Fitch Affirms Eten's $132.8MM Series 2013-1 Sr. Secured Notes 'BBB-'; Outlook Stable

NEW YORK--()--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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014756

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Contacts

Fitch Ratings
Primary Analyst
Yvette Dennis
Senior Director
+1-212-908-0668
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Ryan Cunningham
Director
+1-646-582-4723
33 Whitehall St.
New York, NY 10004
or
Committee Chairperson
Astra Castillo
Senior Director
+52 (55) 5955 1611
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com