Fitch Rates Southern Power's Senior Notes 'BBB+'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB+' rating to Southern Power Co.'s EUR600 million series 2016A 1.000% senior notes due June 20, 2022 and EUR500 million series 2016B 1.850% senior notes due June 20, 2026. The notes are unsecured and unsubordinated obligations of Southern Power.

The net proceeds from the issuances will be used to fund Southern Power's investments in renewable energy generation, namely solar and wind power generation projects in the U.S. Pending allocation of net proceeds to eligible renewable generation projects, the company will use a portion of the net proceeds to repay a portion of outstanding indebtedness.

Fitch affirmed the 'BBB+' Issuer Default Rating (IDR) and security ratings for Southern Power on May 12, 2016. Southern Power's ratings and Stable Outlook reflect Fitch's view that the company will continue to operate its portfolio of nonregulated generation assets with a conservative strategy that seeks to minimize commodity risk and maintain a balanced capital structure that generates strong credit metrics.

KEY RATING DRIVERS

Conservative Contracting Strategy: Southern Power's ratings are underpinned by its conservative contracting strategy. The company sells power primarily under long-term power sales agreements with investment-grade counterparties. As of April 30, 2016, the company had an average investment coverage ratio of 91% for the next five years and 90% for the next 10 years with an average contract duration of 18 years. Southern Power is generally able to pass through fuel costs to its customers under power sales contracts for its natural gas generation assets, although it retains margin exposure to the operating efficiency of its plants. For the renewable generation projects, Southern Power retains volumetric risks associated with resource variability.

Significant Expansion in Renewable Generation: Fitch views the company's foray into solar and wind as largely neutral to its credit profile at this time. These projects benefit from long-term power purchase agreements (PPAs) with creditworthy offtakers. The long PPA contractual term on renewable projects is offsetting the decline in contract coverage on the natural gas portfolio. Fitch views the technological, completion and operational risks of the solar and wind projects as manageable.

Elevated Near-Term Credit Metrics: Fitch expects Southern Power's leverage-based credit metrics to be elevated in the near term primarily influenced by the delay in using the investment tax credits (ITC). Bonus depreciation has reduced the tax appetite of the company and deferred the recognition of ITCs. For year-end 2015, Southern Power's funds from operations (FFO) adjusted leverage jumped to 5.2x. Fitch expects this measure to moderate to 2.7x by 2018. FFO fixed charge coverage is expected to average around 7.4x over the forecast period. These estimates include a capex estimate of $5 billion over 2016-2018.

KEY ASSUMPTIONSFitch's key assumptions within our rating case are as follows:

--Growth projects as announced;--Funding of growth capex at approximately 55% debt;--2016-2018 FFO ratios include ITCs for the solar projects during construction.

RATING SENSITIVITIES

Positive Rating Action: Positive action is not anticipated at this time, since Fitch typically caps the IDR of a non-regulated power generation company at 'BBB+'.

Negative Rating Action: Future developments that may, individually or collectively, lead to a downgrade include:

--Significant deterioration in power demand, which could negatively affect re-contracting of natural gas-fired power generation output once existing contracts mature;--Aggressive investment strategies, such as buying or building merchant generation assets or taking on major construction or completion risks on unconventional technologies;--Debt-funded acquisitions or new development activities.

LIQUIDITY

Southern Power has good liquidity for its seasonal needs and capital spending under a $600 million revolving credit facility expiring in 2020, which is generally used to back up short-term commercial paper (CP) borrowings. The facility has a 65% debt/capitalization ratio covenant. Southern Power can access the CP market on its own. The company does not conduct short-term borrowings via the Southern Company Funding Corp., an affiliate that issues CP for the regulated utilities subsidiaries of Southern Company. As of March 31, 2016, Southern Power had $53 million of cash and cash equivalents and $560 million in unused revolver capacity.

Date of Relevant Rating Committee: May 12, 2016.

Additional information is available on www.fitchratings.com.

Applicable CriteriaCorporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional DisclosuresSolicitation Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1006097Endorsement Policyhttps://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160615006296/en/

Fitch Ratings
Primary Analyst
Shalini Mahajan, CFA
Managing Director
+1-212-908-0351
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY, 10004
or
Secondary Analyst
Julie Jiang
Director
+1-212-908-0708
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Alyssa Castelli, New York, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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