SOUTHERN COMPANY
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission |
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Registrant, State of Incorporation, |
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I.R.S. Employer |
File Number |
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Address and Telephone Number |
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Identification No. |
1-3526
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The Southern Company
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58-0690070 |
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(A Delaware Corporation) |
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30 Ivan Allen Jr. Boulevard, N.W. |
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Atlanta, Georgia 30308 |
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(404) 506-5000 |
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1-3164
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Alabama Power Company
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63-0004250 |
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(An Alabama Corporation) |
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600 North 18th Street |
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Birmingham, Alabama 35291 |
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(205) 257-1000 |
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1-6468
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Georgia Power Company
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58-0257110 |
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(A Georgia Corporation) |
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241 Ralph McGill Boulevard, N.E. |
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Atlanta, Georgia 30308 |
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(404) 506-6526 |
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0-2429
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Gulf Power Company
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59-0276810 |
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(A Florida Corporation) |
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One Energy Place |
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Pensacola, Florida 32520 |
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(850) 444-6111 |
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001-11229
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Mississippi Power Company
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64-0205820 |
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(A Mississippi Corporation) |
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2992 West Beach |
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Gulfport, Mississippi 39501 |
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(228) 864-1211 |
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333-98553
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Southern Power Company
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58-2598670 |
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(A Delaware Corporation) |
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30 Ivan Allen Jr. Boulevard, N.W. |
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Atlanta, Georgia 30308 |
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(404) 506-5000 |
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Indicate by check mark whether the registrants (1) have filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrants were required to file such reports), and (2) have been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
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Large |
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Accelerated |
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Accelerated |
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Non-accelerated |
Registrant |
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Filer |
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Filer |
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Filer |
The Southern Company |
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X |
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Alabama Power Company |
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X |
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Georgia Power Company |
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X |
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Gulf Power Company |
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X |
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Mississippi Power Company |
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X |
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Southern Power Company |
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X |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act.) Yes o No þ (Response applicable to all registrants.)
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Description of |
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Shares Outstanding |
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Registrant |
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Common Stock |
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at September 30, 2007 |
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The Southern Company |
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Par Value $5 Per Share |
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759,478,801 |
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Alabama Power Company |
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Par Value $40 Per Share |
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15,750,000 |
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Georgia Power Company |
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Without Par Value |
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9,261,500 |
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Gulf Power Company |
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Without Par Value |
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1,792,717 |
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Mississippi Power Company |
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Without Par Value |
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1,121,000 |
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Southern Power Company |
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Par Value $0.01 Per Share |
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1,000 |
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This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company,
Georgia Power Company, Gulf Power Company, Mississippi Power Company, and Southern Power Company.
Information contained herein relating to any individual registrant is filed by such registrant on
its own behalf. Each registrant makes no representation as to information relating to the other
registrants.
2
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2007
3
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2007
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Page |
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Number |
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PART II OTHER INFORMATION
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Item 1. |
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147 |
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Item 1A. |
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147 |
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
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Inapplicable |
Item 3. |
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Defaults Upon Senior Securities |
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Inapplicable |
Item 4. |
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Submission of Matters to a Vote of Security Holders |
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Inapplicable |
Item 5. |
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Other Information |
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Inapplicable |
Item 6. |
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148 |
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152 |
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4
DEFINITIONS
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TERM |
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MEANING |
AFUDC |
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Allowance for funds used during construction |
Alabama Power
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Alabama Power Company |
ALJ
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Administrative law judge |
BMA
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Bond Market Association |
Clean Air Act
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Clean Air Act Amendments of 1990 |
DOE
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U.S. Department of Energy |
Duke Energy
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Duke Energy Corporation |
ECO Plan
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Environmental Compliance Overview Plan |
EPA
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U.S. Environmental Protection Agency |
ERISA
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Employee Retirement Income Security Act of 1974, as amended |
FASB
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Financial Accounting Standards Board |
FERC
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Federal Energy Regulatory Commission |
Form 10-K
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Combined Annual Report on Form 10-K of Southern Company,
Alabama Power, Georgia Power, Gulf Power, Mississippi Power,
and Southern Power for the year ended December 31, 2006
and, with respect to Gulf Power, Amendment No. 1 thereto |
Georgia Power
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Georgia Power Company |
Gulf Power
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Gulf Power Company |
IGCC
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Integrated coal gasification combined cycle |
IIC
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Intercompany Interchange Contract |
IRC
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Internal Revenue Code of 1986, as amended |
IRS
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Internal Revenue Service |
KWH
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Kilowatt-hour |
LIBOR |
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London Interbank Offered Rate |
Mirant |
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Mirant Corporation |
Mississippi Power
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Mississippi Power Company |
MW
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Megawatt |
NRC
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Nuclear Regulatory Commission |
NSR
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New Source Review |
PEP
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Performance Evaluation Plan |
Power Pool
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The operating arrangement whereby the integrated generating
resources of the traditional operating companies and
Southern Power are subject to joint commitment and dispatch
in order to serve their combined load obligations |
PPA
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Power Purchase Agreement |
PSC
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Public Service Commission |
Rate CNP
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Alabama Powers certified new plant rate mechanism |
Rate ECR
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Alabama Powers energy cost recovery rate mechanism |
Rate NDR
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Alabama Powers natural disaster recovery rate mechanism |
Rate RSE
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Alabama Powers rate stabilization and equalization rate
mechanism |
Savannah Electric
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Savannah Electric and Power Company (merged into Georgia
Power on July 1, 2006) |
SCS
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Southern Company Services, Inc. |
SEC
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Securities and Exchange Commission |
Southern Company
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The Southern Company |
Southern Company system
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Southern Company, the traditional operating companies,
Southern Power, and other subsidiaries |
Southern Nuclear
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Southern Nuclear Operating Company, Inc. |
Southern Power
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Southern Power Company |
traditional operating companies
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Alabama Power, Georgia Power, Gulf Power, and Mississippi
Power |
wholesale revenues
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revenues generated from sales for resale |
5
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking
statements include, among other things, statements concerning the strategic goals for the wholesale
business, retail sales growth, customer growth, storm damage cost recovery and repairs, fuel cost
recovery, environmental regulations and expenditures, access to sources of capital, projections for
postretirement benefit trust contributions, synthetic fuel investments, financing activities,
completion or termination of construction projects, impacts of adoption of new accounting rules,
PPA revenues, costs of implementing the IIC settlement with the FERC, and estimated construction
and other expenditures. In some cases, forward-looking statements can be identified by terminology
such as may, will, could, should, expects, plans, anticipates, believes,
estimates, projects, predicts, potential, or continue or the negative of these terms or
other similar terminology. There are various factors that could cause actual results to differ
materially from those suggested by the forward-looking statements; accordingly, there can be no
assurance that such indicated results will be realized. These factors include:
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the impact of recent and future federal and state regulatory change, including legislative
and regulatory initiatives regarding deregulation and restructuring of the electric utility
industry, implementation of the Energy Policy Act of 2005, environmental laws including
regulation of emissions of sulfur, nitrogen, mercury, carbon, soot, or particulate matter and
other substances, and also changes in tax and other laws and regulations to which Southern
Company and its subsidiaries are subject, as well as changes in application of existing laws
and regulations; |
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current and future litigation, regulatory investigations, proceedings or inquiries,
including the pending EPA civil actions against certain Southern Company subsidiaries, FERC
matters, IRS audits, and Mirant matters; |
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the effects, extent, and timing of the entry of additional competition in the markets in
which Southern Companys subsidiaries operate; |
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variations in demand for electricity, including those relating to weather, the general
economy, population and business growth (and declines), and the effects of energy conservation
measures; |
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available sources and costs of fuels; |
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ability to control costs; |
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investment performance of Southern Companys employee benefit plans; |
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advances in technology; |
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state and federal rate regulations and the impact of pending and future rate cases and
negotiations, including rate actions relating to fuel and storm restoration cost recovery; |
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the performance of projects undertaken by the non-utility businesses and the success of
efforts to invest in and develop new opportunities; |
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fluctuations in the level of oil prices; |
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the level of production by the synthetic fuel operations at Carbontronics Synfuels
Investors LP and Alabama Fuel Products, LLC for the remainder of fiscal year 2007; |
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internal restructuring or other restructuring options that may be pursued; |
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potential business strategies, including acquisitions or dispositions of assets or
businesses, which cannot be assured to be completed or beneficial to Southern Company or its
subsidiaries; |
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the ability of counterparties of Southern Company and its subsidiaries to make payments as
and when due; |
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the ability to obtain new short- and long-term contracts with neighboring utilities; |
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the direct or indirect effect on Southern Companys business resulting from terrorist
incidents and the threat of terrorist incidents; |
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interest rate fluctuations and financial market conditions and the results of financing
efforts, including Southern Companys and its subsidiaries credit ratings; |
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the ability of Southern Company and its subsidiaries to obtain additional generating
capacity at competitive prices; |
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catastrophic events such as fires, earthquakes, explosions, floods, hurricanes, droughts,
pandemic health events such as an avian influenza, or other similar occurrences; |
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the direct or indirect effects on Southern Companys business resulting from incidents
similar to the August 2003 power outage in the Northeast; |
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the effect of accounting pronouncements issued periodically by standard setting bodies; and |
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other factors discussed elsewhere herein and in other reports (including the Form 10-K)
filed by the registrants from time to time with the SEC. |
Each registrant expressly disclaims any obligation to update any forward-looking statements.
6
THE SOUTHERN COMPANY AND
SUBSIDIARY COMPANIES
7
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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For the Three Months |
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For the Nine Months |
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Ended September 30, |
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Ended September 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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(in thousands) |
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(in thousands) |
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Operating Revenues: |
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Retail revenues |
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$ |
4,085,704 |
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$ |
3,853,423 |
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$ |
9,934,571 |
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$ |
9,295,223 |
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Wholesale revenues |
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563,233 |
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506,326 |
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1,530,809 |
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1,361,097 |
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Other electric revenues |
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130,590 |
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120,001 |
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381,467 |
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347,086 |
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Other revenues |
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52,516 |
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69,628 |
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165,793 |
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200,735 |
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Total operating revenues |
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4,832,043 |
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4,549,378 |
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12,012,640 |
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11,204,141 |
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Operating Expenses: |
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Fuel |
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1,738,693 |
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1,625,046 |
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4,512,718 |
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3,981,241 |
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Purchased power |
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281,489 |
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239,891 |
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445,698 |
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483,145 |
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Other operations |
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651,127 |
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603,346 |
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1,802,876 |
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1,753,719 |
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Maintenance |
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260,449 |
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236,647 |
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831,483 |
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793,569 |
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Depreciation and amortization |
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311,939 |
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300,104 |
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928,569 |
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896,562 |
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Taxes other than income taxes |
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206,763 |
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186,631 |
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574,329 |
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540,834 |
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Total operating expenses |
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3,450,460 |
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3,191,665 |
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9,095,673 |
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8,449,070 |
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Operating Income |
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1,381,583 |
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1,357,713 |
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2,916,967 |
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2,755,071 |
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Other Income and (Expense): |
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Allowance for equity funds used during construction |
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28,050 |
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11,847 |
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71,821 |
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33,772 |
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Interest income |
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11,638 |
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12,748 |
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31,853 |
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25,657 |
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Equity in losses of unconsolidated subsidiaries |
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(410 |
) |
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(133 |
) |
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(20,712 |
) |
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(44,985 |
) |
Leveraged lease income |
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12,359 |
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16,787 |
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31,928 |
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52,489 |
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Impairment loss on equity method investments |
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(695 |
) |
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(15,969 |
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Interest expense, net of amounts capitalized |
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(220,090 |
) |
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(185,189 |
) |
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(614,345 |
) |
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(542,259 |
) |
Interest expense to affiliate trusts |
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(12,696 |
) |
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(30,550 |
) |
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(58,867 |
) |
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(91,819 |
) |
Preferred and preference dividends of subsidiaries |
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(10,451 |
) |
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(9,120 |
) |
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(30,709 |
) |
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(26,141 |
) |
Other income (expense), net |
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17,271 |
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(30,154 |
) |
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8,325 |
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(26,986 |
) |
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Total other income and (expense) |
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(174,329 |
) |
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(214,459 |
) |
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(580,706 |
) |
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(636,241 |
) |
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Earnings Before Income Taxes |
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1,207,254 |
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|
1,143,254 |
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|
|
2,336,261 |
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|
2,118,830 |
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Income taxes |
|
|
445,259 |
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|
|
405,269 |
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|
806,424 |
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|
734,015 |
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Consolidated Net Income |
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$ |
761,995 |
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$ |
737,985 |
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$ |
1,529,837 |
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$ |
1,384,815 |
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Common Stock Data: |
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Earnings per share- |
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Basic |
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$ |
1.00 |
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$ |
0.99 |
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$ |
2.03 |
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$ |
1.86 |
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Diluted |
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$ |
1.00 |
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$ |
0.99 |
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$ |
2.02 |
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$ |
1.85 |
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Average number of basic shares of common
stock outstanding (in thousands) |
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758,308 |
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|
742,884 |
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|
754,568 |
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|
742,532 |
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Average number of diluted shares of common
stock outstanding (in thousands) |
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762,392 |
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|
|
747,560 |
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|
759,182 |
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|
746,983 |
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Cash dividends paid per share of common stock |
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$ |
0.4025 |
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$ |
0.3875 |
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$ |
1.1925 |
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$ |
1.1475 |
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The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
8
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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For the Nine Months |
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Ended September 30, |
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|
2007 |
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2006 |
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(in thousands) |
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Operating Activities: |
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Consolidated net income |
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$ |
1,529,837 |
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$ |
1,384,815 |
|
Adjustments to reconcile consolidated net income
to net cash provided from operating activities |
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Depreciation and amortization |
|
|
1,108,475 |
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|
1,059,567 |
|
Deferred income taxes and investment tax credits |
|
|
102,314 |
|
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|
344,062 |
|
Allowance for equity funds used during construction |
|
|
(71,821 |
) |
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|
(33,772 |
) |
Equity in losses of unconsolidated subsidiaries |
|
|
20,712 |
|
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|
44,985 |
|
Leveraged lease income |
|
|
(31,928 |
) |
|
|
(52,489 |
) |
Pension, postretirement, and other employee benefits |
|
|
75,303 |
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|
74,033 |
|
Stock option expense |
|
|
26,011 |
|
|
|
25,045 |
|
Hedge settlements |
|
|
15,151 |
|
|
|
18,006 |
|
Hurricane Katrina grant proceeds-property reserve |
|
|
60,000 |
|
|
|
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|
Other, net |
|
|
10,454 |
|
|
|
47,060 |
|
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
Receivables |
|
|
(426,107 |
) |
|
|
(460,092 |
) |
Fossil fuel stock |
|
|
(57,624 |
) |
|
|
(136,720 |
) |
Materials and supplies |
|
|
(55,191 |
) |
|
|
(56,559 |
) |
Other current assets |
|
|
(2,808 |
) |
|
|
61,019 |
|
Hurricane Katrina grant proceeds |
|
|
14,345 |
|
|
|
|
|
Accounts payable |
|
|
(3,951 |
) |
|
|
(319,564 |
) |
Accrued taxes |
|
|
303,781 |
|
|
|
185,626 |
|
Accrued compensation |
|
|
(148,274 |
) |
|
|
(162,455 |
) |
Other current liabilities |
|
|
(1,342 |
) |
|
|
(42,382 |
) |
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
2,467,337 |
|
|
|
1,980,185 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(2,469,059 |
) |
|
|
(2,112,780 |
) |
Investment in restricted cash from pollution control bonds |
|
|
(96,052 |
) |
|
|
|
|
Distribution of restricted cash from pollution control bonds |
|
|
44,550 |
|
|
|
|
|
Nuclear decommissioning trust fund purchases |
|
|
(538,049 |
) |
|
|
(572,932 |
) |
Nuclear decommissioning trust fund sales |
|
|
531,169 |
|
|
|
566,052 |
|
Proceeds from property sales |
|
|
31,333 |
|
|
|
148,427 |
|
Investment in unconsolidated subsidiaries |
|
|
(34,550 |
) |
|
|
(57,116 |
) |
Cost of removal, net of salvage |
|
|
(65,601 |
) |
|
|
(53,605 |
) |
Hurricane Katrina capital grant proceeds |
|
|
10,869 |
|
|
|
|
|
Other |
|
|
25,908 |
|
|
|
(66,517 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(2,559,482 |
) |
|
|
(2,148,471 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Increase (decrease) in notes payable, net |
|
|
(656,348 |
) |
|
|
788,744 |
|
Proceeds |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
3,081,500 |
|
|
|
1,075,845 |
|
Common stock |
|
|
414,498 |
|
|
|
30,804 |
|
Preferred and Preference Stock |
|
|
150,000 |
|
|
|
|
|
Redemptions |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
(904,270 |
) |
|
|
(550,176 |
) |
Long-term debt to affiliate trusts |
|
|
(695,376 |
) |
|
|
(67,457 |
) |
Preferred stock |
|
|
|
|
|
|
(14,569 |
) |
Common stock repurchased |
|
|
|
|
|
|
(117 |
) |
Payment of common stock dividends |
|
|
(898,766 |
) |
|
|
(851,991 |
) |
Other |
|
|
(31,432 |
) |
|
|
(26,811 |
) |
|
|
|
|
|
|
|
Net cash provided from financing activities |
|
|
459,806 |
|
|
|
384,272 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
367,661 |
|
|
|
215,986 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
166,846 |
|
|
|
202,111 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
534,507 |
|
|
$ |
418,097 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $44,229 and $16,604 capitalized for
2007 and 2006, respectively) |
|
$ |
600,634 |
|
|
$ |
638,380 |
|
Income taxes (net of refunds) |
|
$ |
388,634 |
|
|
$ |
245,941 |
|
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
9
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Assets |
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
534,507 |
|
|
$ |
166,846 |
|
Restricted cash |
|
|
51,502 |
|
|
|
|
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
1,360,586 |
|
|
|
942,821 |
|
Unbilled revenues |
|
|
370,541 |
|
|
|
283,275 |
|
Under recovered regulatory clause revenues |
|
|
919,771 |
|
|
|
516,441 |
|
Other accounts and notes receivable |
|
|
318,377 |
|
|
|
329,619 |
|
Accumulated provision for uncollectible accounts |
|
|
(26,336 |
) |
|
|
(34,901 |
) |
Fossil fuel stock, at average cost |
|
|
732,345 |
|
|
|
674,902 |
|
Materials and supplies, at average cost |
|
|
701,243 |
|
|
|
648,127 |
|
Vacation pay |
|
|
123,505 |
|
|
|
121,246 |
|
Prepaid expenses |
|
|
167,974 |
|
|
|
127,908 |
|
Other |
|
|
181,839 |
|
|
|
242,735 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
5,435,854 |
|
|
|
4,019,019 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
46,565,693 |
|
|
|
45,484,895 |
|
Less accumulated depreciation |
|
|
17,213,524 |
|
|
|
16,581,886 |
|
|
|
|
|
|
|
|
|
|
|
29,352,169 |
|
|
|
28,903,009 |
|
Nuclear fuel, at amortized cost |
|
|
336,477 |
|
|
|
317,429 |
|
Construction work in progress |
|
|
2,896,405 |
|
|
|
1,871,538 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
32,585,051 |
|
|
|
31,091,976 |
|
|
|
|
|
|
|
|
Other Property and Investments: |
|
|
|
|
|
|
|
|
Nuclear decommissioning trusts, at fair value |
|
|
1,146,615 |
|
|
|
1,057,534 |
|
Leveraged leases |
|
|
976,928 |
|
|
|
1,138,730 |
|
Other |
|
|
259,147 |
|
|
|
296,484 |
|
|
|
|
|
|
|
|
Total other property and investments |
|
|
2,382,690 |
|
|
|
2,492,748 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
932,382 |
|
|
|
895,446 |
|
Prepaid pension costs |
|
|
1,577,648 |
|
|
|
1,548,983 |
|
Unamortized debt issuance expense |
|
|
183,947 |
|
|
|
171,758 |
|
Unamortized loss on reacquired debt |
|
|
289,820 |
|
|
|
293,016 |
|
Deferred under recovered regulatory clause revenues |
|
|
354,548 |
|
|
|
845,201 |
|
Other regulatory assets |
|
|
912,102 |
|
|
|
935,804 |
|
Other |
|
|
654,172 |
|
|
|
564,498 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
4,904,619 |
|
|
|
5,254,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
45,308,214 |
|
|
$ |
42,858,449 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
10
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
1,721,312 |
|
|
$ |
1,416,898 |
|
Notes payable |
|
|
1,284,453 |
|
|
|
1,940,801 |
|
Accounts payable |
|
|
1,102,793 |
|
|
|
1,081,256 |
|
Customer deposits |
|
|
269,420 |
|
|
|
248,781 |
|
Accrued taxes
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
363,065 |
|
|
|
110,009 |
|
Other |
|
|
423,928 |
|
|
|
390,716 |
|
Accrued interest |
|
|
199,325 |
|
|
|
183,918 |
|
Accrued vacation pay |
|
|
154,857 |
|
|
|
151,113 |
|
Accrued compensation |
|
|
299,306 |
|
|
|
443,610 |
|
Other |
|
|
298,181 |
|
|
|
385,858 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
6,116,640 |
|
|
|
6,352,960 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
13,095,389 |
|
|
|
10,942,025 |
|
|
|
|
|
|
|
|
Long-term Debt Payable to Affiliated Trusts |
|
|
721,651 |
|
|
|
1,561,358 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
5,853,662 |
|
|
|
5,989,063 |
|
Deferred credits related to income taxes |
|
|
278,043 |
|
|
|
291,474 |
|
Accumulated deferred investment tax credits |
|
|
485,259 |
|
|
|
503,217 |
|
Employee benefit obligations |
|
|
1,682,419 |
|
|
|
1,566,591 |
|
Asset retirement obligations |
|
|
1,184,590 |
|
|
|
1,136,982 |
|
Other cost of removal obligations |
|
|
1,318,417 |
|
|
|
1,300,461 |
|
Other regulatory liabilities |
|
|
893,507 |
|
|
|
793,869 |
|
Other |
|
|
565,054 |
|
|
|
305,255 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
12,260,951 |
|
|
|
11,886,912 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
32,194,631 |
|
|
|
30,743,255 |
|
|
|
|
|
|
|
|
Preferred and Preference Stock of Subsidiaries |
|
|
766,302 |
|
|
|
744,065 |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, par value $5 per share |
|
|
|
|
|
|
|
|
Authorized 1 billion shares |
|
|
|
|
|
|
|
|
Issued September 30, 2007: 759,863,967 Shares; |
|
|
|
|
|
|
|
|
December 31, 2006: 751,863,854 Shares |
|
|
|
|
|
|
|
|
Treasury September 30, 2007: 385,166 Shares; |
|
|
|
|
|
|
|
|
December 31, 2006: 5,593,691 Shares |
|
|
|
|
|
|
|
|
Par value |
|
|
3,799,320 |
|
|
|
3,759,319 |
|
Paid-in capital |
|
|
1,340,344 |
|
|
|
1,096,387 |
|
Treasury, at cost |
|
|
(10,571 |
) |
|
|
(192,309 |
) |
Retained earnings |
|
|
7,256,378 |
|
|
|
6,765,219 |
|
Accumulated other comprehensive loss |
|
|
(38,190 |
) |
|
|
(57,487 |
) |
|
|
|
|
|
|
|
Total Common Stockholders Equity |
|
|
12,347,281 |
|
|
|
11,371,129 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
45,308,214 |
|
|
$ |
42,858,449 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
11
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Consolidated Net Income |
|
$ |
761,995 |
|
|
$ |
737,985 |
|
|
$ |
1,529,837 |
|
|
$ |
1,384,815 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $(7,342), $(18,019), $6,087, and
$(3,634), respectively |
|
|
(11,667 |
) |
|
|
(28,556 |
) |
|
|
9,704 |
|
|
|
(5,645 |
) |
Reclassification adjustment for amounts included in net income,
net of tax of $1,548, $(646), $4,227, and $(340), respectively |
|
|
2,369 |
|
|
|
1,059 |
|
|
|
6,770 |
|
|
|
1,347 |
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $1,094, $365, $2,998, and
$4,772, respectively |
|
|
2,130 |
|
|
|
866 |
|
|
|
4,757 |
|
|
|
7,721 |
|
Reclassification adjustment for amounts included in net income,
net of tax of $(127), $-, $(488), and $-, respectively |
|
|
(201 |
) |
|
|
|
|
|
|
(774 |
) |
|
|
|
|
Pension and other post retirement benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
prior service costs from amendment to non-qualified
pension plans,
net of tax of $-, $-, $(1,510), and $-, respectively |
|
|
|
|
|
|
|
|
|
|
(2,424 |
) |
|
|
|
|
Reclassification adjustment for amounts included in net income,
net of tax of $263, $-, $790, and $-, respectively |
|
|
422 |
|
|
|
|
|
|
|
1,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income (loss) |
|
|
(6,947 |
) |
|
|
(26,631 |
) |
|
|
19,297 |
|
|
|
3,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
$ |
755,048 |
|
|
$ |
711,354 |
|
|
$ |
1,549,134 |
|
|
$ |
1,388,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
12
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2007 vs. THIRD QUARTER 2006
AND
YEAR-TO-DATE 2007 vs. YEAR-TO-DATE 2006
OVERVIEW
Discussion of the results of operations is focused on Southern Companys primary business of
electricity sales in the Southeast by the traditional operating companies Alabama Power, Georgia
Power, Gulf Power, and Mississippi Power and Southern Power. Southern Power is an electric
wholesale generation subsidiary with market-based rate authority. Southern Companys other
business activities include investments in synthetic fuels and leveraged lease projects,
telecommunications, and energy-related services. For additional information on these businesses,
see BUSINESS The Southern Company System Traditional operating companies, Southern Power,
and Other Business in Item 1 of the Form 10-K. For information regarding the synthetic fuel
investment, see Note (B) to the Condensed Financial Statements under INCOME TAX MATTERS
Synthetic Fuel Tax Credits herein.
Southern Company continues to focus on several key performance indicators. These indicators include
customer satisfaction, plant availability, system reliability, and earnings per share. For
additional information on these indicators, see MANAGEMENTS DISCUSSION AND ANALYSIS OVERVIEW
Key Performance Indicators of Southern Company in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$24.0
|
|
3.3
|
|
$145.0
|
|
10.5 |
|
Southern Companys third quarter 2007 earnings were $762.0 million ($1.00 per share) compared to
$738.0 million ($0.99 per share) for third quarter 2006. The increase was primarily due to a
retail base rate increase at Alabama Power, favorable weather as compared to the same period in
2006, and an increase in contributions from market-based rates to large commercial and industrial
customers when compared to the same period in 2006. The third quarter 2007 increase was partially
offset by higher other operations and maintenance expenses.
Southern Companys year-to-date 2007 earnings were $1.5 billion ($2.03 per share) compared to $1.4
billion ($1.86 per share) for year-to-date 2006. The increase was primarily due to a retail base
rate increase at Alabama Power, favorable weather as compared to the same period in 2006, and
customer growth in the Southern Company service area. Higher earnings from the synthetic fuel
business also contributed to the increase. The year-to-date 2007 increase was partially offset by
higher other operations and maintenance expenses and a decrease in contributions from market-based
rates to large commercial and industrial customers.
Retail Revenues
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$232.3
|
|
6.0
|
|
$639.3
|
|
6.9 |
|
In the third quarter 2007, retail revenues were $4.1 billion compared to $3.9 billion for the same
period in 2006.
Year-to-date 2007, retail revenues were $9.9 billion compared to $9.3 billion for the same period
in 2006.
13
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the change to retail revenues follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Year-to-Date |
|
|
2007 |
|
2007 |
|
|
(in millions) |
|
(% change) |
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
3,853.4 |
|
|
|
|
|
|
$ |
9,295.2 |
|
|
|
|
|
Estimated change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
89.6 |
|
|
|
2.3 |
|
|
|
121.9 |
|
|
|
1.3 |
|
Sales growth |
|
|
3.3 |
|
|
|
0.1 |
|
|
|
52.2 |
|
|
|
0.6 |
|
Weather |
|
|
23.5 |
|
|
|
0.6 |
|
|
|
54.2 |
|
|
|
0.6 |
|
Fuel and other cost recovery |
|
|
115.9 |
|
|
|
3.0 |
|
|
|
411.1 |
|
|
|
4.4 |
|
|
Retail current year |
|
$ |
4,085.7 |
|
|
|
6.0 |
% |
|
$ |
9,934.6 |
|
|
|
6.9 |
% |
|
Revenues associated with changes in rates and pricing increased for third quarter 2007 when
compared to the same period in 2006 primarily as a result of an increase in base rates at Alabama
Power, as well as an increase in contributions from market-based rates to large commercial and
industrial customers. Revenues associated with changes in rates and pricing increased for
year-to-date 2007 when compared to the same period in 2006 primarily as a result of an increase in
base rates at Alabama Power, partially offset by a decrease in contributions from market-based
rates to large commercial and industrial customers during the first two quarters of 2007.
Revenues attributable to changes in sales growth increased for third quarter and year-to-date 2007
when compared to the same periods in 2006 due to a 1.2% and 1.5% increase in retail KWH sales,
respectively, resulting primarily from continued customer growth. The number of retail customers increased
by 1.5% as of September 2007 compared to September 2006. For the third quarter and year-to-date
2007, residential KWH sales increased 1.5% and 2.6%, respectively, and commercial KWH sales
increased 2.8% and 3.1%, respectively. These increases were partially offset by a 1.0% decrease in
KWH sales to industrial customers in both the third quarter and year-to-date 2007 primarily due to
reduced demand from the primary metals and textile industries.
Revenues resulting from changes in weather increased because of favorable weather for third quarter
and year-to-date 2007 compared to the same periods in 2006.
Fuel and
other cost recovery revenues increased $115.9 million in the third quarter of 2007 and
$411.1 million for year-to-date 2007 when compared to the same periods in 2006. Electric rates for
the traditional operating companies include provisions to adjust billings for fluctuations in fuel
costs, including the energy component of purchased power costs. Under these provisions, fuel
revenues generally equal fuel expenses, including the fuel component of purchased power costs, and
do not affect net income.
Wholesale Revenues
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$56.9
|
|
11.2
|
|
$169.7
|
|
12.5 |
|
In the third quarter 2007, wholesale revenues were $563.2 million compared to $506.3 million in the
same period in 2006. The increase was primarily a result of a rise in fuel revenues due to a 6.4%
increase in the average unit cost of fuel per net KWH generated. Also contributing to the increase
were generating plant operational performance incentives on existing wholesale contracts.
For year-to-date 2007, wholesale revenues were $1.5 billion compared to $1.3 billion for the same
period in 2006. The increase was a result of a rise in fuel revenues due to an 8.6% increase in
the average unit cost of fuel per net KWH generated, increased revenues from new and existing
contracts, and generating plant
operational performance incentives on existing wholesale contracts. Short-term opportunity sales
also contributed to the increase due to higher sales margins attributable to favorable weather
compared to neighboring territories and a
14
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
favorable price differential between market prices and Southern Companys marginal cost.
Short-term opportunity sales are made at market-based rates that generally provide a margin above
Southern Companys variable cost to produce the energy.
Other Electric Revenues
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$10.6
|
|
8.8
|
|
$34.4
|
|
9.9 |
|
In the third quarter 2007, other electric revenues were $130.6 million compared to $120.0 million
in the same period in 2006. The increase was primarily a result of an increase in transmission
revenues of $5.3 million and an increase in outdoor lighting revenues of $2.2 million related to a
3.1% increase in the number of lighting customers.
For year-to-date 2007, other electric revenues were $381.5 million compared to $347.1 million in
the same period in 2006. The increase was primarily a result of an increase in transmission
revenues of $17.8 million, an increase in outdoor lighting revenues of $5.7 million related to a
3.1% increase in the number of lighting customers, and an increase in customer fees of $4.1 million
related primarily to an increase in the number of retail electric customers.
