OREANDA-NEWS. April 13, 2015. Fitch Ratings has affirmed its 'BBB-' rating with a Stable Outlook on Fermaca Enterprises, S. de R.L. de C.V.'s (Fermaca) US\\$550 million notes due 2038 at 6.375% interest rate.

The rating affirmation reflects the transaction's performance which has been in line with Fitch's base case expectations. The rating is underpinned by an experienced sponsor, which has successfully operated one of the assets for almost 12 years, the fact that both pipelines are operating under long-term firm-basis contracts with 'BBB+' counterparties within a highly regulated industry, table and predictable revenue and profit base. Leverage and coverage ratios adequately compare with other availability-based projects in the energy sector that are currently rated by Fitch, as well as with the indication from the applicable criteria.

KEY RATING DRIVERS

Low Operational Risk [Operations Risk - Stronger]: Pipeline operation has a low technical complexity and quite predictable operation and maintenance (O&M) expenses. Though the foremost pipeline has been functional for less than two years, the other one has successfully operated for almost 12 years with no incidents, penalties or revenue deduction. The management team is experienced and has strong incentives to increase operations' efficiency and profitability.

Almost Fully Contracted Capacity [Revenue Risk - Midrange]: Over 90% of the total capacity is contracted under long-term ship-or-pay agreements with 'BBB+' rated counterparties within a well-regulated industry. Revenue has been and is expected to continue being stable as tariffs are predetermined or self-regulated. Although early termination provisions in the ship-or-pay agreement of the main pipeline do not explicitly ensure full debt compensation, Fitch considers contract protections to be sufficient to assume that the outstanding debt balance would likely be covered. Furthermore, Fitch regards the services provided by such pipeline to CFE as strategic to its long-term operations.

Assets' Remaining Life Exceeds Debt Tenure [Infrastructure Development & Renewal - Midrange]: Assets are connected to main consumption centers and, if properly maintained, it is expected their remaining life will last for decades. There is no reserve account for lifecycle costs, though it is estimated such disbursements will be highly stable and foreseeable.

Conventional Debt Structure [Debt Structure - Midrange]: Senior secured debt is at a fixed interest rate and tenure matching that of the main services agreement which represents roughly 90% of total revenue. Typical project provisions include a six months reserve account, distribution test at 1.20x, and limitations for permitted investments and additional indebtedness.

Stable Debt Service Coverage Profile: Leverage is consistent with the rating category, as reflected in Fitch's Base Case debt to EBITDA ratio at 8.41x at its highest level reached in 2016. In this scenario, debt service coverage ratio (DSCR) is 1.23x minimum and 1.29x average, and loan life coverage ratio (LLCR) is 1.30x. Fitch's Rating Case has DSCR of 1.14x minimum and 1.26x average, with LLCR of 1.26x. The projected ratios compare to other projects of similar characteristics that are rated by Fitch, as well as to the applicable sector-specific criteria.

PEERS

Fermaca can be compared to Abengoa Transmision Sur (ATS) whose debt is also rated 'BBB-'/Outlook Stable. Even though ATS operates a different asset (transmission line), both have similar revenue streams as availability-based projects. Fermaca has slightly lower debt coverage than ATS' with average DSCR at 1.29x vs. 1.38x LLCR at 1.30x vs. 1.44x, but this is compensated by a lower leverage as reflected in the Debt/Ebitda ratio of 8.4 for Fermaca and 10.6 for ATS. Attribute assessments are pretty similar for both issuers.

RATING SENSITIVITIES

--Positive: Cash flow available for debt service increasing on a sustainable basis as a result of the establishment of new service agreements to sell Tarahumara Pipeline's currently unused capacity on an interruptible basis and/or the expansion of its expanded capacity via the installation of a compression facility.
--Negative: Fitch Base Case LLCR under 1.20x.
--Negative: Recurring two-digit increase in operation expense that would negatively affect cash flow, or not having enough flexibility to reduce costs in case it is needed.
--Negative: Operational underperformance leading to downtime periods over two days per year.

CREDIT UPDATE

In 2014, Fermaca operated smoothly, having experienced no incidents, revenue deductions or downtime days.

Historically, the organizational structure of Fermaca has been complex, as there has been a number of intermediate entities between the operating companies Tarahumara Pipeline (TP) and Tejas Gas de Tolulca (TGT), and the issuer. Consequently, cash to repay the rated debt is to flow from TP and TGT through the intermediates up to the issuer in the form of dividends and intercompany loans. The company has been in the process of simplifying its structure and is expected to finish such process by November 2015, meeting the commitment made ahead of the notes' issuance.

In May 2014, Fermaca declared its plans to install a compression station that would add 250 mmcfc to the current capacity of TP within the 18 months after the rated notes' issuance (November 2015). Currently, the company has no plans to implement such expansion in the immediate future. This decision does not affect the credit quality of the project as the additional capacity was seen by Fitch as a potential upside, but not considered in our projections.

The company may get into additional contracts to sell the unused capacity of its assets. At present, Fermaca has not engaged in any additional contracts for TP or TGT. Potential the extra revenues arising from new contracts that the company could eventually get into were not considered in Fitch's projections.

The first coupon of the rated debt was paid in Sept. 30, 2014 and resulted in DSCR of 1.75x, which favorably compares to the 1.74x anticipated by Fitch in its base case. The second payment was timely made on March 30, 2015, but the relevant financials were not available at the time of the agency's review.

Among other considerations, Fitch's base case assumed the U.S.'s and Mexico's inflation, respectively, at 2.5% and 4% fixed, O&M expenses at issuer's budget (validated by a third-party expert) plus 5%, one-day/year downtime for each pipeline (history for TGT has been zero day/year), TP revenue following the TSA tariff schedule, and TGT revenue assuming throughput at current level of 44 million cubic feet per day (mmcfd). Under this scenario, DSCR is 1.23x minimum and 1.29x average, with 1.30x LLCR.

Different from the base case, Fitch's rating case assumed O&M expenses at issuer's budget plus 10%, two-day/year downtime for each pipeline, and TGT revenue assuming only the base firm contracted capacity of 30 mmcfd. Under this scenario, DSCR is 1.14x minimum and 1.26x average, with 1.26x LLCR.

Other stresses were also run, finding that, given the revenue and cost structure, cash flow is very stable and highly resilient to aggressive sensitizations in inflation, exchange rate, O&M expense and downtime days. Several upsides have been identified, mainly: i) TP to sell its currently unused capacity on an interruptible basis; ii) TGT to have its TSA renewed or extended or to get into another contract after 2030 when the CH4 agreement ends; and iii) TP to expand its capacity via compression in order to achieve extra profits. None of these upsides have been incorporated in our scenarios.

TP is a 36-inch diameter and 383 kilometer (km) pipeline that extends from the U.S.-Mexico border to Chihuahua City. It receives gas from El Paso Natural Gas system in Texas and delivers it to a CFE power plant. It was built in anticipation of six additional power plants to be built that are planned to start operations between 2015 and 2025. TP has a total 850 mmcfd capacity contracted at a predefined tariff schedule.

TGT is a 16-inch diameter and 127-km pipeline that serves Toluca City by supplying natural gas to a significant industrial corridor in central Mexico, very close to Mexico City. TGT has a contract for 31.3% of its 96 mmcfd capacity at a tariff that is regulated by the CRE and periodically adjusted to reach a preset rate of return target. Therefore, revenue is completely isolated from throughput level.