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 June 30, 2008
OR
oTRANSITION 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
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large |
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Smaller |
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Accelerated |
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Accelerated |
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Non-accelerated |
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Reporting |
Registrant |
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Filer |
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Filer |
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Filer |
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Company |
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 June 30, 2008 |
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The Southern Company
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Par Value $5 Per Share
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770,187,296 |
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Alabama Power Company
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Par Value $40 Per Share
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21,725,000 |
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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
June 30, 2008
3
INDEX TO QUARTERLY REPORT ON FORM 10-Q
June 30, 2008
4
DEFINITIONS
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Term |
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Meaning |
2007 Retail Rate Plan
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Georgia Powers retail rate plan for the years 2008 through 2010 |
Alabama Power
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Alabama Power Company |
Clean Air Act
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Clean Air Act Amendments of 1990 |
Dalton Utilities
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The City of Dalton, Georgia, an incorporated municipality in the
State of Georgia acting by and through its Board of Water, Light
and Sinking Fund Commissioners |
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 |
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, 2007 |
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 |
MEAG Power
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Municipal Electric Authority of Georgia |
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 |
OPC
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Oglethorpe Power Corporation |
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 equilization rate mechanism |
registrants
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Southern Company, Alabama Power, Georgia Power, Gulf Power,
Mississippi Power, and Southern Power |
SCS
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Southern Company Services, Inc. |
SEC
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Securities and Exchange Commission |
SFAS No. 157
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FASB Statement No. 157, Fair Value Measurement |
5
DEFINITIONS
(continued)
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Term |
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Meaning |
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 |
Stone & Webster
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Stone & Webster, Inc. |
traditional operating companies
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Alabama Power, Georgia Power, Gulf Power, and Mississippi Power |
Westinghouse
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Westinghouse Electric Company LLC |
wholesale revenues
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revenues generated from sales for resale |
6
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, earnings growth, dividend payout ratios,
access to sources of capital, projections for postretirement benefit trust contributions, financing
activities, completion of construction projects, plans and estimated costs for new generation
resources, sales under new PPAs, impacts of adoption of new accounting rules, costs of implementing
the IIC settlement with the FERC, cash flow impact of the Economic Stimulus Act of 2008 on tax
payments in 2008, unrecognized tax benefits related to leveraged lease transactions, 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 water quality and 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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effects of inflation; |
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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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regulatory approvals related to the potential Plant Vogtle expansion, including Georgia PSC
and NRC approvals; |
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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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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 and to perform as required; |
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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.
7
THE
SOUTHERN COMPANY AND
SUBSIDIARY COMPANIES
8
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 Six Months |
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Ended June 30, |
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Ended June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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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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$ |
3,449,878 |
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$ |
3,105,056 |
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$ |
6,455,492 |
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$ |
5,848,867 |
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Wholesale revenues |
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591,802 |
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486,877 |
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1,105,464 |
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967,576 |
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Other electric revenues |
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141,162 |
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129,583 |
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271,352 |
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250,877 |
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Other revenues |
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32,345 |
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50,412 |
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65,789 |
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113,277 |
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Total operating revenues |
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4,215,187 |
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3,771,928 |
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7,898,097 |
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7,180,597 |
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Operating Expenses: |
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Fuel |
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1,622,074 |
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1,457,506 |
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3,074,017 |
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2,774,025 |
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Purchased power |
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197,260 |
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100,136 |
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290,164 |
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164,209 |
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Other operations |
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619,369 |
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586,377 |
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1,209,795 |
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1,151,749 |
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Maintenance |
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295,629 |
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289,039 |
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602,020 |
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571,034 |
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Depreciation and amortization |
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358,745 |
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310,286 |
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702,630 |
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616,630 |
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Taxes other than income taxes |
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198,042 |
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184,527 |
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387,314 |
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367,566 |
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Total operating expenses |
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3,291,119 |
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2,927,871 |
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6,265,940 |
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5,645,213 |
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Operating Income |