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 |
|
|
Year-to-Date 2007 |
|
|
|
vs. |
|
|
vs. |
|
|
|
Third Quarter 2006 |
|
|
Year-to-Date 2006 |
|
|
|
(change in millions) |
|
|
(% change) |
|
|
(change in millions) |
|
|
(% change) |
|
Fuel |
|
$ |
113.6 |
|
|
|
7.0 |
|
|
$ |
531.5 |
|
|
|
13.3 |
|
Purchased power |
|
|
41.6 |
|
|
|
17.3 |
|
|
|
(37.4 |
) |
|
|
(7.8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fuel and purchased power expenses |
|
$ |
155.2 |
|
|
|
|
|
|
$ |
494.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel and purchased power expenses for the third quarter 2007 were $2.0 billion compared to $1.8
billion for the corresponding period in 2006. The increase in fuel and purchased power expenses
was due to a $37.3 million net increase in the average cost of fuel and purchased power, as well as
a $117.9 million net increase related to total KWHs generated and purchased when compared to the
same period in 2006. The net increase in fuel and purchased power expenses for the
third quarter 2007 compared to the corresponding period in 2006 resulted from rising fossil fuel
prices and a 0.3% increase in fossil fuel generation by Southern Company-owned facilities,
primarily due to a 17.6% decrease in hydro generation from a severe drought.
Fuel and purchased power expenses for year-to-date 2007 were $5.0 billion compared to $4.5 billion
for the corresponding period in 2006. The increase in fuel and purchased power expenses was due to
a $324.9 million net increase in the average cost of fuel and purchased power, as well as a $169.2
million net increase related to total KWHs generated and purchased when compared to the same period
in 2006. The net increase in fuel and purchased power expenses for year-to-date 2007
compared to the corresponding period in 2006 resulted from rising fossil fuel prices and a 5.0%
increase in fossil fuel generation by Southern Company-owned facilities, primarily due to a 43.6%
decrease in hydro generation from a severe drought.
Increases in fuel and purchased power expenses at the traditional operating companies are generally
offset by fuel revenues and do not affect net income. See FUTURE EARNINGS POTENTIAL FERC and
State PSC Matters Retail Fuel Cost Recovery herein for additional information. Fuel expenses
incurred under Southern Powers PPAs are generally the responsibility of the counterparties and do
not significantly affect net income.
15
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of Southern Companys cost of generation and purchased power are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Third Quarter |
|
|
|
|
|
Year-to-Date |
|
Year-to-Date |
|
|
Average Cost |
|
2007 |
|
2006 |
|
% change |
|
2007 |
|
2006 |
|
% change |
|
|
(cents per net KWH) |
|
|
|
|
|
(cents per net KWH) |
|
|
|
|
|
Fuel |
|
|
3.01 |
|
|
|
2.83 |
|
|
|
6.4 |
|
|
|
2.90 |
|
|
|
2.67 |
|
|
|
8.6 |
|
Purchased power |
|
|
8.67 |
|
|
|
10.45 |
|
|
|
(17.0) |
|
|
|
7.75 |
|
|
|
8.25 |
|
|
|
(6.1) |
|
|
Energy purchases will vary depending on demand for energy within the Southern Company service area,
the market cost of available energy as compared to the cost of Southern Company system
generated-energy, and the availability of Southern Company system generation.
Other Operations and Maintenance Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 |
|
|
Year-to-Date 2007 |
|
|
|
vs. |
|
|
vs. |
|
|
|
Third Quarter 2006 |
|
|
Year-to-Date 2006 |
|
|
|
(change in millions) |
|
|
(% change) |
|
|
(change in millions) |
|
|
(% change) |
|
Other operations |
|
$ |
47.8 |
|
|
|
7.9 |
|
|
$ |
49.2 |
|
|
|
2.8 |
|
Maintenance |
|
|
23.8 |
|
|
|
10.1 |
|
|
|
37.9 |
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
operations and
maintenance
expenses |
|
$ |
71.6 |
|
|
|
|
|
|
$ |
87.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the third quarter 2007, other operations and maintenance expenses were $911.6 million compared
to $840.0 million in the same period in 2006. The increase in other operations and maintenance
expenses was primarily a result of a $49.1 million increase related to labor and materials
expenses, timing of and expenses incurred for maintenance outages, and increases in expenses
associated with new facilities, primarily Plant Rowan acquired by Southern Power in September 2006.
Also contributing to the increase in other operations and maintenance expenses was a $20.1 million
increase in administrative and general expenses largely related to an increase in shared service
expenses and accrued litigation expenses.
For year-to-date 2007, other operations and maintenance expenses were $2.6 billion compared to $2.5
billion for the same period in 2006. The increase in other operations and maintenance expenses was
primarily a result of a $79.8 million increase related to labor and materials expenses, timing of
and expenses incurred for maintenance outages, and increases in expenses associated with new
facilities, primarily Plants DeSoto and Rowan acquired by Southern Power in June 2006 and September
2006, respectively.
Depreciation and Amortization
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$11.8
|
|
3.9
|
|
$32.0
|
|
3.6 |
|
In the third quarter 2007, depreciation and amortization was $311.9 million compared to $300.1
million in the same period in 2006.
For year-to-date 2007, depreciation and amortization was $928.6 million compared to $896.6 million
in the same period in 2006.
The third quarter and year-to-date 2007 increases in depreciation and amortization were a result of
additional investments in environmental, transmission, and distribution projects, as well as an
increase in amortization related to a regulatory liability recorded in 2003 in connection with the
Mississippi PSCs accounting order on
16
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Plant Daniel capacity. See Note 3 to the financial statements of Mississippi Power under Retail
Regulatory Matters in Item 8 of the Form 10-K for additional information. Also contributing to
the increases was the acquisition of Plant Rowan by Southern Power in September 2006.
Taxes Other than Income Taxes
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$20.2
|
|
10.8
|
|
$33.5
|
|
6.2 |
|
In the third quarter 2007, taxes other than income taxes were $206.8 million compared to $186.6
million in the same period in 2006.
For year-to-date 2007, taxes other than income taxes were $574.3 million compared to $540.8 million
in the same period in 2006.
The third quarter and year-to-date 2007 increases in taxes other than income taxes were primarily a
result of increases in franchise taxes which are directly related to increases in revenues.
Allowance for Equity Funds Used During Construction
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$16.3
|
|
136.8
|
|
$38.0
|
|
112.7 |
|
In the third quarter 2007, allowance for equity funds used during construction was $28.1 million
compared to $11.8 million in the same period in 2006.
For year-to-date 2007, allowance for equity funds used during construction was $71.8 million
compared to $33.8 million in the same period in 2006.
The third quarter and year-to-date 2007 increases were primarily a result of additional investments
in environmental, transmission, and distribution projects mainly at Alabama Power and Georgia
Power.
Equity in Losses of Unconsolidated Subsidiaries
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$0.3
|
|
208.3
|
|
$(24.3)
|
|
(54.0) |
|
The third quarter 2007 variance when compared to the third quarter 2006 is not material.
For year-to-date 2007, equity in losses of unconsolidated subsidiaries was $20.7 million compared
to $45.0 million for the same period in 2006. Southern Company made investments in two synthetic
fuel production facilities that generate operating losses. These investments also allow Southern
Company to claim federal income tax credits that offset these operating losses and make the
projects profitable. The decrease in equity in losses of unconsolidated subsidiaries for
year-to-date 2007 when compared with the same period in 2006 was primarily the result of
terminating Southern Companys membership interest in one synthetic fuel entity in 2006 which
eliminated the funding obligation and Southern Companys share of losses for year-to-date 2007,
partially offset by higher operating expenses at the other synthetic fuel entity due to idled
production for a portion of second quarter and most of third quarter 2006. See FUTURE EARNINGS
POTENTIAL Income
17
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Tax Matters Synthetic Fuel Tax Credits and Note (B) to the Condensed Financial Statements under
INCOME TAX MATTERS Synthetic Fuel Tax Credits herein for further information.
Leveraged Lease Income
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(4.4)
|
|
(26.4)
|
|
$(20.6)
|
|
(39.2) |
|
Leveraged lease income for the third quarter 2007 was $12.4 million compared to $16.8 million for
the corresponding period in 2006.
Leveraged lease income for year-to-date 2007 was $31.9 million compared to $52.5 million for the
corresponding period in 2006.
Southern Company has several leveraged lease agreements which relate to international and domestic
energy generation, distribution, and transportation assets. Southern Company receives federal
income tax deductions for depreciation and amortization, as well as interest on long-term debt
related to these investments. The adoption of FASB Staff Position No. FAS 13-2 (FSP 13-2),
Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes
Generated by a Leveraged Lease Transaction resulted in decreases to leveraged lease pre-tax income
of $6.4 million and $19.3 million for the third quarter and year-to-date 2007, respectively, when
compared to the same periods in 2006. See FUTURE EARNINGS POTENTIAL Income Tax Matters
Leveraged Lease Transactions and Note (B) to the Condensed Financial Statements under INCOME TAX
MATTERS Leveraged Lease Transactions herein for further information.
Impairment Loss on Equity Method Investments
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(0.7)
|
|
N/M
|
|
$(16.0)
|
|
N/M |
|
N/M Not meaningful
The third quarter 2007 variance when compared to the third quarter 2006 is not material.
For year-to-date 2007, impairment loss on equity method investments was $0.0 compared to $16.0
million for the same period in 2006. The decrease in impairment loss on equity method investments
was primarily a result of impairment losses of $15.9 million recognized during the second quarter
2006 related to Southern Companys investments in two synthetic fuel production facilities. See
FUTURE EARNINGS POTENTIAL Income Tax Matters Synthetic Fuel Tax Credits and Note (B) to the
Condensed Financial Statements under INCOME TAX MATTERS Synthetic Fuel Tax Credits herein for
further information.
Interest Expense, Net of Amounts Capitalized
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$34.9
|
|
18.8
|
|
$72.0
|
|
13.3 |
|
Interest expense, net of amounts capitalized for the third quarter 2007 was $220.1 million compared
to $185.2 million for the corresponding period in 2006. The increase was a result of $42.8 million
increase associated with $1.6 billion in additional debt outstanding at September 30, 2007 compared
to September 30, 2006 and
higher interest rates associated with the issuance of new long-term debt. Also contributing to the
increase was $2.0 million related to an increase in average interest rates on existing variable
rate debt. These increases were
18
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
partially offset by $9.9 million in higher capitalized interest as compared to the same period in
2006. See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Financing
Activities of Southern Company in Item 7 of the Form 10-K and herein for additional information.
Interest expense, net of amounts capitalized for year-to-date 2007 was $614.3 million compared to
$542.3 million for the corresponding period in 2006. The increase was a result of an $87.4 million
increase associated with $1.6 billion in additional debt outstanding at September 30, 2007 compared
to September 30, 2006 and higher interest rates associated with the issuance of new long-term debt.
Also contributing to the increase was $12.3 million related to an increase in average interest
rates on existing variable rate debt. These increases were partially offset by $27.6 million in
higher capitalized interest as compared to the same period in 2006.
Interest Expense to Affiliate Trusts
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(17.9)
|
|
(58.4)
|
|
$(32.9)
|
|
(35.9) |
|
Interest expense to affiliate trusts for the third quarter 2007 was $12.7 million compared to $30.6
million for the corresponding period in 2006.
Interest expense to affiliate trusts for year-to-date 2007 was $58.9 million compared to $91.8
million for the corresponding period in 2006.
The third quarter and year-to-date 2007 decreases in interest expense to affiliate trusts were
primarily a result of the redemption of approximately $1.0 billion of long-term debt payable to
affiliated trusts since September 30, 2006.
Other Income (Expense), Net
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$47.5
|
|
157.3
|
|
$35.3
|
|
130.8 |
|
In the third quarter 2007, other income (expense), net was $17.3 million compared to $(30.2)
million for the same period in 2006 primarily as a result of a $47.0 million increase related to
changes in the value of derivative transactions in the synthetic fuel business. These derivative
transactions were entered into to reduce Southern Companys exposure to changes in the value of
synthetic fuel tax credits, which are impacted by changes in oil prices. See FUTURE EARNINGS
POTENTIAL Income Tax Matters Synthetic Fuel Tax Credits and Note (B) to the Condensed
Financial Statements under INCOME TAX MATTERS Synthetic Fuel Tax Credits herein for further
information.
For year-to-date 2007, other income (expense), net was $8.3 million compared to $(27.0) million for
the same period in 2006 primarily as a result of a $42.8 million increase related to changes in the
value of derivative transactions in the synthetic fuel business, partially offset by the release of
$6.3 million in certain obligations associated with one of Southern Companys synthetic fuel
investments which was terminated effective July 1, 2006.
Income Taxes
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$40.0
|
|
9.9
|
|
$72.4
|
|
9.9 |
|
19
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income taxes for the third quarter 2007 were $445.3 million compared to $405.3 million for the
corresponding period in 2006. The increase in income taxes was primarily a result of higher
pre-tax earnings and a decrease in net synthetic fuel tax credits in third quarter 2007 compared to
the same period in 2006. See FUTURE EARNINGS POTENTIAL Income Tax Matters Synthetic Fuel Tax
Credits and Note (B) to the Condensed Financial Statements under INCOME TAX MATTERS Synthetic
Fuel Tax Credits herein for further information. The increase in income taxes was partially
offset by the tax benefit associated with an increase in allowance for equity funds used during
construction and an increase in the IRC Section 199 domestic
production deduction. See FUTURE
EARNINGS POTENTIAL Income Tax Matters IRC
Section 199 Domestic Production
Deduction and Note (H) to the Condensed Financial Statements herein for further information.
Income taxes for year-to-date 2007 were $806.4 million compared to $734.0 million for the
corresponding period in 2006. The increase was primarily a result of higher pre-tax earnings. The
increase in income taxes was partially offset by the tax benefit
associated with an increase in reference to a heading where
capitalized allowance for equity funds used during construction and an increase in the IRC Section 199 domestic
production deduction.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Southern Companys
future earnings potential. The level of Southern Companys future earnings depends on numerous
factors that affect the opportunities, challenges, and risks of Southern Companys primary business
of selling electricity. These factors include the traditional operating companies ability to
maintain a stable regulatory environment that continues to allow for the recovery of all prudently
incurred costs during a time of increasing costs. Another major factor is the profitability of the
competitive market-based wholesale generating business and federal regulatory policy, which may
impact Southern Companys level of participation in this market. Future earnings for the
electricity business in the near term will depend, in part, upon growth in energy sales, which is
subject to a number of factors. These factors include weather, competition, new energy contracts
with neighboring utilities, energy conservation practiced by customers, the price of electricity,
the price elasticity of demand, and the rate of economic growth in the service area. For
additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENTS
DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect
earnings if such costs cannot be fully recovered in rates on a timely basis. See MANAGEMENTS
DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters of Southern Company
in Item 7 and Note 3 to the financial statements of Southern Company under Environmental Matters
in Item 8 of the Form 10-K for additional information.
New Source Review Litigation
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters New
Source Review Actions of Southern Company in Item 7 and Note 3 to the financial statements of
Southern Company under Environmental Matters New Source Review Actions in Item 8 of the Form
10-K for additional information regarding a civil action brought by the EPA alleging that Alabama
Power had violated the NSR provisions of the Clean Air Act and related state laws with respect to
certain of its coal-fired generating facilities. The plaintiffs appeal against Alabama Power was
stayed by the U.S. Court of Appeals for the Eleventh Circuit pending the U.S. Supreme Courts
decision in a similar case
against Duke Energy. On April 2, 2007, the U.S. Supreme Court issued an opinion in the Duke Energy
case. The U.S. District Court for the Northern District of Alabama has issued an order indicating
a willingness to re-
20
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
evaluate its previous decision in light of the Supreme Courts Duke Energy opinion. The Eleventh
Circuit is now considering whether to proceed with the appeal or remand the case to the District
Court for further proceedings, and if so, whether to vacate the District Courts original judgment
in favor of Alabama Power. The final resolution of these claims
cannot be determined at this time.
Eight-Hour Ozone Regulations
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Environmental Statutes and Regulations Air Quality of Southern Company in Item 7 of the Form
10-K for additional information regarding revisions to the eight-hour ozone air quality standard.
On June 20, 2007, the EPA proposed additional revisions to the current eight-hour ozone standard
which, if enacted, could result in designation of new nonattainment areas within Southern Companys
service territory. The EPA has requested comment and is expected to make a determination regarding
finalization of a revised standard in 2008. The ultimate outcome of this matter cannot be
determined at this time.
Fine Particulate Matter Regulations
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Environmental Statutes and Regulations Air Quality of Southern Company in Item 7 of the Form
10-K for additional information regarding nonattainment designations for the fine particulate
matter air quality standard. In March 2007, the EPA finalized its fine particulate matter
implementation rule, requiring submittal of state plans for addressing the nonattainment
designations by April 2008. The ultimate outcome of this matter depends on the development and
submittal of those state plans and the resolution of pending legal challenges and, therefore,
cannot be determined at this time.
Georgia Multi-Pollutant Rule
On June 27, 2007, the State of Georgia approved a new multi-pollutant rule for certain existing
coal-fired electric utility steam generating units in Georgia. The rule is designed to reduce
emissions of mercury, sulfur dioxide, nitrogen oxide, and fine particulates state-wide by requiring
installation of specified control technologies at each affected unit by a date certain between
December 31, 2008 and June 1, 2015. This rule will require the installation of controls on the
majority of Georgia Powers coal-fired units. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE
EARNINGS POTENTIAL Environmental Matters Environmental Statutes and Regulations General in
Item 7 of the Form 10-K for a discussion of estimated compliance costs for 2007 through 2009. If
compliance costs cannot be fully recovered in rates on a timely basis, Southern Companys financial
statements would be adversely impacted. See FERC and State PSC Matters Georgia Power Retail
Base Rate Recovery for information on Georgia Powers request to increase retail rates effective
January 1, 2008.
Plant Wansley Environmental Litigation
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Plant Wansley Environmental Litigation of Southern Company in Item 7 and Note 3 to the financial
statements of Southern Company under Environmental Matters Plant Wansley Environmental
Litigation in Item 8 of the Form 10-K for additional information on litigation involving alleged
violations of the Clean Air Act at four of the units at Plant Wansley. On June 18, 2007, the U.S.
District Court for the Northern District of Georgia approved a settlement between the parties
resolving all remaining issues and dismissed the case. There was no material impact on Southern
Companys financial statements.
21
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Florida Greenhouse Gas Executive Orders
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters -
Global Climate Issues of Southern Company in Item 7 of the Form 10-K for additional information
regarding domestic efforts to reduce greenhouse gases. On July 13, 2007, the Governor of the State
of Florida signed three executive orders addressing reduction of greenhouse gas emissions within
the state, including statewide emission reduction targets beginning in 2017. Included in the
orders is a directive to the Secretary of Environmental Protection to develop rules adopting
maximum allowable emissions levels of greenhouse gases for electric utilities, consistent with the
statewide emission reduction targets, and a request to the Florida PSC to initiate rulemaking
requiring utilities to produce at least 20% of their electricity from renewable sources. The
impact of these orders on Southern Company will depend on the development, adoption, and
implementation of any rules governing greenhouse gas emissions, and the ultimate outcome cannot be
determined at this time.
FERC and State PSC Matters
Market-Based Rate Authority
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL FERC Matters
Market-Based Rate Authority of Southern Company in Item 7 and Note 3 to the financial
statements of Southern Company under FERC Matters Market-Based Rate Authority in Item 8 of
the Form 10-K for information regarding the proceedings initiated by the FERC in December 2004
to assess Southern Companys generation dominance within its retail service territory and in May
2005 to determine whether Southern Company satisfies the other three parts of the FERCs
market-based rate analysis: transmission market power, barriers to entry, and affiliate abuse or
reciprocal dealing.
In late June and July 2007, hearings were held in the December 2004 proceeding and briefs to the
presiding ALJ were filed in August and September 2007. Southern Company anticipates an initial
decision from the ALJ in November 2007 on the issues that were set for hearing. The ultimate
outcome of this generation dominance proceeding cannot now be determined, but an adverse
decision by the FERC in a final order could result in refunds of approximately $19.7 million,
plus interest.
On June 21, 2007, the FERC issued an order terminating the May 2005 proceeding pertaining to the
other three parts of the market-based rate analysis. In addition, on June 21, 2007, the FERC
issued its final rule regarding market-based rate authority. The FERC generally retained its
current market-based rate standards. The impact of this order and its effect on the generation
dominance proceeding cannot now be determined.
Intercompany Interchange Contract
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL FERC Matters
Intercompany Interchange Contract of Southern Company in Item 7 and Note 3 to the financial
statements of Southern Company under FERC Matters Intercompany Interchange Contract in Item
8 of the Form 10-K for information regarding the proceeding initiated by the FERC in May 2005 to
examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power,
Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of
which the Power Pool is operated, and, in particular, the propriety of the continued inclusion
of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the
FERCs standards of conduct applicable to utility companies that are transmission providers, and
(3) whether Southern Companys code of conduct defining Southern Power as a system company
rather than a marketing affiliate is just and reasonable.
22
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On April 19, 2007, the FERC approved, with certain modifications, the compliance filing
submitted by Southern Company on November 6, 2006. The compliance plan largely involves
functional separation and information restrictions related to marketing activities conducted on
behalf of Southern Power. Implementation of the plan is not expected to have a material impact
on Southern Companys financial statements.
Retail Fuel Cost Recovery
The traditional operating companies each have established fuel cost recovery rates approved by
their respective state PSCs. Over the past several years, the traditional operating companies have
experienced higher than expected fuel costs for coal, natural gas, and uranium. These higher fuel
costs have resulted in under recovered fuel costs included in the balance sheets of approximately
$1.2 billion at September 30, 2007. Gulf Power and Mississippi Power were granted increased fuel
billing factors effective January 1, 2007. Georgia Power was granted an increase effective March
2007. Alabama Power was ordered to increase its fuel billing factor effective July 2007.
Operating revenues are adjusted for differences in actual recoverable fuel costs and amounts billed
in current regulated rates. Accordingly, changes to the billing factors will have no significant
effect on Southern Companys revenues or net income but will affect cash flow. The traditional
operating companies will continue to monitor the under recovered fuel cost balance in light of
these higher fuel costs. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL
PSC Matters Fuel Cost Recovery of Southern Company in Item 7 and Note 3 to the financial
statements of Southern Company under Alabama Power Retail Regulatory Matters and Georgia Power
Retail Regulatory Matters in Item 8 of the Form 10-K for additional information.
Georgia Power Retail Base Rate Filing
Georgia Power is currently operating under a three-year retail rate order that expires December 31,
2007. Under the terms of the existing order, earnings are evaluated annually against a retail
return on common equity range of 10.25% to 12.25%. Two-thirds of any earnings above the 12.25%
return are applied to rate refunds, with the remaining one-third retained by Georgia Power. The
order required Georgia Power to file a general rate case by July 1, 2007.
On June 29, 2007, Georgia Power filed a request to increase retail base rates with the Georgia PSC.
The request includes an increase effective January 1, 2008 of approximately $406 million, or
5.98%, in retail revenues, based on a future test year ending July 31, 2008 and a proposed retail
return on common equity of 12.5%. The majority of the increase in retail revenues is being
requested to cover the costs of environmental compliance and continued investment in new
generation, transmission, and distribution facilities to support growth and ensure reliability.
The remainder of the increase would include recovery of higher operation, maintenance, and other
investment costs to meet the rising demand for electricity. Hearings on Georgia Powers direct
testimony were held in early October. In direct testimony filed on October 22, 2007, the Georgia
PSC staff proposed certain adjustments to Georgia Powers general rate case that indicates a $21
million revenue surplus. Georgia Power disagrees with the majority of the staffs proposed
adjustments. Hearings on Georgia PSC staffs and intervenors direct testimony will be held in
early November. Georgia Powers rebuttal hearings will occur later the same month. Georgia Power
expects the Georgia PSC to issue a final order in this matter on December 20, 2007. In addition to
the traditional test period request, Georgia Power filed information for a three-year rate plan
option that includes additional increases of approximately $189 million, or 2.62%, and $41 million,
or 0.56%, in retail revenues effective January 1, 2009 and 2010, respectively, to cover the costs
of additional environmental controls and certified PPAs. The final outcome of this matter cannot
now be determined. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE
EARNINGS POTENTIAL PSC Matters Georgia Power of Southern Company in Item 7 and Note 3 to the
financial statements of Southern Company under Georgia Power Retail Regulatory
Matters in Item 8 of the Form 10-K and Note (K) to the Condensed Financial Statements herein for
additional information.
23
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Mississippi Power Storm Damage Cost Recovery
See Note 3 to the financial statements of Southern Company under PSC Matters Storm Damage Cost
Recovery in Item 8 of the Form 10-K for information regarding storm restoration costs in
connection with Hurricane Katrina and a financing order issued by the Mississippi PSC that
authorized the issuance of $121.2 million of storm restoration bonds under a state bond program.
The storm restoration bonds were issued by the Mississippi Development Bank on June 1, 2007 on
behalf of the State of Mississippi. On June 1, 2007, Mississippi Power received a grant payment of
$85.2 million from the State of Mississippi representing recovery of $25.2 million in retail storm
restoration costs incurred or to be incurred and $60.0 million to increase Mississippi Powers
property damage reserve. On October 9, 2007, Mississippi Power received an additional grant
payment of $17.6 million for expenditures incurred to date for construction of a new storm
operations center. The funds received related to previously incurred storm restoration
expenditures have been accounted for as a government grant and have been recorded as a reduction to
the regulatory asset that was recorded as the storm restoration expenditures were incurred, in
accordance with FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation.
The funds received for storm restoration expenditures to be incurred were recorded as a regulatory
liability. Mississippi Power will receive further grant payments of up to $18.4 million as
expenditures are incurred to construct a new storm operations center. See Note (D) to the
Condensed Financial statements herein for additional information.
Mirant Matters
Mirant was an energy company with businesses that included independent power projects and energy
trading and risk management companies in the U.S. and selected other countries. It was a
wholly-owned subsidiary of Southern Company until its initial public offering in October 2000. In
April 2001, Southern Company completed a spin-off to its shareholders of its remaining ownership,
and Mirant became an independent corporate entity. In July 2003, Mirant filed for voluntary
reorganization under Chapter 11 of the U.S. Bankruptcy Code. See Note 3 to the financial
statements of Southern Company under Mirant Matters Mirant Bankruptcy in Item 8 of the Form
10-K for information regarding Southern Companys contingent liabilities associated with Mirant,
including guarantees of contractual commitments, litigation, and joint and several liabilities in
connection with the consolidated federal income tax return.
MC Asset Recovery Litigation
See Note 3 to the financial statements of Southern Company under Mirant Matters MC Asset
Recovery Litigation in Item 8 of the Form 10-K for information regarding a suit between MC Asset
Recovery, a special purpose subsidiary of the post-bankruptcy corporation that adopted the name
Mirant Corporation, and Southern Company. On March 28, 2007, MC Asset Recovery filed a Fourth
Amended Complaint. Among other things, the Fourth Amended Complaint adds a claim under the Federal
Debt Collection Procedure Act (FDCPA) to avoid certain transfers from Mirant to Southern Company
and withdraws the breach of fiduciary duty claim the court struck as a result of Southern Companys
motion for summary judgment. MC Asset Recovery claims to have standing to assert violations of the
FDCPA and to recover property on behalf of the Mirant debtors estates. The ultimate outcome of
this matter cannot be determined at this time.
Mirant Securities Litigation
See Note 3 to the financial statements of Southern Company under Mirant Matters Mirant
Securities Litigation in Item 8 of the Form 10-K for information regarding a class action lawsuit
that several Mirant shareholders (plaintiffs) originally filed against Mirant and certain Mirant
officers in May 2002. In November 2002, Southern Company, certain former and current senior
officers of Southern Company, and 12 underwriters
of Mirants initial public offering were added as defendants. On March 24, 2006, the plaintiffs
filed a motion for reconsideration requesting that the court vacate that portion of its July 14,
2003 order dismissing the
24
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
plaintiffs claims based upon Mirants alleged improper energy trading and marketing activities
involving the California energy market. On March 6, 2007, the court granted plaintiffs motion for
reconsideration, reinstated the California energy market claims, and granted in part and denied in
part defendants motion to compel certain class certification discovery. On March 21, 2007,
defendants filed renewed motions to dismiss the California energy claims on grounds originally set
forth in their 2003 motions to dismiss, but which were not addressed by the court. On July 27,
2007, certain defendants, including Southern Company, filed motions for reconsideration of the
courts denial of a motion seeking dismissal of certain federal securities laws claims based upon,
among other things, certain alleged errors included in financial statements issued by Mirant. The
ultimate outcome of this matter cannot be determined at this time.
Southern Company Employee Savings Plan Litigation
See Note 3 to the financial statements of Southern Company under Mirant Matters Southern Company
Employee Savings Plan Litigation in Item 8 of the Form 10-K for information related to the pending
settlement of a class action complaint filed under ERISA in June 2004, and amended in December 2004
and November 2005, on behalf of a purported class of participants in or beneficiaries of The
Southern Company Employee Savings Plan at any time since April 2, 2001 and whose plan accounts
included investments in Mirant common stock. On August 14, 2007, the U.S. District Court for the
Northern District of Georgia issued a final order and judgment approving the December 2006
settlement agreement. The deadline for the appeal expired with no appeal filed. There was no
material impact on the financial statements of Southern Company. This matter is now concluded.
Income Tax Matters
Leveraged Lease Transactions
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Income Tax Matters
Leveraged Lease Transactions of Southern Company in Item 7 and Note 3 to the financial statements
of Southern Company under Income Tax Matters in Item 8 of the Form 10-K and Note (B) to the
Condensed Financial Statements under INCOME TAX MATTERS Leveraged Lease Transactions herein for
information regarding IRS challenges to Southern Companys transactions related to international
leveraged leases that could have material impacts on Southern Companys financial statements.
Effective January 1, 2007, Southern Company adopted FSP 13-2, which amends FASB Statement No. 13,
Accounting for Leases requiring recalculation of the rate of return and the allocation of income
whenever the projected timing of the income tax cash flows generated by a leveraged lease is
revised with recognition of the resulting gain or loss in the year of the revision. FSP 13-2 also
requires that all recognized tax positions in a leveraged lease must be measured in accordance with
the criteria in FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes,
and any changes resulting from FIN 48 must be reflected as a change in important lease assumptions
as of the date of adoption. The cumulative effect of initially adopting FSP 13-2 was recorded as
an adjustment to beginning retained earnings. For the lease-in-lease-out (LILO) transaction
settled with the IRS in February 2005, the cumulative effect of adopting FSP 13-2 was a $17 million
reduction in retained earnings. With respect to Southern Companys sale-in-lease-out (SILO)
transactions, the adoption of FSP 13-2 reduced retained earnings by $108 million and the adoption
of FIN 48 reduced beginning retained earnings by an additional $15 million. The adjustments to
retained earnings are non-cash charges and will be recognized as income over the remaining terms of
the affected leases. Any future changes in the timing of projected or actual income tax cash flows
will result in an additional recalculation of the net investment in the leases and will be recorded
currently in income. Southern Company is continuing to pursue resolution of these matters through
litigation. Southern Company believes these transactions are valid leases for U.S. tax purposes
and the related deductions are allowable. In addition, the U.S. Senate is currently considering
legislation that would disallow
tax benefits after December 31, 2007 for SILO losses and other international leveraged lease
transactions (such as LILO transactions). The
25
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ultimate impact on Southern Companys net income will be dependent on the outcome of pending
litigation and the proposed legislation. The impact could be significant, and potentially
material, but cannot now be determined.
Synthetic Fuel Tax Credits
As discussed in MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Income Tax
Matters Synthetic Fuel Tax Credits of Southern Company in Item 7 of the Form 10-K, Southern
Company has an investment in an entity that produces synthetic fuel and receives tax credits under
Section 45K (formerly Section 29) of the IRC. In accordance with Section 45K of the IRC, these tax
credits are subject to limitation as the annual average price of oil (as determined by the DOE)
increases over a specified, inflation-adjusted dollar amount published in the spring of the
subsequent year. Southern Company, along with its partners in this investment, has continued to
monitor oil prices. Reserves against tax credits earned in 2007 of $37.6 million have been
recorded in the first nine months of 2007 due to projected phase-outs of the credits in 2007 as a
result of current and projected future oil prices. Additionally, the synthetic fuel tax credits
are not allowed under IRC Section 45K for any production after December 31, 2007.
Georgia State Income Tax Credits
In September 2007, 2006, and 2005, Georgia Power filed its 2006, 2005, and 2004 income tax returns,
respectively, which included state income tax credits for activity through Georgia ports. Georgia
Power has also filed additional similar claims for the years 2002 through 2004. The Georgia Department of
Revenue has not responded to these claims. On July 24, 2007, Georgia Power filed a complaint in
the Superior Court of Fulton County to recover the credits claimed for the years 2002 through 2004.
