OREANDA-NEWS. March 28, 2016. Fitch Ratings affirms the 'BBB-' rating on Mackinaw Power, LLC's (Mackinaw) \\$288.9 million (\\$118.9 million outstanding) senior secured bonds (senior bonds). The Outlook is Stable.

KEY RATING DRIVERS

The affirmation of the senior bonds is based on the expectation for continued stable operational and financial performance of the Mackinaw portfolio with 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 debt service coverage ratios (DSCR) 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+'/Stable Outlook). Capacity payments from these facilities are sufficient to cover fixed costs and debt service of the senior notes through maturity.

Secure Natural Gas Supply - Supply Risk: Stronger
Per 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: Stronger
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. Overall operating complexity will be reduced following removal of Effingham from the portfolio.

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 six-month debt service reserve. Cash flow is fully contracted over the term of the notes, though the expectation is there will be fewer assets contributing to the portfolio after 2016. Under the Fitch rating case, DSCRs average 1.41x through 2023, consistent with an investment grade rating.

Peer Analysis
Mackinaw's peers include Plains End Financing, LLC (rated 'BB'/Stable Outlook) and Orange Cogen Funding Corporation (rated 'BBB+'/Stable Outlook), which both benefit from tolling style revenue contracts with some dispatch risk. Mackinaw's average rating case DSCR of 1.44x falls in between that of Plains End (1.36x senior bonds) and Orange Cogen (2.93x).

RATING SENSITIVITIES
Negative - Deteriorating Performance: Material deterioration in operating performance and/or a significant increase in the cost profile of the portfolio.

Positive - Materially Increased Dispatch: Permanently increased dispatch portfolio-wide which materially increases operating cash flow.

SUMMARY OF CREDIT
In 2015, the Mackinaw portfolio experienced above-average dispatch and generation, primarily at Effingham, due to low gas prices and increased coal retirements and coal-to-gas plant conversions. Through September, capacity factors nearly doubled for all portfolio assets in comparison to 2014, and availability remained at high levels (99.97%-98.02%). In comparison to Fitch's base case, revenues grew 3.1% higher while expenses were 10.8% less, resulting in coverage of 1.50x compared to expected coverage of 1.31x. Thus far, 2016 has been trending the same as 2015, with cooler weather increasing dispatch.

With a sizeable amount of maintenance coming in 2016, the portfolio accrued \\$7.9 million in its major maintenance reserve last year. Specifically, Effingham conducted a planned maintenance outage from January to February, and two combustion inspections are expected at Washington units 2 and 3. No other major maintenance is expected from 2017-2021, as the remaining peaker plants are not anticipated to be dispatched to the extent that extensive major maintenance is warranted.

Management expects that the Effingham plant as well as the Washington units 1 and 4 will be transferred out of the portfolio by year-end 2016, with the Effingham plant being transferred out in March. Given that Mackinaw's debt structure is sculpted to accommodate this transfer and the remainder of plants in the portfolio will be peaking units with lower maintenance requirements, Fitch anticipates that financial stability will remain consistent with historical results. The transfer-out of Washington units 1 and 4 may be delayed due to required lender consent and FERC approval. Credit quality would not be diminished in this potential scenario, as the inclusion of the units is expected to increase project cash flow.

The Fitch rating case combines several stresses to assess how the financial profile would hold up in a reasonably likely downside scenario. The Fitch rating case includes O&M, major maintenance, heat rate, and availability stresses, resulting in an average DSCR of 1.44x through 2023. The minimum rating case DSCR of 1.30x would occur in 2023, the final year of debt repayment.