Eutaw (City of) AL, Industrial Dev. Board -- Moody's upgrades Mississippi Power to Baa1, outlook stable
Rating Action: Moody's upgrades Mississippi Power to Baa1, outlook stable
Global Credit Research - 27 Aug 2020
Approximately $1.2 billion of debt securities upgraded
New York, August 27, 2020 -- Moody's Investors Service, (Moody's) upgraded the long-term ratings of Mississippi Power Company (Mississippi Power) including its senior unsecured rating to Baa1 from Baa2. Moody's also affirmed the Prime-2 short-term rating. The outlook is stable.
Upgrades:
..Issuer: Eutaw (City of) AL, Industrial Dev. Board
....Senior Unsecured Revenue Bonds, Upgraded to Baa1 from Baa2
..Issuer: Harrison (County of) MS
....Senior Unsecured Revenue Bonds, Upgraded to Baa1 from Baa2
..Issuer: Mississippi Business Finance Corporation
....Senior Unsecured Revenue Bonds, Upgraded to Baa1 from Baa2
..Issuer: Mississippi Power Company
....Issuer Rating, Upgraded to Baa1 from Baa2
....Preferred Stock, Upgraded to Baa3 from Ba1
....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa1 from Baa2
Affirmations:
..Issuer: Eutaw (City of) AL, Industrial Dev. Board
....Senior Unsecured Revenue Bonds, Affirmed P-2
..Issuer: Harrison (County of) MS
....Senior Unsecured Revenue Bonds, Affirmed P-2
..Issuer: Mississippi Business Finance Corporation
....Senior Unsecured Revenue Bonds, Affirmed P-2
Outlook Actions:
..Issuer: Mississippi Power Company
....Outlook, Changed To Stable From Positive
RATINGS RATIONALE
"Mississippi Power's rating upgrade reflects the improved relationship with state regulators and a stronger financial profile that we expect will be sustained at a level that supports the Baa1 rating," said Jeff Cassella, Moody's VP-Senior Credit Officer.
Mississippi Power's Baa1 rating reflects the continued improvement in the Mississippi regulatory environment which will help the company to sustain a stronger financial profile. Regulatory support deteriorated a few years ago coinciding with several years of delays and cost overruns related to the construction of Plant Ratcliffe (formerly known as the Kemper Integrated Gasification Combined Cycle plant) which went into service in July 2017. The outcomes of a recent rate case and Performance Evaluation Plan (PEP) filing over the last two years have largely been credit supportive and are an indication of an improving regulatory relationship.
The rating also considers Mississippi Power's improved credit metrics. For the 12-months ended 30 June 2020, Mississippi Power exhibited very strong credit metrics including ratio of cash flow from operations pre-working capital (CFO pre-W/C) to debt of 26.6% driven mainly by deferred tax benefits related to the Kemper plant write-offs. Going forward, without such tax benefits, we expect Mississippi Power's ratio of CFO pre-W/C will be sustained in the 17-19% range. In addition, Mississippi Power's rating is constrained by the company's relatively small size and concentration risk in a service territory that has sluggish economic growth and is susceptible to extreme weather events such as storms and tornados.
While there had been several years of heightened regulatory and political contentiousness associated with the Kemper plant construction problems, we believe that the relatively credit supportive outcomes of the recent rate case and PEP filings. As well as the February 2018 regulatory settlement agreement which resolved uncertainty over the Kemper project cost recovery, are evidence of an improved regulatory environment.
On 17 March 2020, the Mississippi Public Service Commission (MPSC) approved a settlement agreement between Mississippi Power and the Commission Staff related to the company's base rate case filed in November 2019. Under the terms of the settlement agreement, annual retail rate revenues were lowered approximately $16.7 million compared to Mississippi Power's request for a $5.8 million reduction. The settlement agreement was based on a 2020 test year and an equity ratio of 53% (up from 50%). However, it did allow Mississippi Power's equity ratio to increase to 55% by the end of 2020, and included a 7.57% return on investment, which equates to an estimated 10% allowed ROE (up from 9.3% previously) although not explicitly stated. As of 30 June 2020, the company's equity ratio was 55%.
