MIDLAND FUNDING CORP. I & II SENIOR DEBT LOWERED TO 'BB+/BB-' BY FITCH -- FITCH FINANCIAL WIRE --
NEW YORK, June 14 /PRNewswire/ -- Midland Funding Corp. I's $633 million senior secured lease obligation bonds series C are lowered to 'BB+' from 'BBB-'
and Midland Funding Corp. II's $367 million subordinated secured lease obligation bonds series A and B to 'BB-' from 'BB'. The ratings are removed from FitchAlert, where they were placed on Aug. 10, 1992. The credit trend is stable. Midland Funding Corp. I and II are special purpose corporations formed as financing vehicles for the June 1990 sale-leaseback of the 1,370-megawatt Midland power plant by Midland Cogeneration Venture LP (MCV).
Fitch believes that the likelihood for erosion in long-term project economics has increased during the past year. Of particular concern is MCV's ability to fully recover fuel costs under its power purchase agreement (PPA) with Consumers Power and the impact this could have on cash flows. Looking several years in the future, the cumulative effect of a combination of flat coal prices and high natural gas prices could contribute to a pessimistic multi-event economic scenario, under which MCV would be unable to fully meet its rent payments out of operating cash flows. However, debtholder risk is mitigated by the expected availability of a growing and substantial MCV reserve fund to support rent payments. Additionally, demonstrated high Midland plant availability and progress toward resolving important issues related to Michigan regulation and FERC QF certification are positives. Given the already thin coverage margins, these positive factors do not outweigh potential weakening project economics. The PPA's energy index, which is used to set the level of variable energy payments made to MCV, is tied to the cost of coal and operating and maintenance costs at Consumers' large, baseload plants. At the same time, only some of the gas to be purchased under MCV's portfolio of gas contracts is tied to the PPA's energy index. The remainder of gas under contract is escalating at a minimum of 4 percent a year. As a result, with low coal prices prevalent in 1992, MCV paid more for gas purchased under contract than it collected under the PPA. However, mitigating this risk is MCV's ability to manage its gas supply purchases in the spot market, utilizing its extensive gas storage capabilities to lower overall gas costs. Almost 12 percent of the gas used at Midland in 1992 was purchased in the spot market. During 1992, lower spot gas prices enabled MCV to accrue gas cost savings more than twice the added costs resulting from the mismatch between the PPA and the long-term gas contracts. Higher spot market gas prices during first-quarter 1993 eliminated any ability to lower fuel expenses for that period. Fitch's growing concern stems from continued weak global coal markets, which results in increased potential for flat coal prices extending several years. In addition, MCV now anticipates that the Midland plant will be dispatched in the future at higher levels than originally assumed. This will require MCV to secure more gas under long- term contract to ensure a reliable fuel supply. While there are several positive impacts from higher plant dispatch, overall gas costs could rise relative to PPA revenues. Having more gas under contract will lessen the amount of gas bought on the spot market and therefore inhibit MCV's ability to gain spot market savings. Additionally, given current weak market conditions for coal, it will be more difficult to contract with natural gas producers for gas with a price escalator tracking the PPA energy index coal proxy. In September 1991, 40 percent of the volume of contract gas was priced under the energy index as compared to 37 percent today. Unless coal prices begin to rise, this percentage should drop as MCV contracts for new gas. This will increase risk. During 1993, the Michigan Public Service Commission approved with modification and, subsequently affirmed, a proposed settlement resolving a protracted dispute over the pricing of power purchased by Consumers Power from MCV. The settlement did not amend the PPA, which obligates Consumers to purchase up to 1,240 megawatts of power by 1995 but sets delivery caps below the contract amount and limits recovery by Consumers. Currently unresolved is whether a PPA regulatory out provision will cause Consumers to reduce payment to MCV on fixed energy payments that it does not recover through rates. As of March 31, 1993, Consumers had escrowed $15.2 million and made payment to MCV subject to refund of $6.1 million. The issue is subject to binding arbitration and if decided against MCV will further weaken project economics. -0- 6/14/93 /CONTACT: Stephen Fedun, 212-908-0568 or Ralph Pellecchia, 212-908-0586, both of Fitch/
CO: Midland Funding Corp. I and II ST: IN: UTI SU: RTG
LR -- NY056 -- 1592 06/14/93 11:16 EST
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|Date:||Jun 14, 1993|
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