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Fitch: Kemper dealt another blow; downgrade pressure looms for Mississippi Power

Kemper-Update-Logo_rgb-300x244NEW YORK — Fitch Ratings sees mounting pressure on Mississippi Power Company’s Issuer Default Rating (IDR) following South Mississippi Electric Power Association (SMEPA)’s decision to terminate the Asset Purchase Agreement (APA) for a 15 percent ownership stake in the Kemper project. Fitch currently rates Mississippi Power’s IDR ‘A-‘ with a Negative Outlook.

Fitch believes that finding another partner to replace SMEPA could be challenging for Mississippi Power given the low wholesale price environment and the construction issues/delays the project has faced. Mississippi Power could allocate approximately 30 percent of the capacity to the FERC-jurisdictional wholesale rate base, in line with its current generation portfolio split. However, allocating the balance to retail rate base would intensify the pressure on customer bills and require modification to the rate filings made only last week, thus, exacerbating the ongoing regulatory uncertainty regarding recovery of Kemper costs.

Fitch will review the ratings and Outlook for Mississippi Power and Southern Company (Southern) in the coming days. A one-notch downgrade for Mississippi Power is likely. However, a two-notch downgrade cannot be ruled out at this time. Fitch will also review Southern’s rating and Outlook in conjunction with Mississippi Power’s potential rating change.

Other key drivers affecting Southern’s ratings include the construction risks associated with the Vogtle project at Georgia Power Company as well as management’s willingness to issue equity to support a capital structure commensurate with the current elevated level of business risk. Fitch has indicated in the past that the funding of Kemper cost overruns primarily by equity is a key factor that underpins Southern Company’s IDR at ‘A’/Stable Outlook. It has been Fitch’s expectation that any future cost overruns at Kemper will be largely funded through parent equity such that the consolidated capital structure remains within the targeted range. Before the SMEPA decision, Southern forecasted no equity needs for 2015-2017.

On May 20, 2015, SMEPA notified Mississippi Power that it will terminate its participation in the Kemper integrated gasification combined cycle (IGCC) project. SMEPA stated delays in project schedule, changing needs, and increased participation costs as reasons for withdrawal. SMEPA entered into an APA with Mississippi Power in 2010 to purchase 17.5 percent ownership in the Kemper project, which was later reduced to 15%. The APA allowed termination of SMEPA’s participation in the project due to delay in closing. Mississippi Power is required to return the $275 million deposit it received from SMEPA along with accrued interest. Southern has guaranteed the repayment of the deposit. SMEPA’s acquisition was estimated to total approximately $600 million at completion of the Kemper IGCC.

SMEPA’s decision adds yet another layer of challenges to the IGCC project, which has seen substantial cost increase, construction delays and legal challenges. In February 2015, Mississippi Supreme Court overturned Mississippi Public Service Commission’s order that allowed Mississippi Power to increase rates to recover approximately $156 million annually and ordered the increase be refunded to ratepayers. Mississippi Power has requested the Supreme Court to rehear the case. On May 15, 2015, Mississippi Power filed an application with the MPSC outlining three alternative rate proposals to raise rates to recover the costs associated with Kemper.

 

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