Mackinaw Power LLC Senior Secured Notes Assigned 'BBB+' Final Rating; Outlook Stable


Mackinaw Power LLC's (Mackinaw Power) closed a debt exchange as part of
the sale of its Washington County power plant, using $35 million of the
proceeds to reduce the $87.6 million of senior notes outstanding.
Despite lower debt service coverage ratios (DSCRs) following the sale,
the rating between the previous debt and the new debt is the same because
there was sufficient DSCR headroom at the current rating level. 
We assigned a final 'BBB+' rating to Mackinaw Power's $52.6 million
senior secured notes due October 2023.
The outlook is stable, reflecting the outlook on Deutsche Bank Trust Co.
Americas as depository bank, which constrains the rating.
SAN FRANCISCO (S&P Global Ratings) Feb. 22, 2019—S&P Global Ratings today took
the rating actions listed above.
Following the recent sale of its Washington County power plant, Mackinaw Power
is a portfolio of two contracted natural-gas-fired power plants in Georgia,
consisting of Monroe (309 MW) and Walton (465 MW). The plants are contracted
peakers having tolling agreements with Georgia Power Co. through May 2024.
Mackinaw Power is a special-purpose, bankruptcy-remote operating company
formed to own and operate power plants. It  is 100% indirectly owned by
Mackinaw Power Holdings LLC, which is indirectly owned by Southeast PowerGen
LLC (SEPG).

Operating under tolling agreements, the portfolio's assets are protected
from market risks, dispatch sensitivities, and exposure to fuel expenses.
Revenue is stable, with 90% derived from capacity payments (enough to
cover all debt service) from an investment-grade offtaker, Georgia Power
Co., under a long-term contract through 2024.
The operating profile has historically been stable.
Counterparties that lower the rating on the portfolio.
Capacity revenues are predicated on Walton and Monroe being able to
achieve at least 95% availability, making it critical that the project
achieves required availability performance to avoid availability payment
deductions.
Mechanical failures, in addition to potentially resulting in
underperformance relative to the project's contractual obligations under
its tolling agreements, could lead to higher-than-anticipated operation
and maintenance (O&M) or major maintenance expenses.
The previous senior notes at Mackinaw Power have been partially paid down and
swapped out with new notes. Mackinaw Power has sold its Washington County
power plant (609 MWs) to an affiliate of Harbert Management Corp., resulting
in about $267 million of proceeds. The proceeds are being used to partially
pay down $288.9 million of notes ($87.6 million outstanding) at Mackinaw Power
and term loan B at SEPG, with the remaining funds being used to help fund The
Carlyle Group LP acquisition of GE Capital Corp.'s 25% stake in SEPG (making
Carlyle the 100% owner of SEPG) and for make-whole payments and transaction
expenses. Of the proceeds, $35 million was used to pay down the notes at
Mackinaw, excluding make-whole payments. Mackinaw purchased the old notes and
sold the new notes to the investors who agreed to the debt exchange. The new
Mackinaw notes continue to have the same 6.3% interest rate and to fully
amortize in 2023, but with reduced principal payments given the partial pay
down.
The Washington County plant sale does not hurt Mackinaw's rating because of
cushion in DSCRs.
We expect the loss of Washington will lower cash flow available for debt
service (CFADS) by about $114 million over the life of the notes, or 48% of
total cash flows. This is partially mitigated by a reduction in bond payments
of $35 million (a 44% reduction), lower tolling agreement letters of credit
(LOC) by $55.6 million (a $4 million reduction), and a reduction in major
maintenance and capital expenditures based on the 2019 budget (a $5 million
reduction) over the same period. Mackinaw's revolving LOC facility will be
reduced by $65 million to $180.6 million to resize its needed capacity as a
result of Washington's sale, with the revolver dropping to $146 million in
June 2019 due to a lower tolling agreement letter of credit requirement for
Walton and Monroe.
The minimum DSCR in our base case declines to 1.43x compared to 1.89x in our
last review in September. We exclude 2022 (1.26x) from our financial forecast
as the minimum because it is associated with the portfolio's one-time major
maintenance event (which occurs at Walton) and is backed by sufficient
liquidity. A reduction of 40 basis points (bps) in DSCR does not affect the
rating given that Mackinaw's current coverage has sufficient headroom at the
rating level to maintain its credit profile at a lower level of expected
DSCRs. This is because the 'a' ratings level for a project with Mackinaw's
operational risks is broader than the range for lower rating levels. 
The project's operational profile and financial performance are commensurate
with an 'A' rating.
We view the asset to have relatively stable cash flow given that it is a
collection of peakers with tolling agreements. When the current project
financing was structured, the portfolio contained a combined cycle power plant
(Effingham), which merited higher DSCRs to be investment-grade given our view
of that asset's higher operational risk. In addition, the portfolio benefits
from low leverage, with debt/kW below $70 (or $136 if the debt service reserve
LOC and working capital are included). As essentially an availability project,
the Mackinaw Power portfolio performs well in our downside scenario, with
performance at an 'aa' level, justifying an additional notch and thereby an
'A' rating before any adjustments for counterparties.
Mackinaw Power's rating remains constrained by counterparties with lower
ratings.
Like the existing rating on Mackinaw Power, the final rating is capped by the
long-term rating on Deutsche Bank Trust Co. Americas (BBB+/Stable/A-2) because
the replacement language in the project agreement does not require a minimum
rating from S&P Global Ratings for any potential substitute bank in the event
Deutsche Bank Trust Co. Americas must be substituted for an alternative
deposit account provider. Thus, the rating and outlook on Mackinaw Power are
tied to and currently constrained by the rating on this bank. This is similar
to Orange Cogen Funding Corp. (BBB+/Stable), which we would also rate 'A' if
not for being weak-linked to the same financial counterparty as Mackinaw.
Since the Mackinaw rating is already capped by the rating on Deutsche Bank
Trust Co. Americas, the rating on off-taker Georgia Power Co. (A-/Negative) is
not a rating constraint at the current rating level.
The outlook is stable, reflecting our outlook on Deutsche Bank Trust Co.
Americas, which currently constrains the rating. We forecast the DSCR in 2019
will be about 1.57x, with a minimum DSCR (excluding 2022) of 1.43x in 2021.
We could lower the rating if the rating on the project's off-taker or one of
the financial counterparties, particularly Deutsche Bank Trust Co. Americas,
falls below 'BBB+'. We could also lower the rating if any asset significantly
contributing to cash flow has a sustained operating issue that precludes
execution under the tolls or results in significantly high major maintenance
or capital expenditures, causing DSCRs to consistently fall to the lower end
of the 1.2x to 1.4x range. We could also lower the rating if lower coverages
lead to weaker performance in our downside case and liquidity reserves fall
significantly.
We could raise the rating if we upgrade Deutsche Bank Trust Co. Americas above
'BBB+' and the minimum DSCR in our base-case financial forecast remained at
least in the upper end of the 1.2x to 1.4x range.
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