KEMPER COUNTY — Fitch Ratings is not taking any rating actions following the latest cost revisions and schedule extension for the Kemper integrated gasification combined cycle (IGCC) project.
Last week, Mississippi Power Company (Mississippi Power) announced a revision in the scheduled in-service date for Kemper IGCC. The operational date is delayed to the fourth quarter of 2014, from May 2014, due to weather and slower than expected pace of piping installations. The delay will lead to a loss of Phase I investment tax credits of $133 million for the project. In addition, the company revised Kemper IGCC project’s cost estimates upwards for amounts subject to cost cap by $150 million and took an equivalent amount of pre-tax charge in its recently released third quarter results.
Fitch wrote: “The Kemper IGCC project has faced significant overruns relative to its original project costs estimate. The project is now expected to cost approximately $5 billion, of which $978 million is subject to exemptions and exceptions from the regulatory cost cap. Of the remaining $4.02 billion, Mississippi Power does not intend to seek rate recovery for $1.14 billion of costs incurred above the $2.88 billion cost cap and has taken an equivalent charge to income through its 2012 and year-to-date financial results. The project spend is approximately 72% complete with $3.6 billion of actual costs incurred through the end of September.
“The parent, Southern Company, is planning to inject equity into Mississippi Power to the full extent of the cost overrun so as to maintain the utility’s 50/50 capital structure, which is a key factor underpinning Fitch’s Issuer Default Rating (IDR) of ‘A-‘ for Mississippi Power. Management has committed that the parent will continue to underwrite any potential cost overruns that cannot be recoverable from customers by Mississippi Power. Hence, the risk of future cost overruns insulates Mississippi Power’s credit profile to a large extent.
“The Rating Outlook for Mississippi Power is Negative, which reflects the ongoing construction and operational risks associated with the IGCC project and still elevated regulatory risk. The significant risks that still remain with project execution are associated with the gasifier start-up, which is currently targeted for mid to late second quarter of 2014. Any further delay in schedule exposes the utility to greater regulatory risk. The Mississippi Public Service Commission (PSC) has established a revised schedule for prudency hearings on project costs incurred till March 2013; the hearings are expected to be conducted in May, 2014. Mississippi Power plans to update its seven-year plan for the revised in-service date and other income tax related items and seek approval from the PSC. All these events combined elevate the regulatory risks for the utility.
“Fitch expects the Negative Rating Outlook to persist until there is sufficient clarity regarding the final capital costs and time to completion for the Kemper project as well as successful operational performance of the plant within the parameters established by the Mississippi PSC.
“Southern Company is planning to finance the approximately $1.14 billion equity infusion into Mississippi Power largely through equity. Management has committed to issue equity of $700 million in 2013 and $600 million in 2014. Management has further committed to issue additional equity in 2015, if needed, to maintain consolidated equity ratio at the targeted 44% levels. The funding of Kemper cost overruns primarily by equity is a key factor that underpins Southern Company’s IDR at ‘A’ and Stable Rating Outlook. It is Fitch’s expectation that any future cost overruns at Kemper will be similarly largely funded through equity such that the consolidated capital structure remains within the targeted range. “