The rate case followed a more credit positive PEP filing stipulation approved by the MPSC in August 2018. The approved stipulation included a revenue increase of $21.6 million compared to Mississippi Power's request of $23.4 million. The revenue increase reflected the change in tax rate as a result of December 2017 tax cut legislation. The authorized return on equity in the plan was 9.3% based on an equity ratio of 50% at that time.
The 2018 PEP filing outcome followed the Kemper settlement agreement approved by the MPSC in February 2018 that resolved the outstanding cost recovery issues associated with Plant Ratcliffe. Although the settlement materially lowered Mississippi Power's revenue requirements for the natural gas combined cycle portion of the facility, it allowed the utility to begin to gradually improve its financial metrics over time. The agreement was also an indication that the company and the MPSC were in the early stages of improving their regulatory relationship after the adverse impact from the Kemper construction project.
The rapid spread of the coronavirus outbreak, severe global economic shock and asset price volatility are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
We expect Mississippi Power to be relatively resilient to recessionary pressures related to the coronavirus because of its rate regulated business model and timely cost recovery mechanisms. Nevertheless, we are watching for electricity usage declines, utility bill payment delinquency, and the regulatory response to counter these effects on earnings and cash flow. As events related to the coronavirus continue, we are taking into consideration a wider range of potential outcomes, including more severe downside scenarios. The effects of the pandemic could result in financial metrics that are weaker than expected; however, we see these issues as temporary and not reflective of the long-term financial profile or credit quality of Mississippi Power.
Environmental considerations incorporated into our credit analysis for Mississippi Power are primarily related to the company's carbon transition risk as well as extreme weather events such as severe storms and tornados. Mississippi Power has a moderate carbon transition risk within the US regulated utility sector because it is a vertically integrated utility that is heavily dependent on natural gas fired generation and a modest amount of coal generation.
Social risks are primarily related to health and safety, demographic and societal trends, as well as customer relations as the company continues to strive to provide reliable and affordable electricity service to customers and safe working conditions for employees. Regarding affordability, we see the potential for rising social risks associated with the coronavirus pandemic and its effect on Mississippi Power's service territory, should unemployment remain high, making customers less able to absorb rate increases.
From a governance perspective, financial and risk management policies including a strong financial profile are important characteristics for managing environmental and social risks. Mississippi Power's governance is based on its ultimate parent, The Southern Company (Baa2 stable). We view its governance as strong based on Southern's governance practices, including alignment with credit supportive benchmarks regarding ownership, control, compliance and reporting practices.
Outlook
The stable outlook is based on the credit supportive rate construct established by the MPSC which includes several timely cost recovery mechanisms which will allow the company to generate consistent and predictable cash flows. The stable outlook reflects our expectation that Mississippi Power will maintain a financial profile that supports its credit quality including a ratio of CFO pre-W/C to debt in the 17-19% range.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to an upgrade
Over the longer term, Mississippi Power could be upgraded if there is further evidence that the regulatory environment has become more credit supportive including additional constructive rate case proceedings and PEP filings with timely recovery of costs and investments; and if the company's financial profile strengthens, including a ratio of CFO pre-W/C to debt sustained above 20%.
Factors that could lead to a downgrade
Mississippi Power could be downgraded if the credit supportiveness of the regulatory environment deteriorates such that costs are not recovered in a timely basis; or if financial metrics weaken, including a ratio of CFO pre-W/C to debt sustained below 16%.
Based in Gulfport, Mississippi, Mississippi Power Company is a vertically integrated utility subsidiary of The Southern Company, providing electricity to over 188,000 retail customers within the state of Mississippi and to wholesale customers in the Southeast. For the 12-month period ending 30 June 2020, Mississippi Power had $1.22 billion in revenues, about $4.8 billion in total assets, and accounted for about 6% of Southern's financial results. The company is regulated primarily by the Mississippi Public Service Commission.
The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, 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 issued the credit rating is available on www.moodys.com.
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
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