Fitch Ratings Affirms Southern Power.

Business Editors

NEW YORK--(BUSINESS WIRE)--July 1, 2003

Fitch Ratings affirms the rating of Southern Power Co.'s (SPC) unsecured senior bank facility and senior unsecured notes due 2012 at 'BBB+'. The short-term rating of 'F2' is also affirmed by Fitch. The Rating Outlook is Stable.

The rating affirmation at 'BBB+' reflects SPC's favorable contract portfolio with a high percentage of projected cash flows under intermediate- and long-term contracts, the absence of commodity price risk from nearly all existing power sales agreements, and the operating benefits of participation in the Southern power pool. Over 90% of SPC's expected net revenues are under long-term contracts through 2009, excluding the Franklin 3 plant. The bulk of SPC's contracts have been signed with highly-rated affiliates of SPC. In large part, these contracts include capacity payments and pricing mechanisms that eliminate volume risk and transfer fuel price risk to the buyer. After 2009, the contractual position declines, and SPC plans to renew or extend existing contracts or obtain new contracts at prevailing prices. SPC's ratings also recognize the ongoing benefit SPC receives from its affiliation with the Southern Company system and from the completion guarantees and equity commitments which its parent, Southern Company (SO, rated 'A' by Fitch), has provided in the past for specific construction projects. While SO is not obligated to provide ongoing support to SPC after the expiration of the current bank credit facility in April 2006, continuing equity investment in SPC is consistent with SO's business strategy.

Principal risks include relatively high debt leverage (projected to be in excess of 60% of total capital) and, in the longer-term, refinancing risk. SPC's need to refinance $575 million senior notes in 2012 coincides with the expiration of several large contracts. However, there is an extended period before this refinancing risk becomes more prominent and SPC plans to remarket its contracts several years prior to termination. If SPC is not successful in extending contracts at favorable pricing in the 2008-2012 time frame, bondholders will at that time be exposed to both merchant risk and refinancing risk. As construction continues over the next several years, leverage is expected to remain high (averaging 4.8x gross debt-EBITDA through 2006), though this is largely mitigated by the above-average level of contractual cover.

SO recently announced that it had negotiated the termination of its three purchase power agreements (PPAs) with Dynegy, Inc. (DYN), including a $155 million payment to SO. The agreement eliminated SPC's credit exposure to DYN under two PPAs with its subsidiary Dynegy Power Marketing. However, the termination of the contracts also reduced SPC's contracted sales. Unless a replacement purchaser is found in the near-term, SPC may delay the construction schedule of the Franklin 3 plant, which is currently slated to go on-line in mid 2005.

Additional uncertainty exists relating to two long-term PPAs SPC signed for output of its 1,240 MW McIntosh plant, which is due online in 2005. SPC has received Georgia Public Service Commission (GPSC) approval for the 15-year contracts it established with affiliates Georgia Power Co. and Savannah Electric Co., pursuant to auction process under the aegis of GPSC. However, Calpine Corp. and the Electric Power Supply Association have asked the Federal Energy Regulatory Commission (FERC) to reject the McIntosh contracts, claiming SO abused its market power in the Southeast region and unfairly awarded the PPAs to SPC over other bidders. FERC has not yet indicated that it believes there has been any market abuse by SO. Fitch believes that a likely scenario would involve a requirement upon affiliates or the GPSC to publish future contract terms.

In April 2003, SPC negotiated the extension of its revolving credit facility to 2006 and reduced its size to $650 million from $850 million. The facility backs up SPC's commercial paper program and includes a requirement for equity commitments and completion guarantees from SO similar to those contained in the company's previous bank agreement.

Southern Power Company is a subsidiary of Southern Company. It is a developer and operator of power generation facilities in the southeastern United States.