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Rating Action:

Moody's confirms Mississippi Power's ratings; outlook stable

Global Credit Research - 21 Sep 2017

Approximately $800 million of debt securities affected

New York, September 21, 2017 -- Moody's Investors Service ("Moody's") confirmed 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 affirmed the SG short-term pollution control revenue bond rating. The rating outlook is stable. Moody's also upgraded Mississippi Power's speculative grade liquidity rating to SGL-3 from SGL-4. This rating action concludes the review of Mississippi Power's ratings initiated on 22 June 2017.

Upgrades:

..Issuer: Mississippi Power Company

.... Speculative Grade Liquidity Rating, Upgraded to SGL-3 from SGL-4

Outlook Actions:

..Issuer: Mississippi Power Company

....Outlook, Changed To Stable From Rating Under Review

Confirmations:

..Issuer: Eutaw (City of) AL, Industrial Dev. Board

....Senior Unsecured Revenue Bonds, Confirmed at Ba1(LGD3)

..Issuer: Harrison (County of) MS

....Senior Unsecured Revenue Bonds, Confirmed at Ba1(LGD3)

..Issuer: Mississippi Business Finance Corporation

....Senior Unsecured Revenue Bonds, Confirmed at Ba1(LGD3)

..Issuer: Mississippi Power Company

.... Probability of Default Rating, Confirmed at Ba2-PD

.... Corporate Family Rating, Confirmed at Ba1

....Pref. Stock Preferred Stock, Confirmed at Ba3(LGD5)

....Senior Unsecured Regular Bond/Debenture, Confirmed at Ba1(LGD3)

Affirmations:

..Issuer: Eutaw (City of) AL, Industrial Dev. Board

....Senior Unsecured Revenue Bonds, Affirmed S.G.

..Issuer: Harrison (County of) MS

....Senior Unsecured Revenue Bonds, Affirmed S.G.

..Issuer: Mississippi Business Finance Corporation

....Senior Unsecured Revenue Bonds, Affirmed S.G.

RATINGS RATIONALE

"The confirmation of Mississippi Power's ratings reflects the termination of construction and the expected near-term resolution of the remaining cost recovery issues associated with the Kemper Integrated Gasification Combined Cycle (IGCC) plant" said Michael G. Haggarty, Associate Managing Director. "It also reflects the utility's improved liquidity position and reduced leverage following a $1 billion capital contribution from its parent Southern Company (Baa2 stable) in June", added Haggarty. These developments have materially lowered the likelihood of further credit deterioration at Mississippi Power as a result of the Kemper plant.

Mississippi Power's current credit profile and Ba1 rating reflect the cumulative effect of several years of high spending and concurrent delays and cost overruns on the Kemper plant, construction of which was suspended at the direction of the Mississippi Public Service Commission (MPSC) in June 2017. As a result of the suspension order, Mississippi Power recorded an additional charge to income of $2.8 billion ($2.0 billion after tax), bringing total Kemper plant charges to $6.0 billion ($3.9 billion after tax).

The MPSC order directed the company to pursue a regulatory settlement with the Mississippi Public Utilities Staff that would reflect (i) at a minimum, no rate increase for Mississippi Power customers (with a rate reduction focused on residential customers encouraged); (ii) removal of all cost risk to customers associated with the Kemper IGCC gasifier and related assets; and (iii) modification or amendment of the Kemper certificate to allow for the operation of a natural gas facility only. The MPSC ordered that a settlement be filed after a 45 day negotiating period following the 6 July 2017 suspension order.

Despite the 45 day period, and a subsequent three week extension, the utility and the Staff failed to reach a settlement, leading the MPSC to issue an order on 12 September 2017 laying out a procedural schedule for the remainder of this year with a final MPSC decision to be issued in January 2018, instead of October 2017 as we had previously expected. A settlement is still possible over this period.

We believe the inability to reach a settlement demonstrates how seriously the Kemper project has negatively affected the utility's regulatory environment. The utility proposed a stipulation that included a $126.3 million revenue requirement based on a 9.413% return on equity (ROE), which includes some performance incentives, which would have kept customer rates unchanged.

The Staff proposed a $122.1 million revenue requirement based on a 9.225% ROE, which would have resulted in a rate reduction for residential customers, better addressing the wishes of the MPSC. The Staff also proposed a shorter amortization period for some regulatory assets, which would result in the utility not recovering a portion of the costs it attributes to the Kemper natural gas combined cycle units and taking an additional charge of potentially up to $250 million.

We believe Mississippi Power's high customer rates (approximately 40% higher than 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 Staff's attempt to try to mitigate the impact of the Kemper natural gas plant on customer rates as much as possible. Attempts to bridge the difference between the proposals of the utility and the Staff were not successful.

Despite the lack of a settlement, the confirmation of Mississippi Power's ratings considers the relatively narrow gap between the two proposals and the MPUC's intention to resolve the remaining cost recovery issues over the next four months. The near-term resolution of Kemper related cost recovery issues, along with the significant recent capital contribution and continued support from the parent company, has stabilized Mississippi Power's credit profile.

We expect Mississippi Power's cash flow coverage metrics, including its CFO pre-working capital to debt ratio, to improve rapidly over the next few years due for the most part to the deferred tax benefits that will result from the Kemper write-off. The utility will also return to a more normal level of capital expenditures post-Kemper. The magnitude of the increase in coverage metrics will be somewhat dependent on continued regulatory support for cost recovery under Mississippi Power's performance evaluation plan (PEP) going forward.

The upgrade of Mississippi Power's Speculative Grade Liquidity Rating to SGL-3 from SGL-4 reflects the utility's improved liquidity position following the $1 billion parent company capital contribution in June 2017. The capital was used to repay $300 million of the company's $1.2 billion bank term loan, which the utility has relied on in lieu of long-term bonds while the Kemper project was pending, and the repayment of $591 million of promissory notes to the parent company, in effect replacing that debt with equity. On 15 September 2017, Mississippi Power issued a $150 million promissory note to parent Southern Company, under which it borrowed $109 million, to pay the utility's federal income tax obligations for the quarters ending 30 September 2017 and 31 December 2017. The utility expects to repay this borrowing from the proceeds of an income tax refund expected shortly.

Rating Outlook

The stable outlook on Mississippi Power's ratings reflects the anticipated near-term resolution of most of the cost recovery issues associated with the Kemper plant and the continued, demonstrated support of the Southern parent company, including substantial capital contributions. This has helped offset a regulatory environment that has been negatively affected by the Kemper IGCC plant construction project and is likely to remain below average for some time. The stable outlook reflects our view that the utility has finally turned the corner on the problematic project and that its credit quality will not decline further despite the remaining cost recovery uncertainties.

Factors That Could Lead to an Upgrade

A positive rating action could be considered when the MPSC makes a final decision on cost recovery on the in-service natural gas combined cycle portion of the Kemper plant in January 2018, or there is an approved settlement before then, resolving the remaining uncertainty over project cost recovery. An upgrade is also possible if the utility's regulatory environment improves now that the Kemper project construction has ended, and if the utility returns to a more traditional capital structure by refinancing the $900 million of short-term bank loans, and exhibits improved financial coverage metrics, including CFO pre-working capital to debt at least in the mid-teens.

Factors That Could Lead to a Downgrade

A downgrade could occur if parent company support for Mississippi Power unexpectedly diminishes, if the utility's liquidity position worsens from current levels, if the regulatory environment remains below average; or if financial metrics remain below investment grade levels, including CFO pre-working capital to debt in 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

No Related Data.
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