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924,068 |
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844,057 |
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1,632,157 |
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1,535,384 |
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Other Income and (Expense): |
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Allowance for equity funds used during construction |
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35,486 |
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23,597 |
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76,071 |
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43,771 |
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Interest income |
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1,188 |
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9,660 |
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10,993 |
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20,215 |
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Equity in income (losses) of unconsolidated subsidiaries |
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1,097 |
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(13,567 |
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1,425 |
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(20,302 |
) |
Leveraged lease income (losses) |
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(70,879 |
) |
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9,707 |
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(59,954 |
) |
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19,569 |
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Interest expense, net of amounts capitalized |
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(228,947 |
) |
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(222,576 |
) |
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(446,056 |
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(440,426 |
) |
Preferred and preference dividends of subsidiaries |
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(16,195 |
) |
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(10,129 |
) |
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(32,390 |
) |
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(20,258 |
) |
Other income (expense), net |
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(4,484 |
) |
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(6,015 |
) |
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(3,570 |
) |
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(8,946 |
) |
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Total other income and (expense) |
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(282,734 |
) |
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(209,323 |
) |
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(453,481 |
) |
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(406,377 |
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Earnings Before Income Taxes |
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641,334 |
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634,734 |
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1,178,676 |
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1,129,007 |
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Income taxes |
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|
224,952 |
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|
205,581 |
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403,090 |
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361,165 |
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Consolidated Net Income |
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$ |
416,382 |
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$ |
429,153 |
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$ |
775,586 |
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$ |
767,842 |
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Common Stock Data: |
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Earnings per
share |
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Basic |
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$ |
0.54 |
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$ |
0.57 |
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$ |
1.01 |
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$ |
1.02 |
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Diluted |
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$ |
0.54 |
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$ |
0.56 |
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$ |
1.00 |
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$ |
1.01 |
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Average number of shares of common stock outstanding
(in thousands) |
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Basic |
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|
769,122 |
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|
755,137 |
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|
767,636 |
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|
752,698 |
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Diluted |
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|
773,140 |
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|
759,846 |
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|
771,727 |
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|
757,596 |
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Cash dividends paid per share of common stock |
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$ |
0.4200 |
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$ |
0.4025 |
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$ |
0.8225 |
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$ |
0.7900 |
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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 STATEMENTS OF CASH FLOWS (UNAUDITED)
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For the Six Months |
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Ended June 30, |
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2008 |
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2007 |
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(in thousands) |
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Operating Activities: |
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Consolidated net income |
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$ |
775,586 |
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$ |
767,842 |
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Adjustments to reconcile consolidated net income
to net cash provided from operating activities |
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Depreciation and amortization |
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|
831,791 |
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|
732,511 |
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Deferred income taxes and investment tax credits |
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(79,033 |
) |
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|
85,007 |
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Deferred revenues |
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|
57,768 |
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|
(6,193 |
) |
Allowance for equity funds used during construction |
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|
(76,071 |
) |
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|
(43,771 |
) |
Equity in income (losses) of unconsolidated subsidiaries |
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|
(1,425 |
) |
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|
20,302 |
|
Leveraged lease income (losses) |
|
|
59,954 |
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|
(19,569 |
) |
Pension, postretirement, and other employee benefits |
|
|
24,596 |
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|
21,510 |
|
Stock option expense |
|
|
15,734 |
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|
23,454 |
|
Derivative fair value adjustments |
|
|
6,652 |
|
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|
(958 |
) |
Hedge settlements |
|
|
17,289 |
|
|
|
7,866 |
|
Hurricane Katrina grant proceeds-property reserve |
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|
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|
60,000 |
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Other, net |
|
|
(11,504 |
) |
|
|
(6,875 |
) |
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
Receivables |
|
|
(317,403 |
) |
|
|
(122,018 |
) |
Fossil fuel stock |
|
|
(121,823 |
) |
|
|
(113,570 |
) |
Materials and supplies |
|
|
(28,609 |
) |
|
|
(36,002 |
) |
Other current assets |
|
|
(54,536 |
) |
|
|
(69,985 |
) |
Hurricane Katrina grant proceeds |
|
|
|
|
|
|
14,345 |
|
Accounts payable |
|
|
161,703 |
|
|
|
(31,681 |
) |
Accrued taxes |
|
|
181,105 |
|
|
|
(82,875 |
) |
Accrued compensation |
|
|
(185,500 |
) |
|
|
(251,073 |
) |
Other current liabilities |
|
|
121,336 |
|
|
|
26,103 |
|
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
1,377,610 |
|
|
|
974,370 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(1,983,177 |
) |
|
|
(1,568,357 |
) |
Investment in restricted cash from pollution control bonds |
|
|
(161 |
) |
|
|
(96,049 |
) |
Distribution of restricted cash from pollution control bonds |
|
|
32,908 |
|
|
|
|
|
Nuclear decommissioning trust fund purchases |
