Fitch Affirms Mackinaw Power LLC at 'BBB-' & Mackinaw Power Holdings LLC at 'BB-'; Outlook Stable

  Fitch Affirms Mackinaw Power LLC at 'BBB-' & Mackinaw Power Holdings LLC at   'BB-'; Outlook Stable  Business Wire  SAN FRANCISCO -- May 7, 2014  Fitch Ratings affirms the 'BBB-' rating on Mackinaw Power, LLC's (Mackinaw) $288.9 million ($176.2 million outstanding) senior secured bonds (senior bonds), and affirms the 'BB-' rating on Mackinaw Power Holdings, LLC's (MPH) $147 million ($110 million outstanding) senior secured term loan (term loan). The Rating Outlook for both instruments is Stable.  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. Capacity payments cover fixed costs and debt service at the senior notes level, indicating a low reliance on dispatch levels. (Revenue Risk: Midrange)  Secure Natural Gas Supply: Due to the nature of the tolling agreements, the off-takers are responsible for procurement of natural gas. As a result, the volume and price risk associated with fuel is minimal. (Supply Risk: Stronger)  Long, Stable Operating History: The Mackinaw portfolio contains assets that employ conventional technology and have displayed stable operations over a minimum of 10 years. The operator is an affiliate of the majority owner and has established a 24-month forward-looking maintenance reserve program to facilitate continued stable operations and low variability in costs. (Operation Risk: Stronger)  Fully Amortizing Senior Notes: Mackinaw receives distributions from facilities with no project-level debt. The debt is fully amortizing with a fixed interest rate and six-month debt service reserve. On the basis of contracted-only cash flows, Fitch rating case DSCRs average 1.76x through 2023, sufficient for an investment grade rating. (Debt Structure: Midrange)  Term Loan Faces Refinance Risk: The term loan is subordinate to the senior notes and the interest rate is variable and unhedged. Fitch expects a bullet of roughly $100 million upon maturity of the term loan in June 2015 at MPH. Despite these weaknesses, portfolio cash flow appears sufficient to facilitate refinancing under an eight-year refinance scenario. (Debt Structure: Weaker)  RATING SENSITIVITIES  Fitch notes that the option to transfer Washington 1 and 4, as well as the Effingham facility, to MPH in late 2015 is permitted in the indenture. Under a scenario in which these assets are transferred out of the senior bonds cash flow, debt service coverage will approach the investment-grade threshold, increasing susceptibility to operational challenges across the remaining pool of assets.  A change to the contractual status of the Effingham facility could impact long-term cash flow projections.  A significant variance in the amount of term loan principal outstanding relative to projected levels could impact the assessment of refinance risk.  SECURITY  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.  CREDIT UPDATE  The rating affirmation of the senior bonds is based on continued stable operational performance of the portfolio and low reliance on dispatch levels to repay outstanding debt obligations. The affirmation of the term loan reflects near-term consolidated DSCRs consistent with the rating category and the expectation that long-term portfolio cash flow will be sufficient to refinance a bullet of approximately $100 million.  In 2013, the four assets that comprise the Mackinaw portfolio were dispatched at much lower levels than budgeted, due to mild weather across the Southeast U.S. and a rebound in natural gas prices. As a result, the facilities earned less variable energy revenue, and operating cash flow fell from recent levels. Still, availability across the portfolio was high and full capacity payments were sufficient to cover senior debt obligations at an annual DSCR of 1.22x.  Over the remaining 10-year term of the senior notes, cash flow is expected to be sufficient to produce DSCRs that are consistent with an investment-grade rating. Under Fitch's rating case, which applies a combination of stresses to costs, availability, and heat rates across the portfolio, contracted-only cash flows average 1.76x, with a minimum of 1.32x in 2015. Projections include additional cash flow from new tolling agreements at units 1 and 4 of the Washington facility, which begin in 2016.  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+'; Rating Watch Negative 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. 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 17, 2013).  Applicable Criteria and Related Research:  Rating Criteria for Infrastructure and Project Finance  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867  Rating Criteria for Thermal Power Projects  http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=710786  Additional Disclosure  Solicitation Status  http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=829059  ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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Contact:  Fitch Ratings Primary Analyst Andrew Joynt Associate Director +1-415-732-5622 Fitch Ratings, Inc. 650 California Street San Francisco, CA 94108 or Secondary Analyst Chris Joassin Director +1-312-368-3166 or Committee Chairperson Gregory Remec Senior Director +1-312-606-2339 or Media Relations: Elizabeth Fogerty, +1-212-908-0526 (New York) elizabeth.fogerty@fitchratings.com