TEXT-Fitch affirms Southern Co ratings
Aug 22 - Fitch Ratings has affirmed the Issuer Default Rating (IDR) and security ratings for Southern Company. In addition, Fitch has affirmed the IDRs and debt ratings of Southern Company's subsidiaries, Alabama Power Company (Alabama Power), Georgia Power Company (Georgia Power), Gulf Power Company (Gulf Power), Mississippi Power Company (Mississippi Power) and Southern Power Company (Southern Power). The Rating Outlook for all of the subsidiaries is Stable except for Mississippi Power, which remains Negative. Approximately $22 billion of long-term debt is affected by these rating actions. A complete list of rating actions is provided at the end of this release. Southern Company Southern Company's ratings recognize the financial support that the company gets from its operating subsidiaries in the form of dividends for the payment of corporate expenses, debt-service, dividends to common stockholders, and for other business matters. Southern Company provides equity funding to its subsidiaries for their long-term growth while optimizing their capital mix. Southern Company's regulated utility subsidiaries derive predictable cash flows from low-risk utility businesses, enjoy relatively favorable regulatory framework in their service territories, and exhibit limited commodity price risks due to the ability to recover fuel and purchased power through separate cost trackers. Southern Company's non-regulated generation subsidiary, Southern Power, follows a conservative business model by signing long-term sale contracts with credit worthy counterparties and minimal commodity exposure through recovery of fuel costs through its power supply contracts. Southern Company's consolidated credit metrics are much stronger than pre-recession levels aided by factors such as, bonus depreciation benefits, strong rate case decisions at Georgia Power and Gulf Power, significant fuel recoveries at Georgia Power and steady operating and financial performance at Alabama Power and Southern Power. Electric sales have recovered well across its subsidiaries post the recession, albeit growth has slowed somewhat in 2012 compared with 2011. Regulatory environments remain supportive across all the states it operates in, except in Mississippi. Southern Company's consolidated environmental compliance expenditures remain significant over Fitch's forecast period of 2012-2014, even as these have been ratcheted down from prior expectations due to timing effects. The company is planning to spend approximately $2.3 billion over 2012-2014 on environment capex, which was recently reduced from its prior guidance of $4.2 billion. All of Southern Company's regulated subsidiaries, with the exception of Georgia Power, have environment trackers. Georgia Power has typically recovered environment compliance related costs through base rate case decisions. For the last 12 months (LTM) ending June 30, 2012, the funds flow from operations (FFO) to total debt ratio stood at 24%, which includes the benefit of bonus depreciation, and the adjusted debt to EBITDA ratio stood at 3.8x. Fitch forecasts Southern Company's coverage ratios to remain strong over the forecast period. Fitch expects EBITDA interest coverage to be greater than 6x over 2012-2014 and FFO interest coverage to decline to 5.5x range as the benefit of bonus depreciation subsides. Fitch expects Southern Company's adjusted debt to EBITDA ratio to be approximately 3.3x and FFO to adjusted debt to be approximately 21% by 2014. Fitch's rating concerns for Southern Company include significant construction and regulatory risks associated with the two large baseload projects under construction, namely the 2,200 MW Plant Vogtle nuclear units 3 and 4 being built by Georgia Power and the 580 MW Integrated Gasification and Combined Cycle (IGCC) plant at Kemper being built by Mississippi Power. The Vogtle nuclear units are recovering the financing costs on construction work in progress (CWIP) through a tracker since 2011 and have, as yet, not filed for any adjustment to the total project costs or schedule. Georgia Power is currently negotiating with its contractors for Vogtle regarding a claim filed for cost increases related to the delays in project schedule most significantly due to the timing of approval of the Design Control Document (DCD) and issuance of the combined operating license (COL) by the Nuclear Regulatory Commission (NRC). It is Fitch's expectation that any adjustments to the overall project costs are deemed recoverable by the Georgia Public Service Commission (GPSC). Fitch has assumed a continuation of constructive regulatory support in Georgia during the period of high capital spending. Regarding the Kemper IGCC project, Fitch has several concerns, namely: (1) uncertainty around CWIP recovery given the denial by the Mississippi Public Service Commission (MPSC) of such recovery in June 2012 and the recent Mississippi Supreme Court's denial of Mississippi Power's request for interim rate relief; (2) a hard construction cap of $2.88 billion imposed by the MPSC that exposes the utility to residual risk; (3) untested technology at the proposed scale; and (4) large undertaking for a small utility. At the present time, Fitch's concerns regarding the Kemper IGCC project are not causing any ratings pressure for the parent company. This is based on Fitch's assumption that the project becomes operational within the currently projected capital costs and schedule, and that the MPSC authorizes a timely recovery of both capital and operating costs. The Stable Rating Outlook for Southern Company reflects successful execution of both Vogtle and Kemper construction projects and balanced funding of cash flow deficits. The Stable Outlook also reflects adequate liquidity, financial flexibility, and easy access to capital markets during a period of high capital investment. In the first half of 2012, Southern Company raised approximately $2.5 billion in long-term bond issuances at attractive interest rates. Fitch does not anticipate any positive rating actions for Southern Company in the near future. Negative rating actions could result from a decline in the consolidated credit metrics due to factors such as persistent economic weakness in its service territories, unfavorable regulatory actions and/or higher leverage to support a heavy capital investment program at Mississippi Power and Georgia Power. Significant time/cost overrun on the Vogtle or Kemper projects and negative regulatory actions on recovery of those costs would also be a trigger for downward rating actions. Alabama Power 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 currently exists. Fitch expects adjusted debt to EBITDA ratio to remain in the 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. 