TEXT-S&P rates Mexico Generadora de Energia bonds 'BBB'

Thu Dec 6, 2012 5:30pm EST

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Overview
     -- Mexico-based electricity generator Mexico Generadora de Energia issued 
$575 million senior secured bonds due December 2032.
     -- We are assigning our 'BBB' rating to the issue.
     -- The stable outlook reflects our expectation of very stable cash flows 
as a result of the Project's ESSA and the fixed capacity payments and full 
cost pass-through.


Rating Action
On Dec. 6, 2012, Standard & Poor's Ratings Services assigned its 'BBB' issue 
rating to Mexico Generadora de Energia S. de R.L.'s (MGE) $575 million, 
fixed-interest senior secured bonds due Dec. 6, 2032. The outlook is stable.


Rationale
MGE is a bankruptcy-remote, limited purpose company which was created with the 
sole purpose ofdeveloping, constructing, operating and maintaining two nominal 
250 megawatt (MW) natural gas fired combined cycle generation facilities. 
Grupo Mexico S.A.B. de C.V. (BBB/Stable/--) indirectly owns 99.99% of MGE. 
Siemens Energy Inc. and Siemens Innovaciones S.A., which Siemens AG 
(A+/Stable/A-1+) owns, are constructing MGE under fixed-price, date certain, 
turnkey, engineering, procurement and construction contracts. MGE will also 
include support infrastructure such as a 4-kilometer single circuit 
transmission line, a 20-kilometer double circuit transmission line, a 
3.4-kilometer natural gas pipeline, and a redundant source water conveyance 
system.

MGE has entered into the long-term energy self-supply agreement (ESSA) 
contract with Mexicana de Cobre S.A. de C.V. and Buenavista del Cobre S.A. de 
C.V., (Consumer Partners), and Minera Mexico S.A. de C.V. (BBB/Stable/--), a 
parent of these two companies, as the ESSA guarantor. Minera Mexico is a 
subsidiary of U.S.-based mining company Southern Copper Corp. (BBB/Stable/--), 
81.3% of which Grupo Mexico indirectly owns. Mexicana de Cobre and Buenavista 
del Cobre operate Minera Mexico's copper mines.

The rating reflects the following strengths:
     -- The ESSA with strong offtaker guarantor, Minera Mexico, provides a 
stable cash flow generation to MGE through its fixed capacity payments and the 
pass-through of all O&M expenses including fuel, to the Consumer Partners, 
mitigating market and operating risk.
     -- The fixed capacity payments are enough to cover operations and 
maintenance (O&M) costs and maintain an average and minimum debt service 
coverage ratio (DSCR) of 1.43x and 1.40x respectively throughout the bonds' 
term, even if energy capacity is lower.
     -- If the ESSA is terminated for any reason, the termination payment 
includes the outstanding amount of MGE's debt plus accrued interest. However, 
the timeliness of the termination payment is not specified which could lead to 
a default of MGE's financial obligations in the event of early termination.
     -- Noteholders benefit from a full security package that includes all of 
MGE's assets and a pledge of the99.99% of its equity in the project.
     -- Noteholders benefit from structural protections such as limitations on 
additional debt and a six-month debt service reserve.
     -- MGE uses proven Siemens turbine technology.

The following weaknesses limit the rating:
     -- Exposure to counterparty risk: A downgrade of Minera Mexico would 
result in a downgrade of the bonds.
     -- Construction risk: However, it's mitigated by the guarantee of Siemens 
Corp. and the Consumer Partners' obligation to make fixed-capacity payments 
even if MGE hasn't reached the operating phase.

The Consumer Partners will not make fixed capacity payments in a force majeure 
event that affects MGE and in the unlikely event that the self-supply permits 
are revoked by the regulator for a reason imputable to MGE. We believe that in 
such scenarios a default of MGE is very likely.

MGE will be located northeast of the city of Nacozari de Garcia, in the state 
of Sonora. The construction of the project is on land owned by MGE, which is 
inside Mexicana de Cobre's property. The construction of the first plant 
started in August 2011 and of the second one in April 2012. The first plant of 
is expected to start operating in the second quarter of 2013 and the second 
one in the second quarter of 2014. Operacion y Mantenimiento Energy Mexico, 
S.A. de C.V. (an indirect subsidiary of Gas Natural SDG S.A. 
 ) will operate and maintain MGE pursuant to a 16-year O&M 
agreement. Siemens will perform major maintenance according to two contracts 
to up to 18-year. Currently, the construction is on schedule. An independent 
engineer is monitoring construction of both phases.

