NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to Alabama Power Company's (Alabama Power) issuance of $550 million series 2015A 3.750% senior notes due March 1, 2045. 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. As of Dec. 31, 2014, Alabama Power did not have any outstanding secured debt. The net proceeds from the offering will be used by Alabama Power to redeem $250 million series DD 5.65% senior notes due March 15, 2035 and for general corporate purposes including the company's continuous construction program.
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 potential rate increases under the Rate Stabilization & Equalization (RSE) mechanism and environmental cost recovery clauses.
KEY RATING DRIVERS
Constructive Regulation: Alabama Power operates in a constructive regulatory environment and has consistently earned more than 13% return on equity (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's rates are set based on a weighted cost of equity (WCE) range of 5.75%-6.21% with an adjusting point of 5.98%. In addition, the utility is 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 in the top one-third in customer satisfaction survey.
High Industrial Concentration: Rating concerns for Alabama Power include a high reliance on the industrial sector, which makes up for approximately 38% of its total MWH sales. The dominant industrial customers in its service territory comprise primary metals, chemicals, pulp and paper, and transportation. Assuaging Fitch's concerns somewhat is a strong recovery in industrial sales in 2014, which increased 3.9% as compared to 2013. 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.
Stable Credit Metrics: For the year ending 2014, funds from operations (FFO) adjusted leverage was a robust 3.3x. Fitch expects this metric to average 3.5x over 2015-2016 as the benefits of bonus depreciation subside. Year-end 2014 debt to EBITDRA was 3.2x and Fitch expects this metric to be approximately 3.0x over the next two years. Funds from operations (FFO) fixed charge coverage is expected to average 6.0x over the same period.
High Proportion of Coal in Fuel Mix: Other rating concerns include Alabama Power's large coal mix (approximately 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, the retail electricity rates would rise, reducing the flexibility for Alabama Power to increase the base rates to earn an attractive ROE.
KEY ASSUMPTIONS
--Total retail electricity sales growth of 1% over 2015 and 2016.
--Rate RSE increase of 3.5% and rate CNP Environmental increase of 1.5% for 2015 and modest increases in rates for 2016;
--Capex of $1.5 billion in 2015 and $1 billion in 2016; and
--O&M costs escalated at 3%.
RATING SENSITIVITIES
Positive: Positive rating actions are not anticipated at this time given a high concentration of coal in Alabama Power's fuel mix amid tightening environmental regulations.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Sharp industrial slowdown in Alabama Power's service territory that depresses margins as well as curtails its flexibility to continue to earn attractive ROEs;
--Unexpected negative regulatory developments that cause a mismatch between incurrence and recovery of capital and operating expenses; and
--Sustained adjusted FFO leverage above 4.0x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage', May 28, 2014;
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', Dec. 23, 2013;
--'Recovery Ratings and Notching Criteria for Utilities', March 05, 2015;
--'Rating U.S. Utilities, Power and Gas Companies', March 11, 2014.
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568
Recovery Ratings and Notching Criteria for Utilities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863298
Rating U.S. Utilities, Power and Gas Companies (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735155
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981154
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