Planta de Reserva Fria de Generacion de Eten S.A. #BBB# Debt Rating Affirmed, Outlook Still Stable

Stocks and Financial Services Press Releases Thursday June 29, 2017 09:30
MEXICO CITY--29 Jun--S&P Global Ratings

MEXICO CITY (S&P Global Ratings) June 28, 2017--S&P Global Ratings said todaythat it had affirmed its 'BBB' issue-level rating on Planta de Reserva Fría deGeneración de Eten (Eten or the project) $132 million, fixed-interest securedvariable funding notes due December 2033. The outlook remains stable.

The rating reflects our expectation that the project will maintain adequateoperating and financial performance during the remaining term of the notes,mainly thanks to the stability and predictability of its cash flow, driven bythe availability payments under the concession agreement with the government

of Perú (BBB+/Stable/A-2).

According to the agreement, the off-taker makes fixed monthly availabilitypayments to Eten. The government may also require Eten to dispatch energy intothe system, mainly during emergency situations upon the request of thePeruvian Committee of Economic Operation System (COES). Under the availabilitytests and emergency situations, Eten will pass through all variable costsassociated with the energy generation to the government (i.e. costs of fuelconsumption of start-stops).

We believe that the abovementioned compensation mechanism incorporated in theconcession agreement provides stability to Eten's cash flow generation, alongwith the Development Bank of Latin America (CAF) guarantee that will guaranteethe payment obligations up to 20% of the notes. As such, we consider thelatter as an extraordinary liquidity source for Eten.

Construction Phase stand-alone credit profile (SACP): N/AThe project has been in operation since July 2015.

Operations Phase stand-alone credit profile (SACP): 'bbb'Eten is a 230 megawatts (MW) dual fuel simple cycle power generation plantlocated in Reque, in northern Perú. The plant uses a dual fuel turbine (GE 7FA5) prepared to burn either gas or B5 diesel and it is owned by Cobra

Instalaciones y Servicios (Cobra) and EMCE Holdings with a 50% stake each.Eten operates as a backup generator for the national grid, under a 20-yearconcession agreement with the Peruvian government. The project receives fixedavailability payments, and the government may also require Eten to dispatchenergy into the system, mainly during emergency situations. We expect that the

effective contracted power will continue providing the project's mainrevenues. Monthly payments of $7,627 per MW are inflation and exchange ratelinked. However, availability payments only adjust whenever the combinedweighted average inflation (78% of which is based on the U.S. rate and the

remainder on Peru's) and the exchange rate variation of the Peruvian solagainst the dollar, vary by 5% (whether increase or decrease) or more.

The government may also require Eten to dispatch energy into the system,mainly during emergency situations. Under such circumstances, Eten will passthrough all variable costs associated with the energy generation to thegovernment.

In January 2016, COES asked Eten to provide energy due to a gas leak emergencyat one of the pipelines. Thus, there was a three-day energy generation foralmost 24 hours with a totaling 2,902 megawatt hours (MWh). The rest of theyear, the project generated energy mainly due to monthly availability tests.Given the plant's status as a replacement generator, its performance has been

in line with our expectations, because it has responded to emergency calls andavailability tests according to the off-takers' request and within thecontract's 30-minute limit. In addition, during 2016, the plant performed sixsuccessful requests for availability tests. The project hasn't reported any

delays in payments during 2016. We expect Eten's overall operating andfinancial performance to remain strong and in line with our originalexpectations based on the existence of the concession agreement.

Eten is exposed to fuel availability risk if the government requires the plantto dispatch energy to the system. Nevertheless, we don't consider it as arisk, because the project has a 10-day storage capacity fuel tank. Accordingto the concession agreement, the government could only request Eten to run ondiesel fuel for up to 10 days on a continuing basis. Failure to supply fuelfor a longer period would be a force majeure event, and Eten won't be liablefor failing to dispatch energy into the system. As such, we believe diesel isan available raw material and because the plant could only be asked to

dispatch energy for a 10-day period, we don't view raw material supply as asignificant risk for Eten. Furthermore, Eten would be exposed to a highermaintenance costs, related to the plant's depreciation, if the governmentrequires Eten to dispatch energy for more than 30 days in a year.

The stable outlook reflects our expectation that there will be consistent cashflows driven by the monthly availability payments in the next 12 to 24 months.We expect the payments will continue to be sufficient to cover the project'soperations and maintenance (O&M) expenses and debt service with a minimum DSCRof 1.18x for the notes' remaining term.

The main factor that could lead to a downgrade would be an increase in the O&Mexpenses that reduces the minimum DSCR to below 1.15x.
An upgrade is possible in the next 12-24 months if O&M expenses drop due to animprovement in the efficiency of the plant, which would lead to a minimum DSCRover 1.21x.

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