Moody’s Investors Service said May 27 that it was putting long-term ratings of Southern’s (NYSE:SO) utility subsidiary Mississippi Power (Baa1 senior unsecured) on review for downgrade.
The VMIG-2 rating on Mississippi Power’s revenue bonds is not on review. Moody’s affirmed the ratings of the Southern Co. (Southern, Baa1 senior unsecured) with a stable outlook.
“The review of Mississippi Power’s ratings is prompted by last week’s decision by the electric cooperative South Mississippi Electric (SME) to terminate its 15% ownership interest in the Kemper IGCC plant, increasing concentration risk and uncertainty over the recovery of these additional costs,” said Michael G. Haggarty, associate managing director.
“The decision comes at a critical time for Mississippi Power as it filed for substantial rate increases earlier this month to recover Kemper project costs following the rejection of their previous rate plan by the Mississippi Supreme Court,” added Haggarty. Mississippi Power has filed for a rehearing of the Supreme Court’s decision.
On May 15, before the SME announcement, Mississippi Power filed three separate rate plans with the Mississippi Public Service Commission (MPSC), two requesting rate increases close to 40% over two years, while the third largely incorporated the rate mitigating elements of the previously rejected rate plan, including the issuance of $1bn of securitization bonds.
The utility also continues to engage in settlement discussions with the Mississippi Public Utilities Staff. Mississippi Power could choose to amend the rate plans to include its additional 15% ownership share in the plant, “but we believe will likely leave this portion as part of its wholesale rates or sell this power on a merchant basis and not pursue recovery from retail ratepayers,” Moody’s said.
Kemper IGCC troubles spooked South Mississippi Electric
SME attributed its decision to delays in the Kemper project schedule, its own changing power needs, and increased participation costs in the project. The cooperative also cited the rate impact on its member customers. Under the Asset Purchase Agreement between the two utilities, Mississippi Power is required to refund SME’s $275m deposit plus interest, or approximately $300m, within 15 days. “The deposit is guaranteed by Southern, which we expect will fund the return of the deposit, although it will ultimately likely be the obligation of Mississippi Power,” Moody’s said.
The Kemper project has been plagued by schedule delays and cost overruns over the last two years and Mississippi Power now expects the plant to begin commercial operation during the first half of 2016. The company originally estimated construction costs of $2.4bn, net of government incentives, and the MPSC agreed to cap recoverable costs at $2.88bn. However, the cost has been revised upward several times and was most recently increased to $4.94bn (or $6.2bn in total, including peripheral items like the lignite mine and CO2 pipeline, which are excluded from the cost recovery cap). This is more than twice the original estimates, resulting in approximately $2bn of write-downs by Mississippi Power and Southern for those costs above the recoverable cap.
The review will consider Mississippi Power’s plans for recovering the nearly $600m of additional costs associated with the return of SME’s share, including any impact on its pending retail rate proceedings.
The Moody’s review will focus on the financial implications of the rate plan ultimately approved by the MPSC and the impact on retail customers, including any successful resolution of pending settlement discussions.
The review will assess the ongoing progress of construction, including the potential for additional cost increases and schedule delays as the plant enters the critical startup and execution phase.
The rating agency review will also consider the prospects that the additional 15% share of the Kemper plant’s output could be sold under contract to another utility or left uncovered to be sold in the spot market. Finally, the review will take into consideration the ongoing support and commitment of the parent company Southern to both Mississippi Power and to the completion and successful commercial operation of the Kemper project, Moody’s said.
Moody’s notes that the Kemper project has been supported by only two of the three Commissioners on the MPSC, both of whom are leaving the Commission at the end of 2015. With all three seats up for election, there is a risk that the composition of the Commission could change and regulatory support for the plant diminish in 2016, making the current rate proceeding particularly important in providing clarity on the permanent recovery of Kemper project costs.