S&P Places Ratings of Southern Co. (SO) on CreditWatch Negative Following MPSC Order
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Standard & Poor's Ratings Services placed its ratings on Southern Co. (NYSE: SO), including the 'A' issuer credit rating, on CreditWatch with negative implications. At the same time, we placed our ratings on Southern's utility subsidiaries Mississippi Power Co. (MPC), Georgia Power Co. (GPC), Alabama Power Co. (APC), and Gulf Power Co. (Gulf) on CreditWatch with negative implications, including the 'A' issuer credit ratings.
The MPSC issued an order yesterday directing MPC to submit a plan for lowering rates and refunding to ratepayers up to an estimated $350 million collected over the past few years ($294 million as of March 31, 2015) to begin to pay for the 582 megawatt Kemper County integrated coal gasification combined cycle (IGCC) electric generating plant now nearing completion. "We placed the ratings on CreditWatch with negative implications because the MPSC order suggests a deteriorating regulatory relationship with the company and raises the probability of lower ratings if MPC is required to fully roll back that rate increase and make full, immediate refunds," said Standard & Poor's credit analyst Todd Shipman. Actual Kemper costs have significantly exceeded original estimates, and more than $2 billion has been written off as unrecoverable. The rest of the estimated $6.2 billion of total Kemper costs were scheduled to be recovered through existing rates (which were raised in 2013), securitization of about $1 billion of the costs, and deferral of some costs for later recovery.
Yesterday's order responded to an earlier Mississippi Supreme Court reversal of a 2013 MPSC approval of an 18% rate increase to begin to pay for Kemper. The court ordered rates to be rolled back and refunds be made, but left the details to the commission. An extended period of lower rates combined with sizable refunds would dramatically inflate the size of subsequent rate increases needed for Kemper cost recovery, which would put pressure on the MPSC to disallow further costs. The disarray and the company's failure thus far to contain the risks arising from the court's decision to overturn the MPSC, in combination with recent regulatory recalcitrance in Georgia on oversight of the Vogtle nuclear project, point to rising regulatory risk for Southern as a whole.
A ratings downgrade will depend on the financial and regulatory implications of MPC's proposals to the MPSC for changing its rates and the size and pace of customer refunds, and the commission's response to those proposals. The MPSC order gives MPC 14 days to respond, and the commission's decision could come in early August. We expect Southern to fully support MPC's liquidity needs through the process, and its behavior in funding those and other funding needs in 2015 may also factor into any rating decision. Any scenario that does not preserve or quickly restore rates and limit short-term refunds would raise the risk that more Kemper costs will be unrecoverable and call into question Southern's overall ability to manage regulatory risk, resulting in lower ratings.
We could lower ratings on Southern and its utility subsidiaries if the company does not propose or the MPSC does not adopt a plan that incorporates rates that stay essentially flat and a refund order that allows the company to manage the refund exposure by giving customers optionality on when to receive the refunds. Indication by the MPSC of openness to future rate increases to fully replace the Kemper cost recovery lost through the refunds would reinforce a view that the regulatory risk surrounding Kemper is manageable. Without those elements, or some of them together with actions by Southern to support the balance sheet and credit metrics with equity to offset any actions in Mississippi, we would see a higher probability that substantially more Kemper costs will eventually be disallowed, leading to a possible ratings downgrade because of our perception of higher regulatory risk for Southern.
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