|
|
(405,999 |
) |
|
|
(322,509 |
) |
Nuclear decommissioning trust fund sales |
|
|
399,119 |
|
|
|
315,629 |
|
Proceeds from property sales |
|
|
5,495 |
|
|
|
28,602 |
|
Investment in unconsolidated subsidiaries |
|
|
(2,780 |
) |
|
|
(25,185 |
) |
Cost of removal, net of salvage |
|
|
(40,757 |
) |
|
|
(40,957 |
) |
Hurricane Katrina capital grant proceeds |
|
|
7,314 |
|
|
|
10,869 |
|
Other |
|
|
(35,907 |
) |
|
|
15,877 |
|
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(2,023,945 |
) |
|
|
(1,682,080 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Decrease in notes payable, net |
|
|
(151,513 |
) |
|
|
(445,605 |
) |
Proceeds |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
1,684,935 |
|
|
|
2,531,500 |
|
Common stock |
|
|
235,454 |
|
|
|
311,485 |
|
Redemptions |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
(361,263 |
) |
|
|
(1,084,078 |
) |
Preferred stock |
|
|
(125,000 |
) |
|
|
|
|
Payment of common stock dividends |
|
|
(630,594 |
) |
|
|
(593,991 |
) |
Other |
|
|
(12,267 |
) |
|
|
(9,610 |
) |
|
|
|
|
|
|
|
Net cash provided from financing activities |
|
|
639,752 |
|
|
|
709,701 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
(6,583 |
) |
|
|
1,991 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
200,550 |
|
|
|
166,846 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
193,967 |
|
|
$ |
168,837 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $39,434 and $26,926 capitalized for 2008 and 2007, respectively) |
|
$ |
389,466 |
|
|
$ |
391,105 |
|
Income taxes (net of refunds) |
|
$ |
280,902 |
|
|
$ |
266,273 |
|
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 June 30, |
|
|
At December 31, |
|
Assets |
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
193,967 |
|
|
$ |
200,550 |
|
Restricted cash |
|
|
41,406 |
|
|
|
68,013 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
1,199,505 |
|
|
|
999,264 |
|
Unbilled revenues |
|
|
426,817 |
|
|
|
294,487 |
|
Under recovered regulatory clause revenues |
|
|
519,002 |
|
|
|
715,744 |
|
Other accounts and notes receivable |
|
|
379,994 |
|
|
|
347,573 |
|
Accumulated provision for uncollectible accounts |
|
|
(23,384 |
) |
|
|
(22,142 |
) |
Fossil fuel stock, at average cost |
|
|
836,265 |
|
|
|
709,823 |
|
Materials and supplies, at average cost |
|
|
746,435 |
|
|
|
725,001 |
|
Vacation pay |
|
|
134,285 |
|
|
|
134,806 |
|
Assets from risk management activities |
|
|
312,156 |
|
|
|
83,043 |
|
Prepaid expenses |
|
|
297,999 |
|
|
|
147,903 |
|
Other |
|
|
304,169 |
|
|
|
328,167 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
5,368,616 |
|
|
|
4,732,232 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
49,537,608 |
|
|
|
47,175,717 |
|
Less accumulated depreciation |
|
|
17,887,372 |
|
|
|
17,412,658 |
|
|
|
|
|
|
|
|
|
|
|
31,650,236 |
|
|
|
29,763,059 |
|
Nuclear fuel, at amortized cost |
|
|
459,377 |
|
|
|
336,129 |
|
Construction work in progress |
|
|
2,452,957 |
|
|
|
3,227,605 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
34,562,570 |
|
|
|
33,326,793 |
|
|
|
|
|
|
|
|
Other Property and Investments: |
|
|
|
|
|
|
|
|
Nuclear decommissioning trusts, at fair value |
|
|
1,054,152 |
|
|
|
1,131,798 |
|
Leveraged leases |
|
|
923,451 |
|
|
|
984,441 |
|
Other |
|
|
212,127 |
|
|
|
237,400 |
|
|
|
|
|
|
|
|
Total other property and investments |
|
|
2,189,730 |
|
|
|
2,353,639 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
944,201 |
|
|
|
910,402 |
|
Prepaid pension costs |
|
|
2,415,092 |
|
|
|
2,368,798 |
|
Unamortized debt issuance expense |
|
|
200,756 |
|
|
|
190,700 |
|
Unamortized loss on reacquired debt |
|
|
278,203 |
|
|
|
288,973 |
|
Deferred under recovered regulatory clause revenues |
|
|
525,926 |
|
|
|
388,945 |
|
Other regulatory assets |
|
|
861,530 |
|
|
|
769,226 |
|
Other |
|
|
511,631 |
|
|
|
459,172 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
5,737,339 |
|
|
|
5,376,216 |
|
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
47,858,255 |
|
|
$ |
45,788,880 |
|
|
|
|
|
|
|
|
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 BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At June 30, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
947,837 |
|
|
$ |
1,177,889 |
|
Notes payable |
|
|
1,119,944 |
|
|
|
1,271,457 |
|
Accounts payable |
|
|
1,396,380 |
|
|
|
1,213,766 |
|
Customer deposits |
|
|
290,234 |
|
|
|
273,800 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Income taxes |
|
|
33,907 |
|
|
|
52,237 |
|
Unrecognized tax benefits |
|
|
279,819 |
|
|
|
164,599 |
|
Other |
|
|
302,274 |
|
|
|
329,895 |
|
Accrued interest |
|
|
243,888 |
|
|
|
217,883 |
|
Accrued vacation pay |
|
|
168,920 |
|
|
|
170,574 |
|
Accrued compensation |
|
|
228,592 |
|
|
|
407,543 |
|
Other regulatory liabilities |
|
|
345,929 |
|
|
|
34,352 |
|
Other |
|
|
348,224 |
|
|
|
316,665 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
5,705,948 |
|
|
|
5,630,660 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
15,582,929 |
|
|
|
14,143,114 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
5,884,614 |
|
|
|
5,838,674 |
|
Deferred credits related to income taxes |
|
|
265,527 |
|
|
|
272,181 |
|
Accumulated deferred investment tax credits |
|
|
467,388 |
|
|
|
479,302 |
|
Employee benefit obligations |
|
|
1,524,918 |
|
|
|
1,492,472 |
|
Asset retirement obligations |
|
|
1,147,394 |
|
|
|
1,200,094 |
|
Other cost of removal obligations |
|
|
1,326,393 |
|
|
|
1,307,732 |
|
Other regulatory liabilities |
|
|
1,737,912 |
|
|
|
1,613,004 |
|
Other |
|
|
362,896 |
|
|
|
346,371 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
12,717,042 |
|
|
|
12,549,830 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
34,005,919 |
|
|
|
32,323,604 |
|
|
|
|
|
|
|
|
Preferred and Preference Stock of Subsidiaries |
|
|
1,081,863 |
|
|
|
1,080,248 |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, par value $5 per share |
|
|
|
|
|
|
|
|
Authorized 1 billion shares |
|
|
|
|
|
|
|
|
Issued June 30, 2008: 770,617,262 Shares; |
|
|
|
|
|
|
|
|
December 31, 2007: 763,502,427 Shares |
|
|
|
|
|
|
|
|
Treasury June 30, 2008: 429,966 Shares; |
|
|
|
|
|
|
|
|
December 31, 2007: 398,746 Shares |
|
|
|
|
|
|
|
|
Par value |
|
|
3,853,038 |
|
|
|
3,817,453 |
|
Paid-in capital |
|
|
1,678,470 |
|
|
|
1,454,288 |
|
Treasury, at cost |
|
|
(12,207 |
) |
|
|
(11,143 |
) |
Retained earnings |
|
|
7,295,431 |
|
|
|
7,154,596 |
|
Accumulated other comprehensive loss |
|
|
(44,259 |
) |
|
|
(30,166 |
) |
|
|
|
|
|
|
|
Total Common Stockholders Equity |
|
|
12,770,473 |
|
|
|
12,385,028 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
47,858,255 |
|
|
$ |
45,788,880 |
|
|
|
|
|
|
|
|
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
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Consolidated Net Income |
|
$ |
416,382 |
|
|
$ |
429,153 |
|
|
$ |
775,586 |
|
|
$ |
767,842 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $2,571, $14,996, $(11,417),
and $13,429, respectively |
|
|
4,337 |
|
|
|
23,839 |
|
|
|
(17,914 |
) |
|
|
21,371 |
|
Reclassification adjustment for amounts included in net income,
net of tax of $2,371, $1,420, $4,149, and $2,679, respectively |
|
|
3,734 |
|
|
|
2,197 |
|
|
|
6,509 |
|
|
|
4,401 |
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $(319), $1,086, $(2,456),
and $1,904, respectively |
|
|
(925 |
) |
|
|
1,320 |
|
|
|
(4,026 |
) |
|
|
2,627 |
|
Reclassification adjustment for amounts included in net income,
net of tax of $-, $(361), $-, and $(361), respectively |
|
|
|
|
|
|
(573 |
) |
|
|
|
|
|
|
(573 |
) |
Pension and other post retirement benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit plan net gain (loss), net of tax of $-, $(1,510),$-,
and $(1,510), respectively |
|
|
|
|
|
|
(2,424 |
) |
|
|
|
|
|
|
(2,424 |
) |
Reclassification adjustment for amounts included in net income,
net of tax of $277, $280, $536, and $527, respectively |
|
|
471 |
|
|
|
404 |
|
|
|
882 |
|
|
|
842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
7,617 |
|
|
|
24,763 |
|
|
|
(14,549 |
) |
|
|
26,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
$ |
423,999 |
|
|
$ |
453,916 |
|
|
$ |
761,037 |
|
|
$ |
794,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
13
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER 2008 vs. SECOND QUARTER 2007
AND
YEAR-TO-DATE 2008 vs. YEAR-TO-DATE 2007
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. The traditional operating
companies are vertically integrated utilities providing electric service in four Southeastern
states. Southern Power constructs, acquires, and manages generation assets and sells electricity
at market-based rates in the wholesale market. Southern Companys other business activities
include investments in 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 Businesses in Item 1 of the Form
10-K.
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
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(12.8)
|
|
(3.0)
|
|
$7.8
|
|
1.0 |
|
Southern Companys second quarter 2008 earnings were $416.4 million ($0.54 per share) compared to
$429.2 million ($0.57 per share) for the second quarter 2007. The decrease in the second quarter
2008 when compared to the same period in 2007 was primarily the result of a significant charge
related to leveraged lease investments, higher other operations and maintenance expenses, and
higher depreciation and amortization. The second quarter 2008 decrease was partially offset by an
increase in contributions from market-response rates to large commercial and industrial customers
and retail base rate increases at Alabama Power and Georgia Power.
