Approximately $2 billion of debt securities downgraded
New York, November 05, 2015 -- Moody's Investors Service downgraded Mississippi Power Company's
ratings, including its senior unsecured debt to Baa3 from Baa2,
preferred stock to Ba2 from Ba1 and short-term pollution control
revenue bond rating to VMIG-3 from VMIG-2. The rating
outlook is negative. Moody's affirmed the ratings of The
Southern Company (Southern, Baa1 senior unsecured) with a negative
outlook.
RATINGS RATIONALE
"The downgrade of Mississippi Power's ratings is prompted
by the election of what we expect to be a less credit supportive Mississippi
Public Service Commission (MPSC) at a time when the utility will be pursuing
important rate recovery proceedings on the Kemper IGCC plant in 2016,"
said Michael G. Haggarty, Associate Managing Director.
"The election of two new commissioners increases regulatory uncertainty
and heightens the risk that the utility will not obtain full and timely
rate recovery on all $2.88 billion of costs subject to the
MPSC approved cost cap, as well as $1.3 billion of
costs exempt from the cap", added Haggarty. While the
election outcome could have been worse from a credit standpoint as the
most vocal Kemper opponent was defeated, both of the new commissioners
have voiced serious concerns and reservations about the plant over the
last several months.
The downgrade also reflects Mississippi Power's weak liquidity and
standalone financial condition, metrics that we expect to be below
investment grade levels for at least one to two years, the continued
cost increases and delays at the plant, the potential forfeiture
of $234 million of Phase II tax credits because of these delays,
and its increasing reliance on the Southern parent company for financial
and liquidity support. Although Southern continues to back both
Mississippi Power and the project, including making another $75
million equity contribution in September, we believe there are limits
to the parent company's continued support for both the company and
the Kemper project.
Last month, Mississippi Power revised its plant cost estimate upward
by $110 million, mostly reflecting the inclusion of projected
costs from April 1, 2016 through June 30, 2016 due to its
expectation that the plant will be placed into service during the first
half of 2016, including a three month contingency. These
cost increases, along with smaller cost increases in July and August,
resulted in pre-tax charge to income of approximately $150
million ($93 million after-tax) in the third quarter.
The potential delay of the in-service date beyond 19 April 2016
has led Mississippi Power to reclassify $235 million of Phase II
investment tax credits allocated to the project by the IRS as a current
liability. Once a final determination is made on the in-service
date, which Moody's expects will be later than this date,
repayment of the tax credit would be made to the IRS with any funding
requirements expected to be provided by Southern.
Mississippi Power is currently collecting $159 million of refundable,
emergency interim rates on the commercially operating portion of the plant
(including the combined cycle, transmission facilities, natural
gas pipeline, and water pipeline), which are in place until
hearings are held and a MPSC decision is made on making these rates permanent,
expected by 8 December 2015. The emergency rate relief and subsequent
proceedings became necessary after the Mississippi Supreme Court invalidated
the MPSC approved rate plan Mississippi Power had been operating under
since 2013. Mississippi Power is in the process of refunding $353
million of rates already collected (as of 30 June), funding which
will need to be provided by the parent.
This funding requirement is in addition to an 18-month promissory
note that Mississippi Power provided to Southern earlier this year to
fund the return of a $301 million deposit from a partner ending
its participation in the plant, South Mississippi Electric.
Mississippi Power has also been reliant on short-term bank term
loans for its ongoing financing needs in anticipation of a potential securitization
of a portion of the Kemper plant costs, with $900 million
of bank term loans scheduled to mature on 1 April 2016.
The negative outlook on Mississippi Power's ratings reflects the
company's constrained liquidity position combined with the heightened
regulatory uncertainty facing the company as it strives to obtain permanent
rate relief on the Kemper plant with a new, less credit supportive
state regulatory commission coming into office in January. It also
reflects the technological and other first-of-a-kind
challenges facing the company as it continues the testing and start-up
activities on the plant in order to maintain its currently estimated commercial
operation date in the first half of 2016.
What Could Change the Rating - Up
An upgrade of Mississippi Power is highly unlikely while there are no
permanent cost recovery provisions in place and while the utility is in
the midst of completing and testing the Kemper plant. Ratings could
be upgraded if there is an MPSC approved plan for the ultimate recovery
of costs up to the current $2.88 billion regulatory approved
cap and for $1.3 billion of costs outside the cap;
if the MPSC demonstrates that it continues to be credit supportive after
new commissioners take office in January; and if the utility successfully
executes an anticipated lengthy start-up and testing phase.
