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

--$39.16 million Mississippi Business Finance Corporation Gulf Opportunity Zone Bonds, Series 2009A;

--$16.446 million Claiborne County, MS Pollution Control Bonds, 1985 Series G.

The Rating Outlook is Stable.

Fitch is also withdrawing its rating on SMEPA's parity non-publicly held senior secured obligations as the rating is no longer considered by Fitch to be relevant to the agency's coverage. These debt obligations were privately borrowed from lenders including the Rural Utilities Service (RUS), National Rural Utilities Cooperative Finance Corporation and CoBank. The above is a correction to Fitch's press release dated Sept. 28, 2010. It clarifies that non-publicly held senior secured obligations are not rated and that only the publicly held senior secured obligations outlined above are rated 'A-'.

SECURITY:

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

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 in anticipation of future 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 pending acquisitions of three natural gas-fired units totaling 837 MW and a 15% share of new integrated gasification combined cycle (IGCC) project located in Kemper County, MS.

SIZABLE CAPITAL PROGRAM: Capital spending from 2012-2016 will be well above historical levels and approximate $1 billion reflecting the construction and acquisition of new resources, as well as scheduled improvements to existing units. Fitch views the planned diversification of resources positively; however, related borrowings will significantly 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, 3.54x); debt service coverage (DSC, 2.42x); and equity/capitalization (56%) in 2011 were mostly higher than in 2009.

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

IMPROVED LIQUIDITY: Cash on hand has improved from three days at year-end 2009 to 18 days at year-end 2011, but remains weak compared with Fitch's 'A-' category median (47 days). A new long-term $250 million syndicated bank facility helped bolstered total liquidity to a more acceptable 154 days.

WHAT COULD TRIGGER A RATING ACTION

SIGNIFICANTLY HIGHER FIXED COSTS: A significant increase in fixed costs related to excess generation resources, or cost overruns related to 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 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 410,000.

Residential customers accounted for 58% of total energy sales in 2011. 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.

RELIANCE ON PURCHASED POWER

SMEPA relies heavily on power purchased from third parties, including Mississippi Power Company (MPC; Issuer Default Rating of 'A-'), to meet the energy demands of its membership. SMEPA purchased nearly 69% of energy needs in 2011, including 33% from MPC. SMEPA's remaining power requirements are sourced from a well-diversified portfolio of owned generating resources with an aggregate summer capacity of 1,386 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. Projects including the repowering of its natural gas-fired Plant Moselle and the uprating of its capacity at the Grand Gulf nuclear station are virtually complete, but larger acquisitions of three natural gas units from LSP Energy L.P. out of bankruptcy and SMEPA's share in the Kemper project are pending.

Significantly higher capital expenditures and related borrowings are expected as a result over the near term. However, net margins and coverages consistent with SMEPA's board-approved policies are expected to moderate debt leverage at approximately 80%-82% of total capitalization through 2016.

SOLID AND STABLE FINANCIAL PERFORMANCE

SMEPA reported continued solid and stable performance in 2011 as net margins have remained relatively unchanged since 2009 at approximately $29 million-$30 million. Operating margins and funds available for debt service (FADS) excluding deferrals, fell slightly in 2011, but remained solidly in line with prior years. Fitch-calculated debt service coverage (DSC) was also lower in 2011 at 1.38x, reflecting the slightly lowered FADS and lower debt service in 2010, but remained consistent with the median for the current rating category.

Additional information is available at '[ www.fitchratings.com ]'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria and U.S. Public Power Rating Criteria, this action was informed by information from CreditScope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', June 12, 2012;

--'U.S. Public Power Rating Criteria', Jan. 11, 2012.

Applicable Criteria and Related Research:

U.S. Public Power Rating Criteria

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=665815 ]

Revenue-Supported Rating Criteria

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015 ]

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