Fitch Affirms Midland Cogeneration Venture LP's Sr Secured Notes at 'BBB-'; Outlook Stable
Fitch Ratings has affirmed the rating of Midland Cogeneration Venture
LP's (MCV) combined $741.25 million ($616.7 million outstanding) senior
secured notes due 2025 at 'BBB-'. The Rating Outlook is Stable.
KEY RATING DRIVERS
The affirmation reflects MCV's stable financial profile, which is driven
primarily by steady revenues under its power purchase agreement (PPA).
Debt service coverage ratio (DSCR) forecasts provide adequate cushion
for the project to absorb temporary operational stresses or extreme
market pricing conditions with average Fitch rating case coverage above
1.40x. The forecasted Fixed Energy Rate (FER) along with continued
stable operating performance are expected to produce a financial profile
consistent with an investment grade rating.
Substantially Contracted Cash Flows [Revenue Risk: Midrange]:
On average over 90% of MCV's fixed and variable revenues are derived
from contracted power and steam sales to investment grade offtakers. The
Consumers Energy Co. (Consumers; 'A-'/Stable Outlook) PPA passes along
most of the fuel, operations and maintenance (O&M) and emission costs
through capacity and energy payments. The project also receives FER
payments based on the avoided cost of coal generation at Consumers' coal
plants. Project revenues are partially exposed to volume and price risk
through the PPA fixed energy rate, local gas and power pricing, and
dispatch.
Proven Operating History [Operation Risk Midrange]:
The facility has historical PPA availability exceeding 98% since its
completion in 1990, supported by excess capacity and redundant
equipment. The O&M profile, along with the long-term service agreement
(LTSA) with a subsidiary of General Electric ('AA-'/Stable Outlook) is
expected to support PPA requirements through 2025.
Limited Fuel Risk [Supply Risk: Midrange]:
The abundance of fuel management suppliers mitigates the risk of MCV's
shorter-term contract with Shell Energy. Additionally, fuel costs are a
pass-through under the off-take agreements or the majority hedged with
forward contracts, mitigating the price risk associated with contract
extension or replacement.
Fully Amortizing Debt Structure [Debt Structure: Midrange]:
MCV's debt is fixed and fully amortizes over the debt term. The
structure contains typical project finance features, such as a six-month
debt service reserve and 12 months forward- and backward-looking
distribution test of 1.20x DSCR.
Stable Financial Profile:
Debt service coverage in 2017 is currently expected to be below typical
coverage for investment grade thermal projects, but is supported by a
rating case average DSCR of 1.44x for the remaining debt term. Lower
coverages are the result of lower FER increases than previously
forecasted. The financial profile strengthens in the outer years, as
FERs adjust upwards with DSCRs in line with the investment grade rating.
Peer Comparison:
MCV's high proportion of contracted cash flow and midrange debt
structure and profile are consistent with other single-site investment
grade cogeneration peers. MCV is more exposed to volume and fuel price
risks compared to Orange Cogen ('BBB+'/Stable Outlook). Lower-rated
cogeneration peers with similar exposure to partial price and volume
risks have lower projected margins, lower coverages, and/or experienced
volatility in operations.
RATING SENSITIVITIES
Negative: Material deterioration in operating performance and/or
significant rise in operating costs, in particular to the rates under
the gas exchange agreement, that causes DSCRs to fall below rating case
projections.
Positive: Higher than expected FER adjustments generating forecasted
DSCRs above Fitch's base case projections.
TRANSACTION SUMMARY
MCV was formed in 1987 as a limited partnership to convert a portion of
an uncompleted nuclear power plant owned by Consumers into a 1,633-MW
natural gas-fired, combined cycle, cogeneration facility. MCV issued
series A notes in 2011 and series B notes in 2013. The series are pari
passu, are secured by a typical pledge of project assets and contracts,
and fully amortize in March 2025 via semi-annual payments of principal
and interest.
SUMMARY OF CREDIT
Changes in the FER are largely beyond MCV's control, representing a
potentially substantial price risk under the PPA. Previous adjustments
to the FER in April 2015 and 2016 were lower than projected due to lower
O&M costs at the coal units that closed in April 2016. Beginning in
2017, the FER index is expected to increase by approximately 22% as a
result of the closure of seven coal units and completed installation of
pollution control equipment at the remaining five units. After that, the
FER index is expected to increase by an average of 7% to 8% for the
remaining life of the debt. The lower coal output combined with
increased O&M costs is expected to substantially benefit the FER index.
Through the end of 2015 and first quarter of 2016, operations were in
line with MCV's forecasts and improved from the same period last year.
MCV continues to maintain high availability exceeding 98%, in line with
historical averages. The low gas prices and supportive off-peak power
prices have allowed the project to operate more often in combined cycle
mode, limiting the use of their auxiliary boilers, and resulting in
favorable volume and efficiency variance compared to the same period
last year. The redundancy of the components allows the project to
maintain high PPA availability in addition to operating at optimized
configurations based on market pricing for gas and energy.
MCV is forecasting a DSCR of 1.39x for 2016, as it is experiencing more
favorable merchant dispatch due to low gas prices and better positioning
in the dispatch curve resulting from the closure of Consumers coal
plants. In addition, excess capacity of 302 MW was sold to creditworthy
offtakers, providing approximately $13 million in revenues. MCV's 2017
excess capacity has not yet been sold as the Midcontinent Independent
System Operator (MISO) is in process of reviewing its resource adequacy
requirements to potentially allow a three-year forward auction versus
the current one-year auctions. This is an expected benefit if passed as
it will provide MCV with the ability to contract capacity revenues three
years into the future.
Fitch's rating case considers debt service coverage under stressed
market conditions aimed to capture the potential downside of MCV's
volume and price risk. FER projections are based on a detailed analysis
of expected coal generation and O&M costs of the remaining units. These
projections are incorporated under Fitch's various gas/power pricing
scenarios to assess the potential variability of this index under
shifting market conditions. Debt service coverage in 2017 will be 1.23x
in the Fitch rating case, which also excludes all merchant revenues. The
lower coverage is primarily due to slower than forecast FER increases,
although this is expected to improve once impact of the coal plant
closures are recognized.
Individual stresses were conducted for the 2017 cash flow under rating
case scenarios where the FER needs to decline by more than 28% to reach
breakeven coverage. In addition, heat rate increases by 10% or O&M
increases by 65% will also trigger breakeven coverages. Based on the
individual breakeven stresses, the project maintains adequate cushion as
demonstrated by the continued stable operations, costs, and ability to
maintain high availability. The numerous redundancies built into the
plant provide adequate cushion for risk of prolonged downtimes.
Over the full remaining debt term, rating case DSCRs average 1.44x, with
a minimum of 1.23x. The profile strengthens in the outer years and DSCRs
are in line with an investment grade rating.
Consumers has filed an application with the Michigan Public Service
Commission (MPSC) requesting to increase the rate under the gas exchange
agreement. The request is currently under review with results expected
around mid-2017. An adverse outcome would result in a potential $15
million increase in annual operating costs reducing average rating case
coverages by 15 bps.
SECURITY
Collateral includes a first-lien security interest for the benefit of
all senior secured noteholders, 100% of the assets of the issuer (MCV);
100% of the sponsors' equity interests in the issuer; all material
project documents and agreements; the funds of collateral accounts and
all permitted investments; all insurance and reinsurance and
condemnation awards; and all revenues. Shell Energy also holds a $100
million pari passu lien for the above assets and interests as collateral
under the obligation of the secured commodity agreement.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=882594
Rating Criteria for Thermal Power Projects (pub. 28 Jun 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=883254
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010485
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010485
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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