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.
On April 28, Mississippi Power announced another revision on the scheduled in-service date for Kemper IGCC and a further increase in the construction costs. Further cost increases and/or schedule extensions cannot be ruled out as the project approaches start-up activities for the gasifier and the subsequent integration with the combined cycle facilities.
Fitch wrote: “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 recovered from customers by Mississippi Power. Hence, the risk of future cost overruns insulates Mississippi Power’s credit profile to a large extent.
“The extension of the Kemper IGCC in-service date beyond 2014 will result in loss of bonus depreciation benefits of approximately $120 million to $150 million. This along with other changes including investment tax credits and other plan updates will require changes to the seven-year retail rate recovery plan that is currently in place. Mississippi Power is engaged in discussions with the Mississippi Public Service Commission (MPSC) staff and intervenors to arrive at a global settlement that could address both the changes in the seven-year rate plan and prudency of Kemper project costs incurred through March 2013.
“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 remain with project execution are associated with the gasifier start-up and integration with the combined cycle turbines. The near-term regulatory risk pertains to the need for rate mitigation for retail customers due to the loss of aforementioned bonus depreciation benefits and the ability of Mississippi Power to reach a constructive global settlement with the PSC staff and intervenors.
“Fitch expects the Negative Outlook to remain until there is sufficient clarity as to 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 MPSC.
“Southern Company is planning to finance its equity infusion into Mississippi Power through equity issuance. Management has committed to issue $1.3 billion of equity over 2013 – 2014. Management’s comments on the first-quarter earnings conference call held on April 30 indicated that it remains committed to maintaining a consolidated equity ratio at approximately 44% and could consider additional equity issuance to support this target. The funding of Kemper cost overruns primarily by equity is a key factor that underpins Southern Company’s IDR at ‘A’ and Stable Outlook. It is Fitch’s expectation that any future cost overruns at Kemper will also be largely funded through parent equity such that the consolidated capital structure remains within the targeted range.
“On April 28, 2014, Mississippi Power announced a delay in the in-service date for the Kemper IGCC plant to the first half of 2015, from fourth quarter of 2014, due to construction issues led by weather, labor force turnover and productivity as well as anticipated issues from start-up activities. Mississippi Power increased the construction cost estimate for Kemper IGCC by $196 million. Combined with $184 million of cost escalation reported in early April, the project cost estimate has been increased by $380 million in the first quarter of 2014.
“The Kemper IGCC project is now expected to cost approximately $5.5 billion, of which $1.1 billion is subject to exemptions and exceptions from the regulatory cost cap. Of the remaining $4.4 billion, Mississippi Power does not intend to seek rate recovery for $1.56 billion of costs incurred above the $2.88 billion cost cap and has taken an equivalent charge to income through its first quarter 2014 financial results. The project spend is approximately 86% complete with $3.6 billion of actual costs incurred through the end of March 2014. “