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Fitch Affs Rtgs & Revises Southern Co's Outlook to Negative; Dwngrs Mississippi Power's IDR to 'A'

^{Published on 2010-09-03 12:51:00 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch has taken various rating actions on the ratings of Southern Co. (NYSE: SO), Mississippi Power, and SO's subsidiaries, including affirming the Issuer Default Ratings (IDRs) and debt ratings of SO, and revising the Outlook to Negative from Stable. Approximately $18.1 billion of long-term debt is affected by these rating actions.

In addition, Fitch has downgraded the IDR and security ratings for Mississippi Power Company (MPC), and affirmed the IDRs and debt ratings of SO's other subsidiaries, Alabama Power Company (APC), Georgia Power Company (GPC), Gulf Power Company (Gulf Power) and Southern Power Company (SPC). The Rating Outlook for all of the subsidiaries is Stable except for GPC, which remains Negative. Approximately $18.1 billion of long-term debt is affected by these rating actions. (See the full list of rating actions below.)

The one-notch downgrade for MPC reflects the higher business risk assumed by the utility with its decision to proceed with the proposed Kemper County Integrated Gasification Combined Cycle (IGCC) project. Fitch views the Kemper County IGCC as a relatively large and complex project for a utility of MPC's size. In addition, the hard construction cost cap and specific operating parameters imposed by the Mississippi Public Service Commission (MPSC) with its approval of the project elevate the construction and operating risks for MPC. Fitch expects MPC's EBITDA- based credit metrics to weaken during the construction cycle, and there is a risk of cost overruns beyond the $2.88 billion cost cap imposed by the MPSC which is $480 million above MPC's current estimated cost to build. The Stable Outlook reflects moderate growth in MPC's service territory, supportive regulatory framework, manageable debt maturities and ample liquidity. Fitch will continue to monitor the progress of the IGCC project, which is expected to have important bearings on the future credit quality and ratings of the utility.

The revision of SO's Outlook to Negative reflects concerns around rising business risk at several of its utility subsidiaries. For GPC and MPC, the higher business risk is driven by their undertaking of large, complex baseload projects. Gulf Power is facing an uncertain regulatory environment in Florida and a recovering, albeit still weak, economy. A high reliance on the industrial sector in a backdrop of slow economic recovery is likely to affect cash flows for APC, MPC and GPC. Finally, potential stringent environmental rules on coal-fired plants would weigh on SO's utilities because of the predominant coal mix in their generation. The cost of electricity for customers in SO's service territory will likely increase if more stringent controls are mandated and could impact the return on equity (ROE) its subsidiaries may receive in the future.

Consolidated credit metrics for SO have moved downwards in the recent years. For the last 12 months (LTM) ending June 30, 2010, funds flow from operations (FFO) to total debt stood at 18%; this has gradually declined from the 23% level five years ago. Similarly, total debt to EBITDA has been creeping up and stood at 3.9 times (x) for the LTM ending June 30, 2010. In Fitch's view a number of things have to go right to restore SO's credit metrics to their historical strength and prompt an Outlook revision back to Stable. These include robust recovery in load across the service territories of its utilities, a constructive rate outcome in the pending rate case at GPC, and successful execution of the large baseload construction program at GPC and MPC.

Key rating drivers for SO are execution of the baseload construction program at GPC and MPC, outcome of the pending base rate case at GPC, the economic conditions across the service territories, and regulatory support.

SO'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, and for other business matters. SO provides equity funding to its subsidiaries for their long-term growth while optimizing their capital mix. SO's regulated utility subsidiaries derive predictable cash flows from low-risk utility businesses, enjoy favorable regulatory framework in their service territories, and exhibit limited commodity price risks due to the ability to recover fuel and purchased power through a separate cost tracker. SO's ratings also reflect adequate liquidity, financial flexibility, and ready access to the capital markets.

