects are midrange except in the case of price, where the Oaxacas score stronger. This is partially offset by higher average base case DSCR for Inka (1.83x vs. 1.59x).

RATING SENSITIVITIES

Positive

--Energy production consistently and substantially performing above P50 levels.

Negative

--Energy production consistently and substantially underperforming P90 level;

--Operating expenses that are persistently higher than projections leading to a deterioration in DSCR to below 1.30x under the rating case.

The notes are mainly secured by a first-priority interest in the collateral, which includes a pledge on all capital stock of the issuer, all project documents, all existing and future tangible and intangible assets of the issuer, all revenue, project, collateral, reserve accounts, and cash or cash equivalent maintained in the accounts.

CREDIT UPDATE

Energia Eolica, S.A. consists of two wind farms located in the coastal areas of northwestern Peru. Combined, the Cupisnique and Talara wind farms have a combined nameplate capacity of 114.035 MW. Overall, the project contains 45 Vestas V-100 (1.8 MW) for Cupisnique and 17 Vestas V-100 (1.8 MW) turbines manufactured by Vestas Wind Systems A/S. Project started operations in September 2014.

Vestas is also the O&M provider under a 10-year agreement for a full scope of scheduled and unforeseen maintenance. After the 10-year period, ContourGlobal plans to take over O&M for the remaining life of the concession. The project's 20-year fixed price contract with the government requires Cupisnique to generate 303 GWh/yearly (Capacity Factor 41.6%) and for Talara to generate 119.7 GWh/yearly (Capacity Factor 44.2%).

Since September 2014, Talara wind farm has outperformed Fitch's expectations by producing, on average, P18, while Cupisnique produced P89. On a consolidated basis, the plants outperformed Fitch's Base Case by 2.23%, reaching power output of 535.7GWh.

Average availability levels for both projects were well above Fitch's Base Case, reaching 99.5% for Talara and 99.6% in the case of Cupisnique.

Average spot price since September 2014 was USD16.15/MWh, below Fitch's Base Case. However, projects have been receiving PPA premium payments since May of 2015 related to PPA prices of USD87/MWh (Talara) and USD85/MWh (Cupisnique). As of September of 2015, PPA premium revenues accumulated USD10,894,282. Operational Costs and G&A have been below Fitch's Base Case by approximately 8.8%.

The project's cash flow generation in 2015, however, was lower than expected, even though power generation and, consequently, revenues were actually higher. The PPA payment structure is such that the higher the spot price, the less will be the difference from revenues incurred and actual cash received in a certain period, because the lower will be the PPA premium compensation needed.

Spot prices registered in Peru have been lower than forecasted in Fitch's Base and Rating Cases. Additionally, Fitch had considered that PPA premium payments would be made on 12 equal installments, starting on May 2015. According to Management, payment of the deferred PPA premium has only started in June 2015. In the future, revenue collection is expected to stabilize, allowing for DSCRs in line with Fitch's expectations.

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

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967

Rating Criteria for Onshore Wind Farm Projects (pub. 14 May 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865785

Additional Disclosures

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Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996954

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Victor Tamega
Associate Director
Fitch Ratings Brasil Ltda.
+55-11-4504-2618
Alameda Santos, 700 - 7 andar - Cerqueira Cesar
Sao Paulo - SP - CEP: 01418-100
or
Secondary Analyst
Mariana Rigon
Associate Diretor
+55-11-4504-2204
or
Committee Chairperson
Glaucia Calp
Senior Director
+ 571 326 9999 x 1110
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Victor Tamega
Associate Director
Fitch Ratings Brasil Ltda.
+55-11-4504-2618
Alameda Santos, 700 - 7 andar - Cerqueira Cesar
Sao Paulo - SP - CEP: 01418-100
or
Secondary Analyst
Mariana Rigon
Associate Diretor
+55-11-4504-2204
or
Committee Chairperson
Glaucia Calp
Senior Director
+ 571 326 9999 x 1110
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com