Fitch Ratings Affirms Southern Power.

Business Editors

NEW YORK--(BUSINESS WIRE)--Nov. 18, 2002

Fitch Ratings affirms Southern Power Co.'s (SPC) senior bank facility and senior unsecured notes 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. 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 may replace existing contracts with new ones at prevailing prices.

SPC's ratings also recognize the ongoing benefit SPC receives from its affiliation with the Southern Company system and completion guarantees and equity commitments its parent, Southern Company (SO, rated 'A' by Fitch), has provided in the past for specific construction projects. Through its affiliation with SO, SPC also has access to management and skilled professional services and significant negotiating leverage with suppliers. SPC's ability to buy and sell power into the SO power pool provides further flexibility and economic benefit, particularly if supply is needed to cover outages, delays in project construction or capacity shortfalls. While SO is not obligated to provide ongoing support to SPC after the expiration of the current bank credit facility, continuing 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 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 has stated that it intends 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.

SPC's business mix has evolved and now includes a new set of contracts to provide 'full-requirements' service to a group of Georgia utilities. These new contracts, signed with eleven Georgia electric membership corporations (EMCs), are for 15-17 year terms and require SPC to meet the EMCs' incremental power needs beginning in 2005. Though SPC will only supply the EMCs approximately 200 MWs initially, it is likely that the contracts will account for a substantially larger portion of SPC's total portfolio in later years. These 'full-requirements' contracts present a new type of volumetric risk for SPC, though this is partially mitigated by the company's participation in the Southern power pool. Positively, the EMC contracts provide for all future demand growth during the term of the contracts to be met by SPC. Demand growth under the EMC contracts is expected to balance SPC's long capacity position when some existing contracts terminate in 2010-11.

SPC has credit exposure to Dynegy (DYN) under two power purchase agreements with its subsidiary, Dynegy Power Marketing. The DYN contracts comprise approximately 9% of net margins in 2002 and are estimated at 8% in 2011. While collateral totaling $70 million has been posted by DYN due to a significant deterioration of its credit quality in the last several months, the potential for default exposes SPC to increased merchant risk. Fitch notes that SPC has alternative plans that would mitigate in large measure the impact of default by Dynegy via increased equity funding of the related asset construction.

Recent events include the signing of new contracts with affiliates Georgia Power Company and Savannah Electric Company for 1,240 MW of capacity of the McIntosh units 10 and 11 (just beginning construction) for terms from 2005 through 2020. These contracts are still subject to state and federal regulatory approval and construction expenditures will be funded by parent equity contributions prior to such approval.

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