Southern Companys year-to-date 2008 earnings were $775.6 million ($1.01 per share) compared to
$767.8 million ($1.02 per share) for year-to-date 2007. The increase for year-to-date 2008 when
compared to the same period in 2007 was primarily the result of an increase in contributions from
market-response rates to large commercial and industrial customers, retail base rate increases at
Alabama Power and Georgia Power, and an increase in allowance for equity funds used during
construction. The year-to-date 2008 increase was partially offset by a significant charge related
to leveraged lease investments, higher other operations and maintenance expenses, and higher
depreciation and amortization.
Retail Revenues
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$344.8
|
|
11.1
|
|
$606.6
|
|
10.4 |
|
In the second quarter 2008, retail revenues were $3.45 billion compared to $3.11 billion for the
same period in 2007.
14
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2008, retail revenues were $6.46 billion compared to $5.85 billion for the same
period in 2007.
Details of the change to retail revenues follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
Year-to-Date |
|
|
|
2008 |
|
|
2008 |
|
|
|
(in millions) |
|
|
(% change) |
|
|
(in millions) |
|
|
(% change) |
|
Retail prior year |
|
$ |
3,105.1 |
|
|
|
|
|
|
$ |
5,848.9 |
|
|
|
|
|
Estimated change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
213.5 |
|
|
|
6.9 |
|
|
|
348.3 |
|
|
|
6.0 |
|
Sales growth |
|
|
0.9 |
|
|
|
0.0 |
|
|
|
23.4 |
|
|
|
0.4 |
|
Weather |
|
|
(14.5 |
) |
|
|
(0.5 |
) |
|
|
(13.3 |
) |
|
|
(0.2 |
) |
Fuel and other cost recovery |
|
|
144.9 |
|
|
|
4.7 |
|
|
|
248.2 |
|
|
|
4.2 |
|
|
Retail current year |
|
$ |
3,449.9 |
|
|
|
11.1 |
% |
|
$ |
6,455.5 |
|
|
|
10.4 |
% |
|
Revenues associated with changes in rates and pricing increased in the second quarter and
year-to-date 2008 when compared to the same periods in 2007 primarily as a result of an increase in
revenues from market-response rates to large commercial and industrial customers and retail base
rate increases at Alabama Power and Georgia Power.
Revenues attributable to changes in sales growth were insignificant in the second quarter 2008 when
compared to the same period in 2007. For year-to-date 2008, revenues attributable to changes in
sales growth increased when compared to the same period in 2007 due to a 0.2% increase in
weather-adjusted retail KWH sales resulting primarily from a 0.9% increase in customer growth,
partially offset by a 0.7% decrease in usage among customers mainly due to a higher housing
inventory in Southern Companys service area as compared to the same period in 2007. For
year-to-date 2008, weather-adjusted residential KWH sales increased 0.1%, weather-adjusted
commercial KWH sales increased 1.3%, and weather-adjusted industrial KWH sales decreased 0.7%.
Revenues resulting from changes in weather decreased because of less favorable weather in the
second quarter and year-to-date 2008 when compared to the same periods in 2007.
Fuel and other cost recovery revenues increased $144.9 million in the second quarter 2008 and
$248.2 million for year-to-date 2008 when compared to the same periods in 2007. 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
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$104.9
|
|
21.6
|
|
$137.9
|
|
14.3 |
|
In the second quarter 2008, wholesale revenues were $591.8 million compared to $486.9 million for
the same period in 2007. The increase was primarily attributable to a rise in fuel revenues due to
a 14.2% increase in the average unit cost of fuel per net KWH generated, higher revenues associated
with new and existing wholesale contracts, and generating plant operational performance incentives
on existing wholesale contracts.
15
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2008, wholesale revenues were $1.11 billion compared to $0.97 billion for the same
period in 2007. The increase was primarily attributable to a rise in fuel revenues due to a 12.0%
increase in the average unit cost of fuel per net KWH generated and higher revenues associated with
new and existing wholesale contracts. Partially offsetting the year-to-date 2008 increase were
lower revenues from short-term opportunity sales. 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
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$11.6
|
|
8.9
|
|
$20.5
|
|
8.2 |
|
In the second quarter 2008, other electric revenues were $141.2 million compared to $129.6 million
for the same period in 2007. The increase was primarily the result of a $6.1 million increase in
co-generation revenues due to higher natural gas prices and a $6.6 million increase related to the
settlement of transmission service agreements with Calpine Corporation (Calpine).
For year-to-date 2008, other electric revenues were $271.4 million compared to $250.9 million for
the same period in 2007. The increase was primarily the result of a $9.2 million increase in
co-generation revenues due to higher natural gas prices, a $6.6 million increase related to the
settlement of transmission service agreements with Calpine, an increase in customer fees of $3.8
million, and an increase in outdoor lighting revenues of $3.6 million.
Other Revenues
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(18.1)
|
|
(35.8)
|
|
$(47.5)
|
|
(41.9) |
|
In the second quarter 2008, other revenues were $32.3 million compared to $50.4 million for the
same period in 2007. The decrease was primarily the result of a $15.3 million decrease in fuel
procurement service revenues following a contract termination in 2007.
For year-to-date 2008, other revenues were $65.8 million compared to $113.3 million for the same
period in 2007. The decrease was primarily the result of a $31.8 million decrease in fuel
procurement service revenues following a contract termination in 2007 and a $3.9 million decrease
in revenues at a subsidiary that provides energy-related services.
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2008 |
|
|
Year-to-Date 2008 |
|
|
|
vs. |
|
|
vs. |
|
|
|
Second Quarter 2007 |
|
|
Year-to-Date 2007 |
|
|
|
(change in millions) |
|
|
(% change) |
|
|
(change in millions) |
|
|
(% change) |
|
Fuel |
|
$ |
164.6 |
|
|
|
11.3 |
|
|
$ |
300.0 |
|
|
|
10.8 |
|
Purchased power |
|
|
97.1 |
|
|
|
97.0 |
|
|
|
126.0 |
|
|
|
76.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Total fuel and purchased power expenses |
|
$ |
261.7 |
|
|
|
|
|
|
$ |
426.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the second quarter 2008, fuel and purchased power expenses were $1.82 billion compared to $1.56
billion for the same period in 2007. The increase in fuel and purchased power expenses was due to
a $226.5 million net increase in the average cost of fuel and purchased power, primarily related to
an 18.5% increase in the cost of coal per net KWH generated. Also contributing to the increase was
a $35.2 million net increase related to total KWHs generated and purchased when compared to the
same period in 2007.
For year-to-date 2008, fuel and purchased power expenses were $3.36 billion compared to $2.94
billion for the same period in 2007. The increase in fuel and purchased power expenses was due to
a $367.8 million net increase in the average cost of fuel and purchased power, primarily related to
a 15.7% increase in the cost of coal per net KWH generated. Also contributing to the increase was
a $58.2 million net increase related to total KWHs generated and purchased when compared to the
same period in 2007.
