-- Mexico-based electricity generator, Mexico Generadora de Energia is
planning to issue approximately $564.2 million senior secured bonds due
-- 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
On Nov. 16, 2012, Standard & Poor's Ratings Services assigned its 'BBB' issue
rating to Mexico Generadora de Energia S. de R.L.'s (MGE) proposed
approximately $564.2 million, fixed-interest senior secured bonds due Dec. 31,
2032. The outlook is stable.
MGE is a bankruptcy-remote, limited purpose company which was created with the
sole purpose of developing, 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
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 1.40x 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 e (COD) in the second quarter of 2013 and the
second one in the second quarter of 2014. A subsidiary of Gas Natural Mexico
S.A. de C.V. 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
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 approximately $564.2 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 stability, 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 1.40x throughout the bonds' term, even
if electric energy availability is lower or if the Consumer Partners don't
consume the energy.
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
s, 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.
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 1.40x 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
Mexico Generadora de Energia, S. de R.L.
$564.2 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