MGE is designed to deliver a total nominal of approximately 500 MW of energy 
over its and the existing Sistema Electrico Nacional transmission lines to the 
mining facilities under the terms of the ESSA. Once the commercial operations 
begin, the Consumer Partners will pay monthly fixed capacity to MGE, even if 
its capacity is lower (or higher) than Siemens' guaranteed capacity. In 
addition, the Consumer Partners will reimburse MGE for the following: 
     -- All fixed and variable O&M costs; 
     -- Monthly payments to the water transporter; 
     -- The variable fees to the service contractor; 
     -- Monthly fuel charges; 
     -- Charge for back-up power; 
     -- CFE transmission charges; 
     -- Transmission maintenance; 
     -- Compensation for revenues on sales of economic energy to CFE; and 
     -- Any supplemental charges accounting for the difference between the 
capacity and energy charges paid by the Consumer Partners and the fixed 
discount to CFE market rates for electrical energy during the same period. 

If for any reason, the start-up is delayed, MGE has to notify the Consumer 
Partners, so they can make the capacity charges after the deemed commercial 
operation date, mitigating any construction delay risk. In addition, we 
believe the tariff mechanism provides great stability to MGE's cash flow 
generation, as the payments are not subject to performance guarantees related 
to heat rate, capacity, or minimum availability. Moreover, we believe the 
tariffs and adjustments set under the contract mitigate any impact on MGE's 
cash flow as a result of volatility in any of its O&M costs, which the 
Consumer Partners will assume. Furthermore, these payments are guaranteed by 
Minera Mexico. Also, if the ESSA is terminated for any reason, the termination 
payment considers the outstanding debt plus accrued interests. Such payment is 
calculated by MGE and is conclusive and binding for the Consumer Partners. 
However, there is not a specific date and time on which the termination 
payment will be received, which could lead to a default in the financial 
obligations.

Siemens will provide the combustion turbine and the steam turbine, while 
Siemens subcontractors--Nooter Erikson Inc. and Cerrey S.A. de C.V.-will 
provide the heat recovery steam generator. We believe technology risk is low, 
as 245 such combustion turbines operate worldwide.

The $575 million senior secured bonds will bear a fixed interest rate that 
will be paid on semiannual installments. Also, principal will be amortized 
semiannually through an amortization schedule where around 43% of principal is 
paid on the last quarter of the bonds' term, which we consider somewhat 
back-loaded but in line with other investment-grade project finance 
transactions. The notes are backed by full security package that includes all 
project assets and a pledge of the99.99% of MGE's equity in the Project. We 
believe there is no refinancing risk, as the term of the bonds matches the 
term of the ESSA. Moreover, given the expected stability on cash flow, the 
lack of tail between the maturity of the bonds and the expiration of the ESSA 
is not a concern. Also, given the take or pay nature of the ESSA, the fixed 
capacity payments are enough to cover O&M expenses and maintain an average and 
minimum DSCR of 1.43x and 1.40x, respectively, throughout the bonds' term, 
even if electric energy availability is lower or if the Consumer Partners 
don't consume the energy.

Liquidity
We believe MGE's liquidity to be sound given the project's expected stability 
in cash flow generation. Moreover, MGE will fund a six-month debt service 
reserve and an interest during construction account which will cover interest 
payments until the completion of the second plant. Moreover, there is a 
principal payment grace period until June 2015 of the Phase II. In our base 
and stress case scenario, we don't expect the use of the debt service reserve, 
as the capacity payments and fixed O&M payments are enough to cover O&M fixed 
expenses and debt service. However, if there is an event of force majeure or, 
although highly unlikely, the permits are revoked, the debt service reserve 
will provide liquidity for only six months while the termination payment is 
received, which could not be enough to prevent the default, as the ESSA may be 
terminated for a force majeure event after a year of such event.

Outlook
The stable outlook reflects our expectations that MGE will generate stable 
revenues due to the ESSA, which mitigates market and operating risks allowing 
it to generate an average and minimum DSCR of 1.43x and 1.40x respectively, 
throughout the bonds' term. Also, we expect construction works of the project 
to be finished on time and within budget. A downgrade of Minera Mexico could 
lead to a downgrade of MGE, as we believe the contractual foundation provided 
by the ESSA is a key credit consideration. A positive rating action on Minera 
Mexico could lead to a positive rating action on MGE.


Related Criteria And Research
     -- Project Finance Construction And Operations Counterparty Methodology, 
Dec. 20, 2011
     -- Updated Project Finance Summary Debt Rating Criteria, Sept. 18, 2007

Ratings List

New Rating

Mexico Generadora de Energia, S. de R.L.
  US$575 Mil Sr Secured notes due 2032             BBB/Stable



Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
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