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Rating Action:

Moody's downgrades Mississippi Power to A3; Outlook Negative

06 Aug 2012

Approximately $1 billion of Debt Securities downgraded

New York, August 06, 2012 -- Moody's Investors Service downgraded Mississippi Power Company's senior unsecured rating to A3 from A2 and its preferred stock rating to Baa2 from Baa1. The rating outlook is negative. Moody's affirmed the VMIG-2 short-term rating on Mississippi Power's pollution control revenue bonds. This rating action concludes the review for downgrade initiated on Mississippi Power's ratings on July 9, 2012.

RATINGS RATIONALE

"The downgrade of Mississippi Power's ratings reflects higher business and operating risk and lower cash flow coverage metrics resulting from the construction of the Kemper IGCC plant", said Michael G. Haggarty, Senior Vice President. The plant has experienced approximately $366 million of cost overruns to date, pushing the total cost of the plant close to the $2.88 billion cost recovery cap approved by the Mississippi Public Service Commission (MPSC). Recovery of additional cost overruns incurred between now and the May 2014 commercial operation date in excess of the remaining $62 million contingency is less certain and subject to MPSC review.

Because of the large capital expenditures and higher debt associated with the project, financial metrics have weakened considerably and are now well below the parameters expected for a single A rating, using guidelines in Moody's Regulated Electric and Gas Utilities rating methodology. The company's cash flow pre-working capital to debt ratio has fallen to slightly below 15% in 2011 and 10.3% for the twelve months ending March 31, 2012 from the 30% range achieved in 2009. Some of the decline in metrics can also be attributed to higher levels of bonus depreciation being utilized by The Southern Company overall, which has resulted in the deferral of a significant portion of Mississippi Power's tax credits into future years.

The downgrade also reflects the recent denial by the MPSC of the recovery of financing costs during the Kemper plant's construction, an unexpected regulatory reversal that will further stress financial metrics over the near term. After approving financing cost recovery beginning in 2012 in its original order, the MPSC on June 22, 2012 unanimously voted to deny the company financing cost recovery. The MPSC indicated that such recovery would not be prudent given a pending Sierra Club lawsuit challenging the plant's certificate of need pending before the Mississippi Chancery Court. The company's has appealed the financing cost recovery ruling to the Mississippi Supreme Court, although the timing of a decision is uncertain. The company will continue to accrue AFUDC during construction, which will put additional pressure on customer rates when construction is completed.

The negative outlook reflects the significant challenges facing the company as it manages the regulatory, legal, financing, construction and technological uncertainties associated with the Kemper plant. The utility is in the midst of its peak spending year in 2012 at $1.4 billion for the year, with commercial operation expected by May 2014. A similar IGCC plant under construction in Indiana is approximately 50% over its original budgeted costs and commercial operation of the plant has been postponed. The Kemper plant will qualify for $133 million of tax credits allocated by the IRS only if it is completed on time. Although plant construction remains on schedule, IGCC technology is complex, specialized, and not widely utilized. The company also faces a legal challenge to construction of the plant that is pending in Mississippi courts. The next 12 to 18 months will be critical in resolving these uncertainties and determining if the plant achieves commercial operation within its considerable time and budgetary constraints.

A rating upgrade is unlikely while the company is in the midst of such a large construction project. Ratings could be stabilized if the project is substantially completed without major additional delays or cost overruns, if the full amount of expected investment tax credits are realized, if the regulatory environment in Mississippi remains credit supportive, and if metrics return to levels consistent with an A rating, including CFO pre-working capital to debt of at least 22% on a sustained basis.

A downgrade could be considered if there are material delays, additional cost overruns, or diminished regulatory support for the project; if there is an adverse change in the overall regulatory and political environment for utilities in Mississippi; or if cash flow coverage metrics do not improve as expected from current low levels, including CFO pre-working capital to debt remaining below 20% for a sustained period.

Ratings downgraded include:

Mississippi Power's senior unsecured debt and Issuer Rating to A3 from A2; preferred stock to Baa2 from Baa1; and subordinated shelf rating to (P)Baa1 from (P)A3.

Ratings affirmed include:

Mississippi Power's VMIG-2 short-term pollution control revenue bond rating.

The principal methodology used in this rating was Moody's Regulated Electric and Gas Utilities, published in August 2009. Please see the Credit Policy 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 Electric Generating Company, wholesale power company Southern Power Company, financing subsidiary Southern Company Capital Funding, Inc., and commercial paper issuer Southern Company Funding Corporation.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Michael G. Haggarty
Senior Vice President
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

William L. Hess
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

Moody's downgrades Mississippi Power to A3; Outlook Negative
No Related Data.
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