Approximately $800 million of debt securities affected
New York, February 26, 2018 -- Moody's Investors Service ("Moody's") affirmed
the ratings of Mississippi Power Company, including its Ba1 Corporate
Family Rating (CFR), Ba1 senior unsecured; Ba2-PD Probability
of Default, Ba3 preferred stock, and SG short-term
pollution control revenue bond ratings. The rating outlook was
changed to positive from stable. Mississippi Power's speculative
grade liquidity (SGL) rating is downgraded to SGL-4 from SGL-3.
Downgrades:
..Issuer: Mississippi Power Company
.... Speculative Grade Liquidity Rating,
Downgraded to SGL-4 from SGL-3
Outlook Actions:
..Issuer: Mississippi Power Company
....Outlook, Changed To Positive From
Stable
Affirmations:
..Issuer: Eutaw (City of) AL, Industrial Dev.
Board
....Senior Unsecured Revenue Bonds,
Affirmed Ba1(LGD3)
....Senior Unsecured Revenue Bonds,
Affirmed S.G.
..Issuer: Harrison (County of) MS
....Senior Unsecured Revenue Bonds,
Affirmed Ba1(LGD3)
....Senior Unsecured Revenue Bonds,
Affirmed S.G.
..Issuer: Mississippi Business Finance Corporation
....Senior Unsecured Revenue Bonds,
Affirmed Ba1(LGD3)
....Senior Unsecured Revenue Bonds,
Affirmed S.G.
..Issuer: Mississippi Power Company
.... Probability of Default Rating,
Affirmed Ba2-PD
.... Corporate Family Rating, Affirmed
Ba1
....Pref. Stock Preferred Stock,
Affirmed Ba3(LGD5)
....Senior Unsecured Regular Bond/Debenture,
Affirmed Ba1(LGD3)
RATINGS RATIONALE
"The positive outlook is prompted by the settlement agreement approved
earlier this month by the Mississippi Public Service Commission (MPSC)
that resolved the outstanding cost recovery issues associated with the
Kemper County generation facility," said Michael G.
Haggarty, Associate Managing Director. "Although the
agreement materially lowered Mississippi Power's revenue requirements
for the natural gas combined cycle portion of the Kemper facility,
it should allow the utility to gradually improve its cash flow coverage
metrics, assuming its regulatory environment recovers from the adverse
impact of the Kemper construction project," added Haggarty.
Moody's will monitor Mississippi Power's future rate proceedings,
regulatory treatment, and financial performance, including
an evaluation of its high reserve margins, which the MPSC has required
it to file by August 2018, to determine if the utility's financial
recovery will be sustained.
The settlement agreement was the culmination of months of negotiations
following the MPSC's June 2017 order halting construction of the
Kemper Integrated Gasification Combined Cycle (IGCC) plant, authorizing
its operation as a natural gas combined cycle plant only, and encouraging
a rate reduction for the utility's residential customers,
who pay some of the highest rates in the region. Despite that order,
Mississippi Power initially proposed that its rates remain unchanged,
filing for an annual revenue requirement of $126.4 million
-- the same amount that had been in place since the Kemper natural
gas combined cycle units originally came into service in 2014, a
return on equity (ROE) of 9.33%, and amortization
of Kemper regulatory assets over 20 years.
The Mississippi Public Utilities Staff (MPUS) did not agree to or sign
off on the utility's proposal, partly due to their and the
MPSC's expressed desire for a residential rate reduction.
Mississippi Power argued that alternative settlements proposed by the
Staff and others would create a continuous, annual financial drain
on the utility; require a fundamental change in the utility's
business, and place its operations at risk. We believe that
Mississippi Power's high customer rates (approximately 40%
higher than neighboring Entergy Mississippi's retail residential
rates), in a service territory with below average economic demographics
and excess reserve margins in the 50% range, all played a
role in the efforts by the Staff to try to mitigate the impact of the
Kemper natural gas plant on customer rates as much as possible.
The final settlement agreement ultimately agreed to by the Staff and approved
on 6 February 2018 provided for a rate reduction, authorizing an
annual revenue requirement of only $99.3 million,
down from an earlier, amended settlement agreement amount of $112.6
million, with the most recent decrease implemented solely to account
for the impact of federal tax reform legislation. On 7 February
2018, Mississippi Power revised its annual Performance Evaluation
Plan ("PEP") filing for 2018 to reflect the impact of this
tax reform legislation, requesting an increase of $26 million
in annual revenues, based on a performance adjusted ROE of 9.33%
and an increased equity ratio of 55%, which will be addressed
by the MPSC over the next several months.