If Georgia Power prevails, these claims could have a significant, and possibly material, positive
effect on Southern Companys net income. If Georgia Power is not successful, payment of the
related state tax could have a significant, and possibly material, negative effect on Southern
Companys cash flow. The ultimate outcome of this matter cannot now be determined.
IRC Section 199 Domestic Production Deduction
The American Jobs Creation Act of 2004 created a tax deduction for the portion of income
attributable to United States production activities as defined in IRC Section 199. The deduction
is equal to a stated percentage of the taxpayers qualified production activities. The percentage
is phased in over the years 2005 through 2010 with a 3% rate applicable to the years 2005 and 2006,
a 6% rate applicable for years 2007 through 2009, and a 9% rate applicable for all years after
2009. The tax benefit of this deduction is estimated to be approximately $15 $20 million per
year in years 2008 and 2009, and approximately 50% higher in 2010.
Construction Projects
Integrated Gasification Combined Cycle (IGCC) Project
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Construction Projects
Integrated Gasification Combined Cycle of Southern Company in Item 7 of the Form 10-K for
information regarding the development by Southern Power and the Orlando Utilities Commission (OUC)
of an IGCC project in Orlando, Florida at OUCs Stanton Energy site. Since the definitive
agreements relating to the development of the project were executed in December 2005, the estimated
costs of the gasifier portion have increased due primarily to increases in commodity costs and
increased market demand for labor. Southern Power had the option under the original agreements to
end its participation in the gasifier portion of the project at the end of the project definition
phase, which has been completed. On March 29, 2007, Southern
Powers Board of Directors approved the continuation and the completion of the design, engineering,
and construction of the gasifier portion of the project. Southern Power and OUC will share 65% and
35% of the
26
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
estimated cost increase, respectively, under the proposed amended agreements. In April 2007, OUC
approved its portion of the cost increase, subject to the DOEs approval of the additional funding.
On May 8, 2007, SCS, as agent for Southern Power, and the DOE entered into an amendment to the
February 2006 cooperative agreement to increase the DOEs funding for the gasifier portion of the
project by $58.75 million.
Southern
Power is evaluating the potential impacts of proposed federal and state
legislation and regulations on the gasifier portion of the IGCC project. Specifically, there is an
ongoing assessment of the State of Floridas governors executive orders concerning future
emissions restrictions and the rules and regulations necessary for implementation of such orders.
For additional information on the governors orders, see Environmental Matters Florida
Greenhouse Gas Executive Orders herein. As of October 31, 2007, Southern Powers share of actual
and committed costs related to the gasifier portion of the IGCC project was approximately $45
million. These costs will increase as the project continues. The ultimate impact on Southern
Companys financial statements will be dependent on the evaluation and application of the State of
Floridas governors executive orders and any other legislation or regulations, but could be
significant and possibly material. The ultimate outcome of this matter cannot now be determined.
Nuclear
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Construction Projects
Nuclear of Southern Company in Item 7 of the Form 10-K for information regarding a development
agreement between Southern Nuclear and Duke Energy to evaluate the potential construction of a new
two-unit nuclear plant at a jointly owned site in Cherokee County, South Carolina. In March 2007,
the Southern Nuclear Board of Directors voted to withdraw from any further development of this
project and a notice of withdrawal from the project was provided to Duke Energy. Adjustments to
the carrying value of the related assets were recorded in the first quarter 2007 and were not
material to the financial statements. During the second quarter 2007, Duke Energy chose to
independently continue with the project and purchased Southern Companys interest in the project
with no material effect on Southern Companys financial statements. This matter is now concluded.
Other Matters
Georgia Power proposed a donation of approximately 2,200 acres in Tallulah Gorge State Park to the
State of Georgia which the Georgia Department of Natural Resources voted to accept on October 24,
2007. The donation is expected to be effective in the fourth quarter 2007. The impact of this
donation to Southern Companys net income could possibly be significant but cannot be determined at
this time.
Southern Company is subject to certain claims and legal actions arising in the ordinary course of
business. In addition, Southern Companys business activities are subject to extensive
governmental regulation related to public health and the environment. Litigation over
environmental issues and claims of various types, including property damage, personal injury,
common law nuisance, and citizen enforcement of environmental requirements such as opacity and air
quality standards, has increased generally throughout the United States. In particular, personal
injury claims for damages caused by alleged exposure to hazardous materials have become more
frequent. The ultimate outcome of such pending or potential litigation against Southern Company
and its subsidiaries cannot be predicted at this time; however, for current proceedings not
specifically reported herein or in Note 3 to the financial statements of Southern Company in Item 8
of the Form 10-K, management does not anticipate that the liabilities, if any, arising from such
current proceedings would have a material adverse effect on Southern Companys financial
statements.
27
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See the Notes to the Condensed Financial Statements herein for discussion of various other
contingencies, regulatory matters, and other matters being litigated which may affect future
earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Company prepares its consolidated financial statements in accordance with accounting
principles generally accepted in the United States. Significant accounting policies are
described in Note 1 to the financial statements of Southern Company in Item 8 of the Form 10-K.
In the application of these policies, certain estimates are made that may have a material impact
on Southern Companys results of operations and related disclosures. Different assumptions and
measurements could produce estimates that are significantly different from those recorded in the
financial statements. See MANAGEMENTS DISCUSSION AND ANALYSIS ACCOUNTING POLICIES -
Application of Critical Accounting Policies and Estimates of Southern Company in Item 7 of the
Form 10-K for a complete discussion of Southern Companys critical accounting policies and
estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.
New Accounting Standards
Income Taxes
On January 1, 2007, Southern Company adopted FIN 48, which requires companies to determine whether
it is more likely than not that a tax position will be sustained upon examination by the
appropriate taxing authorities before any part of the benefit can be recorded in the financial
statements. It also provides guidance on the recognition, measurement, and classification of
income tax uncertainties, along with any related interest and penalties. The provisions of FIN 48
were applied to all tax positions beginning January 1, 2007. The impact on Southern Companys
financial statements was a reduction to beginning 2007 retained earnings of approximately $15
million related to Southern Companys SILO transactions. See Note (I) to the Condensed Financial
Statements herein for details regarding the financial statement impact of the adoption.
Leveraged Leases
Effective January 1, 2007, Southern Company adopted FSP 13-2. The cumulative effect of initially
adopting FSP 13-2 was recorded as an adjustment to beginning retained earnings. For the LILO
transaction settled with the IRS in February 2005, the cumulative effect of adopting FSP 13-2 was a
$17 million reduction in retained earnings. With respect to Southern Companys SILO transactions,
the adoption of FSP 13-2 reduced retained earnings by $108 million. The adjustments to retained
earnings are non-cash charges and will be recognized as income over the remaining terms of the
affected leases. Any future changes in the projected or actual income tax cash flows will result
in an additional recalculation of the net investment in the leases and will be recorded currently
in income. See FUTURE EARNINGS POTENTIAL Income Tax Matters Leveraged Lease Transactions and
Note (B) to the Condensed Financial Statements under INCOME TAX MATTERS Leveraged Lease
Transactions herein for further details about the effect of FSP 13-2.
Fair Value Measurement
The FASB issued FASB Statement No. 157 (SFAS No. 157), Fair Value Measurements in September 2006.
This standard provides guidance on how to measure fair value where it is permitted or required
under other accounting pronouncements. SFAS No. 157 also requires additional disclosures about
fair value measurements. Southern Company plans to adopt SFAS No. 157 on January 1, 2008 and is
currently assessing the impact of this standard.
28
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fair Value Option
In February 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159), Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115.
This standard permits an entity to choose to measure many financial instruments and certain other
items at fair value. Southern Company plans to adopt SFAS No. 159 on January 1, 2008 and is
currently assessing its impact to the extent the fair value option is elected.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Southern Companys financial condition and liquidity position remained stable at September 30,
2007. Net cash provided from operating activities totaled $2.5 billion for the first nine months
of 2007, compared to $2.0 billion for the corresponding period in 2006. The $487 million increase
is primarily due to the increase in net income as previously discussed and a reduction in the
outflow of cash for accounts payable, primarily related to gas purchases. Net cash used for
investing activities totaled $2.6 billion primarily due to gross property additions to utility
plant of $2.5 billion. Net cash provided from financing activities totaled $460 million for the
first nine months of 2007, compared to $384 million for the corresponding period in 2006. The
increase was primarily the result of additional common stock and long-term debt issuances.
Significant balance sheet changes for the first nine months of the year include a $1.3 billion
increase in long-term debt, which was used primarily for the repayment of short-term debt,
redemptions of long-term debt payable to affiliated trusts, construction expenditures, and general
corporate purposes. Total property, plant, and equipment, net of depreciation, increased $1.5
billion during the first nine months of 2007 primarily from the installation of additional
environmental equipment and transmission and distribution construction.
The market price of Southern Companys common stock at September 30, 2007 was $36.28 per share
(based on the closing price as reported on the New York Stock Exchange) and the book value was
$16.26 per share, representing a market-to-book ratio of 223%, compared to $36.86, $15.24, and
242%, respectively, at the end of 2006. The dividend for the third quarter 2007 was $0.4025 per
share compared to $0.3875 per share in the third quarter 2006.
Capital Requirements and Contractual Obligations
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Capital
Requirements and Contractual Obligations of Southern Company in Item 7 of the Form 10-K for a
description of Southern Companys capital requirements for its construction program and other
funding requirements associated with scheduled maturities of long-term debt, as well as the related
interest, preferred and preference stock dividends, leases, trust funding requirements, and other
purchase commitments. Approximately $1.7 billion will be required by September 30, 2008 for
redemptions and maturities of long-term debt.
Sources of Capital
Southern Company intends to meet its future capital needs through internal cash flow and external
security issuances. Equity capital can be provided from any combination of Southern Companys
stock plans, private placements, or public offerings. The amount and timing of additional equity
capital to be raised will be contingent on Southern Companys investment opportunities. Southern
Company does not currently anticipate any equity offerings in 2007 outside of its existing stock
option plan, the employee savings plan, and the Southern Investment Plan. The traditional
operating companies and Southern Power plan to obtain the funds
required for construction and other purposes from sources similar to those used in the past, which
were primarily
29
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
from operating cash flows, security issuances, term loans, short-term borrowings, and equity
contributions from Southern Company. However, the amount, type, and timing of any financings, if
needed, will depend upon prevailing market conditions, regulatory approval, and other factors. See
MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Sources of Capital of
Southern Company in Item 7 of the Form 10-K for additional information.
Southern Companys current liabilities frequently exceed current assets because of the continued
use of short-term debt as a funding source to meet scheduled maturities of long-term debt as well
as cash needs which can fluctuate significantly due to the seasonality of the business. To meet
short-term cash needs and contingencies, Southern Company has substantial cash flow from operating
activities and access to capital markets, including commercial paper programs. At September 30,
2007, Southern Company and its subsidiaries had approximately $534 million of cash and cash
equivalents, $52 million of restricted cash related to the sale of pollution control bonds which
may be used only for future project costs, and approximately $3.6 billion of unused credit
arrangements with banks, of which $74 million expire in 2007 and $3.5 billion expire in 2008 and
beyond. Approximately $79 million of the credit facilities expiring in 2007 and 2008 allow for the
execution of term loans for an additional two-year period, and approximately $443 million contain
provisions allowing one-year term loans. See Note 6 to the financial statements of Southern
Company under Bank Credit Arrangements in Item 8 of the Form 10-K for additional information.
The traditional operating companies may also meet short-term cash needs through a Southern Company
subsidiary organized to issue and sell commercial paper and extendible commercial notes at the
request and for the benefit of each of the traditional operating companies. At September 30, 2007,
the Southern Company system had outstanding commercial paper of $1.2 billion, outstanding bank
notes of $60 million, and no extendible commercial notes outstanding. Management believes that the
need for working capital can be adequately met by utilizing commercial paper programs and lines of
credit without maintaining large cash balances.
Off-Balance Sheet Financing Arrangements
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Off-Balance Sheet
Financing Arrangements of Southern Company in Item 7 and Note 7 to the financial statements of
Southern Company under Operating Leases in Item 8 of the Form 10-K for information related to
Mississippi Powers lease of a combined cycle generating facility at Plant Daniel.
Credit Rating Risk
Southern Company does not have any credit arrangements that would require material changes in
payment schedules or terminations as a result of a credit rating downgrade. There are certain
contracts that could require collateral, but not accelerated payment, in the event of a credit
rating change to BBB and Baa2, or BBB- or Baa3 or below. These contracts are primarily for physical
electricity purchases and sales. At September 30, 2007, the maximum potential collateral
requirements at a BBB and Baa2 rating were approximately $8.6 million and at a BBB- or Baa3 rating
were approximately $293.3 million. The maximum potential collateral requirements at a rating below
BBB- or Baa3 were approximately $883.5 million. Generally, collateral may be provided by a
Southern Company guaranty, letter of credit, or cash.
Southern Companys operating subsidiaries are also party to certain agreements that could require
collateral and/or accelerated payment in the event of a credit rating change to below investment
grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural gas and
power price risk management activities. At September 30, 2007, Southern Companys total exposure
to these types of agreements was $26.7 million.
30
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Market Price Risk
Southern Companys market risk exposures relative to interest rate changes have not changed
materially compared with the December 31, 2006 reporting period. In addition, Southern Company is
not aware of any facts or circumstances that would significantly affect such exposures in the near
term.
Due to cost-based rate regulation, the traditional operating companies have limited exposure to
market volatility in interest rates, commodity fuel prices, and prices of electricity. In
addition, Southern Powers exposure to market volatility in commodity fuel prices and prices of
electricity is limited because its long-
term sales contracts shift substantially all fuel cost responsibility to the purchaser. To
mitigate residual risks relative to movements in electricity prices, the traditional operating
companies and Southern Power enter into physical fixed-price contracts for the purchase and sale
of electricity through the wholesale electricity market and, to a lesser extent, into financial
hedge contracts for natural gas purchases. The traditional operating companies have implemented
fuel-hedging programs at the instruction of their respective state PSCs.
The fair value of derivative energy contracts at September 30, 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Year-to-Date |
|
|
2007 |
|
2007 |
|
|
Changes |
|
Changes |
|
|
Fair Value |
|
|
(in millions) |
Contracts beginning of period |
|
$ |
(32 |
) |
|
$ |
(82 |
) |
Contracts realized or settled |
|
|
32 |
|
|
|
62 |
|
New contracts at inception |
|
|
|
|
|
|
|
|
Changes in valuation techniques |
|
|
|
|
|
|
|
|
Current period changes (a) |
|
|
(22 |
) |
|
|
(2 |
) |
|
Contracts at September 30, 2007 |
|
$ |
(22 |
) |
|
$ |
(22 |
) |
|
(a) |
|
Current period changes also include the changes in fair value of new contracts entered into
during the period, if any. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source of September 30, 2007 |
|
|
|
|
|
|
Valuation Prices |
|
|
|
|
|
|
Total |
|
Maturity |
|
|
Fair Value |
|
Year 1 |
|
1-3 Years |
|
|
(in millions) |
Actively quoted |
|
$ |
(22 |
) |
|
$ |
(25 |
) |
|
$ |
3 |
|
External sources |
|
|
|
|
|
|
1 |
|
|
|
(1 |
) |
Models and other methods |
|
|
|
|
|
|
|
|
|
|
|
|
- |
Contracts at September 30, 2007 |
|
$ |
(22 |
) |
|
$ |
(24 |
) |
|
$ |
2 |
|
|
Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to the
traditional operating companies fuel hedging programs are recorded as regulatory assets and
liabilities. Realized gains and losses from these programs are included in fuel expense and are
recovered through the traditional operating companies fuel cost recovery clauses. In addition,
unrealized gains and losses on energy-related derivatives used by Southern Power to hedge
anticipated purchases and sales are deferred in other comprehensive income. Gains and losses on
derivative contracts that are not designated as hedges are recognized in the statements of
income as incurred.
31
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At September 30, 2007, the fair value gain/(loss) of derivative energy contracts was reflected in
the financial statements as follows:
|
|
|
|
|
|
|
Amounts |
|
|
(in millions) |
Regulatory assets, net |
|
$ |
(21.7 |
) |
Accumulated other comprehensive income |
|
|
0.5 |
|
Net income |
|
|
(0.4 |
) |
|
Total fair value |
|
$ |
(21.6 |
) |
|
Unrealized pre-tax losses recognized in income for the three months and nine months ended September
30, 2007 for derivative energy contracts that are not hedges were $2.2 million and $0.7 million,
respectively.
To reduce Southern Companys exposure to changes in the value of synthetic fuel tax credits, which
are impacted by changes in oil prices, Southern Company has entered into derivative transactions
indexed to annual average oil prices. Because these transactions are not designated as hedges, the
gains and losses are recognized in the statements of income as incurred. For the three months and
nine months ended September 30, 2007, the fair value gains recognized in income to mark the
transactions to market were $23.6 million and $23.4 million, respectively.
For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND
LIQUIDITY Market Price Risk of Southern Company in Item 7 and Notes 1 and 6 to the financial
statements of Southern Company under Financial Instruments in Item 8 of the Form 10-K and Note
(F) to the Condensed Financial Statements herein.
Financing Activities
In the first nine months of 2007, Southern Company and its subsidiaries issued $2.8 billion of
senior notes, incurred obligations related to the issuance of $246.5 million of pollution control
revenue bonds, issued $150 million of preference stock, and issued $414 million of common stock,
including treasury stock, through employee, director, and other stock plans. The proceeds were
primarily used to repay short-term indebtedness, to redeem higher cost securities, and to fund
ongoing construction projects. See Southern Companys Condensed Consolidated Statements of Cash
Flows herein for further details on financing activities during the first nine months of 2007.
Southern Company and its subsidiaries also terminated interest rate derivatives related to these
transactions at a gain of $15 million. These gains were deferred in other comprehensive income, of
which $9 million will be amortized to income over a 10-year period and $6 million will be amortized
over a 30-year period. During the first nine months of 2007, Southern Company and its subsidiaries
redeemed or paid at maturity $1.6 billion in senior notes and other long-term debt.
In September 2007, holders of $225 million aggregate principal amount of Southern Companys Series
2007B Floating Rate Extendible Senior Notes and holders of $75 million aggregate principal amount
of Georgia Powers Series 2007C Floating Rate Senior Notes elected not to extend the then current
maturity dates in September 2008.
During the first nine months of 2007, Southern Company and its subsidiaries entered into additional
derivative transactions designed to hedge interest rate risk of future debt issuances. See Note
(F) to the Condensed Financial Statements herein for further details.
Subsequent to September 30, 2007, Alabama Power issued $200 million of Series 2007C 6.00% Senior
Insured Monthly Notes due October 15, 2037 and issued $50 million of 6.50% Preference Stock. The
proceeds from both issuances were used for general corporate purposes and to fund its continuous
construction program.
Alabama Power also terminated interest rate derivatives related to the senior note issuance at a
loss of less than $1 million. Georgia Power issued $225 million of 6.50% Preference Stock. The
proceeds along with other
32
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
monies of Georgia Power were applied to the redemption in November of $309 million aggregate
principal amount of its Series F 4.875% Junior Subordinated Notes due November 1, 2042 and the
related flexible trust preferred and common securities of Georgia Power Capital Trust VI. Also
subsequent to September 30, 2007, Gulf Power issued $45 million of 6.45% Preference Stock.
Proceeds were used to repay a portion of short-term indebtedness and for other corporate purposes
including its continuous construction program. In addition, Alabama Power announced the planned
redemption of 1,250 shares of Alabama Power Company Flexible Money Market Class A Preferred Stock
(Series 2003A), Par Value $100,000 Per Share ($125 million aggregate value) in January 2008. In
October 2007, Gulf Power issued a notice of redemption to the holders of the $41.2 million of Gulf
Power Series E Junior Subordinated Notes due November 30, 2042 and the related trust preferred and
common securities of Gulf Power Capital Trust IV. All securities in this series will be redeemed
in November 2007.
In addition to any financings that may be necessary to meet capital requirements and contractual
obligations, Southern Company and its subsidiaries plan to continue, when economically feasible, a
program to retire higher-cost securities and replace these obligations with lower-cost capital if
market conditions permit.
33
PART I
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Market Price Risk
herein for each registrant and Notes 1 and 6 to the financial statements of Southern Company,
Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power under Financial
Instruments in Item 8 of the Form 10-K. Also, see Note (F) to the Condensed Financial Statements
herein for information relating to derivative instruments.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this quarterly report, Southern Company, Alabama Power,
Georgia Power, Gulf Power, Mississippi Power, and Southern Power conducted separate evaluations
under the supervision and with the participation of each companys management, including the Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation
of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934). Based upon these evaluations, the Chief Executive Officer and
the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures
are effective in alerting them in a timely manner to information relating to their company
(including its consolidated subsidiaries, if any) required to be included in periodic filings with
the SEC.
(b) Changes in internal controls.
There have been no changes in Southern Companys, Alabama Powers, Georgia Powers, Gulf Powers,
Mississippi Powers, or Southern Powers internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the
third quarter of 2007 that have materially affected or are reasonably likely to materially affect
Southern Companys, Alabama Powers, Georgia Powers, Gulf Powers, Mississippi Powers, or
Southern Powers internal control over financial reporting.
34
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
1,394,539 |
|
|
$ |
1,333,021 |
|
|
$ |
3,444,282 |
|
|
$ |
3,161,873 |
|
Wholesale revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliates |
|
|
160,832 |
|
|
|
167,066 |
|
|
|
472,015 |
|
|
|
469,748 |
|
Affiliates |
|
|
35,400 |
|
|
|
29,138 |
|
|
|
116,626 |
|
|
|
134,551 |
|
Other revenues |
|
|
44,427 |
|
|
|
43,182 |
|
|
|
135,569 |
|
|
|
128,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
1,635,198 |
|
|
|
1,572,407 |
|
|
|
4,168,492 |
|
|
|
3,894,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
506,933 |
|
|
|
521,507 |
|
|
|
1,353,914 |
|
|
|
1,282,450 |
|
Purchased power |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliates |
|
|
71,622 |
|
|
|
66,690 |
|
|
|
94,330 |
|
|
|
121,394 |
|
Affiliates |
|
|
100,054 |
|
|
|
88,407 |
|
|
|
249,261 |
|
|
|
234,145 |
|
Other operations |
|
|
201,495 |
|
|
|
182,508 |
|
|
|
556,639 |
|
|
|
527,580 |
|
Maintenance |
|
|
88,135 |
|
|
|
81,287 |
|
|
|
303,989 |
|
|
|
287,734 |
|
Depreciation and amortization |
|
|
118,403 |
|
|
|
114,052 |
|
|
|
351,514 |
|
|
|
336,209 |
|
Taxes other than income taxes |
|
|
72,503 |
|
|
|
59,692 |
|
|
|
216,752 |
|
|
|
190,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,159,145 |
|
|
|
1,114,143 |
|
|
|
3,126,399 |
|
|
|
2,980,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
476,053 |
|
|
|
458,264 |
|
|
|
1,042,093 |
|
|
|
914,391 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction |
|
|
9,600 |
|
|
|
3,921 |
|
|
|
24,562 |
|
|
|
13,285 |
|
Interest income |
|
|
4,935 |
|
|
|
4,931 |
|
|
|
12,942 |
|
|
|
12,973 |
|
Interest expense, net of amounts capitalized |
|
|
(65,918 |
) |
|
|
(61,786 |
) |
|
|
(194,565 |
) |
|
|
(174,079 |
) |
Interest expense to affiliate trusts |
|
|
(4,059 |
) |
|
|
(4,059 |
) |
|
|
(12,178 |
) |
|
|
(12,178 |
) |
Other income (expense), net |
|
|
(13,067 |
) |
|
|
(7,866 |
) |
|
|
(19,957 |
) |
|
|
(17,599 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(68,509 |
) |
|
|
(64,859 |
) |
|
|
(189,196 |
) |
|
|
(177,598 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
407,544 |
|
|
|
393,405 |
|
|
|
852,897 |
|
|
|
736,793 |
|
Income taxes |
|
|
152,956 |
|
|
|
149,379 |
|
|
|
319,840 |
|
|
|
280,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
254,588 |
|
|
|
244,026 |
|
|
|
533,057 |
|
|
|
456,417 |
|
Dividends on Preferred and Preference Stock |
|
|
8,504 |
|
|
|
6,072 |
|
|
|
24,867 |
|
|
|
18,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income After Dividends on Preferred and Preference Stock |
|
$ |
246,084 |
|
|
$ |
237,954 |
|
|
$ |
508,190 |
|
|
$ |
438,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net Income After Dividends on Preferred and Preference Stock |
|
$ |
246,084 |
|
|
$ |
237,954 |
|
|
$ |
508,190 |
|
|
$ |
438,201 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $(932), $(2,049), $256, and $334, respectively |
|
|
(1,533 |
) |
|
|
(3,369 |
) |
|
|
420 |
|
|
|
551 |
|
Reclassification adjustment for amounts included in net income, net of tax of $74, $(854), $206, and $(2,869), respectively |
|
|
121 |
|
|
|
(1,406 |
) |
|
|
339 |
|
|
|
(4,720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(1,412 |
) |
|
|
(4,775 |
) |
|
|
759 |
|
|
|
(4,169 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
$ |
244,672 |
|
|
$ |
233,179 |
|
|
$ |
508,949 |
|
|
$ |
434,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
36
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
533,057 |
|
|
$ |
456,417 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
410,695 |
|
|
|
391,422 |
|
Deferred income taxes and investment tax credits, net |
|
|
10,545 |
|
|
|
17,157 |
|
Allowance for equity funds used during construction |
|
|
(24,562 |
) |
|
|
(13,285 |
) |
Pension, postretirement, and other employee benefits |
|
|
6,941 |
|
|
|
8,795 |
|
Stock option expense |
|
|
4,533 |
|
|
|
4,518 |
|
Tax benefit of stock options |
|
|
1,051 |
|
|
|
267 |
|
Hedge settlements |
|
|
|
|
|
|
18,006 |
|
Other, net |
|
|
11,465 |
|
|
|
(8,383 |
) |
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
Receivables |
|
|
(168,447 |
) |
|
|
(144,475 |
) |
Fossil fuel stock |
|
|
(17,123 |
) |
|
|
(37,858 |
) |
Materials and supplies |
|
|
(30,412 |
) |
|
|
(13,683 |
) |
Other current assets |
|
|
7,624 |
|
|
|
33,980 |
|
Accounts payable |
|
|
(53,611 |
) |
|
|
(152,179 |
) |
Accrued taxes |
|
|
213,510 |
|
|
|
134,349 |
|
Accrued compensation |
|
|
(23,986 |
) |
|
|
(34,658 |
) |
Other current liabilities |
|
|
17,130 |
|
|
|
32,894 |
|
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
898,410 |
|
|
|
693,284 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(822,818 |
) |
|
|
(618,568 |
) |
Investment in restricted cash from pollution control bonds |
|
|
(96,049 |
) |
|
|
|
|
Distribution of restricted cash from pollution control bonds |
|
|
44,550 |
|
|
|
|
|
Nuclear decommissioning trust fund purchases |
|
|
(201,523 |
) |
|
|
(206,480 |
) |
Nuclear decommissioning trust fund sales |
|
|
201,523 |
|
|
|
206,480 |
|
Cost of removal, net of salvage |
|
|
(33,194 |
) |
|
|
(28,089 |
) |
Other |
|
|
(12,930 |
) |
|
|
(19,054 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(920,441 |
) |
|
|
(665,711 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Decrease in notes payable, net |
|
|
(119,670 |
) |
|
|
(315,278 |
) |
Proceeds |
|
|
|
|
|
|
|
|
Common stock issued to parent |
|
|
140,000 |
|
|
|
40,000 |
|
Senior notes |
|
|
450,000 |
|
|
|
950,000 |
|
Pollution control bonds |
|
|
246,500 |
|
|
|
|
|
Preference Stock |
|
|
150,000 |
|
|
|
|
|
Gross excess tax benefit of stock options |
|
|
2,324 |
|
|
|
530 |
|
Redemptions |
|
|
|
|
|
|
|
|
Pollution control bonds |
|
|
|
|
|
|
(2,950 |
) |
Senior notes |
|
|
(168,500 |
) |
|
|
(196,500 |
) |
Payment of preferred and preference stock dividends |
|
|
(22,875 |
) |
|
|
(18,210 |
) |
Payment of common stock dividends |
|
|
(348,750 |
) |
|
|
(330,450 |
) |
Other |
|
|
(14,822 |
) |
|
|
(21,469 |
) |
|
|
|
|
|
|
|
Net cash provided from financing activities |
|
|
314,207 |
|
|
|
105,673 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
292,176 |
|
|
|
133,246 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
15,539 |
|
|
|
22,472 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
307,715 |
|
|
$ |
155,718 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $12,455 and $5,652 capitalized for
2007 and 2006, respectively) |
|
$ |
176,842 |
|
|
$ |
174,568 |
|
Income taxes (net of refunds) |
|
$ |
157,501 |
|
|
$ |
165,266 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
37
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Assets |
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
307,715 |
|
|
$ |
15,539 |
|
Restricted cash |
|
|
51,499 |
|
|
|
|
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
488,928 |
|
|
|
323,202 |
|
Unbilled revenues |
|
|
109,336 |
|
|
|
90,596 |
|
Under recovered regulatory clause revenues |
|
|
278,288 |
|
|
|
32,451 |
|
Other accounts and notes receivable |
|
|
57,179 |
|
|
|
49,708 |
|
Affiliated companies |
|
|
30,128 |
|
|
|
70,836 |
|
Accumulated provision for uncollectible accounts |
|
|
(8,721 |
) |
|
|
(7,091 |
) |
Fossil fuel stock, at average cost |
|
|
170,063 |
|
|
|
153,120 |
|
Materials and supplies, at average cost |
|
|
285,863 |
|
|
|
255,664 |
|
Vacation pay |
|
|
46,642 |
|
|
|
46,465 |
|
Prepaid expenses |
|
|
41,236 |
|
|
|
76,265 |
|
Other |
|
|
21,988 |
|
|
|
66,663 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,880,144 |
|
|
|
1,173,418 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
16,444,682 |
|
|
|
15,997,793 |
|
Less accumulated provision for depreciation |
|
|
5,869,903 |
|
|
|
5,636,475 |
|
|
|
|
|
|
|
|
|
|
|
10,574,779 |
|
|
|
10,361,318 |
|
Nuclear fuel, at amortized cost |
|
|
145,290 |
|
|
|
137,300 |
|
Construction work in progress |
|
|
838,421 |
|
|
|
562,119 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
11,558,490 |
|
|
|
11,060,737 |
|
|
|
|
|
|
|
|
Other Property and Investments: |
|
|
|
|
|
|
|
|
Equity investments in unconsolidated subsidiaries |
|
|
50,325 |
|
|
|
47,486 |
|
Nuclear decommissioning trusts, at fair value |
|
|
549,526 |
|
|
|
513,521 |
|
Other |
|
|
29,780 |
|
|
|
35,980 |
|
|
|
|
|
|
|
|
Total other property and investments |
|
|
629,631 |
|
|
|
596,987 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
378,893 |
|
|
|
354,225 |
|
Prepaid pension costs |
|
|
749,158 |
|
|
|
722,287 |
|
Deferred under recovered regulatory clause revenues |
|
|
69,168 |
|
|
|
301,048 |
|
Other regulatory assets |
|
|
270,877 |
|
|
|
279,661 |
|
Other |
|
|
207,923 |
|
|
|
166,927 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
1,676,019 |
|
|
|
1,824,148 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
15,744,284 |
|
|
$ |
14,655,290 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
38
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
978,244 |
|
|
$ |
668,646 |
|
Notes payable |
|
|
|
|
|
|
119,670 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
172,113 |
|
|
|
162,951 |
|
Other |
|
|
207,241 |
|
|
|
263,506 |
|
Customer deposits |
|
|
65,941 |
|
|
|
62,978 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Income taxes |
|
|
195,292 |
|
|
|
3,120 |
|
Other |
|
|
96,926 |
|
|
|
29,696 |
|
Accrued interest |
|
|
65,770 |
|
|
|
53,573 |
|
Accrued vacation pay |
|
|
38,645 |
|
|
|
38,767 |
|
Accrued compensation |
|
|
62,993 |
|
|
|
87,194 |
|
Other |
|
|
60,003 |
|
|
|
79,907 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,943,168 |
|
|
|
1,570,008 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
4,285,242 |
|
|
|
3,838,906 |
|
|
|
|
|
|
|
|
Long-term Debt Payable to Affiliated Trusts |
|
|
206,186 |
|
|
|
309,279 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
2,056,588 |
|
|
|
2,116,575 |
|
Deferred credits related to income taxes |
|
|
96,114 |
|
|
|
98,941 |
|
Accumulated deferred investment tax credits |
|
|
182,579 |
|
|
|
188,582 |
|
Employee benefit obligations |
|
|
411,073 |
|
|
|
375,940 |
|
Asset retirement obligations |
|
|
499,197 |
|
|
|
476,460 |
|
Other cost of removal obligations |
|
|
612,755 |
|
|
|
600,278 |
|
Other regulatory liabilities |
|
|
439,806 |
|
|
|
399,822 |
|
Other |
|
|
36,769 |
|
|
|
35,805 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
4,334,881 |
|
|
|
4,292,403 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
10,769,477 |
|
|
|
10,010,596 |
|
|
|
|
|
|
|
|
Preferred and Preference Stock |
|
|
634,646 |
|
|
|
612,407 |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, par value $40 per share |
|
|
|
|
|
|
|
|
Authorized 25,000,000 shares |
|
|
|
|
|
|
|
|
Outstanding September 30, 2007: 15,750,000 shares |
|
|
|
|
|
|
|
|
December 31, 2006: 12,250,000 shares |
|
|
630,000 |
|
|
|
490,000 |
|
Paid-in capital |
|
|
2,036,633 |
|
|
|
2,028,963 |
|
Retained earnings |
|
|
1,675,690 |
|
|
|
1,516,245 |
|
Accumulated other comprehensive loss |
|
|
(2,162 |
) |
|
|
(2,921 |
) |
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
4,340,161 |
|
|
|
4,032,287 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
15,744,284 |
|
|
$ |
14,655,290 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
39
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2007 vs. THIRD QUARTER 2006
AND
YEAR-TO-DATE 2007 vs. YEAR-TO-DATE 2006
OVERVIEW
Alabama Power operates as a vertically integrated utility providing electricity to retail
customers within its traditional service area located within the State of Alabama and to wholesale
customers in the Southeast. Many factors affect the opportunities, challenges, and risks of
Alabama Powers primary business of selling electricity. These factors include the ability to
maintain a stable regulatory environment, to achieve energy sales growth, and to effectively manage
and secure timely recovery of rising costs. These costs include those related to growing demand,
increasingly stringent environmental standards, fuel prices, and restoration following major
storms.
