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

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB+' rating to Southern Power's $350 million 3-year series 2015A senior notes and $300 million 5-year series 2015B senior notes. The notes are unsecured and unsubordinated obligations of Southern Power. The net proceeds from the issuances will be used to redeem $525 million of series 2003A senior notes, repayment of all or a portion of outstanding short-term debt, which stood at $309 million as of May 13, 2015, and for general corporate purposes.

Fitch last affirmed the 'BBB+' Issuer Default Rating (IDR) and security ratings for Southern Power on Sept. 18, 2014. 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 FACTORS

Conservative Contracting Strategy: Southern Power sells power primarily under long-term power sales agreements with investment-grade counterparties. The company has 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 time.

Favorable Fuel Mix: Southern Power is well-positioned relative to other power generators in the face of more stringent environmental regulations that affect coal- and oil-fired generation. Its fleet of modern gas-fired power plants comprise 94% of the currently installed capacity of 9,121 MWs. Fitch expects Southern Power's gas generation fleet to benefit from potential retirement of old and inefficient coal capacity in its region.

Expansion into Solar PV: Southern Power has been expanding its solar portfolio, which Fitch views as neutral to its credit profile. Southern Power currently owns ownership interest in approximately 405 MW of installed solar PV projects and has approximately 360 MWs under construction. The entire output from these facilities has been contracted under long-term power purchase agreements (PPA) with the local regulated utilities. The company recently announced its first wind acquisition, the Kay Wind facility, a 299 MW wind project in Oklahoma that is expected to begin commercial operations in late 2015 and has a 20-year PPA for its output.

New Growth Opportunities: Southern Power continues to scout for new investment opportunities that include utility-scale solar, wind projects and natural gas-fired plants. Fitch expects Southern Power to finance new projects and/or acquisitions with 50%-55% debt structure.

Strong Credit Metrics: Fitch expects Southern Power's credit metrics to remain strong through 2015-2017. Fitch expects adjusted debt/EBITDAR and funds from operations (FFO) adjusted leverage metrics to approximate 3.5x and 3.3x, respectively, in 2017, both strong relative to Southern Power's rating level.

KEY RATING ASSUMPTIONS

--Capital expenditures of approximately $2 billion over 2015-17;

--Includes announced projects under construction;

--FFO ratios include investment tax credits for the solar projects during construction;

--Projects under construction financed to maintain overall capital structure at approximately 50%.

RATING SENSITIVITIES

Positive: An upgrade of Southern Power is not likely in the next 12-18 months since Fitch typically caps the IDR of a non-regulated power generation company at 'BBB+'.

Significant Drop in Power Demand: A protracted weakness in economic growth could negatively affect re-contracting of power generation output once existing contracts mature.

Aggressive Investment or Financial Strategy: Buying or building merchant generation assets without long-term PPAs, taking on major construction or completion risks on unconventional technologies, and/or 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 - Including Short-Term Ratings and Parent and Subsidiary Linkage'(May 28, 2014);

--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis'(Nov. 25, 2014);

--'Recovery Ratings and Notching Criteria for Utilities'(March 5, 2015);

--'Rating U.S. Utilities, Power and Gas Companies'(March 11, 2014).

Applicable Criteria and Related Research:

Recovery Ratings and Notching Criteria for Utilities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298

Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis - Effective Dec. 13, 2012 to Dec. 23, 2013

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670

Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984774

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings, New York
Media Relations
Alyssa Castelli, +1-212-908-0540
[email protected]
or
Elizabeth Fogerty, +1-212-908-0526
[email protected]
or
Primary Analyst
Managing Director
Shalini Mahajan, CFA, +1-212-908-0351
or
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY, 10004
or
Secondary Analyst
Director
Julie Jiang, +1-212-908-0708
or
Committee Chairperson
Managing Director
Michael Weaver, +1-312-368-3156

Source: Fitch Ratings

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