Fitch Affirms Ratings of Southern Co. and Subsidiaries; Outlook Stable

Business Wire, Jan 22, 2008

NEW YORK -- Fitch has affirmed the ratings of Southern Company (Southern, IDR 'A') and each of its subsidiaries. The Rating Outlook of Southern and its subsidiaries: Georgia Power Company (GPC, IDR 'A'), Alabama Power Company (APC, IDR 'A'), Mississippi Power Co. (MPC, IDR 'A '), Gulf Power Company (Gulf, IDR 'A-') and Southern Power Co. (SPC, IDR 'BBB ') is Stable. Approximately $16.8 billion of debt and preferred securities are affected by today's rating actions.

Southern's rating strengths include: constructive state regulation; low business risk, above average growth of economically vibrant territories; strong performance of the mainly coal and nuclear based capacity and conservative strategy and access to capital markets and manageable debt maturities. In addition, Southern and its subsidiaries have strong liquidity. The stability of cash flows and timeliness of cost recovery at the utility subsidiaries are supported by numerous annual tariff adjustment mechanisms at subsidiaries. No base rate filings for any of the four utilities are expected to be necessary for several years, limiting regulatory risk.

Rating concerns for the Southern group include: some weakening of consolidated ratio trends, risks of delays in recovery or under-recovery of operating costs or capital projects; environmental related risks such as stricter laws or adverse legal outcomes; and the location of service territories in hurricane-prone regions. Fuel and purchased power costs have persistently been deferred for future recovery as a result of fuel cost increases above those forecast in annual regulatory setting of fuel factors and below normal hydro conditions, but Southern expects to recover prior under-recovered fuel and purchased power costs by the end of 2009. While coal is a relatively low-cost fuel compared to natural gas, the impact of any carbon legislation cannot be predicted and could result in significant capital spending requirements and adversely affect their constructive regulatory relations. Credit metrics at the subsidiaries are currently reasonable relative to Fitch guidelines and their business risk, but the parent financial ratios are somewhat weak relative to Fitch's targets for companies of low business risk.

Southern's Subsidiaries:

GPC's ratings reflect the continued strong operating performance of a mostly coal and nuclear fleet, growing service territory economy, and strong, stable financial condition and good base rate and environmental cost recovery visibility through 2010. Fitch's primary credit rating concerns are the lack of an environmental cost-adjustment mechanism in the face of rising emissions compliance-related spending, and rising prices for fuel, operations and maintenance, and other expenses in a growing service territory. Georgia Power will require ongoing regulatory support to maintain credit quality, as capital spending, operating expenses, and capacity needs continue to trend upwards.

The terms of GPC's December 2007 settlement of its base rate proceeding are considered supportive. The three year accounting order became effective in January 2008 and permits an ROE range of 10.25%-12.25% and recovery of forecasted costs of environmental capital projects scheduled to enter service during the three year settlement period. However, if GPC starts construction on any additional scrubber projects that would enter service after the end of the settlement period, GPC must seek recovery of that investment in a future environmental cost recovery tariff order (i.e., no construction work in progress). That could pressure credit ratios during the period of heavy environmental compliance capital spending.

The ratings of APC are supported by a relatively low cost generation, stable coverage ratios that are consistent with rating category guidelines, and a constructive state regulatory environment. Fitch's rating concerns relate to the higher than average concentration of industrial customers, lags in the recovery of rising fuel (affected by the drought), risk of higher than anticipated increases in operating and maintenance costs, the susceptibility of the territory to hurricanes, and significant capital spending associated with environmental matters and system growth and reliability.

MPC's ratings are supported by constructive regulation, low operating costs and strong partnerships with wholesale customers. In addition, the conservative capitalization provides flexibility. MPC received strong government support to recover storm costs. Proceeds from Community Development Block Grants were $276.4 million and a State of Mississippi tariff bond provided $121 million for storm restoration and repair costs and to build a storm center in 2007. Concerns include the relatively high industrial customer concentration and demand from residential and small commercial customers has not yet recovered to pre-Katrina levels. MPC is considering construction of an integrated gas combined cycle (IGCC) plant, which would materially increase capital spending.