Increases in fuel expense 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.
Details of Southern Companys cost of generation and purchased power are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
Second Quarter |
|
|
Percent |
|
|
Year-to-Date |
|
|
Year-to-Date |
|
|
Percent |
|
Average Cost |
|
2008 |
|
|
2007 |
|
|
Change |
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
|
|
(cents per net KWH)
|
|
(cents per net KWH)
|
Fuel |
|
|
3.29 |
|
|
|
2.88 |
|
|
|
14.2 |
|
|
|
3.18 |
|
|
|
2.84 |
|
|
|
12.0 |
|
Purchased power |
|
|
8.82 |
|
|
|
7.80 |
|
|
|
13.1 |
|
|
|
7.47 |
|
|
|
6.51 |
|
|
|
14.8 |
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2008 |
|
|
Year-to-Date 2008 |
|
|
|
vs. |
|
|
vs. |
|
|
|
Second Quarter 2007 |
|
|
Year-to-Date 2007 |
|
|
|
(change in millions) |
|
|
(% change) |
|
|
(change in millions) |
|
|
(% change) |
|
Other operations |
|
$ |
33.0 |
|
|
|
5.6 |
|
|
$ |
58.0 |
|
|
|
5.0 |
|
Maintenance |
|
|
6.6 |
|
|
|
2.3 |
|
|
|
31.0 |
|
|
|
5.4 |
|
|
|
|
|
Total other operations and maintenance |
|
$ |
39.6 |
|
|
|
|
|
|
$ |
89.0 |
|
|
|
|
|
|
|
|
|
In the second quarter 2008, other operations and maintenance expenses were $915.0 million compared
to $875.4 million for the same period in 2007. The increase in other operations and maintenance
expenses resulted primarily from a $17.9 million increase in fossil and hydro expenses due to costs
incurred for scheduled outages and maintenance of fossil and hydro generating units, as well as
expenses for new facilities; a $13.2 million increase in administrative and general expenses mainly
resulting from increases in affiliated service company expenses and property damage expenses; a
$7.8 million increase in customer account expenses largely related to increases in records and
collections expenses and bad debt expense; and a $5.4 million increase in nuclear expenses due to
costs incurred for maintenance of nuclear generating units and increases in commodity and labor
costs.
17
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2008, other operations and maintenance expenses were $1.81 billion compared to
$1.72 billion for the same period in 2007. The increase in other operations and maintenance
expenses resulted primarily from a $46.2 million increase in fossil and hydro expenses due to costs
incurred for scheduled outages, maintenance of fossil and hydro generating units, increases in
commodity and labor costs, and expenses for new facilities; a $20.1 million increase in
administrative and general expenses mainly resulting from increases in affiliated service company
expenses and property damage expenses; a $17.2 million increase in customer account expenses
largely related to increases in records and collections expenses, bad debt expense, and meter
reading; and a $16.9 million increase in nuclear expenses due to costs incurred for maintenance of
nuclear generating units and increases in commodity and labor costs.
Depreciation and Amortization
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$48.4
|
|
15.6
|
|
$86.0
|
|
13.9 |
|
In the second quarter 2008, depreciation and amortization was $358.7 million compared to $310.3
million for the same period in 2007.
For year-to-date 2008, depreciation and amortization was $702.6 million compared to $616.6 million
for the same period in 2007.
The increases in depreciation and amortization in the second quarter and year-to-date 2008 when
compared to the same periods in 2007 resulted primarily from an increase in plant in service
related to environmental, transmission, and distribution projects mainly at Alabama Power and
Georgia Power. An increase in depreciation rates at Georgia Power and Southern Power also
contributed to the second quarter and year-to-date 2008 increases, as well as the completion of
Southern Powers Plant Oleander Unit 5 in December 2007 and Plant Franklin Unit 3 in June 2008.
Taxes Other Than Income Taxes
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$13.5
|
|
7.3
|
|
$19.7
|
|
5.4 |
|
In the second quarter 2008, taxes other than income taxes were $198.0 million compared to $184.5
million for the same period in 2007.
For year-to-date 2008, taxes other than income taxes were $387.3 million compared to $367.6 million
for the same period in 2007.
The increases in taxes other than income taxes in the second quarter and year-to-date 2008 when
compared to the same periods in 2007 resulted primarily from increases in franchise fees and
municipal gross receipt taxes associated with increases in revenues from energy sales.
18
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Allowance for Equity Funds Used During Construction
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$11.9
|
|
50.4
|
|
$32.3
|
|
73.8 |
|
In the second quarter 2008, allowance for equity funds used during construction was $35.5 million
compared to $23.6 million for the same period in 2007.
For year-to-date 2008, allowance for equity funds used during construction was $76.1 million
compared to $43.8 million for the same period in 2007.
The increases in allowance for equity funds used during construction in the second quarter and
year-to-date 2008 when compared to the same periods in 2007 were primarily the result of additional
investments in environmental projects mainly at Georgia Power and Gulf Power, transmission projects
at Georgia Power, as well as generation facilities at Georgia Power. Additional investments in
environmental projects at Alabama Power also contributed to the year-to-date 2008 increase.
Interest Income
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(8.5)
|
|
(87.7)
|
|
$(9.2)
|
|
(45.6) |
|
In the second quarter 2008, interest income was $1.2 million compared to $9.7 million for the same
period in 2007.
For year-to-date 2008, interest income was $11.0 million compared to $20.2 million for the same
period in 2007.
The decreases in interest income in the second quarter and year-to-date 2008 when compared to the
same periods in 2007 were primarily the result of the reversal of accrued interest income on IRS
deposits related to sale-in-lease-out (SILO) transactions.
Equity in Income (Losses) of Unconsolidated Subsidiaries
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$14.7
|
|
108.1
|
|
$21.7
|
|
107.0 |
|
In the second quarter 2008, equity in income (losses) of unconsolidated subsidiaries was $1.1
million compared to $(13.6) million for the same period in 2007.
For year-to-date 2008, equity in income (losses) of unconsolidated subsidiaries was $1.4 million
compared to $(20.3) million for the same period in 2007.
The increases in equity in income (losses) of unconsolidated subsidiaries in the second quarter and
year-to-date 2008 when compared with the same periods in 2007 were primarily the result of Southern
Company ending its investment in synthetic fuel production facilities in December 2007.
19
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Leveraged Lease Income (Losses)
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(80.6)
|
|
(830.2)
|
|
$(79.6)
|
|
(406.4) |
|
In the second quarter 2008, leveraged lease income (losses) were $(70.9) million compared to $9.7
million for the same period in 2007.
