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Rating Action:

Moody's affirms South Mississippi Electric senior secured bonds at A3; outlook remains stable

22 Nov 2013

Approximately $38 million of debt affected

New York, November 22, 2013 -- Moody's Investors Service, ("Moody's") today affirmed South Mississippi Electric Association's (SMEPA) A3 senior secured rating for its Series 2009A Gulf Opportunity Zone bonds issued through the Mississippi Business Finance Corporation on behalf of SMEPA and also affirmed SMEPA's Baa1 senior unsecured issuer rating. The rating outlook remains stable.

"The rating affirmations and stable outlook reflect the cooperative's strong credit attributes, including its practice of serving 100% of each distribution member-owner's load under a long-term wholesale power contract through 2055, the rate autonomy of both SMEPA and its distribution members, and the cooperative governance model, which helps to manage rising energy costs and infrastructure investments", said Kevin Rose, Vice-President -- Senior Analyst. Other rating considerations include its moderate size, a good financial profile, the healthy member-owner profile, a reasonably competitive rate position and the economic challenges that exist across the SMEPA's members' service territories. "Moreover, SMEPA demonstrates good management of credit risks relating to the currently large amount of purchased power in its supply system, the potential upward pressure on rates and a sizable capital plan of nearly $900 million for 2013-2017, which is expected to be largely debt financed", Rose added. The major component of the capital program is the anticipated investment in the new Kemper County Integrated Gasification Combined Cycle (IGCC) facility.

SMEPA faces market price exposure from a high dependence on purchased-power arrangements (PPAs), which is a dynamic that is driving its strategies to increase owned generating resources. With the acquisition of the 837 megawatt (MW) Batesville Generation Facility (Batesville) at the end of 2012, SMEPA has ownership of over 2,300 megawatts (MW) of generating capacity. The owned capacity is well diversified among coal, natural gas and nuclear, which can help minimize exposure to commodity price volatility, particularly related to natural gas and coal. Still, SMEPA's member electric demands are also met with a significant amount of purchased power (primarily through long-term purchased power agreements). For example, historically more than two-thirds of SMEPA's load has been supplied from purchased power, with a substantial portion of that under a long-term, all-requirements contract with Mississippi Power Company (MPCo:Baa1 stable). 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. The anticipated investment in the Kemper plant is part of the strategy to add more owned capacity to SMEPA's supply portfolio.

Moody's anticipates that SMEPA's capital spending over the next five years will be front-end loaded and largely related to the new coal IGCC project in Mississippi. Although the project has encountered cost overruns and delays, the majority owner, MPCo, has capped SMEPA's 15% planned participation cost based on the original $2.88 billion cost estimate for the IGCC plant. Although Moody's expects modest weakening of SMEPA's equity to capitalization, funds from operations (FFO) to debt and FFO to-interest coverage metrics as a result of debt financing of planned capital projects, timely future rate adjustments by the board are expected to keep the duration of financial pressures to a minimum.

Also, based on expected levels of internally generated cash and existing bank credit facilities, we believe that SMEPA has sufficient liquidity to meet its short-term operating expenses and working capital needs over the next 12 to 18 months. That said, operating cash flows in 2014 will be insufficient to support the anticipated capital spending program described above and SMEPA will increasingly rely on a strategy of borrowings under its bank facilities and other interim arrangements and take-outs with long-term debt under the Rural Utilities Service (RUS) loan program or new first mortgage bonds to meet its external financing needs.

SMEPA supplements its internally generated cash primarily through a $250 million five-year senior unsecured syndicated revolving credit facility syndicated among ten banks with National Rural Utilities Cooperative Finance Corp. (NRUCFC) acting as the lead arranger. SMEPA also maintains two bilateral agreements with Trustmark National Bank and BancorpSouth, currently sized at $25 million and $10 million, respectively. The agreements are considered good quality with no onerous financial covenants or ongoing material adverse change clauses.

As of September 30, 2013, SMEPA had about $24.3 million of cash and equivalents on hand and $85.8 million of outstanding borrowing under its aggregate $285 million of bank credit agreements. SMEPA also participates in the RUS cushion of credit program whereby cash put into the program earns a set rate of interest; however SMEPA's use of those funds becomes restricted solely for the purpose of repaying RUS debt. At September 30, 2013, SMEPA had $34.1 million invested in the cushion of credit program and $55.7 million of current maturities of long term debt. Since the majority of SMEPA's long-term liabilities are obligations to the RUS, the event of any operating cash flow difficulties going forward can be mitigated by SMEPA's funds in the cushion of credit program which can be used to repay RUS debt as it comes due, thus relieving that stress on operating cash flow.

The stable outlook for SMEPA's ratings reflects Moody's expectation that SMEPA's board and management will exercise the flexibility and demonstrate willingness to set rates at levels to avoid undue pressure on metrics during the heavy capital spending period through 2014. The outlook also assumes a conservative patronage capital rotation policy (akin to common dividends paid to shareholders) continues, thus supporting progress toward achieving 20% equity in the capital structure over time.

The large capital spending program will constrain SMEPA's ratings over the next 12 to 24 months. Beyond that horizon, upward pressure on the ratings would depend in part on SMEPA's achieving FFO to debt closer to 9% on a sustainable basis, while also attaining the equity to capitalization metric goal of 20%.

SMEPA's rating could be pressured down if the cooperative encounters significant difficulties in the execution of its capital program; faces diminished member support for future rate increases or the timing and pricing of its purchased power contracts are negatively affected. Credit metrics that would pressure SMEPA's ratings downward include decreased FFO to debt in the low single digits percentage range and FFO coverage of interest below 2.0 times for an extended period.

South Mississippi Electric Power Association, which is headquartered in Hattiesburg, Mississippi, is a not-for-profit electric generation and transmission cooperative, providing wholesale electric power to its 11 distribution member-owners.

The principal methodology used in this rating was U.S. Electric Generation & Transmission Cooperatives published in April 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kevin G Rose
Vice President - Senior Analyst
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Chee Mee Hu
MD - Project Finance
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms South Mississippi Electric senior secured bonds at A3; outlook remains stable
No Related Data.
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