GPC's ratings are supported by its low-risk utility business, a constructive state regulatory regime, manageable debt maturities, and strong operation of predominantly baseload electric generation assets. Based on first-half 2010 financial results, GPC's credit metrics have recovered somewhat from 2009 cyclical lows, driven by favorable weather and a rebound in industrial sales, yet remain modestly weak for its rating category. Fitch anticipates the weakness in credit metrics to persist as electric demand recovers slowly to pre-recession levels and capital expenditures remain elevated, partially offset by a phased-in recovery of the under-recovered fuel balance as stipulated by the 2010 fuel case. A constructive rate outcome in the pending base rate case, expected to be resolved before the end of 2010, is crucial to re-align GPC's credit metrics to Fitch's expectation for an 'A' rated utility and could result in a reversion to a Stable Rating Outlook. A less-than-constructive decision, however, would likely result in a one-notch downgrade of the long-term IDR.

The ratings and Stable Outlook for APC 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) and environment cost recovery clauses. Fitch sees enough room in the credit metrics to absorb a prolonged period of economic slowdown in APC's service territory; this was demonstrated during the stressed economic conditions of last year. APC enjoys a constructive regulatory environment and has consistently earned more than 13% ROE over the last five years. APC has nominal external funding requirements due to a modest capex program relative to operating cash flow and manageable debt maturities over the next three years.

The ratings and Stable Outlook for Gulf Power reflect Fitch's expectation that the credit metrics should improve from the 2009 cyclical lows. The utility enjoys several rate riders that provide timely recovery of all prudent costs related to fuel, purchased costs and environmental expenditures. Fitch expects the Florida economy and the uncertain regulatory situation in the state to gradually improve so as to allow Gulf Power to seek and receive appropriate rate relief in a timely manner.

The ratings and Stable Outlook for SPC 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. The commodity price risk is very low as fuel costs are passed-through to the customers under the contract. External funding requirements are minimal.

Fitch has downgraded the following, with a Stable Outlook:

Mississippi Power Company

--Long-term IDR to 'A' from 'A+';

--Short-term IDR to 'F1' from 'F1+';

--Commercial Paper to 'F1' from 'F1+';

--Senior Unsecured Notes to 'A+' from 'AA-';

--Pollution Control Revenue Bonds to 'A+' from 'AA-';

--Preferred Securities to 'A-' from 'A'.

Fitch affirms the following, with a Stable Outlook:

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+';

--Preferred Securities at 'A-'.

Alabama Power Company Capital Trust V

--Trust Preferred Stock 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';

--Subordinated Notes at 'A-';

--Preferred Securities at 'BBB+'.

Southern Power Company

--Long-term IDR at 'BBB+';

--Short-term IDR at 'F2';

--Senior Unsecured Notes at 'BBB+'.

Fitch affirms the following:

Southern Company Funding Corp.

--Short-term IDR at 'F1';

--Commercial Paper at 'F1'.

Fitch affirms the following, with a Negative Outlook:

Southern Company

--Long-term IDR at 'A';

--Short-term IDR at 'F1';

--Commercial Paper at 'F1';

--Senior Unsecured Notes at 'A'

Southern Company Capital Funding, Inc. (Guaranteed by Southern Company)

--Long-term IDR at 'A';

--Senior Unsecured Notes 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+';

--Preferred Securities at 'A-'.

Georgia Power Capital Trust VII

--Trust Preferred Securities at 'A-'.

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

Applicable criteria available on Fitch's website at '[ www.fitchratings.com ]' include:

--'Corporate Rating Methodology', Aug. 16, 2010

--'Credit Rating Guidelines for Regulated Utility Companies' July 31, 2007

--'U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines' Aug. 22, 2007

--'Utilities Sector Notching and Recovery Ratings', March 16, 2010.

Related Research:

Credit Rating Guidelines for Regulated Utility Companies

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=334652 ]

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

Utilities Sector Notching and Recovery Ratings

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=504546 ]

U.S. Power and Gas Comparative Operating Risk (COR) Evaluation and Financial Guidelines

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=338030 ]

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