For year-to-date 2008, leveraged lease income (losses) were $(60.0) million compared to $19.6
million for the same period in 2007.
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 decreases in leveraged lease income in the second quarter and
year-to-date 2008, when compared to the same periods in 2007, were primarily the result of a $51.2
million after tax adjustment in the second quarter 2008 relating to the application of FASB Staff
Position No. 13-2, Accounting for a Change in the Timing of Cash Flows Relating to Income Taxes
Generated by a Leveraged Lease Transaction (FSP 13-2). 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.
Preferred and Preference Dividends of Subsidiaries
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$6.1
|
|
59.9
|
|
$12.1
|
|
59.9 |
|
In the second quarter 2008, preferred and preference dividends of subsidiaries were $16.2 million
compared to $10.1 million for the same period in 2007.
For year-to-date 2008, preferred and preference dividends of subsidiaries were $32.4 million
compared to $20.3 million for the same period in 2007.
The increases in preferred and preference dividends of subsidiaries in the second quarter and
year-to-date 2008 when compared to the same periods in 2007 resulted primarily from the issuance of
$470 million of preference stock in September and October 2007, partially offset by the redemption
of $125 million of preferred stock in January 2008. 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 further information.
Income Taxes
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$19.4
|
|
9.4
|
|
$41.9
|
|
11.6 |
|
In the second quarter 2008, income taxes were $225.0 million compared to $205.6 million for the
same period in 2007.
For year-to-date 2008, income taxes were $403.1 million compared to $361.2 million for the same
period in 2007.
20
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The increases in income taxes in the second quarter and year-to-date 2008 when compared to the same
periods in 2007 resulted primarily from higher pre-tax earnings and a decrease in net synthetic
fuel tax credits, partially offset by lower leveraged lease income, the tax benefit associated with
an increase in allowance for equity funds used during construction, and an increase in the IRC
Section 199 production activities deduction. See Note (H) to the Condensed Financial Statements
under Effective Tax Rate herein for further information.
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. Other major factors include profitability of the
competitive wholesale supply business and federal regulatory policy (including the FERCs
market-based rate proceeding), 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. In addition, the level of future earnings for the wholesale supply
business also depends on numerous factors including creditworthiness of customers, total generating
capacity available in the Southeast, and the successful remarketing of capacity as current
contracts expire. 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 statutes and regulations
could affect earnings if such costs cannot continue to 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 Actions
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. On July 24, 2008, the U.S. District Court for the
Northern District of Alabama granted partial summary judgment in favor of Alabama Power regarding
the proper legal test for determining whether projects are routine maintenance, repair, and
replacement and therefore are excluded from NSR permitting. The decision does not resolve the
case, the ultimate outcome of which cannot be determined at this time.
21
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Clean Air Interstate Rule
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 background regarding the Clean Air Interstate Rule (CAIR). On July 11, 2008, in response
to petitions brought by certain states and regulated industries challenging particular aspects of
CAIR, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating
CAIR in its entirety and remanding it to the EPA for further action consistent with its opinion.
Southern Companys overall environmental compliance strategy has been developed in response to
numerous federal and state regulatory requirements, many of which remain unaffected by the courts
ruling; however, the courts decision has the potential to impact future decision making regarding
capital expenditures, the installation and operation of pollution control equipment, and the
purchase, use, and associated carrying values of emissions allowances. The ultimate impact of the
courts decision cannot be determined at this time and may depend on subsequent legal action,
including issuance of the courts mandate, and future rulemaking and regulatory treatment.
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.
In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its
stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and
new nonattainment areas within Southern Companys service territory are expected. The ultimate
outcome of this matter cannot be determined at this time and will depend on subsequent legal action
and/or future nonattainment designations and regulatory plans.
Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the
U.S. District Court for the Northern District of California against several electric utilities
(including Southern Company), several oil companies, and a coal company. The plaintiffs are the
governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being
destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions
of greenhouse gases by the defendants. The plaintiffs assert claims for public and private
nuisance and contend that the defendants have acted in concert and are therefore jointly and
severally liable for the plaintiffs damages. The suit seeks damages for lost property values and
for the cost of relocating the village, which cost is alleged to be $95 million to $400 million.
On June 30, 2008, all defendants filed motions to dismiss this case. Southern Company believes
that these claims are without merit and notes that the complaint cites no statutory or regulatory
basis for the claims. The ultimate outcome of this matter cannot be determined at this time.
Global Climate Issues
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 executive orders issued by the Governor of the State of Florida addressing reduction of
greenhouse gas emissions within the state. On June 25, 2008, Floridas Governor signed
comprehensive energy-related legislation that includes authorization for the Florida Department of
Environmental Protection to adopt rules for a cap-and-trade regulatory program to address
greenhouse gas emissions from electric utilities, conditioned upon their ratification by the
legislature no sooner than the 2010 legislative session. This legislation also authorizes the
Florida PSC to adopt a renewable portfolio standard for
22
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
public utilities, subject to legislative ratification. The impact of this legislation on Southern
Company will depend on the development, adoption, legislative ratification, implementation, and
potential legal challenges in connection with rules governing greenhouse gas emissions and mandates
regarding the use of renewable energy, and the ultimate outcome cannot be determined at this time.
FERC and State PSC Matters
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
continued to experience 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 $1.0 billion at June 30, 2008 as compared to $1.1 billion at December 31, 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 continuously 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.
On February 29, 2008, Georgia Power filed a request with the Georgia PSC to change the fuel cost
recovery rate effective June 1, 2008. The request was approved on May 20, 2008. Total annual fuel
recovery billings increased by approximately $222 million. Georgia Power is required to file its
next fuel cost recovery case by March 1, 2009.
Gulf Power filed a petition on June 20, 2008 with the Florida PSC requesting an adjustment to the
fuel cost recovery factor due to a projected increase in the expected
under recovery balance at year end 2008. On July 29, 2008, the Florida PSC approved Gulf Powers request for an
increase of approximately 28.3% in the fuel factor for retail customers. This change represents an
increase of 11.3% for a residential customer billing of 1,000 KWH per month. The increase will result in the recovery of $38.2 million of the projected under recovered balance during
the period September through December 2008. The remaining portion of the projected under recovered
balance is expected to be recovered in 2009. The fuel cost recovery factor will be reviewed again
by the Florida PSC in November 2008 as a normal part of its ongoing oversight over fuel cost
recovery matters with the resulting adjustment to rates to take effect in January 2009.
