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Rating Action:

Moody's affirms Southern Power Company at Baa1; stable outlook

26 Aug 2015

Approximately $1.7 billion of debt securities affirmed

New York, August 26, 2015 -- Moody's Investors Service affirmed Southern Power Company's ratings, including its senior unsecured and Issuer ratings at Baa1 and its short-term rating for commercial paper at Prime-2. Moody's also assigned (P)Baa1, (P)Baa3 ratings to Southern Power's new multi-seniority shelf registration. The rating outlook is stable.

RATINGS RATIONALE

"The affirmation of Southern Power's ratings considers its thus far measured expansion into renewable energy on a national scale, diversifying its generation mix away from its predominantly gas fired roots in the Southeast," said Michael G. Haggarty, Associate Managing Director. "The company's growing renewable portfolio is fully contracted for 20 years or more, largely offsetting the modest decline contractual coverage of its natural gas generation assets, where contract renewals have been adversely affected by market conditions, including persistently low natural gas prices and current high reserve margins".

The percentage of Southern Power's available capacity that is contracted over the next five years (through 2019) is 77%, while the percentage contracted over ten years (through 2024) is 70%, including three new renewable generation projects expected to come on line in 2015. The average duration of its contracts has also declined from nearly 12 years in some previous years to 10 years at the end of 2014 (up slightly from 9 years at the end of 2013). The declining tenor of its gas contracts has been mostly offset by the longer tenor of contracts associated with its growing renewable portfolio. Most of Southern Power's contracts are with investment grade counterparties, which include both parent Southern Company's regulated utility subsidiaries and unaffiliated wholesale power purchasers.

Southern Power's wholesale power contracts include provisions that pass through the cost of fuel and related transportation in most circumstances. However, the company is responsible for fuel costs on the portion of its power not sold under PPAs, which represented about 21% of total revenues in 2014. This power is sold at market rates or to Southern Company affiliates. In addition, if a particular generating facility does not meet the operational requirements contemplated within a PPA, Southern Power may be responsible for excess fuel costs.

Southern Power projects capital expenditures of $1.4 billion in 2015 and $1.3 billion in 2016 before declining to $407 million in 2017, assuming its growth into renewables slows beyond 2016. The company has already identified projects to account for all of its projected capital spending for 2015, including the 299 MW Kay Wind facility, as well as the Decatur, Lost Hills, and North Star solar facilities (191 MW in total). The acquisition of the Kay Wind facility represents the company's first wind project and demonstrates a change in the company's view of wind, which it had not invested in historically.

Southern Power's cash flow coverage metrics have benefitted from the substantial use of investment tax credits on solar projects, as well as the positive cash impact of bonus deprecation, over the last few years. As a result, the company's cash flow pre-working capital (CFO pre-W/C) to debt ratio was in the robust 40% range in both 2012 and 2013, before falling to 15% in 2014. The decline in 2014 can be attributed to the carry forward of $305 million of investment tax credits into 2015, which negatively affected CFO pre-W/C. After adjusting for these ITC carry forwards, CFO pre-W/C to debt would have been in the 30% range in 2014, adequate for its current Baa1 rating. The company projects $1.2 billion of debt issuances over the three year period from 2015 to 2017, approximately $525 million of which was used to refinance debt due in July 2015. There are no additional major debt maturities until 2036.

Southern Power maintains adequate liquidity, financing its working capital needs with a commercial paper program sized at $500 million. The company had no commercial paper outstanding at 30 June 2015. In February 2013, Southern Power amended its $500 million bank credit facility supporting this commercial paper program and extended its maturity date to 2018 from 2016. There was $34 million drawn under the facility as of 30 June 2015. The credit agreement can be used for working capital and general corporate purposes as well as to provide liquidity support for its commercial paper program.

Outlook

The stable outlook reflects Moody's expectation that Southern Power will continue to execute on its comparatively low risk business strategy, that it will reverse the declining trend in percentage of capacity under long-term contract; and that acquisitions or additional renewable energy investments outside of its core Southeast natural gas generation business will remain fully contracted over the long-term, diversifying the company away from natural gas fired generation.

What Could Change the Rating Up

An upgrade is unlikely until there is a material increase in the level of capacity under long-term contracts in conjunction with strong, sustained less ITC driven credit metrics, including CFO pre-W/C to debt ratio in the low 30% range or above.

What Could Change the Rating Down

A downgrade could occur if long-term contractual coverage declines, if there is an increased reliance on non-PPA revenues, if the company undertakes a major debt financed acquisition, if there is an expansion into generating assets without long-term contractual coverage and/or fuel pass through, or if Southern Power's credit metrics were to decline including CFO pre-W/C to debt ratio below 25% for an extended period.

Other Considerations

Southern Power had previously been evaluated under Moody's Regulated Electric and Gas Utilities rating methodology due to its historical position as a mostly contracted, natural gas generation company operating solely in the fully regulated, southeastern states of Alabama, Georgia, Florida, and North Carolina. The company has more recently expanded into contracted solar, wind, and biomass generation in both the south and Midwest, adding plants in California, Nevada, New Mexico, Oklahoma, and Texas. As a result, the company is now evaluated under our Unregulated Utilities and Unregulated Power Companies rating methodology, published in October 2014. This methodology applies to companies engaged in the production and/or sale of electricity and natural gas in unregulated markets. Although Southern Power's legacy natural gas assets operate with a high level of contractual coverage in regulated markets, its more recent expansion into PPA-based renewable generation in unregulated markets as well as a material percentage of its revenues not covered by PPAs, makes the Unregulated Utilities and Unregulated Power Companies methodology the most applicable.

Southern Power Company (SPC) is a wholly owned subsidiary of The Southern Company engaged in the construction, ownership and management of wholesale electric power generation.

Affirmations:

..Issuer: Southern Power Company

.... Issuer Rating, Affirmed Baa1

....Senior Unsecured Bank Credit Facility (Local Currency), Affirmed Baa1

....Senior Unsecured Regular Bond/Debenture (Local Currency), Affirmed Baa1

....Senior Unsecured Commercial Paper (Local Currency), Affirmed P-2

Assignments:

....Preference Stock Shelf (Local Currency), Assigned (P)Baa3

....Senior Unsecured Shelf (Local Currency), Assigned (P)Baa1

Outlook Actions:

....Outlook, Remains Stable

The methodology used in these ratings was Unregulated Utilities and Unregulated Power Companies published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine this credit rating.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Michael G. Haggarty
Associate Managing Director
Infrastructure Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

William L. Hess
MD - Utilities
Infrastructure Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Southern Power Company at Baa1; stable outlook
No Related Data.
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