(The following statement was released by the rating agency)
Oct 11 - Fitch Ratings has assigned an 'A+' rating to Alabama Power Company's (APC) issuance of $400 million series 2012B 0.550% senior notes due Oct. 15, 2015. The Rating Outlook is Stable.
The notes are senior, unsecured obligations of APC and will rank equally with all other unsecured and unsubordinated obligations of the company and junior to all secured indebtedness, which stood at approximately $153 million as of June 30, 2012.
The net proceeds from the offering will be used for redeeming series 2007C 6.00% senior insured monthly notes due Oct. 15, 2037 and for general corporate purposes, including the continuous construction program at the company.
The ratings and Stable Outlook for Alabama Power 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). Alabama Power enjoys a constructive regulatory environment and has consistently earned more than 13% ROE over the last five years. Alabama Power is expected to incur rising environmental expenditure to bring its coal dominated generation mix in compliance with the Environmental Protection Agency (EPA) rules. The environmental cost recovery clauses reduce the regulatory lag associated with such investments.
Rating concerns for Alabama Power include a high reliance on the industrial sector, which makes up for approximately 37% of its total MWH sales. A prolonged economic slowdown or a double-dip recession in a stress case, can impact Alabama Power's credit metrics. However, while the metrics would see some degradation, these should continue to be in line with Fitch's guideline ratios for a low risk 'A' rated utility given the significant headroom that currently exists. Fitch expects adjusted debt to EBITDA ratio to remain in the 2.7x-2.75x range over the next three years. FFO to adjusted debt is expected to moderate to 25% by 2014 after the benefit of bonus depreciation recedes.
Positive ratings actions for Alabama Power could be driven by strong electric sales spurred by robust economic growth and supportive regulatory actions that allow the utility to earn superior credit metrics. Any unexpected negative regulatory developments that cause a mismatch between incurrence and recovery of capital and operating expenses could lead to negative rating actions in the future as also a sharp industrial slowdown in Alabama Power's service territory that curtail its flexibility to continue to earn attractive ROEs.
(Caryn Trokie, New York Ratings Unit)