Mississippi Base Load Construction Legislation
In the 2008 regular session of the Mississippi legislature, a bill was passed and signed by the
Governor on May 9, 2008 to enhance the Mississippi PSCs authority to facilitate development and
construction of base load generation in the State of Mississippi. The bill authorizes, but does
not require, the Mississippi PSC to include in retail base rates, prior to and during
construction, all or a portion of the prudently incurred pre-construction and construction costs
incurred by a utility in constructing a base load electric generating plant. The bill also
provides for periodic prudence reviews by the Mississippi PSC and prohibits the cancellation of
any such generating plant without the approval of the Mississippi PSC. In the event of
cancellation of the construction of the plant without approval of the Mississippi PSC, the bill
authorizes the Mississippi PSC to make a public interest determination as to whether and to what
extent the utility will be afforded rate recovery for costs incurred in connection with such
cancelled generating plant. The effect of this legislation on Mississippi Power cannot now be
determined.
23
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 of the Form 10-K for information
regarding pending litigation and proposed legislation related to the SILO transactions. Also see
Note 1 to the financial statements of Southern Company under Income and Other Taxes, Note 3 to
the financial statements of Southern Company under Income Tax Matters, and Note 5 to the
financial statements of Southern Company under Unrecognized Tax Benefits in Item 8 of the Form
10-K and Note (H) to the Condensed Financial Statements under Unrecognized Tax Benefits herein
for information regarding Southern Companys unrecognized tax benefit related to the SILO
transactions.
During the second quarter 2008, decisions in favor of the IRS were reached in several court cases
involving other tax payers with similar leveraged lease investments. Pursuant to the application
of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) and FSP 13-2,
management is required to assess, on a periodic basis, the likely outcome of the uncertain tax
positions related to the SILO transactions. Based on these accounting standards and managements
review of the recent court decisions, Southern Company recorded an after tax charge of
approximately $67 million in the second quarter 2008. Of the total, approximately $16 million is
associated with the application of FIN 48 and represents additional interest expense related to tax
returns for years 2000 through 2007 and approximately $51 million represents non-cash charges
related to the application of FSP 13-2. The charges related to FSP 13-2 reflect the reallocation
of lease income and will be recognized as income over the remaining term of the affected leases.
The tax benefit associated with the lease transactions represents timing differences that do not
impact total net income over the life of the transactions. The ultimate impact on Southern
Companys net income and cash flow will be dependent on the outcome of its pending litigation,
other court decisions, and proposed legislation, and cannot be determined at this time.
Bonus Depreciation
On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into
law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property
acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. The States of
Alabama, Florida, Georgia, and Mississippi do not allow the bonus depreciation deduction allowed by
the Stimulus Act for state income tax purposes. Southern Company is currently assessing the
financial implications of the Stimulus Act and estimates the cash flow reduction to tax payments
for 2008 to be between $120 million and $215 million.
Construction Projects
Integrated Coal Gasification Combined Cycle
As part of the evaluation and screening of alternatives to meet its future generation needs,
Mississippi Power is considering the construction of an advanced coal gasification facility to be
located in Kemper County, Mississippi, that would use locally mined lignite coal. The plant would
use an air-blown IGCC technology that generates power from low-rank coals and coals with high
moisture or high ash content. These coals, which include lignite, make up approximately half the
proven United States and worldwide coal reserves. The feasibility assessment of the project is
currently underway. Mississippi Power filed an application in June 2006 with the DOE for certain
tax credits available to projects using clean coal technologies under the Energy Policy Act of
2005. The DOE subsequently certified the project and in November 2006, the IRS allocated IRC
Section 48A tax credits of $133 million to Mississippi Power. The utilization of these credits is
dependent
24
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
upon meeting the certification requirements for the project, including an in-service date no later
than November 2013. On February 14, 2008, Mississippi Power also requested that the DOE transfer
the remaining funds previously granted to another Southern Company project that would have been
located in Orlando, Florida. The Orlando project was cancelled in 2007.
In December 2006, the Mississippi PSC approved Mississippi Powers request for accounting treatment
of the costs associated with Mississippi Powers generation resource planning, evaluation, and
screening activities. The Mississippi PSC gave Mississippi Power the authority to defer such costs
as a regulatory asset. In December 2007, Mississippi Power reported to the Mississippi PSC an
updated estimate and received an order directing Mississippi Power to continue charging all costs
associated with the generation capacity assessment to the regulatory asset. At June 30, 2008,
Mississippi Power had spent $31.1 million, of which $2.7 million related to land purchases
capitalized. Of the remaining $28.4 million, the retail portion of $20 million was deferred in
other regulatory assets and the wholesale portion of $8.4 million was expensed. Of this $8.4
million, $4.3 million and $4.1 million are related to expenses through June 30, 2008 and 2007,
respectively. The retail portion of these costs will be charged to and remain as a regulatory
asset until the Mississippi PSC determines the prudence and ultimate recovery of such costs, which
decision is expected by January 2009. The balance of such regulatory asset is included in
Mississippi Powers rate base for retail ratemaking purposes. Approval by various regulatory
agencies, including the Mississippi PSC, will also be required if the project proceeds. The
Mississippi PSC, in its discretion, may exercise its additional rate authority granted to the
Mississippi PSC in the Mississippi base load construction legislation if the project proceeds. See
FERC and State PSC Matters Mississippi Base Load Construction Legislation herein for
additional information.
The final 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 the potential
expansion of Plant Vogtle.
In August 2006, Southern Nuclear, on behalf of Georgia Power, OPC, MEAG Power, and Dalton Utilities
(collectively, Owners), filed an application with the NRC for an early site permit approving two
additional nuclear units on the site of Plant Vogtle. On March 31, 2008, Southern Nuclear filed an
application with the NRC for a combined construction and operating license (COL) for the new units.
On April 8, 2008, Georgia Power, acting for itself and as agent for the Owners, and a consortium
consisting of Westinghouse and Stone & Webster (collectively, Consortium) entered into an
engineering, procurement, and
construction agreement to design, engineer, procure, construct, and test two AP1000 nuclear units
with electric generating capacity of approximately 1,100 MWs each and related facilities,
structures, and improvements at Plant Vogtle (Vogtle 3 and 4 Agreement).
The Vogtle 3 and 4 Agreement is an arrangement whereby the Consortium supplies and constructs the
entire facility with the exception of certain items provided by the Owners. Under the terms of the
Vogtle 3 and 4 Agreement, the Owners will pay a purchase price that will be subject to certain
price escalation and adjustments, adjustments for change orders, and performance bonuses. Each
Owner is severally (and not jointly) liable for its proportionate share, based on its ownership
interest, of all amounts owed to the Consortium under the Vogtle 3 and 4 Agreement. Georgia
Powers proportionate share, based on its current ownership interest, is 45.7%. Under the terms of
a separate joint development agreement, the Owners finalized their ownership percentages on July 2,
2008, except for allowed changes, under certain limited circumstances, during the Georgia PSC
certification process.
