Fitch Affirms CE Oaxaca Cuatro, S. de R.L. de C.V.'s Senior Secured Notes at 'BBB-'

  Fitch Affirms CE Oaxaca Cuatro, S. de R.L. de C.V.'s Senior Secured Notes at   'BBB-'  Business Wire  MONTERREY, Mexico -- June 2, 2014  Fitch Ratings affirms the 'BBB-' rating on CE Oaxaca Cuatro, S. de R.L. de C.V.'s (Oaxaca IV) USD150.2 million (USD145.7 million outstanding) senior secured notes due 2031. The Rating Outlook remains Stable.  The rating affirmation reflects the project's operational and financial performances between Fitch's base and rating case expectations for 2013, due to lower wind supply, and a satisfactory 2014 to date. The Stable Outlook incorporates the view that cash flows are to remain solid, supported by a fixed-price contract with investment grade counterparty.  KEY RATING DRIVERS  --Moderate Operation Risk: The rating reflects the risks inherent to the operation of a 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 project's operation and maintenance are provided by sponsor Acciona Energia Mexico, S. de R.L. de C.V. (AEM), Fitch considers that there are heightened incentives for the sponsor to assure the facility's operational continuity. (Operation Risk: Midrange)  --Low-Variability Wind Resource: Wind P50 original estimates have been exceeded. 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 conditions that could negatively affect output. (Revenue Risk - Volume: 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). (Revenue Risk - Price: Stronger)  --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 project's life. Structural features such as distribution tests as well as the project's resilience to significant operation and maintenance (O&M) cost increases contribute to mitigate such risk. (Debt Structure: Midrange)  --Mid-Range Financial Performance: Leverage is moderate. Debt service coverage ratio (DSCR) is projected to remain consistent with minimal deviations from average over life of the debt. Under Fitch rating case conditions, which contemplate higher O&M costs combined with reduced energy production, the DSCR is expected to average 1.35x, with a minimum of 1.33x. Coverage levels are in line with Fitch's applicable criteria and other similarly rated transactions. (Debt Service: Midrange)  RATING SENSITIVITIES  --Greater than expected wind resource volatility, or consistent performance below the P50 levels;  --Expenses persistently higher than expected especially if, all other variables kept stable, costs constantly surpass budget by double-digit deviations;  --Change in off-taker rating, i.e. a downgrade of CFE's current rating to a rating level below 'BBB-'.  SECURITY  Among others, the notes are mainly secured by a first-priority interest in the collateral, such as the capital stock of the issuer, the project documents' rights, all existing and future tangible and intangible property, and sponsor guarantees under the engineering, procurement and construction (EPC) and O&M agreements.  CREDIT UPDATE  Cash flows have been and are expected to remain solid. Revenue comes solely from the electricity rendered under the PPA with exclusive off-taker CFE, at a fixed pre-defined price of USD66.7 per megawatt hour (MWh) in 2014, which increases annually up to USD108.7/MWh in 2031 and is partially readjusted by the U.S. Producer Price Index.  2013 observed performance was under Fitch's base case expectations, mainly due to averse climatic conditions that affected not only this project, but most of the region's. Nonetheless, performance was above rating case scenario.  Although wind capacity factor below the forecast (44.91% versus 49.74%) resulted in revenues 10% lower than Fitch's base projection, rigid cost control and turbine average availability above the expectation (99.10% versus 96.00%) contributed to keep cash available for debt service close to what was estimated.  Total expense was USD2.8 million, compared to the USD3 million budget and cash available for the debt service of the year reached USD23.4 million, resulting in a 1.51x natural coverage against the 1.58x projection. This ratio was calculated based on the information of the 'DSCR Calculation Certificate' provided by the company pursuit to the Indenture.  As of the first quarter of 2014, operational figures have recovered and surpassed Fitch's original base case. Three-month (January-March) average was 98.16% versus 96.00% for turbine availability, and 57.04% versus 49.74% for plant capacity factor. This stemmed in a 127,141 MWh production, over the 111,113 MWh estimated.  Starting in 2014, the turbine maintenance expense is paid by the project and no longer by the EPC contractor. No impact is foreseen on coverage ratio, though, given the amortization schedule was designed taking this into account.  Current balance in reserve funds is USD5.6 million for the debt service reserve account and USD3.2 million for the O&M account, in line with the established target balances. Worth to mention, the last was mostly funded with the project's own resources.  Fitch's Base Case assumed 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 1.43x minimum and 1.59x in average. Loan Life Coverage Ratio (LLCR) is 1.68x.  Fitch's Rating Case adds additional stresses to the Base Case by including IE's P90 one-year capacity factor, 96% turbine availability with 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 DSCR of 1.33x minimum and 1.35x average. LLCR is 1.43x.  Oaxaca IV is a Mexican special purpose vehicle (SPV) created by 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 in March 5, 2012 with a demonstrated capacity of 103.7 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%.  Additional information is available at 'www.fitchratings.com'.  Applicable Criteria and Related Research:  --'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);  --'Rating Criteria for Onshore Wind Farm Projects' (April 11, 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 Onshore Wind Farm Projects  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=705018  Additional Disclosure  Solicitation Status  http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832619  ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.  Contact:  Fitch Ratings Primary Analyst Astra Castillo Director Fitch Mexico S.A. de C.V. +52-81-8399-9137 Prol. Alfonso Reyes 2612 Monterrey, Mexico 64920 or Secondary Analyst Alberto Santos Senior Director +1-212-908-0714 or Committee Chairperson Glaucia Calp Senior Director +57-1-326-9999 or Media Relations: Elizabeth Fogerty, +1-212-908-0526 (New York) elizabeth.fogerty@fitchratings.com  
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