Alabama Power continues to focus on several key performance indicators. These indicators include
customer satisfaction, plant availability, system reliability, and net income. For additional
information on these indicators, see MANAGEMENTS DISCUSSION AND ANALYSIS OVERVIEW Key
Performance Indicators of Alabama Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$8.1
|
|
3.4
|
|
$70.0
|
|
16.0 |
|
Alabama Powers net income after dividends on preferred and preference stock for the third quarter
2007 was $246.1 million compared to $238.0 million for the corresponding period of 2006. Net
income after dividends on preferred and preference stock for year-to-date 2007 was $508.2 million
compared to $438.2 million for the corresponding period of 2006. The increase in earnings for the
third quarter and year-to-date 2007 were primarily due to retail base rate revenue increases
resulting from an increase in rates under Rate RSE and Rate CNP for environmental costs (Rate CNP
Environmental) that took effect January 1, 2007, as well as favorable weather conditions. See
MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Retail Rate
Adjustments of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power
under Retail Regulatory Matters in Item 8 of the Form 10-K for additional information on Alabama
Powers rates. The increases in revenues for the third quarter and year-to-date 2007 were
partially offset by increases in other operations expense mainly related to administrative and
general expense, maintenance expense primarily associated with distribution, steam power, and
nuclear power, taxes other than income taxes related to state and municipal public utility license
tax, and interest expense due to additional debt outstanding and higher interest rates associated
with the issuance of new long-term debt.
40
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$61.5
|
|
4.6
|
|
$282.4
|
|
8.9 |
|
In the third quarter 2007, retail revenues were $1.39 billion compared to $1.33 billion in the same
period in 2006.
For year-to-date 2007, retail revenues were $3.44 billion compared to $3.16 billion in the same
period in 2006.
Details of retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Year-to-Date |
|
|
2007 |
|
2007 |
|
|
(in millions) |
|
(% change) |
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
1,333.0 |
|
|
|
|
|
|
$ |
3,161.9 |
|
|
|
|
|
Estimated change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
61.5 |
|
|
|
4.6 |
|
|
|
171.0 |
|
|
|
5.4 |
|
Sales growth |
|
|
(2.6 |
) |
|
|
(0.2 |
) |
|
|
(0.5 |
) |
|
|
0.0 |
|
Weather |
|
|
10.8 |
|
|
|
0.8 |
|
|
|
34.2 |
|
|
|
1.0 |
|
Fuel and other cost recovery |
|
|
(8.2 |
) |
|
|
(0.6 |
) |
|
|
77.7 |
|
|
|
2.5 |
|
|
Retail current year |
|
$ |
1,394.5 |
|
|
|
4.6 |
% |
|
$ |
3,444.3 |
|
|
|
8.9 |
% |
|
Revenues associated with changes in rates and pricing increased in the third quarter and
year-to-date 2007 when compared to the same periods in 2006 primarily due to the Rate RSE and Rate
CNP Environmental increases effective in January 2007. See MANAGEMENTS DISCUSSION AND ANALYSIS -
FUTURE EARNINGS POTENTIAL PSC Matters Retail Rate Adjustments of Alabama Power in Item 7 and
Note 3 to the financial statements of Alabama Power under Retail Regulatory Matters in Item 8 of
the Form 10-K.
Revenues attributable to changes in sales growth were relatively flat in the third quarter of 2007
when compared to the same period in 2006. Commercial KWH energy sales increased due to continued
customer and demand growth. This increase was offset by a decrease in industrial KWH energy sales
as a result of decreased sales demand in the chemicals and textiles sectors. Residential KWH
energy sales during the third quarter 2007 were relatively flat.
For year-to-date 2007, revenues attributable to changes in sales growth were relatively flat when
compared to the same period in 2006. Commercial KWH energy sales increased 1.5% due to continued
customer and demand growth. This increase was offset by a 0.9% decrease in KWH energy sales to
residential customers primarily as a result of a decrease in average residential customer usage and
a 2.0% decrease in KWH energy sales to industrial customers primarily as a result of decreased
sales demand in the primary metals and textiles sectors.
Revenues increased as a result of favorable weather in the third quarter of 2007 when compared to
same period in 2006. The favorable weather, which primarily impacts residential and commercial
customers, resulted in increased KWH energy sales to these customers of 1.5% each.
41
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2007, revenues increased as a result of favorable weather when compared to same
period in 2006 which resulted in increased KWH energy sales to residential and commercial customers
of 3.1% and 1.2%, respectively.
Fuel and other cost recovery revenues decreased in the third quarter of 2007 when compared to the
same period in 2006 due to the reduction in the Rate NDR customer billing rate as a result of
Alabama Power fully recovering the balance in the deferred natural disaster reserve account in June
2007. See FUTURE EARNINGS POTENTIAL FERC and Alabama Power PSC Matters Natural Disaster Cost
Recovery herein for additional information.
For year-to-date 2007, fuel and other cost recovery revenues increased when compared to the same
period in 2006 due to an increase in fuel costs, purchased power costs, and cost associated with
PPAs certificated by the Alabama PSC, offset by a reduction in the Rate NDR customer billing rate.
Electric rates for Alabama Power include provisions to recognize the full recovery of fuel costs,
purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with Alabama
Powers natural disaster reserve. Under these provisions, fuel and other cost recovery revenues
generally equal fuel and other cost recovery expenses and do not affect net income.
Wholesale Revenues Affiliates
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$6.3
|
|
21.5
|
|
$(17.9)
|
|
(13.3) |
|
In the third quarter 2007, revenues from wholesale energy sales to affiliates were $35.4 million
compared to $29.1 million in the same period in 2006. This increase was primarily due to a 44.1%
increase in price offset by a 15.7% decrease in KWH sales.
For year-to-date 2007, revenues from wholesale energy sales to affiliates were $116.6 million
compared to $134.5 million for the same period in 2006. This decrease was primarily due to an 8.3%
decrease in price as well as a 5.5% decrease in KWH sales.
Wholesale energy sales to affiliated companies within the Southern Company system vary from period
to period depending on demand and the availability and cost of generating resources at each
company. These sales are made in accordance with the IIC, as approved by the FERC. These
transactions do not have a significant impact on earnings since the energy is generally sold at
marginal cost.
Other Revenues
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$1.2
|
|
2.9
|
|
$7.2
|
|
5.6 |
|
The third quarter 2007 variance when compared to the third quarter 2006 is not material.
For year-to-date 2007, other revenues were $135.6 million compared to $128.4 million for the same
period in 2006. This increase was mainly due to a $4.2 million increase in revenues from
co-generation steam facilities
resulting from higher gas prices and facilities service contracts and a $2.1 million increase in
revenues associated with rent from electric property related to pole attachments and microwave
tower rentals.
42
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 |
|
|
Year-to-Date 2007 |
|
|
|
vs. |
|
|
vs. |
|
|
|
Third Quarter 2006 |
|
|
Year-to-Date 2006 |
|
|
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
Fuel |
|
$ |
(14.6 |
) |
|
|
(2.8) |
|
|
$ |
71.5 |
|
|
|
5.6 |
|
Purchased power-non-affiliates |
|
|
4.9 |
|
|
|
7.4 |
|
|
|
(27.1 |
) |
|
|
(22.3) |
|
Purchased power-affiliates |
|
|
11.7 |
|
|
|
13.2 |
|
|
|
15.1 |
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fuel and purchased power expenses |
|
$ |
2.0 |
|
|
|
|
|
|
$ |
59.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the third quarter 2007, total fuel and purchased power expenses were $678.6 million compared to
$676.6 million in the same period in 2006. This increase was primarily due to a $10.6 million
increase related to greater KWHs purchased offset by an $8.6 million decrease in the cost of energy
resulting from a decrease in the average cost of fuel.
For year-to-date 2007, total fuel and purchased power expenses were $1.70 billion compared to $1.64
billion for the same period in 2006. This increase is primarily due to a $60.4 million increase
related to greater KWHs generated and purchased.
Fuel and purchased power transactions do not have a significant impact on earnings since energy
expenses are generally offset by energy revenues through Alabama Powers energy cost recovery
clause.
Details of Alabama Powers cost of generation and purchased power are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Third Quarter |
|
|
|
|
|
Year-to-Date |
|
Year-to-Date |
|
|
Average Cost |
|
2007 |
|
2006 |
|
% change |
|
2007 |
|
2006 |
|
% change |
|
|
(cents per net KWH) |
|
|
|
|
|
(cents per net KWH) |
|
|
|
|
Fuel |
|
|
2.35 |
|
|
|
2.41 |
|
|
|
(2.5 |
) |
|
|
2.35 |
|
|
|
2.34 |
|
|
|
0.4 |
|
Purchased power |
|
|
7.57 |
|
|
|
7.43 |
|
|
|
1.9 |
|
|
|
6.30 |
|
|
|
6.41 |
|
|
|
(1.7 |
) |
|
In the third quarter 2007, fuel expense was $506.9 million compared to $521.5 million in the same
period in 2006. This decrease was due to a 1.4% decrease in generation from Alabama Power-owned
coal and gas-fired facilities and a 5.0% decrease in natural gas prices. These decreases were
partially offset by a 1.4% increase in the average cost of coal.
For year-to-date 2007, fuel expense was $1.35 billion compared to $1.28 billion for the same period
in 2006. This increase was due to a 1.4% increase in the average cost of coal and a 3.2% increase
in generation from Alabama Power-owned coal and gas-fired facilities due to a 47.3% decrease in
hydro generation from a severe drought. These increases were partially offset by a 4.6% decrease
in natural gas prices.
Non-affiliates
In the third quarter 2007, purchased power non-affiliates was $71.6 million compared to $66.7
million in the same period in 2006. This increase was primarily due to a 65.5% increase in the
amount of energy purchased due to the use of available lower price market purchases from
non-affiliates to meet the increase in weather related system demand requirements partially offset
by a 33.6% decrease in price.
43
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2007, purchased power non-affiliates was $94.3 million compared to $121.4
million for the same period in 2006. This decrease was primarily due to a 12.9% decrease in price
while the amount of energy purchased declined slightly.
Energy purchases from non-affiliates will vary depending on market cost of available energy being
lower than Southern Company system-generated energy, demand for energy within the system service
territory, and availability of Southern Company system generation.
Affiliates
In the third quarter 2007, purchased power affiliates was $100.1 million compared to $88.4
million in the same period in 2006. This increase was due to a 13.1% increase in price offset by a
2.5% decrease in energy purchased.
For year-to-date 2007, purchased power affiliates was $249.3 million compared to $234.2 million
in the same period in 2006. This increase was due to a 6.4% increase in energy purchased and a
5.4% increase in price.
Energy purchases from affiliates will vary depending on demand and the availability and cost of
generating resources at each company within the Southern Company system. These purchases are made
in accordance with the IIC, as approved by the FERC.
Other Operations and Maintenance Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 |
|
Year-to-Date 2007 |
|
|
vs. |
|
vs. |
|
|
Third Quarter 2006 |
|
Year-to-Date 2006 |
|
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
Other operations |
|
$ |
19.0 |
|
|
10.4 |
|
|
$ |
29.0 |
|
|
5.5 |
|
Maintenance |
|
|
6.8 |
|
|
8.4 |
|
|
|
16.3 |
|
|
5.6 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total other operations and maintenance expenses |
|
$ |
25.8 |
|
|
|
|
|
$ |
45.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
In the third quarter 2007, other operations and maintenance expenses were $289.6 million compared
to $263.8 million in the same period in 2006. This was primarily a result of a $9.6 million
increase in administrative and general expenses related to an increase in the accrued expenses for
liability insurance, litigation and workers compensation reserve, and an increase in nuclear
services expense and a $6.7 million increase in steam power expense associated with scheduled
outage maintenance cost, environmental-related expense at various coal-fired facilities, and the
cost of labor and materials. Also contributing to the increase was a $4.6 million increase in
nuclear expense related to outage cost and a $2.9 million increase in distribution expenses
related to scheduled overhead line clearance.
For year-to-date 2007, other operations and maintenance expenses were $860.6 million compared to
$815.3 million in the same period in 2006. This increase is primarily due to a $12.6 million
increase in distribution expenses related to scheduled overhead line clearance and meter expenses
and an $8.8 million increase in administrative and general expenses related to an increase in the
accrued expenses for liability insurance, litigation and workers compensation reserve, and an
increase in employee group insurance. Also contributing to the increase was a $7.2 million
increase in steam power expense associated with increases in environmental-related expenses as well
as the cost of labor and materials, a $6.3 million increase in nuclear expense related to
44
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
outage cost, a $3.3 million increase in transmission expenses related to load dispatching and
external electric purchases, and a $2.6 million increase in customer accounts related to
uncollectible accounts and meter reading expense.
Taxes Other than Income Taxes
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$12.8
|
|
21.5
|
|
$26.1
|
|
13.7 |
|
In the third quarter 2007, taxes other than income taxes were $72.5 million compared to $59.7
million in the same period in 2006. For year-to-date 2007, taxes other than income taxes were
$216.7 million compared to $190.6 million for the same period in 2006. These increases were
primarily due to increases in state and municipal public utility license taxes which are directly
related to increased retail revenues.
Allowance for Equity Funds Used During Construction
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$5.7
|
|
144.8
|
|
$11.3
|
|
84.9 |
|
Allowance for equity funds used during construction (AFUDC) in the third quarter 2007 was $9.6
million compared to $3.9 million in the same period in 2006. For year-to-date 2007, AFUDC was
$24.6 million compared to $13.3 million for the same period in 2006. These increases were
primarily due to increases in the amount of construction work in progress related to environmental,
transmission, and distribution projects compared to the same periods in 2006.
Interest Expense, Net of Amounts Capitalized
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$4.1
|
|
6.7
|
|
$20.5
|
|
11.8 |
|
In the third quarter 2007, interest expense, net of amounts capitalized was $65.9 million compared
to $61.8 million in the same period in 2006. For year-to-date 2007, interest expense, net of
amounts capitalized was $194.6 million compared to $174.1 million for the same period in 2006.
These increases were mainly due to additional debt outstanding and higher interest rates associated
with the issuance of new long-term debt. For additional information, see MANAGEMENTS DISCUSSION
AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Financing Activities of Alabama Power in Item
7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY Financing Activities herein.
Other Income (Expense), Net
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$5.2
|
|
66.1
|
|
$2.4
|
|
13.4 |
|
45
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the third quarter 2007, other income (expense), net was $13.1 million compared to $7.9 million
in the same period in 2006. This increase in other income (expense), net was mainly attributed to
the write off of the net book value of certain equipment due to the discontinuation of a
non-utility marketing program. Neither the write off of the assets, the revenue, nor the net
profit(loss) associated with this marketing program were material to the results of operations.
For year-to-date 2007, other income (expense), net was $20.0 million compared to $17.6 million for
the same period in 2006. The increase in other expense, net was mainly attributed to the write
off of the net book value of certain equipment due to the discontinuation of a non-utility
marketing program during the third quarter. This increase was partially offset due to the
recording of the settlement with the EPA in the NSR litigation in the first quarter of 2006. For
additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL -
Environmental Matters New Source Review Actions of Alabama Power in Item 7 of the Form 10-K.
Dividends on Preferred and Preference Stock
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$2.4
|
|
40.1
|
|
$6.7
|
|
36.5 |
|
Dividends on preferred and preference stock in the third quarter 2007 were $8.5 million compared to
$6.1 million in the same period in 2006. For year-to-date 2007, dividends on preferred and
preference stock were $24.9 million compared to $18.2 million for the same period in 2006. These
increases were due to the additional dividends associated with the issuance of six million shares
of preference stock ($150 million stated capital) in December 2006 and the issuance of six million
shares of preference stock ($150 million stated capital) in September 2007. For additional
information, see MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY
Financing Activities of Alabama Power in Item 7 of the Form 10-K.
Income Taxes
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$3.6
|
|
2.4
|
|
$39.5
|
|
14.1 |
|
The third quarter 2007 variance when compared to the third quarter 2006 is not material.
For year-to-date 2007, income tax expense was $319.8 million compared to $280.3 million in the same
period in 2006. This increase was primarily a result of higher earnings before income taxes.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Alabama Powers future
earnings potential. The level of Alabama Powers future earnings depends on numerous factors that
affect the opportunities, challenges, and risks of Alabama Powers primary business of selling
electricity. These factors include Alabama Powers ability to maintain a stable regulatory
environment that continues to allow for the recovery of all prudently incurred costs during a time
of increasing costs. Future earnings in the near term will depend, in part, upon growth in energy
sales, which is subject to a number of factors. These factors include
46
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
weather, competition, new energy contracts with neighboring utilities, energy conservation
practiced by customers, the price of electricity, the price elasticity of demand, and the rate of
economic growth in Alabama Powers service area. For additional information relating to these
issues, see RISK FACTORS in Item 1A and MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS
POTENTIAL of Alabama Power in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect
earnings if such costs cannot be fully recovered in rates on a timely basis. See MANAGEMENTS
DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters of Alabama Power in
Item 7 and Note 3 to the financial statements of Alabama Power under Environmental Matters in
Item 8 of the Form 10-K for additional information.
New Source Review Litigation
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters New
Source Review Actions of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama
Power under Environmental Matters New Source Review Actions in Item 8 of the Form 10-K for
additional information regarding a civil action brought by the EPA alleging that Alabama Power had
violated the NSR provisions of the Clean Air Act and related state laws with respect to certain of
its coal-fired generating facilities. The plaintiffs appeal against Alabama Power was stayed by
the U.S. Court of Appeals for the Eleventh Circuit pending the U.S. Supreme Courts decision in a
similar case against Duke Energy. On April 2, 2007, the U.S. Supreme Court issued an opinion in
the Duke Energy case. The U.S. District Court for the Northern District of Alabama has issued an
order indicating a willingness to re-evaluate its previous decision in light of the Supreme Courts
Duke Energy opinion. The Eleventh Circuit is now considering whether to proceed with the appeal or
remand the case to the District Court for further proceedings, and if so, whether to vacate the
District Courts original judgment in favor of Alabama Power. The final resolution of these claims
cannot be determined at this time.
Eight-Hour Ozone Regulations
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters -
Environmental Statutes and Regulations Air Quality of Alabama Power in Item 7 of the Form 10-K
for additional information regarding revisions to the eight-hour ozone air quality standard. On
June 20, 2007, the EPA proposed additional revisions to the current eight-hour ozone standard
which, if enacted, could result in designation of new nonattainment areas within Alabama Powers
service territory. The EPA has requested comment and is expected to make a determination regarding
finalization of a revised standard in 2008. The ultimate outcome of this matter cannot be
determined at this time.
Fine Particulate Matter Regulations
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters -
Environmental Statutes and Regulations Air Quality of Alabama Power in Item 7 of the Form 10-K
for additional information regarding nonattainment designations for the fine particulate matter air
quality standard. In March 2007, the EPA finalized its fine particulate matter implementation
rule, requiring submittal of state plans for addressing the nonattainment designations by April
2008. The ultimate
outcome of this matter depends on the development and submittal of those state plans and the
resolution of pending legal challenges and, therefore, cannot be determined at this time.
47
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FERC and Alabama PSC Matters
Market-Based Rate Authority
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL FERC Matters -
Market-Based Rate Authority of Alabama Power in Item 7 and Note 3 to the financial statements
of Alabama Power under FERC Matters Market-Based Rate Authority in Item 8 of the Form 10-K
for information regarding the proceedings initiated by the FERC in December 2004 to assess
Southern Companys generation dominance within its retail service territory and in May 2005 to
determine whether Southern Company satisfies the other three parts of the FERCs market-based
rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal
dealing.
In late June and July 2007, hearings were held in the December 2004 proceeding and briefs to the
presiding ALJ were filed in August and September. Alabama Power anticipates an initial decision
from the ALJ in November 2007 on the issues that were set for hearing. The ultimate outcome of
this generation dominance proceeding cannot now be determined, but an adverse decision by the
FERC in a final order could result in refunds of approximately $3.9 million, plus interest.
On June 21, 2007, the FERC issued an order terminating the May 2005 proceeding pertaining to the
other three parts of the market-based rate analysis. In addition, on June 21, 2007, the FERC
issued its final rule regarding market-based rate authority. The FERC generally retained its
current market-based rate standards. The impact of this order and its effect on the generation
dominance proceeding cannot now be determined.
Intercompany Interchange Contract
See MANAGEMENTS DISCUSSION AND ANALYSIS - FUTURE EARNINGS POTENTIAL FERC Matters -
Intercompany Interchange Contract of Alabama Power in Item 7 and Note 3 to the financial
statements of Alabama Power under FERC Matters Intercompany Interchange Contract in Item 8
of the Form 10-K for information regarding the proceeding initiated by the FERC in May 2005 to
examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power,
Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of
which the Power Pool is operated, and, in particular, the propriety of the continued inclusion
of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the
FERCs standards of conduct applicable to utility companies that are transmission providers, and
(3) whether Southern Companys code of conduct defining Southern Power as a system company
rather than a marketing affiliate is just and reasonable.
On April 19, 2007, the FERC approved, with certain modifications, the compliance filing
submitted by Southern Company on November 6, 2006. The compliance plan largely involves
functional separation and information restrictions related to marketing activities conducted on
behalf of Southern Power. Implementation of the plan is not expected to have a material impact
on Alabama Powers financial statements.
Retail Fuel Cost Recovery
Alabama Power has established fuel cost recovery rates approved by the Alabama PSC. Alabama
Powers under recovered fuel costs as of September 30, 2007 totaled $307 million as compared to
$301 million at December 31, 2006. As a result of the increasing level of under recovered fuel
costs, in June 2007, the
Alabama PSC ordered Alabama Power to increase its Rate ECR factor to 3.1 cents per KWH from 2.4
cents per KWH,
48
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
effective with billings beginning July 2007 for the 30-month period ending December 2009. This
change represents on average an increase of approximately $7.37 per month for a customer billing of
1,000 KWH. This increase is intended to permit the recovery of energy costs based on an estimate
of future energy costs, as well as the collection of the existing under recovered energy costs by
the end of 2009. During the 30-month period, Alabama Power will be allowed to include a carrying
charge associated with the under recovered fuel costs in the fuel expense calculation. In the
event the application of this increased Rate ECR factor results in an over recovered position
during this period, Alabama Power will pay interest on any such over recovered balance at the same
rate used to derive the carrying costs. As a result of the order, Alabama Power classified $69
million of the under recovered regulatory clause receivable as deferred charges and other assets in
the Condensed Balance Sheet as of September 30, 2007 herein.
Natural Disaster Cost Recovery
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Natural
Disaster Cost Recovery of Alabama Power in Item 7 and Note 3 to the financial statements of
Alabama Power under Retail Regulatory Matters Natural Disaster Cost Recovery in Item 8 of the
Form 10-K for information regarding natural disaster cost recovery. As of December 31, 2006,
Alabama Power had a deficit balance in the deferred natural disaster reserve account of
approximately $16.8 million. In June 2007, Alabama Power fully recovered its prior storm costs
related to Hurricanes Dennis and Katrina. As a result customer rates decreased by $1.73 per month
per residential customer account and $4.29 per month per non-residential customer account beginning
with July 2007 billings. Alabama Power continues to collect a monthly Rate NDR charge to establish
and maintain a target reserve balance of $75 million for future storms. At September 30, 2007,
Alabama Power had accumulated a balance of $23.1 million in the target reserve for future storms,
which is included in the Condensed Balance Sheet herein under Other Regulatory Liabilities.
Other Matters
Alabama Power is subject to certain claims and legal actions arising in the ordinary course of
business. In addition, Alabama Powers business activities are subject to extensive governmental
regulation related to public health and the environment. Litigation over environmental issues and
claims of various types, including property damage, personal injury, common law nuisance, and
citizen enforcement of environmental requirements such as opacity and air quality standards, has
increased generally throughout the United States. In particular, personal injury claims for
damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate
outcome of such pending or potential litigation against Alabama Power cannot be predicted at this
time; however, for current proceedings not specifically reported herein or in Note 3 to the
financial statements of Alabama Power in Item 8 of the Form 10-K, management does not anticipate
that the liabilities, if any, arising from such current proceedings would have a material adverse
effect on Alabama Powers financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other
contingencies, regulatory matters, and other matters being litigated which may affect future
earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Alabama Power prepares its financial statements in accordance with accounting principles generally
accepted in
49
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the United States. Significant accounting policies are described in Note 1 to the financial
statements of Alabama Power in Item 8 of the Form 10-K. In the application of these policies,
certain estimates are made that may have a material impact on Alabama Powers results of operations
and related disclosures. Different assumptions and measurements could produce estimates that are
significantly different from those recorded in the financial statements. See MANAGEMENTS
DISCUSSION AND ANALYSIS ACCOUNTING POLICIES Application of Critical Accounting Policies and
Estimates of Alabama Power in Item 7 of the Form 10-K for a complete discussion of Alabama Powers
critical accounting policies and estimates related to Electric Utility Regulation, Contingent
Obligations, and Unbilled Revenues.
New Accounting Standards
Income Taxes
On January 1, 2007, Alabama Power adopted FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes. FIN 48 requires companies to determine whether it is more likely
than not that a tax position will be sustained upon examination by the appropriate taxing
authorities before any part of the benefit can be recorded in the financial statements. It also
provides guidance on the recognition, measurement, and classification of income tax uncertainties,
along with any related interest and penalties. The provisions of FIN 48 were applied to all tax
positions beginning January 1, 2007. The adoption of FIN 48 did not have a material impact on
Alabama Powers financial statements.
Fair Value Measurement
The FASB issued FASB Statement No. 157 (SFAS No. 157), Fair Value Measurements in September 2006.
This standard provides guidance on how to measure fair value where it is permitted or required
under other accounting pronouncements. SFAS No. 157 also requires additional disclosures about
fair value measurements. Alabama Power plans to adopt SFAS No. 157 on January 1, 2008 and is
currently assessing the impact of this standard.
Fair Value Option
In February 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159), Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115.
This standard permits an entity to choose to measure many financial instruments and certain other
items at fair value. Alabama Power plans to adopt SFAS No. 159 on January 1, 2008 and is currently
assessing its impact to the extent the fair value option is elected.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Alabama Powers financial condition and liquidity position remained stable at September 30, 2007.
Net cash provided from operating activities totaled $898.4 million for the first nine months of
2007, compared to $693.3 million for the corresponding period in 2006. The $205.1 million increase
in cash provided from operating activities in the first nine months of 2007 is primarily due to the
increase in net income as previously discussed, lower cash outflow for accounts payable, and an
increase in the accrued tax liability. Net cash used for investing activities totaled $920.4
million primarily due to gross property additions to utility plant of $822.8 million in the first
nine months of 2007. These additions were primarily related to construction of transmission and
distribution facilities, replacement of steam equipment, purchases of nuclear fuel, and
installation of
50
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
equipment to comply with environmental standards. Net cash provided from financing activities
totaled $314.2 million for the first nine months of 2007, compared to $105.7 million for the
corresponding period in 2006. The increase was primarily the result of a decrease in cash outflow
for the repayment of outstanding notes payable.
Capital Requirements and Contractual Obligations
See MANAGEMENTS DISCUSSION AND ANALYSIS -
FINANCIAL CONDITION AND LIQUIDITY Capital Requirements and Contractual Obligations of Alabama
Power in Item 7 of the Form 10-K for a description of Alabama Powers capital requirements for its
construction program, scheduled maturities of long-term debt, as well as the related interest,
preferred and preference stock dividends, lease obligations, purchase commitments, and trust
funding requirements. Approximately $978 million will be required through September 30, 2008 for
maturities of long-term debt.
In October 2007, Alabama Powers Board of Directors approved a new capital budget for 2008 and
2009. The construction program budget for Alabama Power is $1.57 billion for 2008 and $1.58
billion for 2009. Through 2009, Alabama Power estimates spending $1.26 billion on environmental
related additions, $354 million on Plant Farley (including $272 million for nuclear fuel), $752
million on distribution facilities and $281 million on transmission facilities. The Southern
Companys system financial plan, including its capital budget, is expected to be reviewed by the
Southern Company Board of Directors in early 2008. See Note 7 to the financial statements of
Alabama Power under Construction Program in Item 8 of the Form 10-K for additional details.
Sources of Capital
Alabama Power plans to obtain the funds required for construction and other
purposes from sources similar to those utilized in the past. Recently, Alabama Power has primarily
utilized funds from operating cash flows, short-term debt, external security offerings, and equity
contributions from Southern Company. However, the amount, type, and timing of any future
financings, if needed, will depend upon regulatory approval, prevailing market conditions, and
other factors. See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY
Sources of Capital of Alabama Power in Item 7 of the Form 10-K for additional
information.
Alabama Powers current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt as well as cash needs which can fluctuate significantly due to the seasonality of the business. To meet short-term cash needs and contingencies, Alabama
Power had at September 30, 2007 approximately $308 million of cash and cash
equivalents, $51.5 million of restricted cash related to the sale of pollution control bonds
which may be used only for future project costs, unused committed lines of credit of approximately
$978 million (including $563 million of such lines which are dedicated to funding purchase
obligations related to variable rate pollution control bonds), and an extendible commercial
note program. Of the unused credit facilities, $378 million will expire at various times
in 2008 (of which $298 million allow for one-year term loans). The remaining $600 million
credit facility expires in 2012. Alabama Power expects to renew its credit facilities,
as needed, prior to expiration. See Note 6 to the financial statements of Alabama Power under
Bank Credit Arrangements in Item 8 of the Form 10-K for additional information. Alabama
Power may also meet short-term cash needs through a Southern Company subsidiary organized to
issue and sell commercial paper and extendible commercial notes at the request and for the
benefit of Alabama Power and other Southern Company subsidiaries. Alabama Power has regulatory
authority for up to $1.4 billion of short-term borrowings. At September 30, 2007, Alabama Power
had no commercial paper or extendible commercial notes outstanding. Management believes that the
need for working capital can be adequately met by issuing commercial paper or utilizing lines of
credit without maintaining large cash balances.
