GULFPORT — Fitch Ratings has downgraded the Issuer Default Rating (IDR) of Mississippi Power Company (Mississippi Power) to “A-“ from “A” and revised the Rating Outlook to “negative” from “stable.”
Fitch wrote: “The downgrade is driven by the recent Mississippi Public Service Commission (MPSC) order to deny Mississippi Power’s revenue increase request to earn a cash return on construction work in progress (CWIP) associated with the Kemper Integrated Gasification Combined Cycle (IGCC) plant. The MPSC did not deem it prudent to allow Mississippi Power to recover financing costs associated with the Kemper project from ratepayers until a pending appeal of the MPSC order regarding the plant’s certificate of public convenience and necessity (CPCN) was resolved. On April 26, 2012, the Sierra Club had appealed the PSC’s final certificate order on remand to the Chancery Court of Harrison County, Mississippi.
The MPSC order introduces significant uncertainty regarding the timing of CWIP recovery since the pending litigation could take several months to resolve. Kemper IGCC is a relatively large and complex project for a utility of Mississippi Power’s size, and the delay in recovery of financing costs has already caused significant stress on Mississippi Power’s credit metrics. For the last 12 months ending March 31, 2012, the Funds Flow from Operations (FFO) to total debt ratio declined to 12.9 percent and the leverage ratio declined to 7.3x, which is significantly below historical metrics and Fitch’s guidelines for Mississippi Power’s current rating category. Excluding the impact of Kemper IGCC, Fitch believes the underlying financial metrics of the utility remain strong.
“Fitch had originally factored in CWIP recovery for Mississippi Power and is surprised that MPSC has unanimously voted to deny it, when both its final certificate order issued May 26, 2010 and a more detailed final certificate order on remand issued on April 26, 2012 allowed for 100 percent CWIP recovery beginning 2012. Furthermore, the MPSC’s decision raises the risk of a significant and unpalatable rate shock to Mississippi Power’s customers given the utility is likely to continue to construct the plant and capitalize the financing costs.
“Fitch is also concerned with the escalation in capital costs of the Kemper IGCC project. Mississippi Power recently disclosed that it expects the construction costs to exceed its original estimate of $2.4 billion by 15 percent. The revised project cost estimate of $2.76 billion is now quite close to the $2.88 billion hard cap imposed by the MPSC for plant construction. If the cost of the plant exceeds $2.88 billion, the excess may not be recoverable from utility customers, a source of potential credit risk for Mississippi Power.
“Fitch’s financial analysis indicates that if the project becomes operational within the currently projected capital costs and schedule, and based on the assumption that the MPSC authorizes a timely recovery of both capital and operating costs, Mississippi Power’s credit metrics are expected to revert to Fitch’s guideline ratios of a low risk ‘A-‘ rated utility company by 2015. Until then, however, Fitch expects Mississippi Power’s credit metrics to remain considerably weak.
“The Negative Outlook reflects rising regulatory risks for the company in addition to the construction and operational risks associated with the IGCC project. Fitch expects the Negative Outlook to persist until there is sufficient clarity regarding the cost recovery mechanisms for Kemper project as well as final confirmation of the capital costs. Fitch’s rating for Mississippi Power are sensitive to several key issues facing the Kemper IGCC project, namely, the timing and quantum of rate relief for the recovery of the capital and operating costs; the final construction costs of the project relative to the hard cap authorized by the MPSC; and successful operational performance of the plant within the parameters established by the MPSC. Fitch is unable to quantify these risks at this time.”