OREANDA-NEWS. Fitch Ratings has assigned an 'A+' rating to Alabama Power Company's (Alabama Power) issuance of $400 million series 2016A 4.300% senior notes due Jan. 2, 2046. The Rating Outlook for Alabama Power is Stable.

The series 2016A 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. Alabama Power does not have any outstanding secured debt. The net proceeds from the offering will be used by the company to redeem at maturity $200 million aggregate principal amount of series FF 5.200% senior notes due Jan. 15, 2016, 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

Supportive Regulation
Fitch views Alabama regulation to be constructive. 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, federal mandates and new generation facilities. The RSE rates are set based on a weighted cost of equity (WCE) range of 5.75%-6.21% with an adjusting point of 5.98%. 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 of customer satisfaction surveys.

Strong Credit Metrics
For the last 12 months (LTM) ending Sept. 30, 2015, funds from operations (FFO) adjusted leverage was 3.5x. Fitch expects this metric to sustain at these levels over 2015-2017. LTM debt to EBITDAR was 3.4x and Fitch expects this metric to moderate to 3.2x by 2017. FFO fixed charged cover is expected to average approximately 6.0x over the same period.

High Reliance on Industrial Sales
Rating concerns for Alabama Power include a high reliance on the industrial sector, which makes up approximately 40% of its total MWh sales. 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 2009.

High Proportion of Coal in Fuel Mix
Alabama Power's large coal mix (approximately 55% of total generation) leaves the utility exposed to potential higher environmental expenditures. While Alabama Power has a compliance clause that allows for recovery of all prudent and mandated environmental expenditures, retail electricity rates would rise, reducing Alabama Power's flexibility to increase base rates to earn an attractive return on equity (ROE).

KEY ASSUMPTIONS

--Modest increases in RSE rates over 2015-2017;
--2.5% increase under CNP C (environmental) rates in 2016;
--0.5% increase in electricity sales in 2016 and 2017.

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;
--Sustained adjusted FFO leverage above 4.0x.

LIQUIDITY

Alabama Power has adequate access to liquidity, in Fitch's view. The company had $609 million of cash and cash equivalents as of Sept. 30, 2015. The company also had $1.3 billion of credit facilities, of which $810 million was used to provide liquidity support to its outstanding variable-rate pollution control revenue bonds. The credit facilities carry a 65% debt-to-capital covenant, and Alabama Power was well within the threshold. Alabama Power could also meet its short-term cash needs through its own commercial paper (CP) program or through a Southern Company subsidiary organized to issue and sell CP. Near-term debt maturities are manageable.