Fitch Affirms Mackinaw Power LLC at 'BBB-' & Mackinaw Power Holdings LLC at
'BB-'; Outlook Stable
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)
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
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.
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 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
Rating Criteria for Thermal Power Projects
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Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
Elizabeth Fogerty, +1-212-908-0526 (New York)
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