Moody's Investors Service has downgraded Southern (NYSE:SO) utility subsidiary Mississippi Power over lingering questions over rate recovery for the Kemper integrated gasification combined-cycle (IGCC) power plant.
Moody's downgraded Mississippi Power's senior unsecured rating to Baa2 from Baa1 and its preferred stock rating to Ba1 from Baa3. The rating outlook is negative, Moody’s said Aug. 14.
This rating action concludes the review of Mississippi Power's rating initiated on May 27. Moody’s affirmed the ratings of the Southern parent (Southern, Baa1 senior unsecured) with a stable outlook.
"The downgrade of Mississippi Power's ratings reflects the lack of permanent cost recovery provisions in place for the Kemper IGCC plant since the Mississippi Supreme Court invalidated the utility's 2013 rate plan earlier this year," said Michael G. Haggarty, Associate Managing Director. "The downgrade also considers the increased concentration risk, financial exposure and liquidity pressure on the utility following the exit of its electric cooperative utility partner from a planned 15% ownership in the Kemper plant," added Haggarty.
Although the Mississippi Public Service Commission (MPSC) approved interim rates by a two to one margin yesterday, providing the utility with some limited, potentially refundable rate relief on the plant's in-service assets and averting a potentially more negative rating action, there is still no permanent cost recovery plan in place for the Kemper plant. The lack of a unanimous decision on a utility's appeal for emergency financial relief is a particular credit concern, Moody’s said.
In addition, some interveners may challenge the approval of these interim rates. The negative outlook reflects the financial uncertainty still facing Mississippi Power as it strives to obtain permanent rate relief on the Kemper plant with only two of the three commissioners supportive.
Under a scheduling order issued by the MPSC earlier this week, hearings on designating these interim rates as permanent, including determining the prudency of the costs incurred for the in-service assets, are scheduled for November with a final order to be issued by Dec. 8.
The negative outlook also reflects Mississippi Power's constrained liquidity position and high reliance on parent company Southern for liquidity support. As a result of the Supreme Court decision, the MPSC ordered the utility to stop collecting the rates that had been in place since 2013 and to submit a plan for refunding those amounts already collected. The approximately $350m of refunds will put additional stress on Mississippi Power's cash flow coverage metrics and increase its reliance on the Southern parent company for intercompany loans and other financial support.
Mississippi Power already borrowed $301m from Southern in June through an 18-month promissory note to fund the return of the deposit to South Mississippi Electric, its former 15% partner in the Kemper project. For external financing, the utility is relying almost exclusively on short-term bank term loans ($900m due April 1, 2016) in anticipation of a potential securitization of a portion of the Kemper costs, approval of which is by no means assured, Moody’s said.