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Rating Action:

Moody's Assigns Baa1 Issuer Rating to South Mississippi Electric Power Association; Outlook Stable

08 Sep 2008
Moody's Assigns Baa1 Issuer Rating to South Mississippi Electric Power Association; Outlook Stable

New York, September 08, 2008 -- Moody's Investors Service today assigned a Baa1 Issuer Rating to South Mississippi Electric Power Association ("SMEPA"). The rating outlook is stable. This is the first time that Moody's has rated SMEPA.

SMEPA is a small-to-medium sized electric generation and transmission ("G&T") cooperative based in Hattiesburg, Mississippi that provides wholesale electric power to its 11 electric distribution cooperative members, who are its owners. The members' electric distribution footprint extends through much of the State of Mississippi, including its western borders in the north and south as well as the southern Mississippi gulf coastline. Collectively, SMEPA's members service a population of more than one million consumers. SMEPA also has ownership of approximately 1,300 megawatts (MW's) of generating capacity and controls an additional 1,290 MW's through several purchase power agreements (PPA).

SMEPA's rating reflects the company's strong attributes in a number of key areas including, its practice of serving 100% of its member load under a long-term wholesale power contract (expires in 2045), the unregulated status of both the G&T and distribution members with respect to rate-making authority, and importantly, the "cooperative" rate-setting model which helps to manage rising energy costs and infrastructure investments. The rating also considers other solid "Baa" credit qualities of SMEPA including its size, relatively good financial profile, healthy member profile, current regionally competitive power position, and moderate exposure to new capital spending for infrastructure projects in the near term. The rating also reflects Moody's concerns, including the large amount of purchased power in SMEPA's system, and a notable upward trend in the company's wholesale rates over the last several years.

SMEPA has good diversity in terms of its owned generating capacity with coal, gas, hydro and nuclear (a 10% interest in the Grand Gulf Nuclear Station). Although diversified, SMEPA is also "short" owned capacity. Its member's peak load in 2007 of approximately 2,219 MW's was met with purchased power that ultimately accounted for 60% of the system's needs for the year. This factor is relatively weak from a ratings perspective. A key component of SMEPA's power arrangements is the all requirements contract with Mississippi Power Co. ("MPCo": A1, stable). A substantial component of the contract between SMEPA and MPCo has a FERC regulated pricing structure that allows for MPCo to recover full embedded costs and requires a ten-year termination notice, providing an element of stability for SMEPA. However, the power received from MPCo is also notably higher in cost than that of SMEPA's owned baseload generation.

SMEPA's capital structure includes secured borrowings from USDA Rural Development Utilities Program ("RUS") and RUS guaranteed loans provided by the Federal Financing Bank ("FFB"). A substantial portion of SMEPA's existing debt ($768 million as of July 31, 2008) consisted of first mortgage notes outstanding to FFB. As such, SMEPA sets rates to comply with standard covenants under the indenture including TIER of 1.05 times and DSC greater than 1.0 times. For the year-ended December 31, 2007 the company reported TIER and DSC of 1.4 times and 1.1 times, respectively. Importantly, our ratings also take into account SMEPA's liquidity and assume that its board will remain proactive and consistent with its historical approach to rate setting, which should help to maintain positive operating margins in support of equity capital formation. Equity to capitalization for year-end 2007 was 14%, in line with the rating category. Current internally generated funds and external facilities aggregating $135 million (various expirations) are expected to be sufficient for short-term needs over the next four quarters until such time that it can be refinanced with long-term borrowings.

The stable outlook reflects Moody's expectation that SMEPA will continue to maintain a financial profile consistent with its Baa1 Issuer Rating.

Headquartered in Hattiesburg, Mississippi, South Mississippi Electric Power Association is a not-for-profit electric generation and transmission cooperative that reported revenues of $667 million in 2007.

New York
James O'Shaughnessy
Analyst
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William L. Hess
Managing Director
Infrastructure Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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