51
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Credit Rating Risk
Alabama Power does not have any credit arrangements that would require material changes in payment
schedules or terminations as a result of a credit rating downgrade. However, Alabama Power, along
with all members of the Power Pool, is party to certain agreements that could require collateral
and/or accelerated payment in the event of a credit rating change to below investment grade for it
and/or Georgia Power. These agreements are primarily for natural gas and power price risk
management activities. At September 30, 2007, Alabama Powers total exposure to these types of
agreements was $26.7 million.
Market Price Risk
Alabama Powers market risk exposures relative to interest rate changes have not changed materially
compared with the December 31, 2006 reporting period. In addition, Alabama Power is not aware of
any facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulation, Alabama Power has limited exposure to market volatility in
interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks
relative to movements in electricity prices, Alabama Power enters into physical fixed-price
contracts for the purchase and sale of electricity through the wholesale electricity market.
Alabama Power has also implemented a retail fuel hedging program at the instruction of the Alabama
PSC.
The fair value of derivative energy contracts at September 30, 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
Year-to-Date |
|
|
|
2007 |
|
|
2007 |
|
|
|
Changes |
|
|
Changes |
|
|
|
Fair Value |
|
|
|
(in thousands) |
|
Contracts beginning of period |
|
$ |
(12,670 |
) |
|
$ |
(32,628 |
) |
Contracts realized or settled |
|
|
10,510 |
|
|
|
25,245 |
|
New contracts at inception |
|
|
|
|
|
|
|
|
Changes in valuation techniques |
|
|
|
|
|
|
|
|
Current period changes (a) |
|
|
(5,795 |
) |
|
|
(572 |
) |
|
Contracts at September 30, 2007 |
|
$ |
(7,955 |
) |
|
$ |
(7,955 |
) |
|
(a) Current period changes also include the changes in fair value of new contracts entered
into during the period, if any.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source of September 30, 2007 |
|
|
|
Valuation Prices |
|
|
|
Total |
|
|
Maturity |
|
|
|
Fair Value |
|
|
Year 1 |
|
|
1-3 Years |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Actively quoted |
|
$ |
(7,956 |
) |
|
$ |
(8,921 |
) |
|
$ |
965 |
|
External sources |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
Models and other methods |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts at September 30, 2007 |
|
$ |
(7,955 |
) |
|
$ |
(8,920 |
) |
|
$ |
965 |
|
|
52
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to
Alabama Powers fuel hedging programs are recorded as regulatory assets and liabilities. Realized
gains and losses from
these programs are included in fuel expense and are recovered through Alabama Powers fuel cost
recovery clause. Certain other energy related derivatives, designated as hedges, are deferred in
other comprehensive income. Gains and losses on derivative contracts that are not designated as
hedges are recognized in the statements of income as incurred.
At September 30, 2007, the fair value gain/(loss) of derivative energy contracts was reflected in
the financial statements as follows:
|
|
|
|
|
|
|
Amounts |
|
|
|
(in thousands) |
|
Regulatory assets, net |
|
$ |
(7,956 |
) |
Accumulated other comprehensive income |
|
|
|
|
Net income |
|
|
1 |
|
|
Total fair value |
|
$ |
(7,955 |
) |
|
Unrealized pre-tax gains and losses on energy contracts recognized in income were not material for
any period presented. For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS -
FINANCIAL CONDITION AND LIQUIDITY - Market Price Risk of Alabama Power in Item 7 and
Notes 1 and 6 to the financial statements of Alabama Power under Financial Instruments in Item 8
of the Form 10-K and Note (F) to the Condensed Financial Statements herein.
Financing Activities
Alabama Power issued $200 million of senior notes in the first quarter of 2007. The proceeds were
used to repay a portion of Alabama Powers outstanding short-term indebtedness and for other
general corporate purposes, including Alabama Powers continuing construction activities. Also in
the first quarter of 2007, Alabama Power issued 1,750,000 shares of common stock to Southern
Company at $40.00 a share ($70 million aggregate purchase price). The proceeds from the sale were
used by Alabama Power for general corporate purposes.
In the second quarter 2007, Alabama Power paid at maturity $168.5 million in aggregate principal
amount of Series W Floating Rate Extendible Senior Notes. In addition, Alabama Power issued $250
million of senior notes. The proceeds were used to repay a portion of Alabama Powers outstanding
short-term indebtedness and for other general corporate purposes, including Alabama Powers
continuing construction activities. Also in the second quarter of 2007, Alabama Power issued
1,750,000 shares of common stock to Southern Company at $40.00 a share ($70 million aggregate
purchase price). The proceeds from the sale were used by Alabama Power for general corporate
purposes.
Additionally, in the second quarter 2007, Alabama Power incurred obligations related to the
issuance of $246.5 million of The Industrial Development Board of the City of Mobile Pollution
Control Revenue Bonds (Alabama Power Barry Plant Project). The proceeds will be held by the
trustee and will be transferred to Alabama Power to fund pollution control and environmental
improvement facilities at Plant Barry. As of September 30, 2007, approximately $195.5 million had
been applied to fund project costs, with the remaining $51 million held by the trustee.
53
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In September 2007, Alabama Power issued 6,000,000 shares of 6.45% Series Preference Stock,
Non-Cumulative, Par Value $1 Per Share (Stated Capital $25 Per Share) ($150 million aggregate
purchase price). The proceeds from the sale were used by Alabama Power for general corporate
purposes.
Subsequent to September 30, 2007, Alabama Power issued $200 million of Series 2007C 6.00% Senior
Insured Monthly Notes due October 15, 2037. Alabama Power also terminated interest rate
derivatives related to the senior note issuance at a loss of less than $1.0 million. In addition,
Alabama Power issued 2,000,000 shares of 6.50% Series Preference Stock, Non-Cumulative, Par Value
$1 Per Share (Stated Capital $25 Per Share) ($50 million aggregate purchase price). The proceeds
from the sale were used by Alabama Power for general corporate purposes.
Also subsequent to September 30, 2007, Alabama Power paid at maturity $200 million in aggregate
principal amount of Series L 7.125% Senior Notes and Alabama Power redeemed $103.1 million
aggregate principal amount of Series D Junior Subordinated Notes due October 1, 2042 and the
related Flexible Trust Preferred Securities and Common Securities of Alabama Power Capital Trust
IV. In addition, Alabama Power announced the planned redemption of 1,250 shares of Alabama Power
Company Flexible Money Market Class A Preferred Stock (Series 2003A), Par Value $100,000 Per Share
($125 million aggregate value) in January 2008.
In addition to any financings that may be necessary to meet capital requirements and contractual
obligations, Alabama Power plans to continue, when economically feasible, a program to retire
higher-cost securities and replace these obligations with lower-cost capital if market conditions
permit.
54
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
2,143,511 |
|
|
$ |
2,001,938 |
|
|
$ |
5,141,403 |
|
|
$ |
4,885,404 |
|
Wholesale revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliates |
|
|
127,810 |
|
|
|
135,647 |
|
|
|
406,632 |
|
|
|
404,014 |
|
Affiliates |
|
|
107,451 |
|
|
|
78,249 |
|
|
|
208,065 |
|
|
|
203,791 |
|
Other revenues |
|
|
64,965 |
|
|
|
59,471 |
|
|
|
188,956 |
|
|
|
173,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
2,443,737 |
|
|
|
2,275,305 |
|
|
|
5,945,056 |
|
|
|
5,666,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
786,021 |
|
|
|
698,703 |
|
|
|
2,030,745 |
|
|
|
1,750,638 |
|
Purchased power |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliates |
|
|
168,358 |
|
|
|
145,495 |
|
|
|
282,121 |
|
|
|
288,459 |
|
Affiliates |
|
|
196,700 |
|
|
|
186,669 |
|
|
|
560,897 |
|
|
|
572,642 |
|
Other operations |
|
|
258,865 |
|
|
|
258,055 |
|
|
|
739,151 |
|
|
|
744,858 |
|
Maintenance |
|
|
129,812 |
|
|
|
116,320 |
|
|
|
391,070 |
|
|
|
374,203 |
|
Depreciation and amortization |
|
|
128,268 |
|
|
|
125,352 |
|
|
|
381,679 |
|
|
|
372,850 |
|
Taxes other than income taxes |
|
|
87,708 |
|
|
|
82,701 |
|
|
|
231,659 |
|
|
|
227,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,755,732 |
|
|
|
1,613,295 |
|
|
|
4,617,322 |
|
|
|
4,331,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
688,005 |
|
|
|
662,010 |
|
|
|
1,327,734 |
|
|
|
1,335,874 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction |
|
|
17,846 |
|
|
|
7,802 |
|
|
|
45,712 |
|
|
|
20,324 |
|
Interest income |
|
|
1,436 |
|
|
|
1,039 |
|
|
|
2,543 |
|
|
|
1,613 |
|
Interest expense, net of amounts capitalized |
|
|
(81,796 |
) |
|
|
(65,770 |
) |
|
|
(225,457 |
) |
|
|
(193,442 |
) |
Interest expense to affiliate trusts |
|
|
(6,798 |
) |
|
|
(14,878 |
) |
|
|
(35,682 |
) |
|
|
(44,633 |
) |
Other income (expense), net |
|
|
11,291 |
|
|
|
7,772 |
|
|
|
7,376 |
|
|
|
9,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(58,021 |
) |
|
|
(64,035 |
) |
|
|
(205,508 |
) |
|
|
(206,472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
629,984 |
|
|
|
597,975 |
|
|
|
1,122,226 |
|
|
|
1,129,402 |
|
Income taxes |
|
|
229,862 |
|
|
|
214,102 |
|
|
|
401,046 |
|
|
|
413,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
400,122 |
|
|
|
383,873 |
|
|
|
721,180 |
|
|
|
715,570 |
|
Dividends on Preferred Stock |
|
|
689 |
|
|
|
1,790 |
|
|
|
2,067 |
|
|
|
4,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income After Dividends on Preferred Stock |
|
$ |
399,433 |
|
|
$ |
382,083 |
|
|
$ |
719,113 |
|
|
$ |
711,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net Income After Dividends on Preferred Stock |
|
$ |
399,433 |
|
|
$ |
382,083 |
|
|
$ |
719,113 |
|
|
$ |
711,420 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $(4,686), $(10,765),
$5,044,
and $254, respectively |
|
|
(7,430 |
) |
|
|
(17,066 |
) |
|
|
7,996 |
|
|
|
398 |
|
Reclassification adjustment for amounts included in net
income,
net of tax of $73, $(236), $75, and $(194), respectively |
|
|
116 |
|
|
|
(373 |
) |
|
|
120 |
|
|
|
(308 |
) |
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $71, $(296), $107,
and $(459), respectively |
|
|
112 |
|
|
|
(471 |
) |
|
|
170 |
|
|
|
(729 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income (loss) |
|
|
(7,202 |
) |
|
|
(17,910 |
) |
|
|
8,286 |
|
|
|
(639 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
$ |
392,231 |
|
|
$ |
364,173 |
|
|
$ |
727,399 |
|
|
$ |
710,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
56
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
721,180 |
|
|
$ |
715,570 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
458,522 |
|
|
|
439,197 |
|
Deferred income taxes and investment tax credits |
|
|
34,267 |
|
|
|
35,865 |
|
Deferred expenses affiliates |
|
|
(19,460 |
) |
|
|
(19,721 |
) |
Allowance for equity funds used during construction |
|
|
(45,712 |
) |
|
|
(20,324 |
) |
Pension, postretirement, and other employee benefits |
|
|
35,337 |
|
|
|
32,140 |
|
Other, net |
|
|
14,382 |
|
|
|
4,989 |
|
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
Receivables |
|
|
(211,971 |
) |
|
|
(213,235 |
) |
Fossil fuel stock |
|
|
1,827 |
|
|
|
(76,805 |
) |
Materials and supplies |
|
|
(22,605 |
) |
|
|
(43,252 |
) |
Prepaid income taxes |
|
|
42,047 |
|
|
|
62,164 |
|
Other current assets |
|
|
7,450 |
|
|
|
(786 |
) |
Accounts payable |
|
|
(1,122 |
) |
|
|
(162,226 |
) |
Accrued taxes |
|
|
25,779 |
|
|
|
151,042 |
|
Accrued compensation |
|
|
(62,643 |
) |
|
|
(56,274 |
) |
Other current liabilities |
|
|
31,179 |
|
|
|
8,272 |
|
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
1,008,457 |
|
|
|
856,616 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(1,214,093 |
) |
|
|
(781,134 |
) |
Nuclear decommissioning trust fund purchases |
|
|
(336,526 |
) |
|
|
(366,452 |
) |
Nuclear decommissioning trust fund sales |
|
|
329,646 |
|
|
|
359,572 |
|
Cost of removal, net of salvage |
|
|
(28,811 |
) |
|
|
(18,363 |
) |
Change in construction payables, net of joint owner portion |
|
|
48,074 |
|
|
|
(13,133 |
) |
Other |
|
|
(11,553 |
) |
|
|
(7,328 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(1,213,263 |
) |
|
|
(826,838 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Increase (decrease) in notes payable, net |
|
|
(166,951 |
) |
|
|
371,480 |
|
Proceeds |
|
|
|
|
|
|
|
|
Senior notes |
|
|
1,400,000 |
|
|
|
|
|
Capital contributions from parent company |
|
|
270,250 |
|
|
|
265,777 |
|
Pollution control bonds |
|
|
|
|
|
|
125,845 |
|
Redemptions |
|
|
|
|
|
|
|
|
Senior notes |
|
|
(300,000 |
) |
|
|
(150,000 |
) |
First mortgage bonds |
|
|
|
|
|
|
(20,000 |
) |
Pollution control bonds |
|
|
|
|
|
|
(125,845 |
) |
Capital leases |
|
|
(2,073 |
) |
|
|
(270 |
) |
Long-term debt to affiliate trusts |
|
|
(453,608 |
) |
|
|
|
|
Preferred stock |
|
|
|
|
|
|
(14,569 |
) |
Payment of preferred stock dividends |
|
|
(2,255 |
) |
|
|
(2,126 |
) |
Payment of common stock dividends |
|
|
(517,425 |
) |
|
|
(472,500 |
) |
Other |
|
|
(24,662 |
) |
|
|
(1,621 |
) |
|
|
|
|
|
|
|
Net cash provided from (used for) financing activities |
|
|
203,276 |
|
|
|
(23,829 |
) |
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
(1,530 |
) |
|
|
5,949 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
16,850 |
|
|
|
11,138 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
15,320 |
|
|
$ |
17,087 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $19,181 and $8,177 capitalized for
2007 and 2006, respectively) |
|
$ |
229,282 |
|
|
$ |
226,368 |
|
Income taxes (net of refunds) |
|
$ |
254,742 |
|
|
$ |
177,486 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed
financial statements.
57
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Assets |
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
15,320 |
|
|
$ |
16,850 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
670,600 |
|
|
|
474,046 |
|
Unbilled revenues |
|
|
188,036 |
|
|
|
130,585 |
|
Under recovered regulatory clause revenues |
|
|
526,227 |
|
|
|
353,976 |
|
Other accounts and notes receivable |
|
|
95,370 |
|
|
|
93,656 |
|
Affiliated companies |
|
|
49,521 |
|
|
|
21,941 |
|
Accumulated provision for uncollectible accounts |
|
|
(10,273 |
) |
|
|
(10,030 |
) |
Fossil fuel stock, at average cost |
|
|
390,183 |
|
|
|
392,011 |
|
Materials and supplies, at average cost |
|
|
326,938 |
|
|
|
304,514 |
|
Vacation pay |
|
|
62,306 |
|
|
|
61,907 |
|
Prepaid income taxes |
|
|
19,057 |
|
|
|
61,104 |
|
Other |
|
|
42,300 |
|
|
|
85,725 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,375,585 |
|
|
|
1,986,285 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
21,745,564 |
|
|
|
21,279,792 |
|
Less accumulated provision for depreciation |
|
|
8,614,032 |
|
|
|
8,343,309 |
|
|
|
|
|
|
|
|
|
|
|
13,131,532 |
|
|
|
12,936,483 |
|
Nuclear fuel, at amortized cost |
|
|
191,186 |
|
|
|
180,129 |
|
Construction work in progress |
|
|
1,559,280 |
|
|
|
923,948 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
14,881,998 |
|
|
|
14,040,560 |
|
|
|
|
|
|
|
|
Other Property and Investments: |
|
|
|
|
|
|
|
|
Equity investments in unconsolidated subsidiaries |
|
|
61,706 |
|
|
|
70,879 |
|
Nuclear decommissioning trusts, at fair value |
|
|
597,089 |
|
|
|
544,013 |
|
Other |
|
|
36,883 |
|
|
|
58,848 |
|
|
|
|
|
|
|
|
Total other property and investments |
|
|
695,678 |
|
|
|
673,740 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
523,012 |
|
|
|
510,531 |
|
Prepaid pension costs |
|
|
709,115 |
|
|
|
688,671 |
|
Deferred under recovered regulatory clause revenues |
|
|
285,381 |
|
|
|
544,152 |
|
Other regulatory assets |
|
|
601,613 |
|
|
|
629,003 |
|
Other |
|
|
296,054 |
|
|
|
235,788 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
2,415,175 |
|
|
|
2,608,145 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
20,368,436 |
|
|
$ |
19,308,730 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
58
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
432,400 |
|
|
$ |
303,906 |
|
Notes payable |
|
|
566,330 |
|
|
|
733,281 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
239,813 |
|
|
|
238,093 |
|
Other |
|
|
439,132 |
|
|
|
402,222 |
|
Customer deposits |
|
|
169,317 |
|
|
|
155,763 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Income taxes |
|
|
183,303 |
|
|
|
217,603 |
|
Other |
|
|
236,235 |
|
|
|
275,098 |
|
Accrued interest |
|
|
87,135 |
|
|
|
74,643 |
|
Accrued vacation pay |
|
|
49,485 |
|
|
|
49,704 |
|
Accrued compensation |
|
|
82,897 |
|
|
|
141,356 |
|
Other |
|
|
98,974 |
|
|
|
125,494 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,585,021 |
|
|
|
2,717,163 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
5,207,764 |
|
|
|
4,242,839 |
|
|
|
|
|
|
|
|
Long-term Debt Payable to Affiliated Trusts |
|
|
515,465 |
|
|
|
969,073 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
2,891,790 |
|
|
|
2,815,724 |
|
Deferred credits related to income taxes |
|
|
149,349 |
|
|
|
157,297 |
|
Accumulated deferred investment tax credits |
|
|
272,361 |
|
|
|
282,070 |
|
Employee benefit obligations |
|
|
764,125 |
|
|
|
698,274 |
|
Asset retirement obligations |
|
|
654,295 |
|
|
|
626,681 |
|
Other cost of removal obligations |
|
|
428,084 |
|
|
|
436,137 |
|
Other regulatory liabilities |
|
|
268,606 |
|
|
|
281,391 |
|
Other |
|
|
139,556 |
|
|
|
80,839 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
5,568,166 |
|
|
|
5,378,413 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
13,876,416 |
|
|
|
13,307,488 |
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
44,990 |
|
|
|
44,991 |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, without par value |
|
|
|
|
|
|
|
|
Authorized - 20,000,000 shares |
|
|
|
|
|
|
|
|
Outstanding - 9,261,500 shares |
|
|
398,473 |
|
|
|
398,473 |
|
Paid-in capital |
|
|
3,320,650 |
|
|
|
3,039,845 |
|
Retained earnings |
|
|
2,731,514 |
|
|
|
2,529,826 |
|
Accumulated other comprehensive loss |
|
|
(3,607 |
) |
|
|
(11,893 |
) |
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
6,447,030 |
|
|
|
5,956,251 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
20,368,436 |
|
|
$ |
19,308,730 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
59
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2007 vs. THIRD QUARTER 2006
AND
YEAR-TO-DATE 2007 vs. YEAR-TO-DATE 2006
OVERVIEW
Georgia Power operates as a vertically integrated utility providing electricity to retail customers
within its traditional service area located within the State of Georgia and to wholesale customers
in the Southeast. Many factors affect the opportunities, challenges, and risks of Georgia Powers
business of selling electricity. These factors include the ability to maintain a stable regulatory
environment, to achieve energy sales growth, and to effectively manage and secure timely recovery
of rising costs. These costs include those related to growing demand and increasingly stringent
environmental standards. These issues are addressed in a general rate case filed on June 29, 2007
that is expected to be completed in late December. In addition, fuel costs rose significantly
during 2005 and 2006. Georgia Power received Georgia PSC orders to increase its fuel recovery rate
effective July 1, 2006 and March 1, 2007 and continues to work with the Georgia PSC to enable the
timely recovery of these costs.
Georgia Power continues to focus on several key performance indicators. These indicators include
customer satisfaction, plant availability, system reliability, and net income. For additional
information on these indicators, see MANAGEMENTS DISCUSSION AND ANALYSIS OVERVIEW Key
Performance Indicators of Georgia Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$17.3
|
|
4.5
|
|
$7.7
|
|
1.1 |
|
Georgia Powers net income after dividends on preferred stock for the third quarter was $399.4
million compared to $382.1 million for the corresponding period in 2006. The increase in earnings
was primarily the result of higher base retail revenues due to favorable weather conditions and its
effects on pricing partially offset by the timing of maintenance activities.
For year-to-date 2007 net income after dividends on preferred stock was $719.1 million compared to
$711.4 million for the corresponding period in 2006. The increase in earnings was primarily the
result of higher base retail revenues from residential and commercial customers due to favorable
weather conditions, customer growth, and a lower effective tax rate. This increase was offset by
increased maintenance and interest expenses as well as lower contributions from market-driven rates
to large commercial and industrial customers during the first two
quarters of 2007.
Retail Revenues
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$141.6
|
|
7.1
|
|
$256.0
|
|
5.2 |
|
In the third quarter 2007, retail revenues were $2.1 billion compared to $2.0 billion in the
corresponding period in 2006.
For year-to-date 2007, retail revenues were $5.1 billion compared to $4.9 billion for the same
period in 2006.
60
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 |
|
Year-to-Date 2007 |
|
|
(in millions) |
|
(% change) |
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
2,001.9 |
|
|
|
|
|
|
$ |
4,885.4 |
|
|
|
|
|
Estimated change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
28.0 |
|
|
|
1.4 |
|
|
|
(56.8 |
) |
|
|
(1.2 |
) |
Sales growth |
|
|
1.7 |
|
|
|
0.1 |
|
|
|
37.2 |
|
|
|
0.8 |
|
Weather |
|
|
10.5 |
|
|
|
0.5 |
|
|
|
20.5 |
|
|
|
0.4 |
|
Fuel cost recovery |
|
|
101.4 |
|
|
|
5.1 |
|
|
|
255.1 |
|
|
|
5.2 |
|
|
Retail current year |
|
$ |
2,143.5 |
|
|
|
7.1 |
|
|
$ |
5,141.4 |
|
|
|
5.2 |
|
|
Revenues associated with changes in rates and pricing increased in the third quarter 2007 and
decreased for year-to-date 2007 when compared to the corresponding periods for 2006. Revenues
associated with rates and pricing changes increased in the third quarter 2007 primarily due to
higher demand driven revenues from commercial customers. Some commercial customers are billed
under tariffs that are subject to increased capacity charges when new peak demands are set, as
occurred in August. Also contributing to the increase related to changes in rates and pricing were
higher contributions from market-driven rates for sales to large commercial and industrial
customers. Revenues associated with changes in rates and pricing decreased year-to-date 2007
primarily due to lower contributions from market-driven rates for sales to large commercial and
industrial customers partially offset by higher demand revenues from commercial customers.
Revenues attributable to sales growth were $1.7 million in the third quarter and $37.2 million
year-to-date 2007 when compared to the corresponding periods for 2006. Total retail KWH sales
increased 1.6% for the third quarter and 1.9% for year-to-date compared to the corresponding
periods in 2006. These increases were primarily the result of the addition of over 26,000 customers. For the third
quarter and year-to-date, residential KWH sales increased 1.4% and 3.1%, respectively, and
commercial KWH sales increased 2.8% in each period. These increases were partially offset by a
0.5% year-to-date decrease in KWH sales to industrial customers primarily due to reduced demand
from the textile industry.
Revenues attributable to changes in weather increased in the third quarter and year-to-date 2007
when compared to the corresponding periods for 2006 primarily due to the sustained warmer
conditions in August 2007.
Fuel cost recovery revenues increased when compared to the corresponding periods for 2006. Georgia
Powers rates include provisions to adjust billings for fluctuations in fuel costs, including the
energy component of purchased power costs. Under these provisions, which increased July 1, 2006
and March 1, 2007, fuel revenues generally equal fuel expenses, including the fuel component of
purchased power costs, and do not affect net income. See FUTURE EARNINGS POTENTIAL FERC and
Georgia PSC Matters Retail Fuel Cost Recovery herein for additional information.
Wholesale Revenues Non-Affiliates
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(7.8)
|
|
(5.8)
|
|
$2.6
|
|
0.6 |
|
In the third quarter 2007, revenues from wholesale non-affiliates were $127.8 million compared to
$135.6 million in the same period in 2006. The third quarter decrease was primarily the result of a
5.9% decrease in
61
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
wholesale non-affiliate sales volume due to lower off-system sales from long-term contracts as well
as decreased
off-system market opportunity sales because generation resources were needed to meet Georgia Power
retail and Southern Company system demand.
For year-to-date 2007, revenues from wholesale non-affiliates were $406.6 million compared to
$404.0 million in the same period in 2006. The increase was not material.
Wholesale energy sales to non-affiliates will vary depending on the market cost of available energy
compared to the cost of Georgia Power and Southern Company system owned generation, demand for
energy within the Southern Company service territory, and availability of Southern Company system
generation.
Wholesale Revenues Affiliates
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$29.3
|
|
37.3
|
|
$4.3
|
|
2.1 |
|
In the third quarter 2007, revenues from wholesale affiliates were $107.5 million compared to
$78.2 million for the corresponding period in 2006. This increase was primarily due to an 18.9%
increase in third quarter 2007 KWH sales to affiliates due to the availability of Georgia Power
generating assets to meet Southern Company system demand.
For year-to-date 2007, revenues from wholesale affiliates were $208.1 million compared to $203.8
million, for the corresponding period in 2006. The increase was not material.
Wholesale energy sales to affiliated companies within the Southern Company system will vary
depending on demand and the availability and cost of generating resources at each company. These
sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have
a significant impact on earnings since this energy is generally sold at marginal cost.
Other Revenues
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$5.5
|
|
9.2
|
|
$15.3
|
|
8.8 |
|
In the
third quarter and year-to-date 2007, other revenues were
$65.0 million and $189.0 million,
respectively, compared to $59.5 million and $173.7 million in the corresponding periods in 2006.
The other revenue increases were primarily due to increases in transmission and outdoor lighting
revenues. Transmission revenues increased $2.7 million third quarter and $9.6 million year-to-date
primarily due to the increased usage of Georgia Powers transmission system by non-affiliated
companies. Outdoor lighting revenues increased $2.2 million in the third quarter and $5.7 million
year-to-date primarily due to a 3.1% increase in the number of lighting customers.
62
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
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Third Quarter 2007 |
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Year-to-Date 2007 |
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vs. |
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vs. |
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Third Quarter 2006 |
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Year-to-Date 2006 |
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|
|
(change in millions) |
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|
(% change) |
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|
(change in millions) |
|
|
(% change) |
|
Fuel |
|
$ |
87.3 |
|
|
|
12.5 |
|
|
$ |
280.1 |
|
|
|
16.0 |
|
Purchased power non-affiliates |
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|
22.9 |
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|
|
15.7 |
|
|
|
(6.3 |
) |
|
|
(2.2) |
|
Purchased power affiliates |
|
|
10.0 |
|
|
|
5.4 |
|
|
|
(11.8 |
) |
|
|
(2.1) |
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|
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|
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Total fuel and purchased power expenses |
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$ |
120.2 |
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|
|
|
|
|
$ |
262.0 |
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In the third quarter 2007, total fuel and purchased power expenses were $1.2 billion compared to
$1.0 billion for the corresponding period in 2006. The increase in fuel and purchased power
expenses was due to $79.8 million net increase in the average cost of energy per net KWH and a
$40.4 million increase from higher KWH volumes generated and purchased compared to the
corresponding period in 2006. The increase in KWH volumes generated
and purchased can be partially attributed to the
increased demand due to warmer summer weather as well as the decrease in Georgia Powers hydro
generation due to the severe drought in Georgia.
For year-to-date 2007, total fuel and purchased power expenses were $2.9 billion compared to $2.6
billion for the same period in 2006. The net increase in fuel and purchase power expenses was
primarily due to a $203.6 million net increase in the average cost of energy per net KWH and a
$58.4 million increase from higher KWH volumes generated and purchased compared to the
corresponding period in 2006. The increase in KWH volumes generated
and purchased can be partially attributed to the
increased demand due to the warmer summer weather as well as the decrease in Georgia Powers hydro
generation due to the severe drought in Georgia.
Fuel and purchased power transactions do not have a significant impact on earnings since energy
expenses are generally offset by energy revenues through Georgia Powers fuel cost recovery clause.
See FUTURE EARNINGS POTENTIAL FERC and Georgia PSC Matters Retail Fuel Cost Recovery
herein for additional information
Details of Georgia Powers cost of generation and purchased power are as follows:
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Third Quarter |
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Third Quarter |
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|
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Year-to-Date |
|
Year-to-Date |
|
|
Average Cost |
|
2007 |
|
2006 |
|
% change |
|
2007 |
|
2006 |
|
% change |
|
|
(cents per net KWH) |
|
|
|
|
|
(cents per net KWH) |
|
|
|
|
Fuel |
|
|
2.77 |
|
|
|
2.52 |
|
|
|
9.9 |
|
|
|
2.69 |
|
|
|
2.43 |
|
|
|
10.7 |
|
Purchased power |
|
|
7.61 |
|
|
|
7.31 |
|
|
|
4.1 |
|
|
|
7.25 |
|
|
|
7.04 |
|
|
|
3.0 |
|
|
In the third quarter 2007, fuel expense was $786.0 million compared to $698.7 million for the
corresponding period in 2006. This increase was due to a 9.9% increase in the average cost of fuel
per net KWH generated and the increased use of available gas generation resources to meet summer
peak demand requirements in 2007.
For year-to-date 2007, fuel expense was $2.0 billion compared to $1.8 billion in 2006. This
increase was the result of a 10.7% increase in the average cost of fuel per net KWH generated
primarily due to higher coal transportation costs and an increase in the use of available gas
generation resources, which have higher fuel costs than other generation resources.
63
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-affiliates
In the third quarter 2007, purchased power expense non-affiliates was $168.4 million compared to
$145.5 million for the third quarter 2006. This increase was primarily the result of an increase
of 62.2% in KWH volume purchased from non-affiliates compared to the same period in 2006 due to the
use of available lower priced market purchases from non-affiliates to meet the increase in
weather-related system demand requirements.
For year-to-date 2007, purchased power expense non-affiliates was $282.1 million compared to
$288.5 million for the corresponding period in 2006. The decrease was primarily the result of a
year-to-date 20.8% decrease in the average cost of purchase power from non-affiliates per KWH
purchased, partially offset by an increase of 23.5% in KWH volume
purchased from non-affiliates compared to the same
period in 2006.
Energy purchases from non-affiliates will vary depending on market cost of available energy being
lower than Southern Company system-generated energy, demand for energy within the system service
territory, and availability of Southern Company system generation.
Affiliates
In the third quarter 2007, purchased power affiliates was $196.7 million compared to $186.7
million for the third quarter 2006. Purchases from affiliates increased primarily due to an
overall increase in the marginal cost of energy despite a decrease of 6.8% in KWH volume purchased
from affiliates compared to the same period in 2006.
For year-to-date 2007, purchased power affiliates was $560.9 million compared to $572.6 million
for the corresponding period in 2006. Year-to-date KWH purchases decreased 1.1% primarily due to
the availability of Georgia Power self-owned assets to meet customer demand.
Energy purchases from affiliated companies within the Southern Company system will vary depending
with demand and the availability and cost of generating resources at each company. These purchases
are made in accordance with the IIC, as approved by the FERC.
