Fitch Rates Alabama Power Senior Notes 'A+'; Outlook Stable
NEW YORK -- November 29, 2012
Fitch Ratings has assigned an 'A+' rating to Alabama Power Company's (Alabama
Power) issuance of $350 million series 2012C 3.850% senior notes due Dec. 1,
2042. The Rating Outlook is Stable
The notes are senior, unsecured obligations of Alabama Power and will rank
equally with all other unsecured and unsubordinated obligations of the company
and junior to all secured indebtedness, which stood at approximately $153
million as of Sept. 30, 2012.
The net proceeds from the offering along with other funds at Alabama Power
will be used for redeeming $500 million series 2007D 4.85% senior notes that
mature on Dec. 15, 2012.
The ratings and Stable Outlook for Alabama Power reflect consistent financial
performance and strong credit metrics expected over the next three years
driven by a gradual improvement in industrial sales and timely recovery of
costs through its regulatory mechanisms including Rate Stabilization &
Equalization (RSE). Alabama Power enjoys a constructive regulatory environment
and has consistently earned more than 13% ROE over the last five years.
Alabama Power is expected to incur rising environmental expenditure to bring
its coal dominated generation mix in compliance with the Environmental
Protection Agency (EPA) rules. The environmental cost recovery clauses reduce
the regulatory lag associated with such investments.
Rating concerns for Alabama Power include a high reliance on the industrial
sector, which makes up for approximately 37% of its total MWH sales. A
prolonged economic slowdown or a double-dip recession in a stress case, can
impact Alabama Power's credit metrics. However, while the metrics would see
some degradation, these should continue to be in line with Fitch's guideline
ratios for a low risk 'A' rated utility given the significant headroom that
For the last twelve months ending Sep. 30, 2012, Alabama Power's FFO to debt
stood at 27% and adjusted debt to EBITDA was 2.9x. Fitch expects adjusted debt
to EBITDA ratio to be in a 2.7x-2.75x range over the next three years. FFO to
adjusted debt is expected to moderate to 25% by 2014 after the benefit of
bonus depreciation recedes.
What Could Trigger a Rating Action
Strong Electric Sales Growth: Positive ratings actions for Alabama Power could
be driven by strong electric sales spurred by robust economic growth and
supportive regulatory actions that allow the utility to earn superior credit
Sharp Industrial Slowdown: Negative rating actions for Alabama Power could
result if its service territory witnesses a significant industrial slowdown
that curtails its flexibility to earn attractive ROEs. The industrial slowdown
will have to be much worse than that witnessed during 2008-09 recession to
spur a downward rating action.
Negative Regulatory Outcomes: Any unexpected negative regulatory developments
that cause a mismatch between incurrence and recovery of capital and operating
expenses could lead to negative rating actions.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (May 3, 2012);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16,
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Utilities
Rating North American Utilities, Power, Gas, and Water Companies
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Shalini Mahajan, CFA
One State Street Plaza
New York, NY, 10004
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