Fitch Rates Southern Power Senior Notes 'BBB+'; Outlook Stable
NEW YORK -- July 12, 2013
Fitch Ratings has assigned a 'BBB+' rating to Southern Power Company's
(Southern Power) issuance of $300 million series 2013A 5.25% senior notes due
July 15, 2043. The notes are senior, unsecured obligations of Southern Power.
The Rating Outlook is Stable.
Southern Power plans to use the net proceeds from the offering to repay a part
of its outstanding short-term debt, which stood at $268 million as of July 9,
2013 and for general corporate purposes, including the company's continuous
capital expenditure program.
KEY RATING DRIVERS
The ratings and Stable Outlook for Southern Power are based upon consistent
credit metrics generated by the company, a disciplined low-risk business
model, visibility of cash flows due to the highly contracted nature of the
generation output, and conservative financial strategy employed by management.
Southern Power sells power primarily under long-term power sales agreements
with investment-grade counterparties. As of March 31, 2013, the company had
contracted an average of 78% of its capacity for the next five years and 71%
of its capacity over the next 10 years. The company is generally able to pass
through fuel costs to its customers under power sales contracts, although it
retains margin exposure to the operating efficiency of its plants. This
results in a high visibility of cash flows and consistent credit metrics over
The company is well positioned relative to other power generators in the face
of more stringent environmental regulations that affect coal and oil-fired
generation, as its fleet mainly consists of modern gas-fired power plants.
Fitch expects Southern Power's generation fleet to benefit from potential
retirement of old and inefficient coal capacity in its region.
Southern Power's 2013 capex is expected to be high at approximately $910
million due to the ongoing construction of the 139 MWs Campo Verde and 30 MWs
Spectrum solar projects; Southern Power owns a 90% ownership interest in each.
The total estimated cost of these two projects is approximately $610 million -
$620 million. Capex requirements for 2014 and 2015 are expected to be $752
million and $736 million, respectively, which include potential plant
acquisitions and new construction projects. Fitch expects Southern Power to
finance new projects and/ or acquisitions with 50% - 55% debt structure.
Fitch expects Southern Power's credit metrics to remain strong until 2015,
excluding the benefit from bonus depreciation. Fitch expects Southern Power's
debt-to-EBITDA and funds from operations (FFO)-to-debt metrics to be
approximately 3.2x and 21%, respectively, in 2015, both strong relative to
Southern Power's rating category.
Southern Power's Stable Rating Outlook is based on ample liquidity and access
to capital both on its own and as a subsidiary of Southern Company,
management's conservative business strategy, and minimal projected external
Positive Action: Positive rating actions for Southern Power are not
anticipated at this time.
Significant Deterioration in Power Demand: Negative rating actions can be
triggered by a significant drop in power demand led by protracted weakness in
economic growth, which could negatively affect recontracting of power
generation output once existing contracts mature.
Aggressive Investment or Financial Strategy: Southern Power's credit rating
could be adversely affected if the company adopts a more speculative stance on
new investments, such as buying or building merchant generation assets without
long-term power purchase agreements, or taking on major construction or
completion risks on unconventional technologies. An aggressive financial
strategy, such as debt-funded acquisitions or new development, could also lead
to downward rating actions.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2012);
--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 12, 2012);
--'Rating North American Utilities, Power, Gas and Water Companies' (May 16,
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Utilities
Rating North American Utilities, Power, Gas, and Water Companies
Corporate Rating Methodology
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Shalini Mahajan, CFA
Fitch Ratings, Inc.
One State Street Plaza
New York, NY, 10004
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