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 metrics. Any unexpected negative regulatory developments that cause a mismatch between incurrence and recovery of capital and operating expenses could lead to negative rating actions in the future as also a sharp industrial slowdown in Alabama Power's service territory that curtail its flexibility to continue to earn attractive ROEs. Georgia Power Georgia Power's ratings are supported by the solid financial profile of the integrated utility which benefits from constructive regulation in Georgia that limits regulatory lag. The execution risk associated with the construction of Vogtle units 3 and 4 and the associated external financing needs are also considered in the ratings. The Stable Outlook reflects the expectation that the company will continue to receive constructive regulatory treatment of the pre-approved nuclear projects including recovery of costs during the construction period. Capital projects, in addition to Georgia Power's $6.1 billion share of Vogtle costs, include up to 2,500 MWs of gas-fired combined cycle capacity at Plant McDonough that will be used to replace retiring coal-fired capacity. Coal-fired power plants will require ongoing spending for environmental compliance. Georgia Power's annual capital expenditures are forecasted to be in the $2 billion-$2.5 billion range over 2012-2014, or approximately three times depreciation, for the next few years. This is a high level relative to peer electric utilities. Approximately 36% of these expenditures are related to new generation projects and 13% related to environmental expenditures. Georgia Power's revenue increases resulting from the December 2010 base rate settlement, bonus depreciation and significant fuel recoveries have resulted in strengthening of cash flow credit measures. This has allowed Georgia Power to embark on a heavy capital investment program with strong credit metrics. Georgia Power's FFO interest coverage ratio was 7.3x for the LTM ended June 30, 2012, and FFO to adjusted debt was 24.5%. Fitch anticipates a gradual decline in Georgia Power's financial ratios until 2014 under the current three-year rate settlement. Fitch expects Georgia Power's coverage metrics to remain strong relative to its rating category until 2014, however, the leverage ratios are expected to be modestly weaker reflecting the pressure from a large capital intensive construction program. Fitch forecasts Georgia Power's adjusted debt to EBITDA and FFO to adjusted debt to be approximately 3.3x and 21.5%, respectively, in 2014. Successful execution of nuclear plant construction and continued regulatory support is key to maintaining rating stability at Georgia Power. In this regard, Fitch will continue to monitor the construction timelines, frequency and nature of any license amendment requests to the NRC, potential escalation of the project costs, and outcome of the periodic monitoring reports filed by Georgia Power at the GPSC. Positive rating actions for the utility are unlikely while the Vogtle project is underway. On the other hand, cost overruns or schedule delays in the Vogtle construction could pressure cash flow and ratings. Significant project cost overruns that cannot be recovered in rates or unexpected long deferral periods for project costs would be adverse credit factors. In addition, any adverse change in Georgia Power's relations with the GPSC, which is currently not anticipated, would also likely lead to negative rating action. Gulf Power The ratings and Stable Outlook for Gulf Power reflect predictable cash flows from regulated electric operations, a slow but steady improvement in retail sales after a deep economic downturn, return to a more orderly and constructive regulatory environment in Florida, and steadily improving credit metrics from 2009 cyclical lows. Gulf Power's service territory continues to see slow but steady improvement in the local economy with economic indicators such as housing starts, unemployment and income growth, all showing positive trends. The utility enjoys several rate riders that provide timely recovery of all prudent costs related to fuel, purchased costs and environmental expenditures. While Gulf Power is heavily dependent on coal fired generation capacity that must comply with stringent emissions standards, the fuel and environmental recovery clauses promote timely recovery of associated costs. Gulf Power achieved a constructive outcome in its recently concluded rate case. The Florida Public Service Commission authorized a $64.1 million rate increase for Gulf Power and an additional $4 million step up increase in 2013. The rate increases are based on a midpoint ROE of 10.25% and an authorized retail ROE range of 9.25%-11.25%. As a result, Fitch expects Gulf Power's credit metrics to be much stronger than these have been historically. Fitch forecasts Gulf Power's adjusted debt to EBITDA and FFO to adjusted debt to be approximately 3.5x and 20.5%, respectively, in 2014, which is in line with its rating category. Positive rating actions for Gulf Power are not anticipated at this time. Negative rating