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Power co-op gets bond rating upgrade after exiting Kemper deal

Cooperative Energy and its 11 co-op members will see lower debt costs on $35.4 million bond



Bailing out of its 15 percent ownership stake in Mississippi Power’s Kemper gasification plant has helped Hattiesburg-based Cooperative Energy gain a ratings upgrade on a $35.4 million bond issue.

The electric power co-op, which changed its name to Cooperative Energy from South Mississippi Electric Power Association in November, received a ratings upgrade from A- to A for its 2009 2009A Mississippi Business Finance Corporation Gulf Opportunity Zone Bonds.

“This rating upgrade reflects the success of our strategy to move from purchased power to owned generation resources, and from coal to natural gas and renewable energy,” said Cooperative Energy President/CEO Jim Compton in a press release.  “The result for our members is lower borrowing costs and more favorable rates.”

An “A” rating from Fitch designates the bond issue as “near premium quality.”

The cooperative has another $1.1 billion in senior secured private debt that is not rated, Fitch noted.

The not-for-profit generation and transmission cooperative provides wholesale electric service to 11 retail electric distribution cooperatives in southern and western Mississippi. The cooperatives are in 55 counties from the Delta to the coast and serve a combined 423,000 retail customers.

The electric power association, founded in 1941, has a generation plant in Batesville in north Central Mississippi. In recent years, it has expanded its renewable energy and solar generation focus, the co-op says.

Fitch Ratings, in its report, said the Cooperative Energy upgrade reflects lower financial and operating risk from the co-op’s May 2015 termination of its 15 percent ownership interest in the Kemper Integrated Gasification Combined Cycle (IGCC) facility. Fitch described Kemper’s advanced generating technology as carrying “high execution and operating risk.”

Kemper’s escalating cost overruns and ongoing construction delays led the co-op to exit Kemper.  Kemper’s total project cost is currently estimated at $6.6 billion, from an original forecast of $2.8 billion, Fitch said in its report.

With the exit, Cooperative Energy received a $301 million deposit refund. It applied the refund to debt reduction, including $150 million in bank loans.

While the cooperative has departed as an investor in the Kemper facility, it will bear some portion of the project costs in its purchased power from Mississippi Power Corp. The investor owned subsidiary of the Southern Company provided 28 percent of Cooperative Energy members’ energy needs in 2015.

“Initial estimates of MPC rate hikes appear manageable for Cooperative Energy and likely not implemented until 2019,” the Fitch report noted.

Fitch said its upgrade of Cooperative Energy’s bond debt also reflects a more balanced and diverse power supply portfolio. Cooperative Energy’s power supply has evolved, with the expansion of existing resources, expiration of purchased power contracts, and addition of natural gas-fired generation and renewables, Fitch said.

“Reliance on purchased power has declined from 69 percent of energy requirements in 2011 to a more moderate 47 percent in 2015; energy provided from coal resources has dropped from 55 percent in 2011 to 21 percent in 2015,” Fitch noted.

Fitch further attributed the upgrade to strengthened finances, with improved cash flow and debt service coverage. “Exiting the Kemper project reduced prospective capital expenditures, alleviating new debt requirements,” said Lina Santoro, a Fitch analytical consultant and primary analyst for Cooperative Energy’s bond upgrade.

FERC to determine the revised cost based rate for Cooperative Energy-contracted purchases from MPC.

Santoro further noted that the electrical association’s equity to total capitalization is projected to rise from a healthy 26 percent in fiscal 2015 to 31 percent by 2020, a figure above the peer median.

Days cash on hand is weak at 13 days cash in fiscal 2015, although with available external bank lines, days liquidity is adequate at 192 days, according to Santoro.

Commenting in the November name change, CEO Compton said the new name “better defines who we are as a company.”

Added Compton: “We have grown our energy resources, we have grown our geographic service area and honestly we outgrew our name.”


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