Other Operations and Maintenance Expenses
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Third Quarter 2007 |
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Year-to-Date 2007 |
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|
|
vs. |
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|
vs. |
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|
|
Third Quarter 2006 |
|
|
Year-to-Date 2006 |
|
|
|
(change in millions) |
|
|
(% change) |
|
|
(change in millions) |
|
|
(% change) |
|
Other operations |
|
$ |
0.8 |
|
|
|
0.3 |
|
|
$ |
(5.7 |
) |
|
|
(0.8) |
|
Maintenance |
|
|
13.5 |
|
|
|
11.6 |
|
|
|
16.9 |
|
|
|
4.5 |
|
|
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|
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|
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|
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Total other
operations and
maintenance
expenses |
|
$ |
14.3 |
|
|
|
|
|
|
$ |
11.2 |
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In the third quarter 2007, other operations and maintenance expenses were $388.7 million compared
to $374.4 million in the same period in 2006. This was primarily
the result of a $13.0 million
increase due to the timing and higher cost of generation maintenance and outage activities at
Georgia Powers fossil and nuclear units and a $6.4 million increase in expenses due to the timing
of distribution maintenance activities. This was partially offset by a $2.1 million decrease in
transmission expenses associated with the integrated transmission system that Georgia Power shares
with its joint owners and a $2.4 million decrease in uncollectible account expenses.
64
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2007, other operations and maintenance expenses were $1.13 billion compared to
$1.12 billion for the same period in 2006. The $11.2 million increase was primarily the result of
an $18.0 million increase in fossil generation expenses due to the timing and higher cost of
maintenance outages. Also contributing to the increase was $5.5 million in additional nuclear
outage expenses. Offsetting these increases were a $5.4 million decrease in uncollectible account
expenses and a $7.0 million decrease in employee compensation and benefit expenses.
Allowance for Equity Funds Used During Construction
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|
|
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Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$10.0
|
|
128.7
|
|
$25.4
|
|
124.9 |
|
In the third quarter and year-to-date 2007, the allowance for equity funds used during construction
was $17.8 million and $45.7 million, respectively, compared to $7.8 million and $20.3 million for
the corresponding periods in 2006. These increases were primarily related to a 115.3% increase in
average third quarter expenditures and a 106.4% increase in average year-to-date expenditures
related to new and ongoing construction activities for environmental, transmission, and
distribution projects. See Note 7 to the financial statements of Georgia Power under Construction
Program in Item 8 of the Form 10-K for additional information regarding Georgia Powers
construction program.
Interest Expense, Net of Amounts Capitalized
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|
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|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$16.0
|
|
24.4
|
|
$32.1
|
|
16.6 |
|
In the third quarter and year-to-date 2007, interest expense, net of amounts capitalized was $81.8
million and $225.5 million, respectively, compared to $65.8 million and $193.4 million for the
corresponding periods in 2006. These increases were primarily the result of generally higher
interest rates for variable rate debt and the issuance of additional long-term debt. See
MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION
AND LIQUIDITY Financing Activities
herein for additional information.
Interest Expense to Affiliate Trusts
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(8.1)
|
|
(54.3)
|
|
$(8.9)
|
|
(20.1) |
|
In the third quarter and year-to-date 2007, interest expense to affiliate trusts was $6.8 million
and $35.7 million, respectively, compared to $14.9 million and $44.6 million for the corresponding
periods in 2006. These decreases were primarily the result of the redemption of junior
subordinated notes and related trust preferred securities issued by Georgia Power Capital Trust V
in June 2007. This decrease was partially offset by the increase in interest expense, net of
amounts capitalized. See MANAGEMENTS DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND LIQUIDITY
Financing Activities herein for additional information.
65
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Income (Expense), Net
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|
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|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$3.5
|
|
45.3
|
|
$(2.3)
|
|
(23.7) |
|
In the third quarter and year-to-date 2007, other income (expense), net was $11.3 million and $7.4
million, respectively, compared to $7.8 million and $9.7 million for the corresponding periods in
2006. The third quarter increase was primarily the result of higher income from a residential
pricing program and customer contract work. The year-to-date decrease was the result of higher
charitable donations and lower customer facilities charges.
Income Taxes
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|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$15.8
|
|
7.4
|
|
$(12.8)
|
|
(3.1) |
|
In the third quarter and year-to-date 2007, income taxes were $229.9 million and $401.0 million,
respectively, compared to $214.1 million and $413.8 million for the corresponding periods in 2006.
The third quarter increase was primarily a result of higher pre-tax net income. The year-to-date
decrease was primarily the result of higher state income tax credits, an increase in federal tax
benefits, and lower pre-tax income. See Note (H) to the Condensed Financial Statements herein for
additional information related to the tax impact of state income tax credits on Georgia Powers
effective tax rate.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Georgia Powers future
earnings potential. The level of Georgia Powers future earnings depends on numerous factors that
affect the opportunities, challenges, and risks of Georgia Powers business of selling electricity.
These factors include Georgia Powers ability to maintain a stable regulatory environment that
continues to allow for the recovery of all prudently incurred costs during a time of increasing
costs. Future earnings in the near term will depend, in part, upon growth in energy sales which is
subject to a number of factors. These factors include weather, competition, new energy contracts
with neighboring utilities, energy conservation practiced by customers, the price of electricity,
the price elasticity of demand, and the rate of economic growth in Georgia Powers service area.
For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENTS
DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL of Georgia Power in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect
earnings if such costs cannot be fully recovered in rates on a timely basis. See MANAGEMENTS
DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters of Georgia Power in
Item 7 and Note 3 to the financial statements of Georgia Power under Environmental Matters in
Item 8 of the Form 10-K for additional information.
66
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Eight-Hour Ozone Regulations
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Environmental Statutes and Regulations Air Quality of Georgia Power in Item 7 of the Form 10-K
for additional information regarding revisions to the eight-hour ozone air quality standard. On
June 20, 2007, the EPA proposed additional revisions to the current eight-hour ozone standard
which, if enacted, could result in designation of new nonattainment areas within Georgia Powers
service territory. The EPA has requested comment and is expected to make a determination regarding
finalization of a revised standard in 2008. The ultimate outcome of this matter cannot be
determined at this time.
Fine Particulate Matter Regulations
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Environmental Statutes and Regulations Air Quality of Georgia Power in Item 7 of the Form 10-K
for additional information regarding nonattainment designations for the fine particulate matter air
quality standard. In March 2007, the EPA finalized its fine particulate matter implementation
rule, requiring submittal of state plans for addressing the nonattainment designations by April
2008. The ultimate outcome of this matter depends on the development and submittal of those state
plans and the resolution of pending legal challenges and, therefore, cannot be determined at this
time.
Georgia Multi-Pollutant Rule
On June 27, 2007, the State of Georgia approved a new multi-pollutant rule for certain existing
coal-fired electric utility steam generating units in Georgia. The rule is designed to reduce
emissions of mercury, sulfur dioxide, nitrogen oxide, and fine particulates state-wide by requiring
installation of specified control
technologies at each affected unit by a date certain between December 31, 2008 and June 1, 2015.
This rule will require the installation of controls on the majority of Georgia Powers coal-fired
units. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental
Matters
Environmental Statutes and Regulations General in Item 7 of the Form 10-K for a discussion of
estimated compliance costs for 2007 through 2009. If compliance costs cannot be fully recovered in
rates on a timely basis, Georgia Powers financial statements would be adversely impacted. See
FERC and Georgia PSC Matters Retail Base Rate Recovery for information on Georgia Powers
request to increase retail rates effective January 1, 2008.
Plant Wansley Environmental Litigation
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Plant Wansley Environmental Litigation of Georgia Power in Item 7 and Note 3 to the financial
statements of Georgia Power under Environmental Matters Plant Wansley Environmental Litigation
in Item 8 of the Form 10-K for additional information on litigation involving alleged violations of
the Clean Air Act at four of the units at Plant Wansley. On June 18, 2007, the U.S. District Court
for the Northern District of Georgia approved a settlement between the parties resolving all
remaining issues and dismissed the case. There was no material impact on Georgia Powers financial
statements.
67
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FERC and Georgia PSC Matters
Market-Based Rate Authority
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL FERC Matters
Market-Based Rate Authority of Georgia Power in Item 7 and Note 3 to the financial statements
of Georgia Power under FERC Matters Market-Based Rate Authority in Item 8 of the Form 10-K
for information regarding the proceedings initiated by the FERC in December 2004 to assess
Southern Companys generation dominance within its retail service territory and in May 2005 to
determine whether Southern Company satisfies the other three parts of the FERCs market-based
rate analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal
dealing.
In late June and July 2007, hearings were held in the December 2004 proceeding and briefs to the
presiding ALJ were filed in August and September. Georgia Power anticipates an initial decision
from the ALJ in November 2007 on the issues that were set for hearing. The ultimate outcome of
this generation dominance proceeding cannot now be determined, but an adverse decision by the
FERC in a final order could result in refunds of approximately $5.8 million, plus interest.
On June 21, 2007, the FERC issued an order terminating the May 2005 proceeding pertaining to the
other three parts of the market-based rate analysis. In addition, on June 21, 2007, the FERC
issued its final rule regarding market-based rate authority. The FERC generally retained its
current market-based rate standards. The impact of this order and its effect on the generation
dominance proceeding cannot now be determined.
Intercompany Interchange Contract
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL FERC Matters
Intercompany Interchange Contract of Georgia Power in Item 7 and Note 3 to the financial
statements of Georgia Power under FERC Matters Intercompany Interchange Contract in Item 8
of the Form 10-K for information regarding the proceeding initiated by the FERC in May 2005 to
examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power,
Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of
which the Power Pool is operated, and, in particular, the propriety of the continued inclusion
of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the
FERCs standards of conduct applicable to utility companies that are
transmission providers, and (3) whether Southern Companys code of conduct defining Southern
Power as a system company rather than a marketing affiliate is just and reasonable.
On April 19, 2007, the FERC approved, with certain modifications, the compliance filing
submitted by Southern Company on November 6, 2006. The compliance plan largely involves
functional separation and information restrictions related to marketing activities conducted on
behalf of Southern Power. Implementation of the plan is not expected to have a material impact
on Georgia Powers financial statements.
Retail Fuel Cost Recovery
As of September 30, 2007, Georgia Power had an under recovered fuel balance of approximately $811.6
million, compared to $898.1 million at December 31, 2006. On February 6, 2007, the Georgia PSC
approved an increase in Georgia Powers total annual billings of approximately $383 million related
to fuel cost recovery effective March 1, 2007. The order also requires Georgia Power to file for a
new fuel cost recovery rate no later than March 1, 2008. Fuel cost recovery revenues as recorded
on the financial statements are adjusted for differences in actual recoverable costs and amounts
billed in current regulated rates. Accordingly, any changes
68
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
in the billing factor will have no significant effect on Georgia Powers revenues or net income,
but will affect cash flow. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL
PSC Matters Fuel Cost Recovery of Georgia Power in Item 7 and Note 3 to the financial
statements of Georgia Power under Retail Regulatory Matters Fuel Cost Recovery in Item 8 of the
Form 10-K for additional information.
Retail Base Rate Filing
Georgia Power is currently operating under a three-year retail rate order that expires December 31,
2007. Under the terms of the existing order, earnings are evaluated annually against a retail
return on common equity range of 10.25% to 12.25%. Two-thirds of any earnings above the 12.25%
return are applied to rate refunds, with the remaining one-third retained by Georgia Power. The
order required Georgia Power to file a general rate case by July 1, 2007.
On June 29, 2007, Georgia Power filed a request to increase retail base rates with the Georgia PSC.
The request includes an increase effective January 1, 2008 of approximately $406 million, or
5.98%, in retail revenues, based on a future test year ending July 31, 2008 and a proposed retail
return on common equity of 12.5%. The majority of the increase in retail revenues is being
requested to cover the costs of environmental compliance and continued investment in new
generation, transmission, and distribution facilities to support growth and ensure reliability.
The remainder of the increase would include recovery of higher operations, maintenance, and other
investment costs to meet the rising demand for electricity. Hearings on Georgia Powers direct
testimony were held in early October. In direct testimony filed on October 22, 2007, the Georgia
PSC staff proposed certain adjustments to Georgia Powers general rate case that indicates a $21
million revenue surplus. Georgia Power disagrees with the majority of the staffs proposed
adjustments. Hearings on Georgia PSC staffs and intervenors direct testimony will be held in
early November. Georgia Powers rebuttal hearings will occur later the same month. Georgia Power
expects the Georgia PSC to issue a final order in this matter on December 20, 2007. In addition to
the traditional test period request, Georgia Power filed information for a three-year rate plan
option that includes additional increases of approximately $189 million, or 2.62%, and $41 million,
or 0.56%, in retail revenues effective January 1, 2009 and 2010, respectively, to cover the costs
of additional environmental controls and certified PPAs. The final outcome of this matter cannot
now be determined. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE
EARNINGS POTENTIAL PSC Matters Rate Plans of Georgia Power in Item 7 and Note 3 to the
financial statements of Georgia Power under Retail Regulatory Matters Rate Plans in Item 8 of
the Form 10-K and Note (K) to the Condensed Financial Statements herein for additional information.
Other
The Georgia PSC recently approved certification of Plant McDonough combined cycle units four and
five and decertified Plant McDonough coal units one and two. See BUSINESS Rate Matters
Integrated Resource Planning of Georgia Power in Item 1 of the Form 10-K for additional
information.
Other Matters
In September 2007, 2006, and 2005 Georgia Power filed its 2006, 2005, and 2004 income tax returns,
respectively, which included state income tax credits for activity through Georgia ports. Georgia
Power has also filed additional similar claims for the years 2002 through 2004. The Georgia Department of
Revenue has not responded to these claims. On July 24, 2007, Georgia Power filed a complaint in
the Superior Court of Fulton County to recover the credits claimed for the years 2002 through 2004.
If Georgia Power prevails, these claims
could have a significant, and possibly material, positive effect on Georgia Powers net income. If
Georgia Power is not
69
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
successful, payment of the related state tax could have a significant, and possibly material,
negative effect on Georgia Powers cash flow. The ultimate outcome of this matter cannot now be
determined.
See Note 3 to the financial statements of Georgia Power under Property Tax Dispute in Item 8 of
the Form 10-K for information on the property tax dispute with Monroe County, Georgia. The
administrative appeals and notices of arbitration have been expanded to include tax year 2006. The
appeals remain stayed pending the outcome of the related litigation. On March 30, 2007, the
Georgia Court of Appeals reversed the trial court and ruled that the Monroe County Board of Tax
Assessors (Monroe Board) had exceeded its legal authority and remanded the case for entry of an
injunction prohibiting the Monroe Board from collecting taxes based on its independent valuation of
Plant Scherer. In April 2007, the Monroe Board filed a petition with the Georgia Supreme Court
requesting review of the decision of the Georgia Court of Appeals. On July 16, 2007, the Georgia
Supreme Court agreed to hear the Monroe Boards requested review of this decision. The Georgia
Supreme Court heard oral arguments regarding the matter on October 15, 2007. The suit could impact
all co-owners. Georgia Power could be subject to total taxes through September 30, 2007 of up to
$21.7 million, plus penalties and interest. The ultimate outcome of this matter cannot currently
be determined.
Georgia Power proposed a donation of approximately 2,200 acres in Tallulah Gorge State Park to the
State of Georgia which the Georgia Department of Natural Resources voted to accept on October 24,
2007. The donation is expected to be effective in the fourth quarter 2007. The impact of this
donation to Georgia Powers net income could possibly be significant but cannot be determined at
this time.
Georgia Power is subject to certain claims and legal actions arising in the ordinary course of
business. In addition, Georgia Powers business activities are subject to extensive governmental
regulation related to public health and the environment. Litigation over environmental issues and
claims of various types, including property damage, personal injury, common law nuisance, and
citizen enforcement of environmental requirements such as opacity and air quality standards, has
increased generally throughout the United States. In particular, personal injury claims for
damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate
outcome of such pending or potential litigation against Georgia Power cannot be predicted at this
time; however, for current proceedings not specifically reported herein or in Note 3 to the
financial statements of Georgia Power in Item 8 of the Form 10-K, management does not anticipate
that the liabilities, if any, arising from such current proceedings would have a material adverse
effect on Georgia Powers financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other
contingencies, regulatory matters, and other matters being litigated which may affect future
earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Georgia Power prepares its financial statements in accordance with accounting principles generally
accepted in the United States. Significant accounting policies are described in Note 1 to the
financial statements of Georgia Power in Item 8 of the Form 10-K. In the application of these
policies, certain estimates are made that may have a material impact on Georgia Powers results of
operations and related disclosures. Different assumptions and measurements could produce estimates
that are significantly different from those recorded in the financial
statements. Also see MANAGEMENTS DISCUSSION AND ANALYSIS ACCOUNTING POLICIES Application of
Critical Accounting Policies and Estimates of Georgia Power in Item 7 of the Form 10-K for a
complete discussion of Georgia Powers critical accounting policies and estimates related to
Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.
70
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
New Accounting Standards
Income Taxes
On January 1, 2007, Georgia Power adopted FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes. FIN 48 requires companies to determine whether it is more likely
than not that a tax position will be sustained upon examination by the appropriate taxing
authorities before any part of the benefit can be recorded in the financial statements. It also
provides guidance on the recognition, measurement, and classification of income tax uncertainties,
along with any related interest and penalties. The provisions of FIN 48 were applied to all tax
positions beginning January 1, 2007. The adoption of FIN 48 did not have a material impact on
Georgia Powers financial statements. See Note (I) to the Condensed Financial Statements herein
for additional information.
Fair Value Measurement
The FASB issued FASB Statement No. 157 (SFAS No. 157), Fair Value Measurements in September 2006.
This standard provides guidance on how to measure fair value where it is permitted or required
under other accounting pronouncements. SFAS No. 157 also requires additional disclosures about
fair value measurements. Georgia Power plans to adopt SFAS No. 157 on January 1, 2008 and is
currently assessing the impact of this standard.
Fair Value Option
In February 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159), Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115.
This standard permits an entity to choose to measure many financial instruments and certain other
items at fair value. Georgia Power plans to adopt SFAS No. 159 on January 1, 2008 and is currently
assessing its impact to the extent the fair value option is elected.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Georgia Powers financial condition and liquidity position remained stable at September 30,
2007. Net cash provided from operating activities totaled $1.0 billion for the first nine months
of 2007, compared to $857 million for the corresponding period in 2006. The $152 million increase
in cash provided from operating activities in the first nine months of 2007 is primarily due to
higher total retail revenues and less cash used for working capital primarily through lower
inventory additions and increases in accounts payable, accrued taxes, and other current
liabilities. Net cash used for investing activities totaled $1.2 billion primarily due to gross
property additions to utility plant of $1.3 billion in the first nine months of 2007. These
additions were primarily related to construction of transmission and distribution facilities,
purchases of nuclear fuel, and installation of equipment to comply with environmental standards.
Net cash provided from financing activities totaled $203 million for the first nine months of 2007,
compared to net cash used for financing activities of $24 million for the corresponding period in
2006. The net change was primarily the result of the issuance of new senior notes.
Capital Requirements and Contractual Obligations
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Capital
Requirements and Contractual Obligations of Georgia Power in Item 7 of the Form 10-K for a
description of Georgia Powers capital requirements for its construction program, scheduled
maturities of long-term debt, as well as related interest, preferred stock dividends, lease
obligations, purchase commitments, and
71
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
trust funding requirements. Since December 31, 2006, Georgia Power has entered into four
additional PPAs totaling approximately 1,863 MW annually. These contracts begin in 2009 and 2010
and are expected to result in additional obligations of $1.3 million in 2008-2009, $191.4 million
in 2010-2011, and $1.08 billion thereafter. Of the total capacity, approximately 561 MW will
expire in 2017, 1,274 MW in 2025, and 28 MW in 2029. These contracts have been certified by the
Georgia PSC. Two of the contracts are with Southern Power and are also subject to FERC approval.
Approximately $432 million will be required through September 30, 2008 for redemptions and
maturities of long-term debt.
Sources of Capital
Georgia Power plans to obtain the funds required for construction and other purposes from sources
similar to those utilized in the past. Recently, Georgia Power has primarily utilized funds from
operating cash flows, short-term debt, external security offerings, and equity contributions from
Southern Company. However, the amount, type, and timing of any future financings, if needed, will
depend upon regulatory approval, prevailing market conditions and other factors. See MANAGEMENTS
DISCUSSION AND ANALYSIS FINANCIAL
CONDITION AND LIQUIDITY Sources of Capital of Georgia Power in Item 7 of the Form 10-K for
additional information.
Georgia Powers current liabilities frequently exceed current assets because of the continued use
of short-term debt as a funding source to meet scheduled maturities of long-term debt as well as
cash needs which can fluctuate significantly due to the seasonality of the business. To meet
short-term cash needs and contingencies, Georgia Power had at September 30, 2007 approximately $15
million of cash and cash equivalents and $902 million of unused credit arrangements with banks, of
which $110 million of such lines are dedicated to funding purchase obligations related to variable
rate pollution control bonds. Of the unused credit arrangements, $40 million expire in 2008 and
$862 million expire in 2012.
Of the facilities that expire in 2008, all contain provisions allowing two-year term loans
executable at expiration. Georgia Power expects to renew its credit facilities, as needed, prior
to expiration. See Note 6 to the financial statements of Georgia Power under Bank Credit
Arrangements in Item 8 of the Form 10-K for additional information. These unused credit
arrangements provide liquidity support to Georgia Powers obligations with respect to variable rate
pollution control bonds and commercial paper. Georgia Power may also meet short-term cash needs
through a Southern Company subsidiary organized to issue and sell commercial paper and extendible
commercial notes at the request and for the benefit of Georgia Power and other Southern Company
subsidiaries. At September 30, 2007, Georgia Power had approximately $566 million of commercial
paper and no bank loans or extendible commercial notes outstanding. Management believes that the
need for working capital can be adequately met by utilizing commercial paper programs and lines of
credit without maintaining large cash balances.
Credit Rating Risk
Georgia Power does not have any credit arrangements that would require material changes in payment
schedules or terminations as a result of a credit rating downgrade. There are certain contracts
that could require collateral, but not accelerated payment, in the event of a credit rating change
to BBB- or Baa3 or below. These contracts are primarily for physical electricity purchases and
sales. At September 30, 2007, the maximum potential collateral requirements at a BBB- or Baa3
rating were approximately $8 million. The maximum potential collateral requirements at a rating
below BBB- or Baa3 were approximately $388 million. Generally, collateral may be provided for by a
Southern Company guaranty, letter of credit, or cash.
Georgia Power, along with all members of the Power Pool, is also party to certain agreements that
could require collateral and/or accelerated payment in the event of a credit rating change to below
investment grade for it and/or Alabama Power. These agreements are primarily for natural gas and
power price risk management
72
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
activities. At September 30, 2007, Georgia Powers total exposure to these types of agreements was
$26.7 million.
Market Price Risk
Georgia Powers market risk exposures relative to interest rate changes have not
changed materially compared with the December 31, 2006 reporting period. In addition, Georgia
Power is not aware of any facts or circumstances that would significantly affect such exposures in
the near term.
Due to cost-based rate regulation, Georgia Power has limited exposure to market volatility in
interest rates, commodity fuel prices, and prices of electricity. To mitigate residual risks
relative to movements in electricity prices, Georgia Power enters into physical fixed-price
contracts for the purchase and sale of electricity through the wholesale electricity market.
Georgia Power continues to manage a fuel hedging program at the instruction of the Georgia PSC.
The fair value of derivative energy contracts at September 30, 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Year-to-Date |
|
|
2007 |
|
2007 |
|
|
Changes |
|
Changes |
|
|
Fair Value |
|
|
(in thousands) |
Contracts beginning of period |
|
$ |
(21,458 |
) |
|
$ |
(38,003 |
) |
Contracts realized or settled |
|
|
19,859 |
|
|
|
33,394 |
|
New contracts at inception |
|
|
|
|
|
|
|
|
Changes in valuation techniques |
|
|
|
|
|
|
|
|
Current period changes (a) |
|
|
(9,557 |
) |
|
|
(6,547 |
) |
|
Contracts at September 30, 2007 |
|
$ |
(11,156 |
) |
|
$ |
(11,156 |
) |
|
(a) |
|
Current period changes also include the changes in fair value of new contracts entered
into during the period, if any. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source of September 30, 2007 |
|
|
Valuation Prices |
|
|
Total |
|
Maturity |
|
|
Fair Value |
|
Year 1 |
|
1-3 Years |
|
|
(in thousands) |
Actively quoted |
|
$ |
(11,158 |
) |
|
$ |
(12,095 |
) |
|
$ |
937 |
|
External sources |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
Models and other methods |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts at September 30,
2007 |
|
$ |
(11,156 |
) |
|
$ |
(12,093 |
) |
|
$ |
937 |
|
|
Unrealized gains and losses from mark to market adjustments on derivative contracts related to
Georgia Powers fuel hedging programs are recorded as regulatory assets and liabilities. Realized
gains and losses from these programs are included in fuel expense and are recovered through Georgia
Powers fuel cost recovery mechanism. Gains and losses on derivative contracts that are not
designated as hedges are recognized in the statements of income as incurred.
73
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At September 30, 2007, the fair value gain/(loss) of all derivative energy contracts was reflected
in the financial statements as follows:
|
|
|
|
|
|
|
Amounts |
|
|
(in thousands) |
Regulatory assets, net |
|
$ |
(11,158 |
) |
Accumulated other comprehensive income |
|
|
|
|
Net income |
|
|
2 |
|
|
Total fair value |
|
$ |
(11,156 |
) |
|
Unrealized pre-tax gains and losses on energy contracts recognized in income were not material for
any period presented.
For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND
LIQUIDITY Market Price Risk of Georgia Power in Item 7 and Notes 1 and 6 to the financial
statements of Georgia Power under Financial Instruments in Item 8 of the Form 10-K and Note (F)
to the Condensed Financial Statements herein.
Financing Activities
In the first nine months of 2007, Georgia Power issued $1.4 billion of senior notes. The proceeds
were used to repay a portion of Georgia Powers outstanding short-term indebtedness, to fund the
redemption in June of $454 million outstanding principal amount of its Series E 7.125% Junior
Subordinated Notes due March 2042 and the related 7.125% Preferred Securities of Georgia Power
Capital Trust V, and for other general corporate purposes, including Georgia Powers continuous
construction program. Georgia Power also terminated derivative transactions related to the
issuances at a net gain of $12.1 million, $5.7 million of which will be amortized over a 30-year
period, with the remainder amortized over a 10-year period.
In July, Georgia Power borrowed $300 million under a short-term credit agreement that matured in
September 2007. The proceeds were used to repay short-term indebtedness incurred to repay $300
million of Georgia Powers Series J 4.875% Senior Notes at maturity in July 2007. Also during
July, Georgia Power borrowed $150 million under a short-term credit agreement that matured in
August 2007 to provide additional short-term liquidity.
In addition, in September 2007, holders of $75 million aggregate principal amount of Georgia
Powers Series 2007C Floating Rate Senior Notes elected not to extend the then current maturity
date in September 2008.
Also, in the first nine months of 2007, Georgia Power entered into derivative transactions designed
to mitigate interest rate risk related to planned future debt issuances. See Note (F) to the
Condensed Financial Statements for further details.
Subsequent to September 30, 2007, Georgia Power issued $225 million of 6.50% Preference Stock. The
proceeds along with other monies of Georgia Power were applied to the redemption in November of
$309 million aggregate principal amount of its Series F 4.875% Junior Subordinated Notes due
November 2042 and the related flexible trust preferred and common securities of Georgia Power
Capital Trust VI.
Also subsequent to September 30, 2007, Georgia Power entered into interest rate derivatives with a
notional amount of $50 million to hedge the interest rate risk of a planned future debt issuance.
The derivative will be settled at the time the underlying debt is issued.
74
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to any financings that may be necessary to meet capital requirements and contractual
obligations, Georgia Power plans to continue, when economically feasible, a program to retire
higher-cost securities and replace these obligations with lower-cost capital if market conditions
permit.