Any upgrade would also be predicated on the maintenance of credit metrics
at levels more commensurate with strong Baa rating, including CFO
pre-working capital to debt of approximately 20% on a sustained
basis.
What Could Change the Rating - Down
A downgrade of Mississippi Power could occur if there is no near term
approval by the MPSC on a permanent cost recovery plan for the in-service
assets of Kemper; if the interim rates currently in place are invalidated
or rolled back for any reason; if the newly constituted MPSC takes
actions that are detrimental to Mississippi Power's credit;
if there are additional material delays, cost increases, or
other problems associated with the plant; if parent company financial
and liquidity support for the utility becomes less certain and/or Southern's
commitment to the project declines; or if Mississippi Power's
CFO pre-working capital to debt falls below 13% for a sustained
period.
The affirmation of the ratings of Southern considers the large and diverse
nature of its sources of cash flow, with three of its other major
operating subsidiaries, Alabama Power Company (A1 senior unsecured,
stable), Gulf Power Company (A2 senior unsecured, stable),
and Southern Power Company (Baa1 senior unsecured, stable),
all maintaining stable rating outlooks. Mississippi Power is one
of Southern's smallest subsidiaries, providing approximately
10% of the consolidated company's cash from operations in
2014.
Although Southern's largest utility, subsidiary Georgia Power
(A3 senior unsecured) also maintains a stable rating outlook, it
has experienced cost increases and delays at its Vogtle new nuclear project
that have weakened its relative position at the A3 rating level.
However, the recently announced settlement between the Vogtle project
owners and the EPC contractors is credit positive in that it resolved
long-term disputes that had plagued the projects and provided renewed
clarity on the current expected cost of construction. The settlement
also ended the litigation between the Vogtle owners and the EPC contractor.
The size and importance of Georgia Power and the Vogtle nuclear project
make them a much more important driver of Southern's consolidated
credit profile and credit rating.
The negative outlook on Southern reflects the company's pending
acquisition of AGL Resources, Inc. (unrated), an Atlanta
based natural gas distribution company, for approximately $8
billion of cash. The transaction will result in a significant increase
in debt at the Southern holding company level at a time when holding company
debt has already been increasing, partly to support funding needs
at Mississippi Power and portfolio growth at Southern Power. As
a result, the rating of Southern is likely to be lowered one notch
at or before the closing date of the AGL acquisition if the transaction
is financed as currently envisioned. Southern estimates closing
will be in the second half of 2016.
The principal methodology used in these ratings was Regulated Electric
and Gas Utilities published in December 2013. 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.
Downgrades:
..Issuer: Eutaw (City of) AL, Industrial Dev.
Board
....Backed Senior Unsecured Revenue Bonds,
Downgraded to Baa3/VMIG 3 from Baa2/VMIG 2
..Issuer: Harrison (County of) MS
....Backed Senior Unsecured Revenue Bonds,
Downgraded to Baa3/VMIG 3 from Baa2/VMIG 2
..Issuer: Mississippi Business Finance Corporation
....Backed Senior Unsecured Revenue Bonds,
Downgraded to Baa3/VMIG 3 from Baa2/VMIG 2
....Senior Unsecured Revenue Bonds,
Downgraded to Baa3 from Baa2
..Issuer: Mississippi Power Company
.... Issuer Rating, Downgraded to Baa3
from Baa2
....Pref. Stock Preferred Stock,
Downgraded to Ba2 from Ba1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa3 from Baa2
Affirmations:
..Issuer: Southern Company (The)
.... Commercial Paper, Affirmed P-2
....Junior Subordinated Regular Bond/Debenture,
Affirmed Baa2
....Senior Unsecured Shelf, Affirmed
(P)Baa1
....Senior Unsecured Bank Credit Facility,
Affirmed Baa1
....Senior Unsecured Regular Bond/Debenture,
Affirmed Baa1
Outlook Actions:
..Issuer: Mississippi Power Company
....Outlook, Remains Negative
..Issuer: Southern Company (The)
....Outlook, Remains Negative
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 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 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 rating action, and
whose ratings may change as a result of this 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
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 Baa3, negative outlook; affirms Southern, negative outlook
