NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Planta de Reserva Fria de Generacion de Eten S.A.'s (Eten) senior secured notes as follows:
--$132.8 million series 2013-1 partially guaranteed senior secured variable funding notes due 2033 at 'BBB-'/Outlook Stable.
The rating reflects stable cash flows anchored by contracted long-term revenues with the Peruvian electrical generation system. Operations are supported by a long-term services agreement with an experienced provider, General Electric. Fitch also expects long-term operating and cost stability, as the plant is expected to maintain low dispatch. Debt service coverage ratios (DSCR) averaging 1.16x in the Fitch rating case are low for the rating category and compared to other 'BBB' category thermal plants. However, an external guarantee provides liquidity support that enhances the financial profile to support the rating. The Stable Outlook is based upon performance to date and Fitch's expectation of adequate operating performance as the facility emerges from manageable ramp-up challenges.
KEY RATING DRIVERS
Minimal Revenue Risk: Revenue Risk- Midrange
Revenue risk is low with fixed capacity payments sized to cover debt service. Payments are due from end electricity users collected via the system of Peruvian generating companies (Gencos) with credit risk of the system viewed as similar to the country of Peru as a whole (rated 'BBB+'/Outlook Stable). The 20-year term of the power purchase agreement (PPA) began at project completion resulting in a tail of approximately two years after the expected payment of the debt. PPA termination risk is low.
Manageable Operating Risk: Operating Risk- Midrange
The project is a simple-cycle power plant to be operated by Cobra Peru, the local operating arm of one of the sponsors, Cobra Instalaciones y Servicios, S.A. (Cobra). Cobra has significant operating experience with solar and wind projects, but does not have prior experience with thermal power plant operations. This risk is mitigated by the experience of the other sponsor, Empresa de Mantenimiento, Construccion y Electricidad S.A. de C.V (EMCE), an operator of thermal projects in Peru and the long-term services agreement provided by General Electric. As the project has been in operation less than two years, it does not have a demonstrated history of operational and cost stability.
Negligible Supply Risk: Supply Risk- Midrange
The project has limited exposure to fuel suppliers to transport limited amounts of B5 diesel fuel from a nearby port to be stored in the plant's onsite reserve tanks; the project receives fuel from Repsol and has not had any fuel supply disruptions. The reserve tanks have a capacity of 10 days assuming constant dispatch. A fuel outage is considered a force majeure event under the concession agreement and is not subject to penalties.
Debt Supported by Partial Credit Guarantee (PCG): Debt Structure- Midrange
The project's fixed-rate, fully amortizing debt due 2033 with debt service and maintenance reserves and an equity distribution lock-up trigger are typical project finance features. The transaction also includes a PCG of 20% of the outstanding debt amount from Corporacion Andina de Fomento (CAF; 'AA-/F1+'/Stable Outlook). The guarantee is exercisable on a pre-default basis to cover any shortfall in principal or interest due and is irrevocable. Guarantee amounts exercised may be repaid on a subordinated basis in subsequent periods, replenishing the liquidity available to the notes.
Financial Profile Boosted by PCG
Under the Fitch base case scenario, the transaction DSCRs average 1.27x with a minimum of 1.19x. Fitch's rating case, which assumed higher dispatch frequency, increased operation and maintenance (O&M) costs, increased degradation and power decrease, result in an average DSCR of 1.16x with a minimum of 1.07x. These coverage levels, in conjunction with the PCG available to noteholders, are supportive of the rating, given asset characteristics.
Peer Comparison
The closest Fitch-rated peers include gas-fired peaking plants such as Mackinaw Power, LLC ('BBB-'/Stable Outlook) and Plains End ('BB'/Stable Outlook). Mackinaw's rating case average DSCR is higher at 1.44x. Eten's DSCR profile is lower than Mackinaw, but it is expected to dispatch less often than a peaking plant, putting less strain on its operations and cost. The PCG is a distinctive feature that adds strength to the financial profile to prevent default. For Plains End, intermittent dispatch and operating costs above the original projections have resulted in cash flows consistent with the below investment grade rating.
