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Rating Action:

Moody's upgrades Mississippi Power to Baa2, maintains positive outlook

01 Aug 2019

Approximately $1.5 billion of debt securities upgraded

New York, August 01, 2019 -- Moody's Investors Service, (Moody's) upgraded the ratings of Mississippi Power Company (Mississippi Power) including its senior unsecured rating to Baa2 from Baa3, and maintained a positive outlook.

Upgrades:

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

....Senior Unsecured Revenue Bonds, Upgraded to P-2 from P-3

....Senior Unsecured Revenue Bonds, Upgraded to Baa2 from Baa3

..Issuer: Harrison (County of) MS

....Senior Unsecured Revenue Bonds, Upgraded to P-2 from P-3

....Senior Unsecured Revenue Bonds, Upgraded to Baa2 from Baa3

..Issuer: Mississippi Business Finance Corporation

....Senior Unsecured Revenue Bonds, Upgraded to P-2 from P-3

....Senior Unsecured Revenue Bonds, Upgraded to Baa2 from Baa3

..Issuer: Mississippi Power Company

.... Issuer Rating, Upgraded to Baa2 from Baa3

....Preferred Shelf, Upgraded to (P)Ba1 from (P)Ba2

....Junior Subordinate Shelf, Upgraded to (P)Baa3 from (P)Ba1

....Senior Unsecured Shelf, Upgraded to (P)Baa2 from (P)Baa3

....Preferred Stock, Upgraded to Ba1 from Ba2

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa2 from Baa3

Outlook Actions:

..Issuer: Mississippi Power Company

....Outlook, Remains Positive

RATINGS RATIONALE

"The upgrade of Mississippi Power's ratings reflects its improving financial profile as the company moves further past the problems associated with the Kemper IGCC plant construction," said Jeff Cassella, Moody's VP-Senior Credit Officer. "The positive outlook incorporates our view that the credit supportiveness of the Mississippi regulatory environment will continue to strengthen over time," added Cassella.

Mississippi Power's Baa2 rating reflects the improving regulatory environment in Mississippi, where support for the utility had declined following several years of delays and cost overruns on the Kemper Integrated Gasification Combined Cycle (IGCC) plant. We believe that the relatively credit supportive outcome of last year's Performance Evaluation Plan (PEP) filing is an initial indication of an improving regulatory relationship and we will closely monitor the progress of Mississippi Power's next general rate case proceeding beginning later this year. The upgrade also considers Mississippi Power's strengthening financial profile, including a ratio of cash flow from operations pre-working capital (CFO pre-W/C) to debt that we expect will be in the mid-teens range in 2019 and about 20% going forward. Mississippi Power's credit quality also considers constraining factors such as the company's relatively small size and concentration risk.

The utility's improving regulatory relationship will be tested as Mississippi Power plans to file its next general rate case in November of this year. During the rate case, the MPSC is expected to address Mississippi Power's prior request to increase its equity ratio to 55% from 50% currently. The rate case will also address the timing for customer refunds on a portion of the company's $44 million of unprotected, excess accumulated deferred income tax (ADIT) balance. The company originally asked to refund this amount over an 8-year period during its last PEP filing but the matter was deferred to the rate case.

In addition, the MPSC is currently undergoing an operations review process, which analyzes the utility's costs, its cost recovery framework and the potential to stream line management operations for the benefit of ratepayers, which the MPSC initiated in August 2018. Moody's understands that Phase I was completed with no findings and the MPSC is currently in the midst of Phase II, which is expected to focus on service company type costs, including benefits and non-fuel O&M. Furthermore, the MPSC is evaluating Mississippi Power's Reserve Margin Plan (RMP), which was also filed in August 2018. We expect that the detailed review of the RMP and operations review will be addressed as part of the upcoming rate case proceeding.

On 29 April 2019, the United States Department of Justice's Civil Division informed The Southern Company (Baa2 stable) and Mississippi Power of an investigation related to the Kemper energy facility. Moody's believes this investigation could be connected to the closeout of a contract related to $387 million of grants the utility had received from the Department of Energy for the Kemper project. The federal grants were designated for the coal gasification technology that was ultimately abandoned.

While the ultimate timing and outcome of this investigation cannot be determined at this time, we acknowledge that the outcome could potentially result in a material financial impact. Moody's believes this may lead the DoE to attempt a claw back of all or a portion of the grant money. However, given the substantial financial and liquidity support that Mississippi Power received from its parent, Southern, throughout the Kemper project, we expect that any costs will be largely covered through capital contributions from the parent in order to maintain the utility's targeted capital structure and that the financial impact on Mississippi Power will be limited.

Outlook

Mississippi Power's positive outlook reflects our expectation that the Mississippi regulatory environment's credit supportiveness will continue to strengthen particularly with Mississippi Power's next rate case proceeding, which is expected to be filed by the end of this year. The positive outlook also incorporates our expectation that Mississippi Power's key financial metrics will continue to improve, such that its ratio of CFO pre-W/C to debt will be in the mid-teens range in 2019 and increase to about 20% in 2020.

Moody's will monitor Mississippi Power's upcoming rate case proceeding, including the evaluation of its high reserve margins as well as the ongoing operations review that the MPSC is conducting, and the utility's financial performance going forward.

Factors that could lead to an upgrade

Mississippi Power's rating could be upgraded if there is further evidence that the regulatory environment has become more credit supportive; if the outcome of the upcoming rate proceedings is constructive, and if financial metrics demonstrate sustained improvement, including a ratio of CFO pre-W/C to debt sustained at about 20% or higher.

Factors that could lead to an downgrade

A downgrade of Mississippi Power is unlikely given the positive outlook. However, the outlook could be changed to stable or Mississippi Power's rating could be downgraded if the credit support from the regulatory environment deteriorates or does not improve as expected; if Southern parent company support for Mississippi Power unexpectedly diminishes; or if financial metrics weaken, including a ratio of CFO pre-W/C to debt sustained below 15%.

Based in Gulfport, Mississippi, Mississippi Power Company is a vertically integrated utility subsidiary of The Southern Company, providing electricity to over 188,000 customers including retail customers within the state of Mississippi and to wholesale customers in the Southeast. For the last 12-month period ending 31 March 2019, Mississippi Power had $1.25 billion in revenues, about $4.8 billion in total assets, and accounted for less than 5% of Southern's financial results. The company is regulated primarily by the Mississippi Public Service Commission (MPSC).

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.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Jeffrey F. Cassella
VP - Senior Credit Officer
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

Michael G. Haggarty
Associate Managing Director
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.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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