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