Fitch Affirms Mackinaw Power LLC at 'BBB-' & Mackinaw Power Holdings LLC at
'BB-'; Outlook Stable
NEW YORK -- May 17, 2013
Fitch Ratings has affirmed the 'BBB-' rating on Mackinaw Power, LLC's
(Mackinaw) $288.9 million ($200 million outstanding) senior secured bonds
(senior bonds), and affirms the 'BB-' rating on Mackinaw Power Holdings, LLC's
(MPH) $147 million ($114 million outstanding) senior secured term loan (term
loan). The ratings affirmations and Stable Outlooks are based on continued
stable operational performance and the addition of new tolling agreements at
two generation units.
KEY RATING DRIVERS
--Substantially Contracted Portfolio: The facilities are nearly fully
contracted under tolling agreements with investment-grade off-takers through
2015. Beyond 2015, approximately 75% of total portfolio capacity is contracted
through the senior notes maturity in 2023. There is adequate cost recovery for
operations and fuel under the contracts based on dispatch.
--Stable Historical Performance: Plants utilize conventional technology and
proven natural-gas fired generation with operational and maintenance risk
diversified across the four facilities. Operating costs, heat rates, and
availability have been consistent with expectations.
--Adequate Supply: Fuel supply is provided by investment-grade off-takers.
--Investment-Grade Senior Bonds Profile: Mackinaw receives distributions from
facilities with no project-level debt. Although cash flow is expected to come
from both contracted and non-contracted sources during the term of the bonds,
debt service coverage is evaluated using contracted-only cash flows. Fitch
projects a contracted-only DSCR average of 1.73x, consistent with the senior
--Manageable Refinance Risk: Fitch expects a bullet refinancing of
approximately $100 million upon maturity of the term loan at MPH. Refinance
risk is mitigated by adequate residual cash flow from Mackinaw to MPH in
Fitch's refinancing case.
-- Owner decision to transfer the Effingham and/or Washington (units 1 and 4)
from Mackinaw to MPH;
-- Contract renewal or replacement at the Effingham facility;
-- Significant shift in the regional merchant power market;
-- Material change in the cost profile of the portfolio;
-- Substantial deviation in term loan principal amortization relative to
The notes are secured by a perfected first priority security interest in all
tangible and intangible assets of Mackinaw and the Project Companies, the
membership interests in Mackinaw held by MPH, the debt service reserve and the
major maintenance reserve. The term loan is secured by a perfected first
priority security interest in all tangible and intangible assets of MPH, and
the letter of credit-funded debt service reserve.
The ratings affirmations for the senior bonds and term loan are based on
continued stable operational performance of the portfolio and the addition of
new tolling agreements at two generation units (Washington 1 and 4). The
tolling agreements were signed with two Georgia cooperatives whose credit
quality is not a constraint on the ratings. These agreements begin in 2016 and
add a material amount of contracted cash flow to the portfolio.
Under Fitch's rating case, which applies a combination of stresses to costs,
availability, and heat rates across the portfolio, contracted cash flows are
sufficient to reach the investment-grade threshold. With the addition of
Washington 1 and 4's new agreements, the average DSCR for the senior bonds is
1.73x, with a minimum of 1.32x in 2015.
Fitch notes that the indenture permits the option to transfer Washington 1 and
4 and the Effingham facility to MPH in late 2015. Under a scenario in which
these assets are transferred out of the senior bonds cash flow, the DSCR
average could fall to 1.34x and could warrant negative rating action. This
flexibility to move some assets directly to MPH in 2015 could also reduce
refinance risk for the term loan.
The term loan rating reflects consolidated debt service coverage for both
principal and interest on the senior bonds and interest payments on the
structurally subordinated term loan under Fitch's combined stress rating case.
From 2013-2015, the term loan consolidated DSCR averages 1.16x, with a minimum
of 1.10x. Fitch expects that principal payments on the term loan via the cash
sweep mechanism will reduce the bullet that will need to be refinanced at
maturity to approximately $100 million.
To assess refinancing risk, Fitch constructed a refinancing scenario that
assumes fixed amortization at an interest rate of 9% over an eight-year term
with debt maturing in 2023, six months before the expiration of several
tolling agreements. Fitch notes that the tolling agreements signed at
Washington 1 and 4 extend beyond 2023, reflecting additional flexibility for
refinancing the bullet. Overall, refinancing at MPH is viewed as midrange
The projects held by Mackinaw and MPH sell energy and capacity under long-term
fixed-price power purchase agreements (PPAs) with Constellation Energy
Commodities Group (owned by Exelon, IDR 'BBB+'; Stable Outlook by Fitch),
Georgia Power Company (GPC, IDR 'A'; Stable Outlook), and two Georgia
cooperatives. The PPAs are structured as tolling agreements, and the
off-takers are responsible for providing natural gas fuel. PPA cash flows are
the primary source of income to the senior bonds. Excess cash flow, if any, is
distributed to MPH and used to make interest payments on the term loan. Fifty
percent of any remaining cash flow at MPH is used for term loan principal
Equity interests in the projects are owned indirectly by majority owner
ArcLight Energy Partners Fund III, LP, as well as minority owner affiliates of
GE Capital and Government of Singapore Investment Corporation.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);
--'Rating Criteria for Thermal Power Projects' (June 20, 2012).
Applicable Criteria and Related Research
Rating Criteria for Thermal Power Projects
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Fitch Ratings, Inc.
Andrew Joynt, +1-212-908-0842
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Cynthia Howells, +1-212-908-0685
Gregory Remec, +1-312-606-2339
Elizabeth Fogerty, +1-212-908-0526
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