Approximately $800 million of debt securities downgraded
New York, March 01, 2017 -- Moody's Investors Service ("Moody's") downgraded
Mississippi Power Company's ratings, including its senior
unsecured rating to Ba1 from Baa3, preferred stock to Ba3 from Ba2,
and short-term pollution control revenue bond rating to SG from
VMIG 3. At the same time, Moody's assigned a Ba1 Corporate
Family Rating (CFR), a Ba2-PD Probability of Default rating,
and an SGL-3 Speculative Grade Liquidity rating to Mississippi
Power. Mississippi Power's Baa3 Issuer Rating is withdrawn.
The rating outlook is negative. This concludes the review initiated
on 6 February 2017.
The ratings and outlook of the parent company, The Southern Company
(Southern, Baa2 senior unsecured, stable), are unchanged.
Downgrades:
..Issuer: Eutaw (City of) AL, Industrial Dev.
Board
....Senior Unsecured Revenue Bonds,
Downgraded to Ba1 (LGD3) from Baa3
....Senior Unsecured Revenue Bonds,
Downgraded to S.G. from VMIG 3
..Issuer: Harrison (County of) MS
....Senior Unsecured Revenue Bonds,
Downgraded to Ba1 (LGD3) from Baa3
....Senior Unsecured Revenue Bonds,
Downgraded to S.G. from VMIG 3
..Issuer: Mississippi Business Finance Corporation
....Senior Unsecured Revenue Bonds,
Downgraded to Ba1 (LGD3) from Baa3
....Senior Unsecured Revenue Bonds,
Downgraded to S.G. from VMIG 3
..Issuer: Mississippi Power Company
....Pref. Stock Preferred Stock,
Downgraded to Ba3 (LGD5) from Ba2
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Ba1 (LGD3) from Baa3
Assignments:
..Issuer: Mississippi Power Company
.... Probability of Default Rating,
Assigned Ba2-PD
.... Speculative Grade Liquidity Rating,
Assigned SGL-3
.... Corporate Family Rating, Assigned
Ba1
Outlook Actions:
..Issuer: Mississippi Power Company
....Outlook, Changed To Negative From
Rating Under Review
Withdrawals:
..Issuer: Mississippi Power Company
.... Issuer Rating, Withdrawn ,
previously rated Baa3
RATINGS RATIONALE
"The downgrade of Mississippi Power's ratings reflects our
expectations for heightened regulatory contentiousness as the utility
pursues cost recovery on the increasingly uneconomic Kemper integrated
gasification combined cycle (IGCC) plant, construction of which
has severely stressed the utility's financial profile" said
Michael G. Haggarty, Associate Managing Director.
There is a high degree of uncertainty with regard to regulatory treatment
of the plant, as increased capital costs, higher projected
operating costs and the continued inability of the utility to put the
plant into service has increased the possibility that the IGCC portion
of the plant may not be economic to operate at all. Despite substantial
ongoing financial and liquidity support from The Southern Company (Baa2
stable), Mississippi Power's risk profile has deteriorated
markedly as the Kemper plant has proceeded.
On 22 February 2017, Mississippi Power filed an economic viability
analysis of the Kemper plant with the Mississippi Public Service Commission
(MPSC) that showed the plant to be less economic than a natural gas combined
cycle plant in six out of nine natural gas price and carbon cost scenarios
analyzed. This is in sharp contrast to the last four analyses submitted
by the utility between 2012 and 2015 that showed the plant to be more
economic than a natural gas combined cycle plant in all of its natural
gas price/carbon cost scenarios.
A combination of lower projected long-term gas prices and a substantial
increase in projected plant operating costs has severely hurt the plant's
economic prospects. Compared to original projections when the plant
was approved in 2010, projected operations and maintenance expenses
have increased by an average $105 million annually over the first
five years of operation (or approximately 350%) and maintenance
capital has increased by an average of $44 million annually (or
approximately 240%).
Mississippi Power has also reduced its projected expectation of plant
availability (the number of operational hours on syngas) during the first
year to 35% from 59% originally. The plant is expected
to ramp up to availability of 85% by year 5, but at a slower
rate than originally anticipated. In addition, the estimate
for the Plant's heat rate on syngas has also increased to 12,160
BTU/kWh from 11,708 BTU/kWh originally. The utility is likely
to experience ongoing challenges operating the plant at consistent and
reliable levels and is in the process of identifying projects designed
to improve that performance, although the related costs have not
been fully evaluated or identified, another key variable.
These developments raise questions as to the merits of operating the IGCC
portion of the plant at all, which will lead to a higher degree
of regulatory, political, and public scrutiny of the plant
at a time when the utility intends to pursue critical rate recovery proceedings
and a determination of prudency, which has not yet occurred.
Mississippi Power expects several potential challenges related to these
regulatory cost recovery proceedings, including those on prudence
issues, financing costs, plant operating costs, as well
as the 15% portion of the project originally sold to a cooperative
utility partner that withdrew from the project two years ago.
Due to a combination of higher debt, cost increases, and regulatory
recovery delays associated with the Kemper plant, Mississippi Power's
cash flow pre-working capital to debt ratio has fallen from above
20% historically to 9% in 2015 and 8% in 2016,
well below our financial metric guidelines for an investment grade rating.
A return of the utility's cash flow coverage metrics to pre-Kemper
levels on a sustained basis will depend on the timing and magnitude of
future rate relief on the project, which is highly uncertain.
Recovery is limited to $2.88 billion of capital costs under
a regulatory approved cap, plus about $1.5 billion
of costs that are outside of the cap, which have also increased.
Recovery of higher future operating costs are also not assured and the
utility has indicated that it is reasonably possible that full recovery
of all plant costs will not occur.
