Fitch Rates Alabama Power Senior Notes 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to Alabama Power Company's (Alabama Power) issuance of $300 million series 2013A 3.55% senior notes due Dec. 1, 2023. The Rating Outlook is Stable.

The notes are senior, unsecured obligations of Alabama Power and will rank equally with all other unsecured and unsubordinated obligations of the company and junior to all secured indebtedness, which stood at approximately $158 million as of Sept. 30, 2013.

The net proceeds from the offering will be used by Alabama Power for general corporate purposes including the company's continuous construction program.

KEY RATING DRIVERS

The ratings and Stable Outlook for Alabama Power reflect Fitch's view that the utility will continue to generate strong credit metrics over the next three years driven by a gradual improvement in industrial sales and rate increases under the Rate Stabilization & Equalization (RSE) mechanism and environmental cost recovery clauses. Alabama Power has a constructive regulatory environment and has consistently earned more than 13% ROE over the last five years. Cost-of-service recovery mechanisms provide timely recovery of all prudent costs through various rates/cost trackers, such as those incurred for fuel, purchased power, storm costs, environmental expenditures and new generation facilities.

Alabama Power recently received a favorable outcome from the Alabama PSC regarding review of its RSE mechanism. The PSC voted to replace the current ROE range of 13% - 14.5% and allowed equity ratio of 45% with a weighted cost of equity (WCE) provision. The WCE range was established by the PSC at 5.75% -6.21% with an adjusting point of 5.98%, which is modestly lower than the implied WCE range under current rates of 5.85%-6.53% with an adjusting point of 6.19%. In addition, Alabama Power will be eligible for a performance-based adder of 0.07% if it is rated 'A' by at least one of the major credit rating agencies or is ranked the top one-third in the most recent customer satisfaction survey. The resolution of the RSE review was in line with Fitch's expectation and removes a key source of regulatory uncertainty for Alabama Power.

Rating concerns for Alabama Power include a high reliance on the industrial sector, which makes up 37% of its total MWH sales. The dominant industrial customers in its service territory comprise chemicals, pipelines, primary metals and pulp and paper. Fitch sees enough room in the credit metrics to absorb a prolonged period of economic slowdown in Alabama Power's service territory; this was demonstrated during the stressed economic conditions of the year 2009. Fitch expects adjusted debt to EBITDA ratio to be approximately 3.2x over the next three years. Funds from operations (FFO) to adjusted debt is expected to moderate to 22% by 2015 after the benefit of bonus depreciation recedes.

Other rating concerns include Alabama Power's large coal mix (about 55% of total generation), which leaves the utility exposed to potential higher environmental expenditures. While Alabama Power has an environmental clause that allows for recovery of all prudent and mandated expenditures, retail electricity rates would rise, reducing the flexibility for Alabama Power to increase the base rates to earn an attractive ROE.

RATING SENSITIVITY

Weak Industrial Sales: Sharp industrial slowdown in Alabama Power's service territory that depresses margins as well as curtails its flexibility to continue to earn attractive ROEs would lead to downward rating actions.

Unexpected negative regulatory developments that cause a mismatch between incurrence and recovery of capital and operating expenses could lead to unfavorable rating actions.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);

--'Short-Term Ratings Criteria for Non-Financial Corporates' (Aug. 5, 2013);

--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 13, 2012);

--'Recovery Ratings and Notching Criteria for Utilities' (Nov. 19, 2013);

--'Rating North American Utilities, Power, Gas and Water Companies' (May 16, 2011).

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=810553

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Contacts

Fitch Ratings
Primary Analyst
Shalini Mahajan, CFA, +1 212-908-0351
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY, 10004
or
Secondary Analyst
Lindsay Minneman, +1 212-908-0592
Director
or
Committee Chairperson
Glen Grabelsky, +1 212-908-0577
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Shalini Mahajan, CFA, +1 212-908-0351
Senior Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY, 10004
or
Secondary Analyst
Lindsay Minneman, +1 212-908-0592
Director
or
Committee Chairperson
Glen Grabelsky, +1 212-908-0577
Managing Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com