actions could be triggered by unexpected negative regulatory developments or extended weakness in Florida economy. Mississippi Power The ratings for Mississippi Power reflect several supportive regulatory mechanisms in place that provide timely recovery of prudent costs related to fuel, purchased power, storm restoration, and environmental expenditure, and projected future test year data to determine base rates. As a result, Mississippi Power's historical credit metrics have typically been very stable. There has risen, however, significant risk of recovery lag from the current large construction program related to Kemper IGCC project due to recent actions taken by the MPSC. The key near-term uncertainty at Mississippi Power remains the cost of recovery of financing costs associated with the construction of the Kemper project. The uncertainty stems for the MPSC's June 2012 decision to deny Mississippi Power's revenue increase request to earn a cash return on CWIP associated with the Kemper IGCC plant. Mississippi Power appealed the MPSC's denial of CWIP to the Mississippi Supreme Court and requested interim rate relief. The Mississippi Supreme Court denied Mississippi Power's request for interim rate relief. Mississippi Power's appeal of the MPSC's denial of CWIP is still pending before the Mississippi Supreme Court. The MPSC's decision to deny CWIP to Mississippi Power raises the risk of a significant and unpalatable rate shock to Mississippi Power's customers given the utility is likely to continue to construct the plant and capitalize the financing costs. Fitch is also concerned with the escalation in capital costs of the Kemper IGCC project. The latest revised project cost estimate of $2.88 billion is also the hard cap imposed by the MPSC for plant construction. If the cost of the plant exceeds $2.88 billion, the excess may not be recoverable from utility customers, a source of potential credit risk for Mississippi Power. The delay in recovery of financing costs has already caused significant stress on Mississippi Power's credit metrics. For the LTM ending June 30, 2012, the FFO to total debt ratio declined to 12.2% and the leverage ratio increased to 7.6x, which is significantly below historical metrics and Fitch's guidelines for Mississippi Power's current rating category. Excluding the impact of Kemper IGCC, Fitch believes the underlying financial metrics of the utility remain strong. Fitch's financial analysis indicates that if the project becomes operational within the currently projected capital costs and schedule, and based on the assumption that the MPSC authorizes a timely recovery of both capital and operating costs, Mississippi Power's credit metrics are expected to revert to Fitch's guideline ratios of a low risk 'A-' rated utility company by 2015. Until then, however, Fitch expects the utility's credit metrics to remain considerably weak. The Negative Outlook reflects rising regulatory risks for the company in addition to the construction and operational risks associated with the IGCC project. Fitch expects the Negative Outlook to persist until there is sufficient clarity regarding the cost recovery mechanisms for Kemper project as well as final confirmation of the capital costs. Fitch views the Mississippi Supreme Court's decision regarding Mississippi Power's appeal of the MPSC's denial of CWIP as the next key event to monitor. Southern Power The ratings and Stable Outlook for Southern Power is 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. External funding requirements are minimal. Southern Power is generally able to pass through fuel costs to its customers under power sales contracts, although the company retains margin exposure to the operating efficiency of its plants. 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. Fitch expects Southern Power's credit metrics to strengthen until 2014, excluding the benefit from bonus depreciation. Fitch expects Southern Power's debt to EBITDA and FFO to debt metrics to be approximately 3.2x and 21%, respectively, in 2014, 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 relatively low projected external funding requirements. Rating concerns include decline in electric demand due to a prolonged economic slowdown. Positive rating actions for Southern Power are not anticipated at this time. Negative rating actions can be triggered by deterioration in credit metrics due to weak sales demand led by protracted weakness in economic growth. Debt funded acquisitions or new development could also lead to downward rating actions. Fitch affirms the following ratings with a Stable Outlook: Southern Company --Long-term IDR at 'A'; --Short-term IDR at 'F1'; --Commercial paper at 'F1'; --Senior unsecured notes at 'A'. Southern Company Funding Corp. --Short-term IDR at 'F1'; --Commercial paper at 'F1'. Alabama Power Company --Long-term IDR at 'A'; --Short-term IDR at 'F1'; --Commercial paper at 'F1'; --Senior unsecured notes at 'A+'; --Pollution control revenue bonds at 'A+' and 'F1'; --Preferred securities at 'A-'. Alabama Power Company Capital Trust V --Trust preferred stock at 'A-'. Georgia Power Company --Long-term IDR at 'A'; --Short-term IDR at 'F1'; --Commercial paper at 'F1'; --Senior unsecured notes at 'A+'; --Pollution control revenue bonds at 'A+' and 'F1'; --Preferred securities at 'A-'. Gulf Power Company --Long-term IDR at 'A-'; --Short-term IDR at 'F1'; --Commercial paper at 'F1'; --Senior unsecured notes at 'A'; --Pollution control revenue bonds at 'A'and 'F1'; --Preferred securities at 'BBB+'. Southern Power Company --Long-term IDR at 'BBB+'; --Short-term IDR at 'F2'; --Senior unsecured debt at 'BBB+'. Fitch affirms the following ratings with a Negative Outlook: Mississippi Power Company --Long-term IDR at 'A-'; --Short-term IDR at 'F1'; --Commercial paper at 'F1'; --Senior unsecured notes at 'A'; --Pollution control revenue bonds at 'A'and 'F1';
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