News Column

Fitch Affirms South Mississippi Electric Power Assoc. Bonds at 'A-'; Outlook Stable

August 27, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A-' rating on the following South Mississippi Electric Power Association (SMEPA) outstanding bonds:

--$37.3 million Mississippi Business Finance Corporation Gulf Opportunity Zone Bonds, series 2009A;

--$8.846 millionClaiborne County, MS pollution control bonds, 1985 series G.

The Rating Outlook is Stable.

SECURITY:

The bonds are secured by a mortgage interest in substantially all of SMEPA's tangible and certain of its intangible assets.

KEY RATING DRIVERS

SOLID COOPERATIVE PRINCIPLES: SMEPA benefits from solid electric cooperative principles, and board-supported strategies to pursue a balanced resource portfolio, and improve cash flow and liquidity through its current period of high capital investment.

EVOLVING POWER SUPPLY PORTFOLIO: SMEPA's power supply portfolio continues to evolve reflecting the expansion of existing resources, the expiration of certain power purchase agreements, and the acquisition of three natural gas-fired units totaling 837 MW, and the planned acquisition of a 15% share of a new integrated gasification combined cycle (IGCC) project located in Kemper County, MS.

SIZABLE CAPITAL PROGRAM: Capital spending from 2014-2016 will remain well above historical levels and approach $900 million reflecting the planned investment in the Kemper IGCC project. Fitch views the planned diversification of resources positively; however, related borrowings will continue to increase debt levels and may strain metrics over the forecast period.

IMPROVING MEMBER PERFORMANCE: Member cooperative performance continues to gradually improve. Aggregate member ratios for times interest earned (TIER, 3.56x); debt service coverage (DSC, 2.49x); and equity/capitalization (58%) in 2013 were all higher than in 2011.

COMPETITIVE ELECTRIC RATES: SMEPA's wholesale rates, as well as member residential rates, are expected to rise but remain in line with other statewide electric providers despite the cooperative's planned investment in new generation.

LIQUIDITY REMAINS WEAK: Cash on hand remained weak at 11 days at year-end 2013 and below Fitch's 'A-' category median (70 days). Access to long-term bank facilities totaling $310 million improves total liquidity to a more acceptable 151 days.

RATING SENSITIVITIES

SIGNIFICANTLY HIGHER FIXED COSTS: A significant increase in fixed costs or cost overruns related to SMEPA's share of the Kemper project could strain financial metrics more than anticipated, resulting in downward rating pressure.

MAINTENANCE OF STRONGER METRICS: Maintenance of the cooperative's stronger financial metrics through the proposed construction cycle would be viewed positively.

CREDIT PROFILE

SMEPA is a not-for-profit generation and transmission (G&T) cooperative that provides wholesale electric service to 11 retail electric distribution cooperatives located in Mississippi. SMEPA's members purchase power pursuant to all-requirements wholesale power contracts that expire on Dec. 31, 2055, well beyond the final maturity of the utility's outstanding debt. Under the terms of the power contracts, SMEPA is required to establish rates sufficient to meet all of its costs and obligations. The members are required to pay for power at the rates established by the SMEPA board.

SMEPA's members serve a region covering more than 32,000 square miles. The members serve a population of nearly 1 million and a customer base of roughly 415,000. Residential customers accounted for 56% of total energy sales in 2013. A well-diversified base of commercial and industrial customers accounted for nearly all of the remaining sales. Energy sales and customer growth throughout the member service area has been slow, but steady. Income levels in much of the area served by the SMEPA members remain below the state average.

REDUCED RELIANCE ON PURCHASED POWER

SMEPA's reliance on power purchased from third parties, including Mississippi Power Company (MPC; Fitch Issuer Default Rating of 'A-'), to meet the energy demands of its membership declined in 2013 following the acquisition of three natural gas-fired units totaling 837 MW (the Batesville project). SMEPA purchased only 53% of its energy needs in 2013, versus 73% in 2012. SMEPA's remaining power requirements are sourced from a well-diversified portfolio of owned generating resources with an aggregate summer capacity of 2,323 MW.

REBALANCING OF RESOURCES UNDERWAY

SMEPA is in the midst of its strategy to rebalance its energy supply portfolio, adding new owned generating capacity and replacing several large purchased power agreements. Significantly higher capital expenditures and related borrowings have been incurred as a result, and are expected to continue over the near term. However, net margins and coverages consistent with SMEPA's board-approved policies are expected to moderate debt leverage at approximately 81%-83% of total capitalization through 2016.

SOLID AND STABLE FINANCIAL PERFORMANCE

SMEPA reported continued solid and stable performance in 2013 as net margins have remained in line with historical levels of approximately $30 million ($32.2 million in 2013). Fitch-calculated debt service also improved to 1.52x, reflecting both higher funds available for debt service (FADS) and lower debt service in 2013.

SMEPA's total debt outstanding was approximately $1.359 billion at Dec. 31, 2013, largely unchanged from year-end 2012, but up from $959 million at Dec. 31, 2011 as a result of borrowings for the Batesville acquisition ($290 million). Equity as a percentage of capitalization has remained relatively stable since 2009 at approximately 19% despite the borrowings noted above, as excess margins and cash flow have been used to fund a portion of construction expenditures debt and accumulate capital. Additional borrowings to fund the current capital program are expected to increase outstanding debt to $1.8 billion by 2016. However, forecasted net margins of $29 million-$42 million should continue to moderate debt levels at 81%-83% of capitalization.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);

--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);

--'U.S. Public Power Rating Criteria' (March 18, 2014);

--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013).

Applicable Criteria and Related Research:

2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=740841

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

U.S. Public Power Peer Study Addendum - June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750283

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=859176

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Dennis M. Pidherny

Managing Director

+1-212-908-0738

Fitch Ratings, Inc.

33 Whitehall St.

New York, NY 10004

or

Secondary Analyst

Alan Spen

Senior Director

+1-212-908-0594

or

Committee Chairperson

Christopher Hessenthaler

Senior Director

+1-212-908-0594

or

Media Relations

Brian Bertsch, New York, +1-212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Business Wire


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters