TEXT-Fitch cuts Mississippi Power rtgs, revises outlook

Tue Jul 3, 2012 10:28am EDT

July 3 - Fitch Ratings has downgraded the Issuer Default Rating (IDR) of
Mississippi Power Company (Mississippi Power) to 'A-' from 'A' and revised the
Rating Outlook to Negative from Stable. A full list of rating actions follows at
the end of this release.

The downgrade is driven by the recent Mississippi Public Service Commission 
(MPSC) order to deny Mississippi Power's revenue increase request to earn a cash
return on construction work in progress (CWIP) associated with the Kemper 
Integrated Gasification Combined Cycle (IGCC) plant. The MPSC did not deem it 
prudent to allow Mississippi Power 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. On April 26, 2012, the Sierra Club had appealed the PSC's final 
certificate order on remand to the Chancery Court of Harrison County, 
Mississippi. 

The MPSC order introduces significant uncertainty regarding the timing of CWIP 
recovery since the pending litigation could take several months to resolve. 
Kemper IGCC is a relatively large and complex project for a utility of 
Mississippi Power's size, and the delay in recovery of financing costs has 
already caused significant stress on Mississippi Power's credit metrics. For the
last 12 months ending March 31, 2012, the Funds Flow from Operations (FFO) to 
total debt ratio declined to 12.9% and the leverage ratio declined to 7.3x, 
which is significantly below historical metrics and Fitch's guidelines for 
Mississippi Power's current rating category. Excluding the impact of Kemper 
IGCC, Fitch believes the underlying financial metrics of the utility remain 
strong. 

Fitch had originally factored in CWIP recovery for Mississippi Power and is 
surprised that MPSC has unanimously voted to deny it, when both its final 
certificate order issued May 26, 2010 and a more detailed final certificate 
order on remand issued on April 26, 2012 allowed for 100% CWIP recovery 
beginning 2012. Furthermore, the MPSC's decision raises the risk of a 
significant and unpalatable rate shock to Mississippi Power's customers given 
the utility is likely to continue to construct the plant and capitalize the 
financing costs. 

Fitch is also concerned with the escalation in capital costs of the Kemper IGCC 
project. Mississippi Power recently disclosed that it expects the construction 
costs to exceed its original estimate of $2.4 billion by 15%. The revised 
project cost estimate of $2.76 billion is now quite close to the $2.88 billion 
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 Mississippi Power. 

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, Mississippi Power's credit metrics are expected to revert to 
Fitch's guideline ratios of a low risk 'A-' rated utility company by 2015. Until
then, however, Fitch expects Mississippi Power'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 Kemper project as well as 
final confirmation of the capital costs. Fitch's rating for Mississippi Power 
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.

Fitch downgrades the following ratings with a Negative Outlook:

Mississippi Power Company 
--Long-term IDR to 'A-' from 'A'; 
--Senior Unsecured Notes to 'A' from 'A+';
--Pollution Control Revenue Bonds to 'A' from 'A+';
--Preferred Securities to 'BBB+' from 'A-'. 

Fitch affirms the following ratings:
Mississippi Power Company 
--Short-term IDR at 'F1'; 
--Commercial Paper at 'F1';
--Pollution Control Revenue Bonds at 'F1'.
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