75
GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
325,864 |
|
|
$ |
317,591 |
|
|
$ |
788,827 |
|
|
$ |
742,564 |
|
Wholesale revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliates |
|
|
20,892 |
|
|
|
22,994 |
|
|
|
65,296 |
|
|
|
64,176 |
|
Affiliates |
|
|
13,297 |
|
|
|
19,323 |
|
|
|
74,190 |
|
|
|
87,348 |
|
Other revenues |
|
|
16,503 |
|
|
|
13,122 |
|
|
|
42,870 |
|
|
|
34,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
376,556 |
|
|
|
373,030 |
|
|
|
971,183 |
|
|
|
928,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
150,665 |
|
|
|
165,774 |
|
|
|
430,188 |
|
|
|
407,930 |
|
Purchased power |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliates |
|
|
7,110 |
|
|
|
5,837 |
|
|
|
10,453 |
|
|
|
15,164 |
|
Affiliates |
|
|
36,737 |
|
|
|
28,814 |
|
|
|
54,247 |
|
|
|
50,941 |
|
Other operations |
|
|
53,987 |
|
|
|
47,210 |
|
|
|
147,000 |
|
|
|
137,461 |
|
Maintenance |
|
|
16,491 |
|
|
|
13,238 |
|
|
|
49,148 |
|
|
|
43,952 |
|
Depreciation and amortization |
|
|
21,540 |
|
|
|
22,313 |
|
|
|
63,840 |
|
|
|
66,679 |
|
Taxes other than income taxes |
|
|
25,027 |
|
|
|
23,333 |
|
|
|
65,516 |
|
|
|
62,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
311,557 |
|
|
|
306,519 |
|
|
|
820,392 |
|
|
|
784,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
64,999 |
|
|
|
66,511 |
|
|
|
150,791 |
|
|
|
144,652 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1,295 |
|
|
|
1,938 |
|
|
|
4,192 |
|
|
|
3,488 |
|
Interest expense, net of amounts capitalized |
|
|
(10,968 |
) |
|
|
(10,031 |
) |
|
|
(32,343 |
) |
|
|
(29,088 |
) |
Interest expense to affiliate trusts |
|
|
(577 |
) |
|
|
(1,148 |
) |
|
|
(1,732 |
) |
|
|
(3,443 |
) |
Other income (expense), net |
|
|
150 |
|
|
|
(324 |
) |
|
|
139 |
|
|
|
(1,221 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(10,100 |
) |
|
|
(9,565 |
) |
|
|
(29,744 |
) |
|
|
(30,264 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
54,899 |
|
|
|
56,946 |
|
|
|
121,047 |
|
|
|
114,388 |
|
Income taxes |
|
|
19,911 |
|
|
|
21,544 |
|
|
|
44,271 |
|
|
|
42,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
34,988 |
|
|
|
35,402 |
|
|
|
76,776 |
|
|
|
71,492 |
|
Dividends on Preference Stock |
|
|
825 |
|
|
|
825 |
|
|
|
2,475 |
|
|
|
2,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income After Dividends on Preference Stock |
|
$ |
34,163 |
|
|
$ |
34,577 |
|
|
$ |
74,301 |
|
|
$ |
69,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net Income After Dividends on Preference Stock |
|
$ |
34,163 |
|
|
$ |
34,577 |
|
|
$ |
74,301 |
|
|
$ |
69,017 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $(976), $(1,382), $1,561, and
$(1,573), respectively |
|
|
(1,554 |
) |
|
|
(2,201 |
) |
|
|
2,485 |
|
|
|
(2,505 |
) |
Reclassification adjustment for amounts included in net income,
net of tax of $54, $31, $214, and $94, respectively |
|
|
87 |
|
|
|
51 |
|
|
|
342 |
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other comprehensive income (loss) |
|
|
(1,467 |
) |
|
|
(2,150 |
) |
|
|
2,827 |
|
|
|
(2,354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
$ |
32,696 |
|
|
$ |
32,427 |
|
|
$ |
77,128 |
|
|
$ |
66,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
77
GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
76,776 |
|
|
$ |
71,492 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
67,644 |
|
|
|
70,691 |
|
Deferred income taxes |
|
|
(11,540 |
) |
|
|
6,392 |
|
Pension, postretirement, and other employee benefits |
|
|
1,809 |
|
|
|
2,783 |
|
Stock option expense |
|
|
1,022 |
|
|
|
880 |
|
Tax benefit of stock options |
|
|
268 |
|
|
|
118 |
|
Other, net |
|
|
3,099 |
|
|
|
3,513 |
|
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
Receivables |
|
|
(18,793 |
) |
|
|
(53,771 |
) |
Fossil fuel stock |
|
|
(19,667 |
) |
|
|
(26,151 |
) |
Materials and supplies |
|
|
(1,521 |
) |
|
|
(3,909 |
) |
Prepaid income taxes |
|
|
7,177 |
|
|
|
(603 |
) |
Property damage cost recovery |
|
|
19,467 |
|
|
|
19,285 |
|
Other current assets |
|
|
1,735 |
|
|
|
909 |
|
Accounts payable |
|
|
7,500 |
|
|
|
14,621 |
|
Accrued taxes |
|
|
31,826 |
|
|
|
12,972 |
|
Accrued compensation |
|
|
(5,217 |
) |
|
|
(8,794 |
) |
Other current liabilities |
|
|
2,890 |
|
|
|
6,918 |
|
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
164,475 |
|
|
|
117,346 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(164,217 |
) |
|
|
(108,524 |
) |
Cost of removal, net of salvage |
|
|
(7,890 |
) |
|
|
(3,349 |
) |
Construction payables |
|
|
(6,354 |
) |
|
|
(4,212 |
) |
Other |
|
|
(232 |
) |
|
|
(9,543 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(178,693 |
) |
|
|
(125,628 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Increase (decrease) in notes payable, net |
|
|
(94,881 |
) |
|
|
57,241 |
|
Proceeds |
|
|
|
|
|
|
|
|
Senior Notes |
|
|
85,000 |
|
|
|
|
|
Common stock issued to parent |
|
|
80,000 |
|
|
|
|
|
Capital contributions from parent company |
|
|
|
|
|
|
21,140 |
|
Gross excess tax benefit of stock options |
|
|
646 |
|
|
|
240 |
|
Redemptions Pollution control bonds |
|
|
|
|
|
|
(12,075 |
) |
Payment of preference stock dividends |
|
|
(2,475 |
) |
|
|
(2,475 |
) |
Payment of common stock dividends |
|
|
(55,575 |
) |
|
|
(52,725 |
) |
Other |
|
|
(1,104 |
) |
|
|
(287 |
) |
|
|
|
|
|
|
|
Net cash provided from financing activities |
|
|
11,611 |
|
|
|
11,059 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
(2,607 |
) |
|
|
2,777 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
7,526 |
|
|
|
3,847 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
4,919 |
|
|
$ |
6,624 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $619 and $59 capitalized for 2007 and 2006, respectively) |
|
$ |
24,875 |
|
|
$ |
25,412 |
|
Income taxes (net of refunds) |
|
$ |
25,659 |
|
|
$ |
36,164 |
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
78
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Assets |
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,919 |
|
|
$ |
7,526 |
|
Receivables
|
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
89,608 |
|
|
|
56,489 |
|
Unbilled revenues |
|
|
47,141 |
|
|
|
38,287 |
|
Under recovered regulatory clause revenues |
|
|
69,406 |
|
|
|
79,235 |
|
Other accounts and notes receivable |
|
|
14,304 |
|
|
|
9,015 |
|
Affiliated companies |
|
|
2,587 |
|
|
|
15,302 |
|
Accumulated provision for uncollectible accounts |
|
|
(1,655 |
) |
|
|
(1,279 |
) |
Fossil fuel stock, at average cost |
|
|
95,703 |
|
|
|
76,036 |
|
Materials and supplies, at average cost |
|
|
36,827 |
|
|
|
35,306 |
|
Property damage cost recovery |
|
|
24,341 |
|
|
|
28,771 |
|
Other regulatory assets |
|
|
11,699 |
|
|
|
15,977 |
|
Other |
|
|
2,186 |
|
|
|
14,259 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
397,066 |
|
|
|
374,924 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
2,660,350 |
|
|
|
2,574,517 |
|
Less accumulated provision for depreciation |
|
|
916,031 |
|
|
|
901,564 |
|
|
|
|
|
|
|
|
|
|
|
1,744,319 |
|
|
|
1,672,953 |
|
Construction work in progress |
|
|
97,467 |
|
|
|
62,815 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
1,841,786 |
|
|
|
1,735,768 |
|
|
|
|
|
|
|
|
Other Property and Investments |
|
|
16,709 |
|
|
|
14,846 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
17,212 |
|
|
|
17,148 |
|
Prepaid pension costs |
|
|
71,027 |
|
|
|
69,895 |
|
Other regulatory assets |
|
|
105,113 |
|
|
|
110,077 |
|
Other |
|
|
21,687 |
|
|
|
17,831 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
215,039 |
|
|
|
214,951 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,470,600 |
|
|
$ |
2,340,489 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
79
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
41,238 |
|
|
$ |
|
|
Notes payable |
|
|
25,565 |
|
|
|
120,446 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
47,426 |
|
|
|
44,375 |
|
Other |
|
|
47,485 |
|
|
|
49,979 |
|
Customer deposits |
|
|
24,628 |
|
|
|
21,363 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Income taxes |
|
|
47,870 |
|
|
|
29,771 |
|
Other |
|
|
24,764 |
|
|
|
15,033 |
|
Accrued interest |
|
|
9,982 |
|
|
|
7,645 |
|
Accrued compensation |
|
|
11,715 |
|
|
|
16,932 |
|
Other regulatory liabilities |
|
|
6,743 |
|
|
|
9,029 |
|
Other |
|
|
26,557 |
|
|
|
30,975 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
313,973 |
|
|
|
345,548 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
739,577 |
|
|
|
654,860 |
|
|
|
|
|
|
|
|
Long-term Debt Payable to Affiliated Trusts |
|
|
|
|
|
|
41,238 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
233,252 |
|
|
|
237,862 |
|
Accumulated deferred investment tax credits |
|
|
13,335 |
|
|
|
14,721 |
|
Employee benefit obligations |
|
|
77,401 |
|
|
|
73,922 |
|
Other cost of removal obligations |
|
|
170,432 |
|
|
|
165,410 |
|
Other regulatory liabilities |
|
|
47,164 |
|
|
|
46,485 |
|
Other |
|
|
84,098 |
|
|
|
72,533 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
625,682 |
|
|
|
610,933 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
1,679,232 |
|
|
|
1,652,579 |
|
|
|
|
|
|
|
|
Preference Stock |
|
|
53,886 |
|
|
|
53,887 |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, without par value |
|
|
|
|
|
|
|
|
Authorized 20,000,000 shares |
|
|
|
|
|
|
|
|
Outstanding September 30, 2007: 1,792,717 shares |
|
|
|
|
|
|
|
|
December 31, 2006: 992,717 shares |
|
|
118,060 |
|
|
|
38,060 |
|
Paid-in capital |
|
|
430,498 |
|
|
|
428,592 |
|
Retained earnings |
|
|
190,694 |
|
|
|
171,968 |
|
Accumulated other comprehensive loss |
|
|
(1,770 |
) |
|
|
(4,597 |
) |
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
737,482 |
|
|
|
634,023 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
2,470,600 |
|
|
$ |
2,340,489 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
80
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2007 vs. THIRD QUARTER 2006
AND
YEAR-TO-DATE 2007 vs. YEAR-TO-DATE 2006
OVERVIEW
Gulf Power operates as a vertically integrated utility providing electricity to retail customers
within its traditional service area located in northwest Florida and to wholesale customers in the
Southeast. Many factors affect the opportunities, challenges, and risks of Gulf Powers business
of selling electricity. These factors include the ability to maintain a stable regulatory
environment, to achieve energy sales growth, and to effectively manage and secure timely recovery
of rising costs. These costs include those related to growing demand, increasingly stringent
environmental standards, fuel prices, and storm restoration costs. Appropriately balancing
environmental expenditures with customer prices will continue to challenge Gulf Power for the
foreseeable future.
Gulf Power continues to focus on several key performance indicators. These indicators include
customer satisfaction, plant availability, system reliability, and net income. For additional
information on these indicators, see MANAGEMENTS DISCUSSION AND ANALYSIS OVERVIEW Key
Performance Indicators of Gulf Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(0.4) |
|
|
(1.2 |
) |
|
$ |
5.3 |
|
|
|
7.7 |
|
|
Gulf Powers net income after dividends on preference stock for the third quarter 2007 was $34.2
million compared to $34.6 million for the corresponding period in 2006. The decrease in the third
quarter 2007 compared to the corresponding period in 2006 was primarily due to increases in
maintenance expense and interest expense, net of amounts capitalized offset by an increase in
retail revenues.
Gulf Powers net income after dividends on preference stock for year-to-date 2007 was $74.3 million
compared to $69.0 million for the corresponding period in 2006. The year-to-date increase was
primarily due to increases in retail revenues, earnings on additional
investments in environmental controls through the environmental cost
recovery provision, and related allowance for equity funds used
during construction.
Retail Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$8.3 |
|
|
2.6 |
|
|
$ |
46.2 |
|
|
|
6.2 |
|
|
In the third quarter 2007, retail revenues were $325.9 million compared to $317.6 million in the
corresponding period in 2006.
For year-to-date 2007, retail revenues were $788.8 million compared to $742.6 million for the
corresponding period in 2006.
81
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Year-to-Date |
|
|
2007 |
|
2007 |
|
|
(in millions) |
|
(% change) |
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
317.6 |
|
|
|
|
|
|
$ |
742.6 |
|
|
|
|
|
Estimated change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
0.8 |
|
|
|
0.4 |
|
|
|
2.0 |
|
|
|
0.3 |
|
Sales growth |
|
|
1.1 |
|
|
|
0.3 |
|
|
|
5.1 |
|
|
|
0.7 |
|
Weather |
|
|
2.9 |
|
|
|
0.9 |
|
|
|
1.7 |
|
|
|
0.2 |
|
Fuel and other cost recovery |
|
|
3.5 |
|
|
|
1.0 |
|
|
|
37.4 |
|
|
|
5.0 |
|
|
Retail current year |
|
$ |
325.9 |
|
|
|
2.6 |
|
|
$ |
788.8 |
|
|
|
6.2 |
|
|
Revenues associated with changes in rates and pricing increased in the third quarter 2007 and
year-to-date 2007, when compared to corresponding periods in 2006, due to cost recovery provisions.
These cost recovery provisions include energy conservation costs and environmental compliance
costs. Annually, Gulf Power petitions the Florida PSC for recovery of projected costs including
any true-up amount from prior periods, and approved rates are implemented each January. The
recovery provisions include related expenses and a return on average net investment. See Note 1 to
the financial statements of Gulf Power under Revenues, and Environmental Remediation Cost
Recovery and Note 3 to the financial statements under Retail Regulatory Matters Environmental
Cost Recovery in Item 8 of the Form 10-K for additional information.
Revenues attributable to changes in sales growth increased in the third quarter of 2007 when
compared to the same period in 2006 primarily from a 4.2% increase and a 2.2% increase in KWH
energy sales to commercial and residential customers, respectively. These increases were offset by
a decrease of 3.6% in KWH sales to industrial customers.
For the year-to-date 2007, revenues attributable to changes in sales growth increased when compared
to the corresponding period in 2006 primarily from a 3.4% increase and a 1.8% increase in KWH
energy sales to commercial and residential customers, respectively. These increases were offset by
a decrease of 7.1% in KWH sales to industrial customers.
Revenues associated with changes in weather increased in the third quarter 2007 and year-to-date
2007 when compared to the corresponding periods in 2006. The increases for both periods were the
result of more favorable weather in 2007 compared to 2006.
Revenues associated with changes in fuel and other cost recovery increased in the third quarter
2007 and year-to-date 2007, when compared to corresponding periods in 2006. These cost recovery
provisions include fuel expenses, the energy component of purchased power costs, and purchased
power capacity costs. Annually, Gulf Power petitions the Florida PSC for recovery of projected
fuel and purchased power costs including any true-up amount from prior periods, and approved rates
are implemented each January. Cost recovery provisions also include revenues related to the
recovery of storm damage restoration costs. The recovery provisions generally equal the related
expenses and have no material effect on net income. See FUTURE EARNINGS POTENTIAL FERC and
Florida PSC Matters Retail Fuel Cost Recovery herein and MANAGEMENTS DISCUSSION AND ANALYSIS
FUTURE EARNINGS POTENTIAL PSC Matters Fuel Cost Recovery of Gulf Power in Item 7 and Note 1
to the financial statements of Gulf Power under Revenues, and Property Damage Reserve and Note
3 to the financial statements under Retail Regulatory Matters Storm Damage Cost Recovery in
Item 8 of the Form 10-K for additional information.
82
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale Revenues Non-Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(2.1) |
|
|
(9.1 |
) |
|
$ |
1.1 |
|
|
|
1.7 |
|
|
In the third quarter 2007, wholesale revenues from non-affiliates were $20.9 million compared to
$23.0 million in the corresponding period in 2006. The decrease was primarily a result of lower
KWH sales to wholesale customers due to increased retail demand within Gulf Powers service
territory.
For year-to-date 2007, wholesale revenues from non-affiliates were $65.3 million compared to $64.2
million for the same period in 2006. The increase was primarily a result of higher KWH sales to
wholesale customers.
Wholesale revenues from non-affiliates are predominantly unit power sales under long-term contracts
to other Florida utilities. Revenues from these contracts have both capacity and energy
components. Capacity revenues reflect the recovery of fixed costs and a return on investment under
the contracts. Energy is generally sold at variable cost.
Wholesale Revenues Affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(6.0) |
|
|
(31.2 |
) |
|
$ |
(13.1 |
) |
|
|
(15.1 |
) |
|
In the third quarter 2007, wholesale revenues from affiliates were $13.3 million compared to $19.3
million in the corresponding period in 2006. The decrease was primarily a result of higher retail
customer demand within Gulf Powers service territory.
For year-to-date 2007, wholesale revenues from affiliates were $74.2 million compared to $87.3
million for the same period in 2006. The decrease was primarily a result of higher retail customer
demand within Gulf Powers service territory in peak months of the year.
Wholesale revenues from affiliates will vary depending on demand and the availability and cost of
generating resources at each company within the Southern Company system. These affiliate sales are
made in accordance with the IIC, as approved by the FERC. These transactions do not have a
significant impact on earnings since this energy is generally sold at marginal cost.
Other Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$3.4 |
|
|
25.8 |
|
|
$ |
8.2 |
|
|
|
23.5 |
|
|
In the third quarter 2007, other revenues were $16.5 million compared to $13.1 million in the same
period in 2006. For year-to-date 2007, other revenues were $42.9 million compared to $34.7 million
for the same period in 2006. These increases were primarily a result of other energy services and
higher franchise fees, which have no impact on earnings. Franchise fees are generally proportional
to sales revenue and are offset by franchise and gross receipt taxes. The increased revenues from
other energy services did not have a material impact on earnings since they were offset by
associated expenses.
83
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 |
|
|
Year-to-Date 2007 |
|
|
|
vs. |
|
|
vs. |
|
|
|
Third Quarter 2006 |
|
|
Year-to-Date 2006 |
|
|
|
(change in millions) |
|
|
(% change) |
|
|
(change in millions) |
|
|
(% change) |
|
Fuel |
|
$ |
(15.1 |
) |
|
|
(9.1) |
|
|
$ |
22.3 |
|
|
|
5.5 |
|
Purchased power-non-affiliates |
|
|
1.3 |
|
|
|
21.8 |
|
|
|
(4.7 |
) |
|
|
(31.1) |
|
Purchased power-affiliates |
|
|
7.9 |
|
|
|
27.5 |
|
|
|
3.3 |
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fuel and purchased power expenses |
|
$ |
(5.9 |
) |
|
|
|
|
|
$ |
20.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel and purchased power transactions do not have a significant impact on earnings since energy
expenses are generally offset by energy revenues through Gulf Powers fuel cost recovery clause.
Details of Gulf Powers cost of generation and purchased power are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Third Quarter |
|
|
|
|
|
Year-to-Date |
|
Year-to-Date |
|
|
Average Cost |
|
2007 |
|
2006 |
|
% change |
|
2007 |
|
2006 |
|
% change |
|
|
(cents per net KWH) |
|
|
|
|
|
(cents per net KWH) |
|
|
|
|
Fuel |
|
|
3.44 |
|
|
|
3.55 |
|
|
|
(3.1 |
) |
|
|
3.42 |
|
|
|
3.26 |
|
|
|
4.9 |
|
Purchased power |
|
|
13.08 |
|
|
|
17.94 |
|
|
|
(27.1 |
) |
|
|
9.41 |
|
|
|
9.67 |
|
|
|
(2.7 |
) |
|
In the third quarter 2007, fuel expense was $150.7 million compared to $165.8 million in the same
period in 2006. The decrease was due to a $4.6 million decrease in the average cost of fuel and a
$10.5 million decrease in the KWH volume generated. See FUTURE EARNINGS POTENTIAL FERC and
Florida PSC Matters Retail Fuel Cost Recovery herein for additional information.
For year-to-date 2007, fuel expense was $430.2 million compared to $407.9 million for the same
period in 2006. The increase was due to a $20.2 million increase in the average cost of fuel as
well as a $2.1 million increase due to the KWH volume generated. See FUTURE EARNINGS POTENTIAL
FERC and Florida PSC Matters Retail Fuel Cost Recovery herein for additional information.
Non-affiliates
In the third quarter 2007, purchased power expense non-affiliates was $7.1 million compared to
$5.8 million for the corresponding period in 2006. The increase was due to a $1.4 million increase
resulting from higher average cost per net KWH offset by a $0.1 million decrease in KWH
purchases.
For year-to-date 2007, purchased power expense non-affiliates was $10.5 million compared to $15.2
million in the corresponding period in 2006. The decrease was due to a $2.2 million decrease in
KWH purchases and a $2.5 million decrease resulting from lower cost per net KWH.
Energy purchases from non-affiliates will vary depending on market cost of available energy being
lower than Southern Company system-generated energy, demand for energy within the system service
territory, and availability of Southern Company system generation.
84
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Affiliates
In the third quarter 2007, purchased power affiliates was $36.7 million compared to $28.8 million
for the corresponding period in 2006. The increase was due to a $44.3 million increase in KWH
purchases offset by a $36.4 million decrease resulting from lower average cost per net KWH.
For year-to-date 2007, purchased power affiliates was $54.2 million compared to $50.9 million for
the corresponding period in 2006. The increase was due to a $5.5 million increase in KWH purchases
offset by a $2.2 million decrease resulting from lower average cost per net KWH.
Energy purchases from affiliated companies within the Southern Company system will vary depending
on demand and the availability and cost of generating resources at each company. These purchases
are made in accordance with the IIC, as approved by the FERC.
Other Operations and Maintenance Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 |
|
|
Year-to-Date 2007 |
|
|
|
vs. |
|
|
vs. |
|
|
|
Third Quarter 2006 |
|
|
Year-to-Date 2006 |
|
|
|
(change in millions) |
|
|
(% change) |
|
|
(change in millions) |
|
|
(% change) |
|
Other operations |
|
$ |
6.8 |
|
|
|
14.4 |
|
|
$ |
9.5 |
|
|
|
6.9 |
|
Maintenance |
|
|
3.3 |
|
|
|
24.6 |
|
|
|
5.2 |
|
|
|
11.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other
operations and
maintenance
expenses |
|
$ |
10.1 |
|
|
|
|
|
|
$ |
14.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the third quarter 2007, other operations and maintenance expenses were $70.5 million compared to
$60.4 million in the same period in 2006. This was primarily a result of a $1.0 million increase
in employee benefit expenses, a $2.4 million increase in production expenses associated with
increased operating expenses and maintenance performed on power generation facilities, a $2.1
million increase in other energy services, which did not have a material impact on earnings since
they were offset by associated revenues, a $2.1 million increase in distribution expenses related
to vegetation management and labor cost, and a $0.6 million increase in customer accounts related
to uncollectible accounts.
For year-to-date 2007, other operations and maintenance expenses were $196.1 million compared to
$181.4 million for the same period in 2006. The increase was primarily the result of a $4.7
million increase in other energy services, which did not have a material impact on earnings since
they were offset by associated revenues, and a $2.9 million increase in production operating
expense. Also contributing to the increase was a $4.5 million in additional scheduled and
unscheduled maintenance performed on power generation facilities and a $1.5 million in additional
vegetation management expense.
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(0.8) |
|
|
(3.5 |
) |
|
$ |
(2.8 |
) |
|
|
(4.3 |
) |
|
In the third quarter 2007, depreciation and amortization expenses were $21.5 million compared to
$22.3 million in the same period in 2006. For year-to-date 2007, depreciation and amortization
expenses were $63.8 million
compared to $66.6 million in the same period in 2006. The decreases for both periods were the
result of new depreciation rates implemented in January 2007.
85
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Taxes Other than Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$1.7 |
|
|
7.3 |
|
|
$ |
3.5 |
|
|
|
5.6 |
|
|
In the third quarter 2007, taxes
other than income taxes were $25.0 million compared to $23.3
million in the same period in 2006. For year-to-date 2007, taxes other than income taxes were
$65.5 million compared to $62.0 million for the same period in 2006. These increases were
primarily a result of increases in franchise and gross receipts taxes, which are directly related
to increases in retail revenues.
Interest Expense, Net of Amounts Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$0.9 |
|
|
9.3 |
|
|
$ |
3.2 |
|
|
|
11.2 |
|
|
In the third quarter 2007, interest
expense was $10.9 million compared to $10.0 million in the same
period in 2006. For year-to-date 2007, interest expense was $32.3 million compared to $29.1
million in the same period in 2006. These increases were primarily due to the issuance of $110
million in senior notes in December 2006 and the issuance of $85 million in senior notes in June
2007.
Interest Expense to Affiliate Trusts
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(0.6) |
|
|
(49.7 |
) |
|
$ |
(1.7 |
) |
|
|
(49.7 |
) |
|
In the third quarter 2007, interest
expense to affiliate trusts was $0.6 million compared to $1.2
million in the same period in 2006. For year-to-date 2007, interest expense to affiliate trusts
was $1.7 million compared to $3.4 million for the same period in 2006. These decreases were due to
the redemption of long-term debt payable to affiliated trusts in December 2006.
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$0.5 |
|
|
146.3 |
|
|
$ |
1.3 |
|
|
|
111.4 |
|
|
In the
third quarter 2007, other income (expense), net was $0.2 million
compared to other income (expense), net of $(0.3) million
in the same period in 2006. For year-to-date 2007, other income
(expense), net was $0.1 million compared to other
income (expense), net of $(1.2) million in the same period in
2006. For both periods, other income (expense), net increased
primarily due to an increase in allowance for equity funds used during construction related to increased
construction activities for environmental controls.
86
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(1.6) |
|
|
(7.6 |
) |
|
$ |
1.4 |
|
|
|
3.2 |
|
|
In the third quarter 2007, income tax expense was $19.9 million compared to $21.5 million in the
same period in 2006. The decrease was primarily a result of lower earnings before income taxes,
the tax benefit associated with an increase in allowance for equity funds used during construction,
and an increase in the deduction created by the American Jobs Creation Act of 2004. See Note (H)
to the Condensed Financial Statements herein for additional
information.
For year-to-date 2007, income tax expense was $44.3 million compared to $42.9 million for the same
period in 2006. The increase was primarily a result of higher earnings before income taxes. The
increase was partially offset by the tax benefit associated with an increase in allowance for
equity funds used during construction and an increase in the deduction created by the American Jobs
Creation Act of 2004.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Gulf Powers future
earnings potential. The level of Gulf Powers future earnings depends on numerous factors that
affect the opportunities, challenges, and risks of Gulf Powers business of selling electricity.
These factors include Gulf Powers ability to maintain a stable regulatory environment that
continues to allow for the recovery of all prudently incurred costs during a time of increasing
costs. Future earnings in the near term will depend, in part, upon growth in energy sales, which
is subject to a number of factors. These factors include weather, competition, new energy
contracts with neighboring utilities, energy conservation practiced by customers, the price of
electricity, the price elasticity of demand, and the rate of economic growth in Gulf Powers
service area. For additional information relating to these issues, see RISK FACTORS in Item 1A and
MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL of Gulf Power in Item 7 of the
Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental regulations could affect
earnings if such costs cannot be fully recovered in rates on a timely basis. See MANAGEMENTS
DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters of Gulf Power in Item
7 and Note 3 to the financial statements of Gulf Power under Environmental Matters in Item 8 of
the Form 10-K for additional information.
Eight-Hour Ozone Regulations
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Environmental Statutes and Regulations Air Quality of Gulf Power in Item 7 of the Form 10-K for
additional information regarding revisions to the eight-hour ozone air quality standard. On June
20, 2007, the EPA proposed additional revisions to the current eight-hour ozone standard which, if
enacted, could result in designation of new nonattainment areas within Gulf Powers service
territory. The EPA has requested comment and is expected to make a determination regarding
finalization of a revised standard in 2008. The ultimate outcome of this matter cannot be
determined at this time.
87
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fine Particulate Matter Regulations
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Environmental Statutes and Regulations Air Quality of Gulf Power in Item 7 of the Form 10-K for
additional information regarding nonattainment designations for the fine particulate matter air
quality standard. In March 2007, the EPA finalized its fine particulate matter implementation
rule, requiring submittal of state plans for addressing the nonattainment designations by April
2008. The ultimate outcome of this matter depends on the development and submittal of those state
plans and the resolution of pending legal challenges and, therefore, cannot be determined at this
time.
Florida Greenhouse Gas Executive Orders
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters -
Global Climate Issues of Gulf Power in Item 7 of the Form 10-K for additional information
regarding domestic efforts to reduce greenhouse gases. On July 13, 2007, the Governor of the State
of Florida signed three executive orders addressing reduction of greenhouse gas emissions within
the state, including statewide emission reduction targets beginning in 2017. Included in the
orders is a directive to the Secretary of Environmental Protection to develop rules adopting
maximum allowable emissions levels of greenhouse gases for electric utilities, consistent with the
statewide emission reduction targets, and a request to the Florida PSC to initiate rulemaking
requiring utilities to produce at least 20% of their electricity from renewable sources. The
impact of these orders on Gulf Power will depend on the development, adoption, and implementation
of any rules governing greenhouse gas emissions, and the ultimate outcome cannot be determined at
this time.
Georgia Multi-Pollutant Rule
On June 27, 2007, the State of Georgia approved a new multi-pollutant rule for certain existing
coal-fired electric utility steam generating units in Georgia. The rule is designed to reduce
emissions of mercury, sulfur dioxide, nitrogen oxide, and fine particulates state-wide by requiring
installation of specified control technologies at each affected unit by a date certain between
December 31, 2008 and June 1, 2015. This rule will require the installation of a new pollution
control system at Plant Scherer Unit 3 which Gulf Power co-owns with Georgia Power. See
MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Environmental Statutes and Regulations General in Item 7 of the Form 10-K for a discussion of
estimated compliance costs for 2007 through 2009. The ultimate impact of this rule on Gulf Power
cannot be determined at this time.
Environmental Remediation
During the second quarter 2007, Gulf Power increased its estimated liability for environmental
remediation projects by $12.8 million as a result of changes in the cost estimates to remediate
substation sites. These projects have been approved by the Florida PSC for recovery through the
environmental cost recovery clause; therefore, there was no impact on Gulf Powers net income as a
result of these revised estimates. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS
POTENTIAL Environmental Matters Environmental Remediation of Gulf Power in Item 7 and Note 3
to the financial statements of Gulf Power under Environmental Matters Environmental Remediation
in Item 8 of the Form 10-K for additional information.
88
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FERC and Florida PSC Matters
Market-Based Rate Authority
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL FERC Matters
Market-Based Rate Authority of Gulf Power in Item 7 and Note 3 to the financial statements of
Gulf Power under FERC Matters Market-Based Rate Authority in Item 8 of the Form 10-K for
information regarding the proceedings initiated by the FERC in December 2004 to assess Southern
Companys generation dominance within its retail service territory and in May 2005 to determine
whether Southern Company satisfies the other three parts of the FERCs market-based rate
analysis: transmission market power, barriers to entry, and affiliate abuse or reciprocal
dealing.
In late June and July 2007, hearings were held in the December 2004 proceeding and briefs to the
presiding ALJ were filed in August and September. Gulf Power anticipates an initial decision
from the ALJ in November 2007 on the issues that were set for hearing. The ultimate outcome of
this generation dominance proceeding cannot now be determined, but an adverse decision by the
FERC in a final order could result in refunds of approximately $0.8 million, plus interest.
On June 21, 2007, the FERC issued an order terminating the May 2005 proceeding pertaining to the
other three parts of the market-based rate analysis. In addition, on June 21, 2007, the FERC
issued its final rule regarding market-based rate authority. The FERC generally retained its
current market-based rate standards. The impact of this order and its effect on the generation
dominance proceeding cannot now be determined.
Intercompany Interchange Contract
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL FERC Matters
Intercompany Interchange Contract of Gulf Power in Item 7 and Note 3 to the financial
statements of Gulf Power under FERC Matters Intercompany Interchange Contract in Item 8 of
the Form 10-K for information regarding the proceeding initiated by the FERC in May 2005 to
examine (1) the provisions of the IIC among Alabama Power, Georgia Power, Gulf Power,
Mississippi Power, Savannah Electric, Southern Power, and SCS, as agent, under the terms of
which the Power Pool is operated, and, in particular, the propriety of the continued inclusion
of Southern Power as a party to the IIC, (2) whether any parties to the IIC have violated the
FERCs standards of conduct applicable to utility companies that are transmission providers, and
(3) whether Southern Companys code of conduct defining Southern Power as a system company
rather than a marketing affiliate is just and reasonable.
On April 19, 2007, the FERC approved, with certain modifications, the compliance filing
submitted by Southern Company on November 6, 2006. The compliance plan largely involves
functional separation and information restrictions related to marketing activities conducted on
behalf of Southern Power. Implementation of the plan is not expected to have a material impact
on Gulf Powers financial statements.
Retail Fuel Cost Recovery
Gulf Power has established fuel cost recovery rates approved by the Florida PSC. In recent
years, Gulf Power has experienced higher than expected fuel costs for coal and natural gas. If
the projected fuel over or under recovery exceeds 10% of the projected fuel revenue applicable
for the period, Gulf Power is required to notify the Florida PSC and to indicate if an
adjustment to the fuel cost recovery factor is being requested. Gulf Power filed such notice
with the Florida PSC on June 15, 2007, but no adjustment to the factor was requested. Under
recovered fuel costs at September 30, 2007 totaled $64.2 million, and are included in
under recovered regulatory clause revenues on Gulf Powers Condensed Balance Sheets herein.
Fuel cost recovery
89
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
revenues, as recorded on the financial statements, are adjusted for differences in actual
recoverable costs and amounts billed in current regulated rates. Accordingly, any changes in
the billing factor would have no significant effect on Gulf Powers revenues or net income, but
will affect cash flow. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL
PSC Matters Fuel Cost Recovery of Gulf Power in Item 7 and Note 1 to the financial
statements of Gulf Power under Revenues in Item 8 of the Form 10-K for additional information.
Other
On August 14, 2007, the Florida PSC voted to approve a stipulation among Gulf Power, the Office
of Public Counsel, and the Florida Industrial Power Users Group regarding Gulf Powers plan for
complying with certain federal and state regulations addressing air quality. Gulf Powers
environmental compliance plan as filed on March 29, 2007 contemplates implementation of specific
projects identified in the plan from 2007 through 2018. The stipulation covers all elements of
the current plan that are scheduled to be implemented in the 2007-2011 timeframe. See
MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Capital Requirements
and Contractual Obligations of Gulf Power in Item 7 and Note 7 to the financial statements of
Gulf Power under Construction Program in Item 8 of the Form 10-K for additional information.
Other Matters
See Note 3 to the financial statements of Gulf Power under Property Tax Dispute in Item 8 of the
Form 10-K for information on the property tax dispute with Monroe County, Georgia. The
administrative appeals and notices of arbitration have been expanded to include tax year 2006. The
appeals remain stayed pending the outcome of the related litigation. On March 30, 2007, the
Georgia Court of Appeals reversed the trial court and ruled that the Monroe County Board of Tax
Assessors (Monroe Board) had exceeded its legal authority and remanded the case for entry of an
injunction prohibiting the Monroe Board from collecting taxes based on its independent valuation of
Plant Scherer. In April 2007, the Monroe Board filed a petition with the Georgia Supreme Court
requesting review of the decision of the Georgia Court of Appeals. On July 16, 2007, the Georgia
Supreme Court agreed to hear the Monroe Boards requested review of this decision. The Georgia
Supreme Court heard oral arguments regarding the matter on October 15, 2007. Gulf Power could be
subject to total taxes through September 30, 2007 of up to $3.9 million, plus penalties and
interest. In accordance with Gulf Powers unit power sales contract for Plant Scherer, such
property taxes would be recoverable from the customer. The ultimate outcome of this matter cannot
currently be determined.
Gulf Power is in the process of offering both voluntary and involuntary severance to a number of
employees in connection with a reorganization of certain functions. Gulf Power expects to incur
approximately $4.9 million in expenses related to severance benefits and termination costs. A
portion of these anticipated severance benefits resulted in expenses during the third quarter 2007.