Mississippi Power is required to file a rate case on the Kemper plant
by 3 June 2017 and expects a negotiated settlement agreement. The
construction delays, higher operating costs, and lower natural
gas prices will put the Mississippi Public Service Commission in a difficult
position of being asked to approve rate recovery and a return on a plant
that is much less competitive and more expensive to run than originally
envisioned. This is particularly sensitive given Mississippi Power's
relatively high rates and demographically below average service territory
compared to most other investor owned utilities in the southeast.
Whether the Kemper plant operates as originally expected or not,
it has led to an inordinate amount of asset concentration risk for Mississippi
Power. The $7 billion cost of the plant compares to the
utility's common equity base of $2.9 billion at 31
December 2016. While Southern Company shareholders have borne the
bulk of the higher costs with over $2.8 billion of pre-tax
charges taken on the plant to date, Mississippi Power ratepayers
could bear the brunt of higher plant operating costs in the future,
depending on the outcome of the upcoming rate case proceedings.
If the plant does not operate as an IGCC, the utility will also
lose the generation diversity benefits that were a key rationale for the
construction of the plant originally.
Mississippi Power's Ba1 CFR is predicated on the continued credit
and liquidity support of the Southern parent company, as well as
continued access to external funding sources. Mississippi Power's
31 December 2016 SEC financial statement presentation contemplates continuation
of the utility as a going concern because of Southern's anticipated
ongoing financial support for the company. In its fourth quarter
earnings release on 22 February 2017, Southern indicated that it
is committed to the financial integrity of Mississippi Power, a
key consideration supporting the current rating.
Mississippi Power's SGL-3 reflect the company's adequate
liquidity and high reliance on the parent company, which currently
provides $551 million of promissory notes to the utility.
Mississippi Power's cash on hand was $224 million at 31 December
2016 and the utility maintains $173 million of bank credit facilities
that expire in 2017, of which $23 million was drawn and $40
million provided liquidity support to variable rate pollution control
revenue bonds. Mississippi Power also has an unsecured $1.2
billion term loan agreement with a group of banks that matures on 1 April
2018 and contains covenants that limit debt levels to 65% of total
capitalization as defined in the agreement. As of 31 December 2016,
the utility was in compliance with these covenants.
Southern's ratings and stable outlook are unchanged, reflecting
Mississippi Power's position as one of Southern's smaller
utility subsidiaries, with the Kemper project thus far having a
material but manageable impact on the parent's consolidated financial
condition. This is particularly the case since Southern's
acquisition of AGL Resources, Inc. (now Southern Company
Gas) last year, increased its overall scale, diversification,
and resiliency. Although Southern has taken over $2.8
billion of pre-tax charges related to Kemper, the company's
downgrade to Baa2 last year was largely attributable to higher parent
debt levels and lower financial metrics due to the largely debt financed
AGL acquisition.
Southern's rating could be negatively affected if there are additional,
material debt financed acquisitions by the parent company; if there
are additional delays or cost increases at Georgia Power's Vogtle
new nuclear construction project; further financial deterioration
of EPC contractor Westinghouse Electric Company LLC (unrated) or its parent
Toshiba Corporation (Caa1, ratings on review); if Southern's
consolidated credit metrics show a decline, including cash flow
from operations pre-working capital below 15% for an extended
period; or if there is rating pressure at one of its larger subsidiaries,
including Georgia Power Company (A3 stable), Alabama Power Company
(A1 stable), Southern Power Company (Baa1 stable), or Southern
Company Gas Capital (Baa1 stable).
Rating Outlook
The negative outlook on Mississippi Power's ratings reflects the
challenges and regulatory contentiousness we expect as it seeks rate recovery
and a determination of prudency on the Kemper plant. It also incorporates
execution risk in bringing the plant on line and in maintaining reliable
commercial operation; uncertainty over the plant's future operating
costs and their recovery; and questions as to whether the IGCC portion
of the plant will operate at all.
Factors That Could Lead to an Upgrade
An upgrade of Mississippi Power's rating is unlikely while the company
struggles to bring the Kemper plant into service and there is heightened
uncertainty over regulatory recovery of plant capital and operating costs.
The rating outlook could be stabilized if the plant successfully comes
on line and demonstrates reasonably consistent and reliable commercial
operation and the MPSC approves adequate rate recovery for remaining recoverable
plant capital costs and higher future operating costs. An upgrade
would also be predicated on credit metrics returning to levels more commensurate
for an investment grade rating, including CFO pre-working
capital to debt of at least 13% on a sustained basis, and
the continued support of the parent company.
Factors That Could Lead to a Downgrade
A downgrade could occur if approved Kemper cost recovery provisions are
inadequate to sustain Mississippi Power's financial condition;
the utility does not reach a negotiated settlement and litigates the cost
recovery process; if the Kemper plant does not come on line and reliable
commercial operation is not achieved over the near term; or if the
utility's CFO pre-working capital to debt ratio fails to
recover materially to above 10% from recently depressed levels
in the single digits. The current rating is also predicated on
the continued strong financial and liquidity support of the parent company.
If Southern limits or otherwise deviates from its thus far consistent
support for Mississippi Power, a multi-notch rating downgrade
is possible.
The principal methodology used in these ratings was Regulated Electric
and Gas Utilities published in December 2013. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
The Southern Company is a utility holding company headquartered in Atlanta,
Georgia and the parent company of utility subsidiaries Alabama Power Company,
Georgia Power Company, Gulf Power Company, Mississippi Power
Company, Southern Company Gas, Southern Electric Generating
Company, wholesale power company Southern Power Company, financing
subsidiaries Southern Company Gas Capital and Southern Company Capital
Funding, Inc., and commercial paper issuer Southern
Company Funding Corporation.
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: 212-553-0376
SUBSCRIBERS: 212-553-1653
Jim Hempstead
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
