Fitch Ratings on Dec. 23 upgraded Cooperative Energy’s $35.4 million series 2009A Mississippi Business Finance Corporation Gulf Opportunity Zone Bonds to ‘A’ from ‘A-‘, which prompted a Dec. 28 statement from Cooperative Energy touting that upgrade.
Cooperative Energy, incidentally, recently changed its name from the South Mississippi Electric Power Association. It is a not-for-profit generation and transmission cooperative that provides wholesale electric service to 11 retail electric distribution cooperatives located in southern and western Mississippi.
Fitch stated that the upgrade reflects lower financial and operating risk, as well as a more balanced and diverse power supply portfolio. Cooperative Energy noted that its power supply has evolved, with the expansion of existing resources, expiration of purchased power contracts, and addition of natural gas-fired generation and renewables. Reliance on purchased power has declined. Also, the cooperative pointed out that energy provided from coal resources has dropped from 55% in 2011 to 21% in 2015.
“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. “The result for our Members is lower borrowing costs and more favorable rates.”
Fitch said Dec. 23 that its upgrade reflects lower financial and operating risk given Cooperative Energy’s decision to terminate its 15% ownership interest in the Kemper Integrated Gasification Combined Cycle (IGCC) facility – an advanced generating technology with high execution and operating risk. The decision to exit Kemper was mainly driven by escalating cost overruns and ongoing construction delays. Total project cost is currently estimated at $6.6 billion, from an original forecast of $2.8 billion, Fitch noted.
Kemper, primarily owned by Mississippi Power, gets its gasification feedstock from an adjacent lignite coal mine. Mississippi Power is a unit of Southern Co. (NYSE: SO).
Cooperative Energy’s upgrade also reflects a more balance 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. Reliance on purchased power has declined from 69% of energy requirements (2011) to a more moderate 47% (2015).
Exiting the Kemper project reduced prospective capital expenditures, alleviating new debt requirements, Fitch wrote. Equity to total capitalization is projected to rise from a healthy 26% in FY2015 to 31% by 2020 – above the peer median. While the elimination of the Kemper investment is a positive from a leverage perspective, the rate benefit will be slightly offset by rising power supply costs from Kemper’s owner, Mississippi Power, which provided 28% of members’ 2015 total energy requirements.
Initial estimates of Mississippi Power rate hikes appear manageable for Cooperative Energy and likely not implemented until 2019. Once the Kemper project is operational, which is anticipated in January 2017, Mississippi Power will need to file for a rate increase with the Mississippi Public Service Commission and then with FERC to determine the revised cost based rate for Cooperative Energy-contracted purchases from Mississippi Power, Fitch wrote.