The remainder of the anticipated severance benefits is expected to be expensed during the fourth
quarter 2007. The actual amount and timing of these charges may differ materially from the
estimate described above and will depend upon the final composition and seniority of the affected
employees and the actual timing of completion of the planned reorganization.
See Note 3 to the financial statements of Gulf Power under Right of Way Litigation in Item 8 of
the Form 10-K for information on the lawsuits related to the telecommunication use of rights of
way. In September 2007, Gulf Power and its co-defendant in the Gadsden County litigation reached a
proposed settlement agreement with the plaintiffs that, if approved by the trial court, will
resolve all outstanding claims against Gulf Power in both the Gadsden County litigation and the
2001 telecommunications company litigation. If so approved, the
settlement will have no material impact on Gulf Powers financial statements. Pending final
settlement approval, the ultimate outcome of this matter cannot now be determined.
90
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gulf Power is subject to certain claims and legal actions arising in the ordinary course of
business. In addition, Gulf Powers business activities are subject to extensive governmental
regulation related to public health and the environment. Litigation over environmental issues and
claims of various types, including property damage, personal injury, common law nuisance, and
citizen enforcement of environmental requirements such as opacity and air quality standards, has
increased generally throughout the United States. In particular, personal injury claims for
damages caused by alleged exposure to hazardous materials have become more frequent. The ultimate
outcome of such pending or potential litigation against Gulf Power cannot be predicted at this
time; however, for current proceedings not specifically reported herein or in Note 3 to the
financial statements of Gulf Power in Item 8 of the Form 10-K, management does not anticipate that
the liabilities, if any, arising from such current proceedings would have a material adverse effect
on Gulf Powers financial statements.
See Note (B) to the Condensed Financial Statements herein for discussion of various other
contingencies, regulatory matters, and other matters being litigated which may affect future
earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Gulf Power prepares its financial statements in accordance with accounting principles generally
accepted in the United States. Significant accounting policies are described in Note 1 to the
financial statements of Gulf Power in Item 8 of the Form 10-K. In the application of these
policies, certain estimates are made that may have a material impact on Gulf Powers results of
operations and related disclosures. Different assumptions and measurements could produce estimates
that are significantly different from those recorded in the financial statements. See MANAGEMENTS
DISCUSSION AND ANALYSIS ACCOUNTING POLICIES Application of Critical Accounting Policies and
Estimates of Gulf Power in Item 7 of the Form 10-K for a complete discussion of Gulf Powers
critical accounting policies and estimates related to Electric Utility Regulation, Contingent
Obligations, and Unbilled Revenues.
New Accounting Standards
Income Taxes
On January 1, 2007, Gulf Power adopted FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes. FIN 48 requires companies to determine whether it is more likely
than not that a tax position will be sustained upon examination by the appropriate taxing
authorities before any part of the benefit can be recorded in the financial statements. It also
provides guidance on the recognition, measurement, and classification of income tax uncertainties,
along with any related interest and penalties. The provisions of FIN 48 were applied to all tax
positions beginning January 1, 2007. The adoption of FIN 48 did not have a material impact on Gulf
Powers financial statements.
Fair Value Measurement
The FASB issued FASB Statement No. 157 (SFAS No. 157), Fair Value Measurements in September 2006.
This standard provides guidance on how to measure fair value where it is permitted or required
under other accounting pronouncements. SFAS No. 157 also requires additional disclosures about
fair value measurements. Gulf Power plans to adopt SFAS No. 157 on January 1, 2008 and is
currently assessing the impact of this standard.
91
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fair Value Option
In February 2007, the FASB issued FASB Statement No. 159 (SFAS No. 159), Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115.
This standard permits an entity to choose to measure many financial instruments and certain other
items at fair value. Gulf Power plans to adopt SFAS No. 159 on January 1, 2008 and is currently
assessing its impact to the extent the fair value option is elected.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Gulf Powers financial condition and liquidity position remained stable at September 30, 2007. Net cash
provided from operating activities totaled $164.5 million for the first nine months of 2007,
compared to $117.3 million for the corresponding period in 2006. The $47.2 million increase in
cash provided from operating activities in the first nine months of 2007 is primarily due to
increased cash inflows for fuel cost recovery. Net cash used for investing activities totaled
$178.7 million primarily due to gross property additions to utility plant of $160.9 million in the
first nine months of 2007. These additions were primarily related to installation of equipment to
comply with environmental standards and distribution facilities construction. Net cash provided
from financing activities totaled $11.6 million for the first nine months of 2007, compared to
$11.1 million for the corresponding period in 2006. The change in net cash provided from financing
activities was not material.
Capital Requirements and Contractual Obligations
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Capital
Requirements and Contractual Obligations of Gulf Power in Item 7 of the Form 10-K for a
description of Gulf Powers capital requirements for its construction program, lease obligations,
preference stock dividends, purchase commitments, and trust funding requirements. Approximately
$41.2 million will be required through September 30, 2008 for redemptions and maturities of
long-term debt.
On April 16, 2007 the Florida PSC issued an order approving two PPAs that Gulf Power had previously
entered into, one of which is with Southern Power, for a total of 487 MW annually from June 2009
through May 2014. The PPA with Southern Power was approved by the FERC on July 13, 2007. See
MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Capital Requirements
and Contractual Obligations of Gulf Power in Item 7 of the Form 10-K for additional information.
Sources of Capital
Gulf Power plans to obtain the funds required for construction and other purposes from sources
similar to those utilized in the past. Recently, Gulf Power has primarily utilized funds from
operating cash flows, short-term debt, external security offerings, and equity contributions from
Southern Company. However, the amount, type, and timing of any future financings, if needed, will
depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENTS
DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Sources of Capital of Gulf Power in
Item 7 of the Form 10-K for additional information.
92
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gulf Powers current liabilities frequently exceed current assets because of the continued use of
short-term debt as a funding source to meet scheduled maturities of long-term debt as well as cash
needs which can fluctuate significantly due to the seasonality of the business. To meet short-term
cash needs and contingencies, Gulf Power had at September 30, 2007 approximately $4.9 million of
cash and cash equivalents and $125 million of unused committed lines of credit with banks. Of the
unused credit agreements, $60 million expire in 2007 and $65 million expire in 2008. Subsequent to
September 30, 2007, Gulf Power renewed the $60 million of its facilities that were set to expire in
2007. All $125 million of facilities now contain a 2008 expiration date and $100 million include
one-year term loan options. Gulf Power expects to renew its credit facilities, as needed, prior to
expiration. See Note 6 to the financial statements of Gulf Power under Bank Credit Arrangements
in Item 8 of the Form 10-K for additional information. These credit arrangements provide liquidity
support to Gulf Powers obligations with respect to variable rate pollution control bonds and
commercial paper. Gulf Power may also meet short-term cash needs through a Southern Company
subsidiary organized to issue and sell commercial paper and extendible commercial notes at the
request and for the benefit of Gulf Power and other Southern Company subsidiaries. At September
30, 2007, Gulf Power had $25.6 million of commercial paper outstanding. Management believes that
the need for working capital can be adequately met by utilizing commercial paper programs and lines
of credit without maintaining large cash balances.
Credit Rating Risk
Gulf Power does not have any credit arrangements that would require material changes in payment
schedules or terminations as a result of a credit rating downgrade. There are certain contracts
that could require collateral, but not accelerated payment, in the event of a credit rating change
to BBB- or Baa3, or below. Generally, collateral may be provided for by a Southern Company
guaranty, letter of credit, or cash. These contracts are primarily for physical electricity
purchases and sales. At September 30, 2007, the maximum potential collateral requirements at a
BBB- or Baa3 rating were approximately $23.1 million. The maximum potential collateral
requirements at a rating below BBB- or Baa3 were approximately $46.3 million.
Gulf Power, along with all members of the Power Pool, is also party to certain agreements that
could require collateral and/or accelerated payment in the event of a credit rating change to below
investment grade for Alabama Power and/or Georgia Power. These agreements are primarily for natural
gas and power price risk management activities. At September 30, 2007, Gulf Powers total exposure
to these types of agreements was $26.7 million.
Market Price Risk
Gulf Powers market risk exposures relative to interest rate changes have not changed materially
compared with the December 31, 2006 reporting period. In addition, Gulf Power is not aware of any
facts or circumstances that would significantly affect such exposures in the near term.
Due to cost-based rate regulation, Gulf Power has limited exposure to market volatility in interest
rates, commodity fuel prices, and prices of electricity. To mitigate residual risks relative to
movements in electricity prices, Gulf Power enters into physical fixed-price contracts for the
purchase and sale of electricity through the wholesale electricity market. Gulf Power has also
implemented a fuel-hedging program with the approval of the Florida PSC.
93
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The fair value of derivative energy contracts at September 30, 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Year-to-Date |
|
|
2007 |
|
2007 |
|
|
Changes |
|
Changes |
|
|
Fair Value |
|
|
(in thousands) |
Contracts beginning of period |
|
$ |
(2,139 |
) |
|
$ |
(7,186 |
) |
Contracts realized or settled |
|
|
1,910 |
|
|
|
5,043 |
|
New contracts at inception |
|
|
|
|
|
|
|
|
Changes in valuation techniques |
|
|
|
|
|
|
|
|
Current period changes (a) |
|
|
(1,739 |
) |
|
|
175 |
|
|
Contracts at September 30, 2007 |
|
$ |
(1,968 |
) |
|
$ |
(1,968 |
) |
|
|
|
|
(a) |
|
Current period changes also include the changes in fair value of new contracts entered
into during the period, if any. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source of September 30, 2007 |
|
|
Valuation Prices |
|
|
Total |
|
Maturity |
|
|
Fair Value |
|
Year 1 |
|
1-3 Years |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
Actively quoted |
|
$ |
(1,968 |
) |
|
$ |
(2,183 |
) |
|
$ |
215 |
|
External sources |
|
|
|
|
|
|
|
|
|
|
|
|
Models and other methods |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts at September 30,
2007 |
|
$ |
(1,968 |
) |
|
$ |
(2,183 |
) |
|
$ |
215 |
|
|
Unrealized gains and losses from mark-to-market adjustments on derivative contracts related to Gulf
Powers fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains
and losses from these programs are included in fuel expense and are recovered through Gulf Powers
fuel cost recovery clause. Gains and losses on derivative energy contracts that are not designated
as hedges are recognized in the statements of income as incurred.
At September 30, 2007, the fair value gain/(loss) of derivative energy contracts was reflected in
the financial statements as follows:
|
|
|
|
|
|
|
Amounts |
|
|
(in thousands) |
Regulatory assets, net |
|
$ |
(1,968 |
) |
Accumulated other comprehensive income |
|
|
|
|
Net income |
|
|
|
|
|
Total fair value |
|
$ |
(1,968 |
) |
|
Unrealized pre-tax gains and losses recognized in income were not material for any period
presented.
For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND
LIQUIDITY Market Price Risk of Gulf Power in Item 7 and Notes 1 and 6 to the financial
statements of Gulf Power under Financial Instruments in Item 8 of the Form 10-K and Note (F) to
the Condensed Financial Statements herein.
94
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financing Activities
In January 2007, Gulf Power issued 800,000 shares of common stock to Southern Company at $100
stated value per share ($80 million aggregate purchase price). The proceeds were used to repay a
portion of Gulf Powers short-term indebtedness and for other general corporate purposes.
In March 2007, Gulf Power entered into derivative transactions designed to mitigate interest rate
risk related to future planned debt issuances. The total notional amount of these derivatives was
$165 million. Of this $165 million, $85 million was terminated in June 2007 when the underlying
security was issued at a gain of $3 million. This gain will be amortized over a 10-year period.
See Note (F) to the Condensed Financial Statements herein for further details.
In June 2007, Gulf Power issued $85 million of Series 2007A 5.90% Senior Notes due June 15, 2017.
Proceeds were used to repay a portion of its outstanding short-term indebtedness and for general
corporate purposes, including Gulf Powers continuous construction program.
Subsequent to September 30, 2007, Gulf Power issued $45 million of 6.45% Preference Stock.
Proceeds were used to repay a portion of its outstanding short-term indebtedness and for general
corporate purposes, including its continuous construction program.
In October 2007, Gulf Power issued a notice of redemption to the holders of the $41.2 million of
Gulf Power Series E Junior Subordinated Notes due November 30, 2042 and the related trust preferred
and common securities of Gulf Power Capital Trust IV. All securities in this series will be
redeemed in November 2007.
In addition to any financings that may be necessary to meet capital requirements, contractual
obligations, and storm-recovery, Gulf Power plans to continue, when economically feasible, a
program to retire higher-cost securities and replace these obligations with lower-cost capital if
market conditions permit.
95
MISSISSIPPI POWER COMPANY
96
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
221,790 |
|
|
$ |
200,873 |
|
|
$ |
560,059 |
|
|
$ |
505,382 |
|
Wholesale revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliates |
|
|
93,750 |
|
|
|
76,523 |
|
|
|
247,746 |
|
|
|
204,451 |
|
Affiliates |
|
|
13,657 |
|
|
|
29,541 |
|
|
|
42,229 |
|
|
|
52,094 |
|
Other revenues |
|
|
3,826 |
|
|
|
3,810 |
|
|
|
13,031 |
|
|
|
12,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
333,023 |
|
|
|
310,747 |
|
|
|
863,065 |
|
|
|
774,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
146,864 |
|
|
|
147,979 |
|
|
|
390,781 |
|
|
|
330,628 |
|
Purchased power |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliates |
|
|
5,960 |
|
|
|
5,793 |
|
|
|
8,173 |
|
|
|
15,110 |
|
Affiliates |
|
|
27,506 |
|
|
|
8,851 |
|
|
|
56,970 |
|
|
|
45,268 |
|
Other operations |
|
|
46,264 |
|
|
|
43,204 |
|
|
|
133,220 |
|
|
|
121,615 |
|
Maintenance |
|
|
14,941 |
|
|
|
16,122 |
|
|
|
46,219 |
|
|
|
49,897 |
|
Depreciation and amortization |
|
|
15,302 |
|
|
|
10,586 |
|
|
|
44,683 |
|
|
|
34,908 |
|
Taxes other than income taxes |
|
|
16,651 |
|
|
|
15,997 |
|
|
|
44,989 |
|
|
|
45,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
273,488 |
|
|
|
248,532 |
|
|
|
725,035 |
|
|
|
643,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
59,535 |
|
|
|
62,215 |
|
|
|
138,030 |
|
|
|
131,335 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
538 |
|
|
|
2,831 |
|
|
|
1,537 |
|
|
|
2,902 |
|
Interest expense |
|
|
(4,593 |
) |
|
|
(3,644 |
) |
|
|
(13,344 |
) |
|
|
(12,156 |
) |
Interest expense to affiliate trusts |
|
|
|
|
|
|
(649 |
) |
|
|
(686 |
) |
|
|
(1,948 |
) |
Other income (expense), net |
|
|
184 |
|
|
|
(1,291 |
) |
|
|
5,161 |
|
|
|
1,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(3,871 |
) |
|
|
(2,753 |
) |
|
|
(7,332 |
) |
|
|
(10,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
55,664 |
|
|
|
59,462 |
|
|
|
130,698 |
|
|
|
121,335 |
|
Income taxes |
|
|
20,781 |
|
|
|
22,391 |
|
|
|
49,033 |
|
|
|
45,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
34,883 |
|
|
|
37,071 |
|
|
|
81,665 |
|
|
|
75,985 |
|
Dividends on Preferred Stock |
|
|
433 |
|
|
|
433 |
|
|
|
1,299 |
|
|
|
1,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income After Dividends on Preferred Stock |
|
$ |
34,450 |
|
|
$ |
36,638 |
|
|
$ |
80,366 |
|
|
$ |
74,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net Income After Dividends on Preferred Stock |
|
$ |
34,450 |
|
|
$ |
36,638 |
|
|
$ |
80,366 |
|
|
$ |
74,686 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $(200), $106, $(154), and
$310, respectively |
|
|
(322 |
) |
|
|
171 |
|
|
|
(249 |
) |
|
|
501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
$ |
34,128 |
|
|
$ |
36,809 |
|
|
$ |
80,117 |
|
|
$ |
75,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
97
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
81,665 |
|
|
$ |
75,985 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
51,809 |
|
|
|
50,835 |
|
Deferred income taxes and investment tax credits, net |
|
|
(5,806 |
) |
|
|
34,853 |
|
Plant Daniel capacity |
|
|
(4,244 |
) |
|
|
(9,756 |
) |
Pension, postretirement, and other employee benefits |
|
|
6,877 |
|
|
|
4,527 |
|
Stock option expense |
|
|
935 |
|
|
|
957 |
|
Tax benefit of stock options |
|
|
253 |
|
|
|
71 |
|
Hurricane Katrina grant proceeds-property reserve |
|
|
60,000 |
|
|
|
|
|
Other, net |
|
|
(14,443 |
) |
|
|
(3,583 |
) |
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
Receivables |
|
|
(2,501 |
) |
|
|
24,714 |
|
Fossil fuel stock |
|
|
(18,687 |
) |
|
|
4,591 |
|
Materials and supplies |
|
|
22 |
|
|
|
(387 |
) |
Prepaid income taxes |
|
|
4,822 |
|
|
|
34,764 |
|
Other current assets |
|
|
915 |
|
|
|
(3,718 |
) |
Hurricane Katrina grant proceeds |
|
|
14,345 |
|
|
|
|
|
Hurricane Katrina accounts payable |
|
|
3,309 |
|
|
|
(42,418 |
) |
Other accounts payable |
|
|
(14,032 |
) |
|
|
(43,375 |
) |
Accrued taxes |
|
|
(9,897 |
) |
|
|
11,601 |
|
Accrued compensation |
|
|
(7,236 |
) |
|
|
(8,703 |
) |
Over recovered regulatory clause revenues |
|
|
|
|
|
|
(26,188 |
) |
Other current liabilities |
|
|
(716 |
) |
|
|
(1,682 |
) |
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
147,390 |
|
|
|
103,088 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(84,383 |
) |
|
|
(106,490 |
) |
Cost of removal, net of salvage |
|
|
6,274 |
|
|
|
(2,866 |
) |
Construction payables |
|
|
3,327 |
|
|
|
(11,069 |
) |
Hurricane Katrina capital grant proceeds |
|
|
10,869 |
|
|
|
|
|
Other |
|
|
(90 |
) |
|
|
(2,138 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(64,003 |
) |
|
|
(122,563 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Increase in notes payable, net |
|
|
8,939 |
|
|
|
83,283 |
|
Proceeds Gross excess tax benefit of stock options |
|
|
508 |
|
|
|
90 |
|
Redemptions Long-term debt to affiliate trusts |
|
|
(36,082 |
) |
|
|
|
|
Capital contributions from parent company |
|
|
(3 |
) |
|
|
(2,378 |
) |
Payment of preferred stock dividends |
|
|
(1,299 |
) |
|
|
(1,299 |
) |
Payment of common stock dividends |
|
|
(50,475 |
) |
|
|
(48,900 |
) |
|
|
|
|
|
|
|
Net cash provided from (used for) financing activities |
|
|
(78,412 |
) |
|
|
30,796 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
4,975 |
|
|
|
11,321 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
4,214 |
|
|
|
14,301 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
9,189 |
|
|
$ |
25,622 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest |
|
$ |
13,098 |
|
|
$ |
23,257 |
|
Income taxes (net of refunds) |
|
$ |
48,048 |
|
|
$ |
(43,365 |
) |
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
98
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Assets |
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
9,189 |
|
|
$ |
4,214 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
56,712 |
|
|
|
42,099 |
|
Unbilled revenues |
|
|
26,026 |
|
|
|
23,807 |
|
Under recovered regulatory clause revenues |
|
|
45,850 |
|
|
|
50,778 |
|
Other accounts and notes receivable |
|
|
3,766 |
|
|
|
5,870 |
|
Insurance receivable |
|
|
7,942 |
|
|
|
20,551 |
|
Affiliated companies |
|
|
20,423 |
|
|
|
23,696 |
|
Accumulated provision for uncollectible accounts |
|
|
(868 |
) |
|
|
(855 |
) |
Fossil fuel stock, at average cost |
|
|
61,366 |
|
|
|
42,679 |
|
Materials and supplies, at average cost |
|
|
27,905 |
|
|
|
27,927 |
|
Prepaid income taxes |
|
|
17,209 |
|
|
|
22,031 |
|
Other regulatory assets |
|
|
32,212 |
|
|
|
42,391 |
|
Other |
|
|
9,635 |
|
|
|
15,091 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
317,367 |
|
|
|
320,279 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
2,097,877 |
|
|
|
2,054,151 |
|
Less accumulated provision for depreciation |
|
|
869,166 |
|
|
|
836,922 |
|
|
|
|
|
|
|
|
|
|
|
1,228,711 |
|
|
|
1,217,229 |
|
Construction work in progress |
|
|
51,758 |
|
|
|
40,608 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
1,280,469 |
|
|
|
1,257,837 |
|
|
|
|
|
|
|
|
Other Property and Investments |
|
|
9,807 |
|
|
|
4,636 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
8,901 |
|
|
|
9,280 |
|
Prepaid pension costs |
|
|
35,580 |
|
|
|
36,424 |
|
Other regulatory assets |
|
|
67,023 |
|
|
|
61,086 |
|
Other |
|
|
23,758 |
|
|
|
18,834 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
135,262 |
|
|
|
125,624 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,742,905 |
|
|
$ |
1,708,376 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
99
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2007 |
|
|
2006 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
1,116 |
|
|
$ |
|
|
Notes payable |
|
|
60,316 |
|
|
|
51,377 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
26,296 |
|
|
|
24,615 |
|
Other |
|
|
61,495 |
|
|
|
73,236 |
|
Customer deposits |
|
|
9,533 |
|
|
|
8,676 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Income taxes |
|
|
4,016 |
|
|
|
4,171 |
|
Other |
|
|
39,542 |
|
|
|
50,346 |
|
Accrued interest |
|
|
2,094 |
|
|
|
2,332 |
|
Accrued compensation |
|
|
16,722 |
|
|
|
23,958 |
|
Plant Daniel capacity |
|
|
1,415 |
|
|
|
5,659 |
|
Other regulatory liabilities |
|
|
19,540 |
|
|
|
11,386 |
|
Other |
|
|
24,410 |
|
|
|
28,880 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
266,495 |
|
|
|
284,636 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
247,479 |
|
|
|
242,553 |
|
|
|
|
|
|
|
|
Long-term Debt Payable to Affiliated Trusts |
|
|
|
|
|
|
36,082 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
231,754 |
|
|
|
236,202 |
|
Deferred credits related to income taxes |
|
|
15,397 |
|
|
|
16,218 |
|
Accumulated deferred investment tax credits |
|
|
15,604 |
|
|
|
16,402 |
|
Employee benefit obligations |
|
|
97,781 |
|
|
|
92,403 |
|
Other cost of removal obligations |
|
|
90,127 |
|
|
|
82,397 |
|
Other regulatory liabilities |
|
|
88,753 |
|
|
|
22,559 |
|
Other |
|
|
35,598 |
|
|
|
56,324 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
575,014 |
|
|
|
522,505 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
1,088,988 |
|
|
|
1,085,776 |
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
32,780 |
|
|
|
32,780 |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, without par value |
|
|
|
|
|
|
|
|
Authorized - 1,130,000 shares |
|
|
|
|
|
|
|
|
Outstanding - 1,121,000 shares |
|
|
37,691 |
|
|
|
37,691 |
|
Paid-in capital |
|
|
308,694 |
|
|
|
307,019 |
|
Retained earnings |
|
|
274,402 |
|
|
|
244,511 |
|
Accumulated other comprehensive income |
|
|
350 |
|
|
|
599 |
|
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
621,137 |
|
|
|
589,820 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
1,742,905 |
|
|
$ |
1,708,376 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
100
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2007 vs. THIRD QUARTER 2006
AND
YEAR-TO-DATE 2007 vs. YEAR-TO-DATE 2006
OVERVIEW
Mississippi Power operates as a vertically integrated utility providing electricity to retail
customers within its traditional service area located within the State of Mississippi and to
wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks
of Mississippi Powers business of selling electricity. These factors include the ability to
maintain a stable regulatory environment, to achieve energy sales growth, and to effectively manage
and secure timely recovery of rising costs. These costs include those related to growing demand,
increasingly stringent environmental standards, fuel prices, and storm restoration following
Hurricane Katrina.
Mississippi Power continues to focus on several key performance indicators. In recognition that
Mississippi Powers long-term financial success is dependent upon how well it satisfies its
customers needs, Mississippi Powers retail base rate mechanism, PEP, includes performance
indicators that directly tie customer service indicators to Mississippi Powers allowed return. In
addition to the PEP performance indicators, Mississippi Power focuses on other performance
measures, including broader measures of customer satisfaction, plant availability, system
reliability, and net income. For additional information on these indicators, see MANAGEMENTS
DISCUSSION AND ANALYSIS OVERVIEW Key Performance Indicators of Mississippi Power in Item 7 of
the Form 10-K.
RESULTS OF OPERATIONS
Net Income
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(2.1)
|
|
(6.0)
|
|
$5.7
|
|
7.6 |
|
Mississippi Powers net income after dividends on preferred stock for the third quarter 2007 was
$34.5 million compared to $36.6 million for the corresponding period in 2006. The decrease was
primarily due to the regulatory liability created with the establishment of the System Restoration
Rider (SRR). Currently, Mississippi Power estimates a credit due to retail
customers for the SRR clause when the regulatory liability is settled. See FUTURE EARNINGS
POTENTIAL FERC and Mississippi PSC Matters Retail Regulatory Matters herein for additional
information. The decrease in net income is also attributable to an increase in depreciation and
amortization due to the amortization of a regulatory liability related to Plant Daniel capacity for
the third quarter 2007, an increase in other operations and maintenance expenses, and a decrease in
total other income and (expense). These items were partially offset by increases in territorial
base revenues and in wholesale energy revenues.
Mississippi Powers net income after dividends on preferred stock for year-to-date 2007 was $80.4
million compared to $74.7 million for the corresponding period in 2006. The increase was primarily
due to increases in territorial base revenues which was a result of a retail base rate increase
effective April 1, 2006, sales growth,
wholesale energy revenues, and total other income and (expense). These increases were partially
offset by an increase in other operations and maintenance expenses, an increase in depreciation and
amortization due to the amortization of a regulatory liability related to Plant Daniel capacity for
the year-to-date 2007, and a decrease in SRR retail revenues as discussed above.
101
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$20.9
|
|
10.4
|
|
$54.7
|
|
10.8 |
|
In the third quarter 2007, retail revenues were $221.8 million compared to $200.9 million in the
same period in 2006.
For year-to-date 2007, retail revenues were $560.1 million compared to $505.4 million for the same
period in 2006.
Details of the change to retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Year-to-Date |
|
|
2007 |
|
2007 |
|
|
(in millions) |
|
(% change) |
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
200.9 |
|
|
|
|
|
|
$ |
505.4 |
|
|
|
|
|
Estimated change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
(1.1 |
) |
|
|
(0.5 |
) |
|
|
5.6 |
|
|
|
1.1 |
|
Sales growth |
|
|
3.2 |
|
|
|
1.5 |
|
|
|
10.3 |
|
|
|
2.0 |
|
Weather |
|
|
(0.7 |
) |
|
|
(0.3 |
) |
|
|
(2.2 |
) |
|
|
(0.4 |
) |
Fuel and other cost recovery |
|
|
19.5 |
|
|
|
9.7 |
|
|
|
41.0 |
|
|
|
8.1 |
|
|
Retail current year |
|
$ |
221.8 |
|
|
|
10.4 |
% |
|
$ |
560.1 |
|
|
|
10.8 |
% |
|
Revenue associated with changes in rates and pricing decreased in the third quarter 2007 when
compared to the same period of 2006 primarily due to retail revenue reductions of approximately
$2.2 million related to the SRR and a one time credit to retail customers of approximately $1.1
million related to PEP. This decrease was partially offset by an increase in the ECO Plan rate
effective May 2007 of approximately $2.3 million. See FUTURE EARNINGS POTENTIAL FERC and
Mississippi PSC Matters Retail Regulatory Matters herein for additional information.
Revenue associated with changes in rates and pricing increased for year-to-date 2007 when compared
to the same period of 2006 due to a base rate increase effective April 2006 and increase in the ECO
Plan rate effective May 2007 of approximately $8.5 million. This increase was partially offset by
retail revenue reductions of approximately $1.8 million related to the SRR and a one time credit to
retail customers of approximately $1.1 million related to PEP.
Revenues attributable to changes in sales growth increased in the third quarter 2007 when compared
to the same period in 2006 due to 0.9% and 6.5% increases in KWH sales to residential and
commercial customers, respectively, primarily due to increase in usage and customer loads returning
after Hurricane Katrina.
Revenues attributable to changes in sales growth increased for year-to-date 2007 when compared to
the same period in 2006 due to 1.7%, 8.5%, and 4.5% increases in KWH sales to residential,
commercial, and industrial customers, respectively, primarily due to increase in usage and customer
loads returning after Hurricane Katrina.
Revenues resulting from changes in weather decreased because of mild weather in the third quarter
and year-to-date 2007 compared to normal weather in the third quarter and year-to-date 2006.
102
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel revenues increased in the third quarter and year-to-date 2007 when compared to the same
periods in 2006. Electric rates include provisions to adjust billings for fluctuations in fuel
costs, including the energy component of purchased power costs. Under these provisions, fuel
revenues generally equal fuel expenses, including the fuel component of purchased power costs, and
do not affect net income.
Wholesale Revenues Non-Affiliates
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$17.3
|
|
22.5
|
|
$43.2
|
|
21.2 |
|
In the third quarter 2007, wholesale revenues from non-affiliates were $93.8 million compared to
$76.5 million in the same period in 2006. The increase was primarily due to increased sales to
customers within Mississippi Powers service territory of $9.5 million and increased sales to
customers outside Mississippi Powers service territory of $7.7 million. The $9.5 million increase
in revenues to customers within Mississippi Powers service territory was primarily due to an $8.5
million increase in fuel costs and a $1.0 million increase in base revenue due to higher demand by
customers. The $7.7 million increase in sales to customers outside Mississippi Powers service
territory was primarily due to a $6.8 million increase in energy revenues and a $0.9 million
increase in capacity revenues.
For year-to-date 2007, wholesale revenues to non-affiliates were $247.7 million compared to $204.5
million for the same period in 2006. The increase was primarily due to increased sales to
customers outside Mississippi Powers service territory of $21.8 million and increased sales to
customers within Mississippi Powers service territory of $21.4 million. The $21.8 million
increase in sales to customers outside Mississippi Powers service territory was primarily due to a
$19.0 million increase in energy revenues and a $2.8 million increase in capacity revenues. The
$21.4 million increase in revenues to customers within Mississippi Powers service territory was
primarily due to a $17.3 million increase in fuel costs and a $4.1 million increase in base revenue
due to higher demand by customers.
Revenues from wholesale sales to non-affiliates will vary depending on the market cost of available
energy compared to the cost of Mississippi Power and Southern Company system owned generation,
demand for energy within the Southern Company service territory, and availability of Southern
Company system generation.
Wholesale Revenues Affiliates
|
|
|
|
|
|
|
Third Quarter 2007 vs. Third Quarter 2006 |
|
Year-to-Date 2007 vs. Year-to-Date 2006 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(15.8)
|
|
(53.8)
|
|
$(9.9)
|
|
(18.9) |
|
In the third quarter 2007, wholesale revenues to affiliates were $13.7 million compared to $29.5
million in the same period in 2006. The decrease was primarily due to a $14.4 million decrease in
energy revenues, of which a $16.6 million decrease was associated with decreased sales, partially
offset by a $2.2 million increase associated with higher prices. Capacity revenues decreased $1.5
million.
For year-to-date 2007, wholesale revenues to affiliates were $42.2 million compared to $52.1
million for the same period in 2006. The decrease was primarily due to a $6.9 million decrease in
energy revenues, of which a $2.3 million decrease was associated with decreased sales and a $4.6
million decrease was associated with lower prices. Capacity revenues decreased $2.9 million.
103
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues from wholesale sales to affiliates will vary depending on demand and the availability and
cost of generating resources at each company. These affiliate sales are made in accordance with
the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings
since the energy is generally sold at marginal cost.
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2007 |
|
|
Year-to-Date 2007 |
|
|
|
vs. |
|
|
vs. |
|