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 November 16, 2015 - 3:38 PM EST
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Fitch Rates Southern Power's Senior Notes 'BBB+'

Fitch has assigned a 'BBB+' rating to Southern Power Co.'s $500 million series 2015C 4.15% senior notes due Dec. 1, 2025 and $500 million series 2015D 1.85% senior notes due Dec. 1, 2017. The notes are unsecured and unsubordinated obligations of Southern Power.

Issued as 'Green Bonds', 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. The principal and interest payments on the notes will not be directly tied to the performance of any eligible renewable generation projects but will be made from Southern Power's general funds. The company plans to update investors via a webpage regarding the allocation of net proceeds from these issuances as well as provide an attestation report from an independent accountant. 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 last affirmed the 'BBB+' Issuer Default Rating (IDR) and security ratings for Southern Power on June 5, 2015. 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. Southern Power sells power primarily under long-term power sales agreements with investment-grade counterparties. As of October 31, 2015, the company had contracted approximately 79% of its capacity for the next five years through 2019 and 72% of its capacity over the next 10 years through 2024. Southern Power 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.

Diversification into Solar: Fitch views the company's foray into solar and wind as neutral to its credit profile. These projects benefit from long-term power purchase agreements (PPAs) with creditworthy offtakers. The long PPA contractual term on renewable projects offsets 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. Southern Power currently owns ownership interest in approximately 509 MW of installed solar PV projects and has approximately 676 MWs under construction. The entire output from these facilities has been contracted under long-term power purchase agreements (PPA) with the local regulated utilities. In addition, the company has 450 MWs of wind generation under development that have their output committed to 20-year PPAs.

Jump in Capex: 2015 is shaping up to be a high capex year for Southern Power. The company has exceeded its projected capex guidance of $1.4 billion capex for 2015 and as of Sept. 30, 2015, estimates capex totaling $2.3 billion. This increase was driven by the company's ability to find value-accretive projects in the renewables market. Southern Power is further poised to exceed its projected capex of $1.3 billion for 2016. The company 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.

Cleaner 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 and a growing portfolio of renewable generation projects comprise bulk of its generation portfolio. Fitch expects Southern Power to benefit from the potential retirement of old and inefficient coal capacity in its markets.

Strong Credit Metrics: Fitch expects Southern Power's credit metrics to remain strong through 2015 - 2017. The company's LTM ending Sept. 30, 2015 adjusted debt / EBITDAR and FFO-adjusted leverage metrics are 4.3x and 2.3x respectively. Fitch expects adjusted debt/EBITDAR and FFO-adjusted leverage metrics to approximate 3.5x and 3.3x, respectively, by 2017, both strong relative to Southern Power's rating level.

KEY RATING ASSUMPTIONS

--Capital expenditures exceeding $4 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% - 55%.

RATING SENSITIVITIES

Positive Rating Action: Positive rating actions for Southern Power are 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 recontracting of 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; and

--Debt-funded acquisitions or new development activities.

Date of Relevant Rating Committee: June 5, 2015.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate 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 Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=994185

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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
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
Robert Hornick
Senior Director
+1-212-908-0523
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com


Source: Business Wire (November 16, 2015 - 3:38 PM EST)

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