GULFPORT — Fitch Ratings has rated Mississippi Power Company’s (MPC) issuance of $200 million series 2012A 4.25% senior notes due March 15, 2042 as “A.” These notes are part of the same series of debt securities as the $250 million senior notes issued on March 9, 2012. These notes are senior, unsecured obligations of MPC.
The Rating Outlook is “negative.”
The net proceeds from the offering will be used for general corporate purposes, including the continuous construction program at the company.
Fitch wrote: “The key near-term uncertainty at MPC remains the cost of recovery of financing costs associated with the construction of the Kemper Integrated Gasification Combined Cycle (IGCC) project.
In June, the Mississippi Public Service Commission (MPSC) denied MPC’s revenue increase request to earn a cash return on construction work in progress (CWIP) associated with the Kemper IGCC plant. The MPSC did not allow MPC 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. MPC appealed the MPSC’s denial of CWIP to the Mississippi Supreme Court and requested interim rate relief. The Mississippi Supreme Court denied MPC’s request for interim rate relief. MPC’s appeal of the MPSC’s denial of CWIP is still pending before the Mississippi Supreme Court.
“Kemper IGCC is a relatively large and complex project for a utility of MPC’s size, and the delay in recovery of financing costs has already caused significant stress on MPC’s credit metrics. For the last 12 months ending June 30, 2012, the Funds Flow from Operations (FFO) to total debt ratio declined to 12.2% and the leverage ratio increased to 7.6x, which is significantly below historical metrics and Fitch’s guidelines for MPC’s current rating category. Excluding the impact of Kemper IGCC, Fitch believes the underlying financial metrics of the utility remain strong.
“Fitch is also concerned with the escalation in capital costs of the Kemper IGCC project. MPC recently disclosed that it expects the construction costs to exceed its original estimate of $2.4 billion. The revised project cost estimate of $2.88 billion, which is also the 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 MPC.
“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, MPC’s credit metrics are expected to revert by 2015 to Fitch’s guideline ratios for a low risk utility company with an Issuer Default Rating of ‘A-‘. Until then, however, Fitch expects MPC’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 the Kemper project as well as final confirmation of the capital costs. Fitch’s rating for MPC 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. “
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