RATING SENSITIVITIES
Negative:
--Persistently low plant availability and incurrence of penalties that materially reduce DSCRs below Fitch's rating case.
--If the plant is persistently called to generate power at a higher than expected rate, unrecoverable maintenance expenses could increase materially, affecting the rating.
Positive: Positive rating action is unlikely in the near term. Longer term, financial metrics sustained above Fitch's base case, supported by a proven, stable operating and cost profile could lead to an upgrade.
CREDIT UPDATE
Performance Update
The Peruvian government recognized the commercial operation date (COD) as June 5, 2015, revised from July 2, 2015, due to an excused event (difficulty connecting to the substation) resulting in the project earning revenues as of the earlier date and avoiding delay penalties. The project continues to negotiate with the engineering, procurement, and construction (EPC) contractor for liquidated damages (LD) based on the delay from the March 22, 2015 completion date and the project continues to have access to the contractor's letter of credit. Any settlement would provide additional cash flow although the project is not reliant on LDs to support debt repayment.
The plant was called to dispatch three times in 2015 and twice in 2016 for a total of 83.11 hours and as a result, the plant capacity factor has been less than 1%, within Fitch's expectations. All starts have been successfully completed within the 30 minutes required under the concession contract. Availability has remained above the targeted 95% for 14 of 16 months of operation. However, the project experienced 562 hours of planned and unplanned outages (about 50% each) during 2016, which included an oil leak in the turbine that management reports as having been repaired. While the project exceeded the concession contract limits for annual maintenance, the government did not levy penalties. Fitch will continue to monitor plant performance and the project's ability to operate within outage limits to avoid risks of incurring penalties. Given the low dispatch, there are no plans for any major capital expenditures for the remainder of 2016 or in 2017.
Base and Rating Cases
Fitch has not altered its base case and rating case projections because performance to date has generally been in line with expectations. Based on actual performance through September, Fitch projects the year-end DSCR for 2016 to be 1.46x. Fitch does not anticipate this high level of coverage in 2017 or on an ongoing basis, as a portion of 4Q15 revenues were received in 1Q16, resulting in the artificially high DSCR for 2016. Management also reports that coverage was higher due to 18% lower expenses over the last 12 months. Fitch will monitor whether the expense profile remains materially lower than projected and whether the profile will be stable.
Fitch's base case assumes dispatch frequency of 30, 24-hour starts annually, 95% availability, 5% increase to O&M, and degradation reaching 1.6% over the life of the debt. Under this scenario, DSCRs average 1.27x with a minimum of 1.19x. Fitch's rating case increases dispatch to 45, 24-hour starts annually, maintains 95% availability as the minimum required of the concession agreement, increases O&M by 8% and degradation by 3.2% over the life of the debt. Fitch also reduced power by 2%. DSCRs average 1.16x with a minimum of 1.07x. These coverage levels, in conjunction with the PCG available to noteholders, are supportive of the rating.
Eten's revenues to support debt repayment are derived from a concession from the Peruvian government to build and operate a 223MW thermal power plant in the Chiclayo province of Northwestern Peru. The plant is designated as a "Cold Reserve" back-up generator with a marginal cost approximately 10x higher than Peru's average 2012 marginal cost. As such, the plant is expected to generate electricity only in cases of severe drought or in cases of emergency such as earthquake or other natural disaster resulting in downed transmission lines.
The power plant is a simple-cycle plant consisting of a single GE 7FA 5 series turbine and is capable of generating electricity without access to grid electricity via an auxiliary generator.
The project sponsors are Cobra and Empresa de Mantenimiento, Construccion y Electricidad, S.A. de C.V. (EMCE). Cobra is a subsidiary of the Spanish construction group, Grupo ACS while EMCE forms a part of the energy division within Grupo Terra, a Central American power generator and developer.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
https://www.fitchratings.com/site/re/882594
Rating Criteria for Thermal Power Projects (pub. 28 Jun 2016)
https://www.fitchratings.com/site/re/883254
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014756
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014756
Endorsement Policy
https://www.fitchratings.com/regulatory
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.