Fitch Affirms Mackinaw Power LLC at 'BBB-'; Outlook Stable
KEY RATING DRIVERS
The rating affirmation of the senior bonds is based on the expectation for continued stable operational performance of the Mackinaw portfolio and low reliance on dispatch levels to repay outstanding debt obligations. The anticipated permitted transfer of several units out of the portfolio coincides with a reduction in annual debt service, yielding DSCRs consistent with the rating.
Contracted Portfolio, Strong Counterparty - Revenue Risk: Stronger
The Monroe and Walton facilities and units 2 and 3 of the Washington facility are fully contracted under tolling agreements with Georgia Power Company (rated 'A' with a Stable Outlook by Fitch). Capacity payments from these facilities are sufficient to cover fixed costs and debt service of the senior notes through maturity. The Effingham facility and Washington's units 1 and 4 also operate under tolling agreements but are expected to be transferred out of the portfolio when these agreements expire at the end of 2015.
Secure Natural Gas Supply - Supply Risk: Stronger
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.
Long, Stable Operating History - Operation Risk: Midrange
The Mackinaw portfolio contains assets that employ conventional technology and have displayed stable operations for over 10 years. The 24-month forward-looking maintenance reserve program is expected to facilitate continued stable operations and low variability in costs.
Fully Amortizing Senior Notes - Debt Structure: Midrange
Mackinaw receives distributions from facilities with no project-level debt. The debt is fully amortizing with a fixed interest rate and 6-month debt service reserve. Cash flow is fully contracted over the term of the notes, though there will be fewer assets contributing to the portfolio after 2015. Under the Fitch rating case, DSCRs average 1.41x through 2023, consistent with an investment grade rating.
Peer Analysis
Plains End Financing, LLC's senior secured bonds ('BB', Stable Outlook) also benefit from cash flow derived from tolling style revenue contracts. However, projected DSCRs averaging 1.36x with a declining profile are more consistent with the 'BB' rating of the bonds.
RATING SENSITIVITIES
Negative - Material deterioration in operating performance and/or a significant increase in the cost profile of the portfolio.
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 debt service reserve and the major maintenance reserve.
TRANSACTION SUMMARY
On Dec. 2, 2014, investment vehicles managed by The Carlyle Group (Carlyle, 'A'; Stable Outlook) completed the acquisition of a 75.05% share of Southeast PowerGen Holdings, LLC (SE PowerGen), the indirect holding company of the gas-fired power plants that generate operating cash flow to repay Mackinaw's senior bonds. Carlyle purchased the interests from AcrLight Capital Partners and GIC (the sovereign wealth fund of Singapore), while GE Energy Financials Services retained its 24.95% share. Fitch views Carlyle as an experienced and capable owner and the ownership change did not impact the senior bond's rating.
Concurrent with the closing of Carlyle's acquisition, SE PowerGen completed a \$550 million recapitalization of the company and used proceeds from the financing to fully repay the outstanding term loan of indirect subsidiary Mackinaw Power Holdings, LLC. The lenders subsequently released all security interests and Fitch withdrew its rating as the term loan was paid in full.
The owners have also elected to transition management of the Mackinaw gas plants to Cogentrix Energy Power Management, LLC (Cogentrix). The owners have indicated that employment at the plants will remain mostly unchanged to ensure that operations will transition smoothly. Carlyle owns Cogentrix, which Fitch views as an experienced asset manager capable of maintaining stable operations.
Operationally, the assets continue to perform in line with expectations in 2014 with no major forced outages. Overall plant availability was strong across the portfolio and starts and total electrical output produced rose from 2013 levels, which struggled with low demand amid mild weather conditions.
Total expenses were 8% below average in 2014, though this was mostly due to a decline in contributions to the forward-looking major maintenance reserve, which is based on the plants' operating hours. Overall, operating cash flow produced a DSCR of 1.45x on the senior bonds in 2014, in line with base case expectations. Fitch anticipates a lower DSCR in 2015 due to a deposit of nearly \$11 million to the major maintenance reserve, but subsequent rating case DSCRs return to levels consistent with the assigned rating.
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