The final Kemper settlement included a lower fixed ROE of 8.6%
for 2018, excluding any performance adjustment, and a 2019
ROE calculated in accordance with the utility's PEP filing,
again excluding any performance adjustment, with the latest PEP
filing requesting an ROE of 9.33%. For future years,
a performance based ROE will be calculated pursuant to the PEP.
The amortization of regulatory assets was shortened to 8 years from the
utility's initially proposed 20 years. Because the settlement
reflected a disallowance of some of Mississippi Power's investment
in the Kemper natural gas combined cycle portion of the plant, both
Mississippi Power and parent Southern Company (Baa2 negative) took an
additional charge of approximately $78 million pre-tax ($48
million after-tax).
Although the settlement agreement resolves the Kemper cost recovery uncertainty,
the Ba1 CFR incorporates Moody's view that the materially lower
revenues being collected by Mississippi Power will slow the utility's
financial recovery and may challenge its ability to sustain a CFO pre-working
capital to debt ratio in the mid-teens going forward. Moreover,
the contentious nature of the settlement negotiations, the inability
of Mississippi Power and the MPUS to reach a settlement earlier,
and the strong position of both the MPSC and the MPUS that the utility's
high rates needed to be reduced and reserve margins needed to be addressed,
all point to a regulatory environment that been seriously affected by
the failed Kemper IGCC project. It will likely take some time for
the regulatory relationship to return to its previously credit supportive
posture.
The downgrade of Mississippi Power's Speculative Grade Liquidity
Rating to SGL-4 from SGL-3 reflects the utility's
weak liquidity, with $900 million of unsecured bank term
loans coming due in just over one month on March 31, 2018.
The utility does not have the resources to pay off these term loans on
a stand-alone basis and expects to refinance them with external
debt issuances and/or borrowings from banks or the Southern parent company.
Mississippi Power's 31 December 2017 audited financial statements
contemplate the continuation of the utility as a going concern due to
the parent company's anticipated ongoing financial support.
Mississippi Power has been informed by Southern that the parent will provide
it with loans and/or equity to fund debt maturities and cash needs over
the next 12 months. This has been the case throughout the Kemper
construction period with Southern last making a $1 billion capital
contribution to Mississippi Power in June 2017.
At 31 December 2017, Mississippi Power had $248 million of
cash on hand, up slightly from $231 million at 30 September
2017. The utility maintains $100 million of bank credit
facilities that expire in December 2018, of which none was drawn
and $40 million provided liquidity support to variable rate pollution
control revenue bonds. There is no material adverse change clause
in its bank credit facilities that could prevent borrowings but there
are covenants that limit debt levels to 65% of total capitalization
as defined in the agreement. As of 31 December 2017, the
utility was in compliance with this covenant.
Rating Outlook
The positive outlook on Mississippi Power is prompted by the resolution
of Kemper cost recovery issues provided by the recent settlement agreement
approved by the MPSC. Despite the material rate reduction incorporated
in the settlement, it should permit the utility to gradually improve
its financial performance, assuming the regulatory environment fully
recovers from the negative Kemper construction experience and future rate
proceeding outcomes are credit supportive.
Factors That Could Lead to an Upgrade
An upgrade could be considered if there is evidence that the regulatory
environment has become more credit supportive; if future rate proceedings
are constructive, including its recently revised PEP filing for
federal tax reform; if the utility completes and files a reserve
margin plan as requested by the MPSC; and if it exhibits an improvement
in financial performance, including a ratio of CFO pre-working
capital to debt ratio comfortably above 13% on a sustained basis.
Factors That Could Lead to a Downgrade
A downgrade is less likely give the positive outlook and the resolution
of the Kemper plant cost recovery uncertainty. However, the
outlook could revert to stable or a downgrade could occur if the regulatory
environment does not become more credit supportive; if the utility's
liquidity position does not improve materially from its current high reliance
on short-term financing, including the imminent refinancing
of its upcoming $900 million term loan maturity; if Southern
parent company support for Mississippi Power unexpectedly diminishes;
or if financial metrics remain weak, including CFO pre-working
capital to debt below 13%.
The principal methodology used in these ratings was Regulated Electric
and Gas Utilities published in June 2017. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
Mississippi Power Company, headquartered in Gulfport, Mississippi,
is a regulated utility subsidiary of The Southern Company, a utility
holding company headquartered in Atlanta, Georgia.
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 credit rating action on the support provider and in relation to
each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Jim Hempstead
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
