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
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
--Projects under construction financed to maintain overall capital
structure at approximately 50% - 55%.
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
--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'.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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