GULFPORT — Fitch Ratings has affirmed the issuer default rating (IDR) and security ratings for Southern Company, and has affirmed the IDRs and debt ratings for Southern Company’s subsidiaries. The rating outlook for all of the subsidiaries is stable, except for Mississippi Power, which remains negative.
Fitch wrote: “The key near-term uncertainty at Mississippi Power remains the execution risk associated with the construction of the Kemper IGCC project. Specifically, Fitch is concerned with the escalation in capital costs of the project, the possibility of a further delay in the in-service date for the gasification system and any potential disallowance of Kemper construction costs in the prudency reviews to be conducted by the Mississippi PSC. The project spend is approximately 90% complete with $3.81 billion of capped plant costs incurred through the end of June 2014.
“Significant risks that remain with Kemper are associated with the gasifier start-up and its integration with the combined cycle turbines. Mississippi Power placed the combined cycle portion of Kemper along with the associated facilities in service recently. Issues with start-up activities could delay the schedule beyond the current expected in-service date of 2Q’15. A delay exposes the utility to additional costs of approximately $20 million per month or higher and potentially greater regulatory risk.
“The primary regulatory risk for Mississippi Power pertains to ongoing discussions with the Mississippi PSC staff and intervenors to arrive at a global settlement that could address both the changes in the seven-year rate plan and prudency review of Kemper project costs. The 2013 Mississippi PSC rate order provided for a retail rate increase of 15% effective March 2013 and 3% effective January 2014 or $156 million cumulative rate increase. However, the delay in the in-service date for the gasifier necessitates a change in the seven-year plan to reflect the resultant loss of bonus depreciation, recapture of the Phase I tax credits of $133 million, and other tax matters. On the positive side, the recent settlement with Sierra Club, as a consequence of which Sierra Club agreed to drop all pending regulatory and legal challenges against Kemper, alleviates the legal and regulatory overhang to a certain extent.
“Southern is planning to inject equity into Mississippi Power as necessary to maintain the utility’s 50/50 capital structure, which is a key factor for Fitch to maintain Mississippi Power’s IDR at ‘A-‘. 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 the utility to a large extent.
“Electricity sales to residential and commercial customers continue to grow at a tepid pace. For the first six months of 2014, weather-adjusted MWH sales to residential customers declined 0.7% over the corresponding period of 2013; sales to commercial customers increased 0.3% over the same time period. Industrial sales continue to show solid growth driven by industrial expansions and increased usage by large customers. MWH sales to industrial customers grew by 3.6% for the first half of 2014 as compared to the same period last year. Wholesale service area is showing a stronger growth than retail residential and commercial segments.
“The delay in recovery of financing costs has already put significant stress on Mississippi Power’s credit metrics. For the LTM ending June 30, 2014, FFO adjusted leverage ratio increased to 4.6x and adjusted debt to operating EBITDAR increased to 9.0x. 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 Mississippi PSC approves the utility’s modifications to the seven-year plan as proposed, Mississippi Power’s credit metrics are expected to revert to Fitch’s guideline ratios of a low-risk ‘A-‘ rated utility company by 2016. Fitch expects FFO adjusted leverage to be 3.5x and adjusted debt to operating EBITDAR to be 3.6x by 2016.
“The negative outlook reflects still elevated regulatory risks for the company in addition to the ongoing construction and operational risks associated with the Kemper project. The key near-term uncertainty at Mississippi Power remains the project completion risk, the pending changes to the seven-year rate plan, and the outcome of the prudency reviews to be conducted by the Mississippi PSC. Fitch expects the negative outlook to remain 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.”
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