TEXT-Fitch affirms Southern Co ratings

Wed Aug 22, 2012 5:05pm EDT

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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