25
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Georgia Power submitted its self-build nuclear proposal to the Georgia PSC on May 1, 2008 in
connection with its 2016-2017 base load capacity request for proposals (RFP). No other responses
to the RFP were received. On August 1, 2008, Georgia Power submitted an application for the Georgia
PSC to certify the project. A final certification decision is expected in March 2009.
If certified by the Georgia PSC and licensed by the NRC, Vogtle Units 3 and 4 are scheduled to be
placed in service in 2016 and 2017, respectively. The total plant value to be placed in service
will also include financing costs for each of the Owners, the impacts of inflation on costs, and
transmission and other costs that are the responsibility of the Owners. Georgia Powers
proportionate share of the estimated in-service costs, based on its current ownership interest, is
approximately $6.4 billion, subject to adjustments and performance bonuses under the Vogtle 3 and 4
Agreement.
The Owners and the Consortium have agreed to certain liquidated damages upon the Consortiums
failure to comply with the schedule and performance guarantees. The Owners and the Consortium also
have agreed to certain bonuses payable to the Consortium for early completion and unit performance.
The Consortiums liability to the Owners for schedule and performance liquidated damages and
warranty claims is subject to a cap.
The obligations of Westinghouse and Stone & Webster under the Vogtle 3 and 4 Agreement are
guaranteed by Toshiba Corporation and The Shaw Group, Inc., respectively. In the event of certain
credit rating downgrades of any Owner, such Owner will be required to provide a letter of credit or
other credit enhancement.
The Vogtle 3 and 4 Agreement is subject to certification by the Georgia PSC. In addition, the
Owners may terminate the Vogtle 3 and 4 Agreement at any time for their convenience, provided that
the Owners will be required to pay certain termination costs and, at certain stages of the work,
cancellation fees to the Consortium. The Consortium may terminate the Vogtle 3 and 4 Agreement
under certain circumstances, including delays in receipt of the COL or delivery of full notice to
proceed, certain Owner suspension or delays of work, action by a governmental authority to
permanently stop work, certain breaches of the Vogtle 3 and 4 Agreement by the Owners, Owner
insolvency, and certain other events.
Other Matters
Southern Company is involved in various other matters being litigated, regulatory matters, and
certain tax-related issues that could affect future earnings. In addition, Southern Company is
subject to certain claims and legal actions arising in the ordinary course of business. 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 and water 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.
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.
26
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, Unbilled Revenues, and
Leveraged Leases.
New Accounting Standards
Business Combinations
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), Business Combinations
(SFAS No. 141R). SFAS No. 141R, when adopted, will significantly change the accounting for business
combinations, specifically the accounting for contingent consideration, contingencies, acquisition
costs, and restructuring costs. Southern Company plans to adopt SFAS No. 141R on January 1, 2009.
It is likely that the adoption of SFAS No. 141R will have a significant impact on the accounting
for any business combinations completed by Southern Company after January 1, 2009.
In December 2007, the FASB issued FASB Statement No. 160, Non-controlling Interests in
Consolidated Financial Statements (SFAS No. 160). SFAS No. 160 amends Accounting Research
Bulletin No. 51, Consolidated Financial Statements to establish accounting and reporting
standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation
of a subsidiary. It clarifies that a non-controlling interest in a subsidiary should be reported as
equity in the consolidated financial statements and establishes a single method of accounting for
changes in a parents ownership interest in a subsidiary that do not result in
deconsolidation. Southern Company plans to adopt SFAS No. 160 on January 1, 2009. Southern Company
is currently assessing its impact, if any.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Southern Companys financial condition remained stable at June 30, 2008. Net cash provided from
operating activities totaled $1.38 billion for the first six months of 2008 compared to $974
million for the first six months of 2007. The $404 million increase in net cash provided from
operating activities in 2008 is primarily due to increased revenues as a result of retail rate
increases at Alabama Power and Georgia Power, a reduction in the outflow of cash for accounts
payable of $193 million, a positive change in cash flow of $125 million in accrued taxes primarily
due to a difference between the periods in payments for federal taxes and property taxes, and a
decrease in cash used for compensation earned of $66 million.
Net cash used for investing activities totaled $2.02 billion for the first six months 2008,
compared to $1.68 billion in the same period of the prior year, an increase of $342 million,
primarily due to property additions to utility plant. Net cash provided from financing activities
totaled $640 million for the first six months of 2008 compared to $710 million for the
corresponding period in 2007, a decrease of $70 million, primarily due to reduced issuances of new
long-term debt and the redemption of preferred stock.
27
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant balance sheet changes for the first six months of 2008 include an increase in total
property, plant, and equipment of $1.24 billion and an increase in long-term debt, excluding
amounts due within one year, of $1.44 billion used primarily for the repayment of short-term debt,
construction expenditures, and general corporate purposes.
The market price of Southern Companys common stock at June 30, 2008 was $34.92 per share (based on
the closing price as reported on the New York Stock Exchange) and the book value was $16.58 per
share, representing a market-to-book ratio of 211%, compared to $38.75, $16.23, and 239%,
respectively, at the end of 2007. The dividend for the second quarter 2008 was $0.42 per share
compared to $0.4025 per share in the second quarter 2007.
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, other
purchase commitments, unrecognized tax benefits and interest, and derivative obligations. Revised
funding requirements associated with unrecognized tax benefits and interest for 2008 are $327
million and $139 million for years after 2008. Approximately $948 million will be required through
June 30, 2009 for maturities of long-term debt. In addition, in connection with Georgia Powers
entering into the Vogtle 3 and 4 Agreement, as described under FUTURE EARNINGS POTENTIAL
Construction Projects herein, the revised estimated total construction program for Southern
Company is $4.4 billion in 2008, $5.2 billion in 2009, and $4.8 billion in 2010. Actual
construction costs may vary from these estimates because of changes in such factors as: business
conditions; environmental statutes and regulations; nuclear plant regulation; FERC rules and
regulations; load projections; the cost and efficiency of construction labor, equipment, and
materials; and the cost of capital. In addition, there can be no assurance that costs related to
capital expenditures will be fully recovered.
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
in 2008, as well as in subsequent years, will be contingent on Southern Companys investment
opportunities. 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 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.
28
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southern Companys current liabilities frequently exceed current assets because of the continued
use of short-term debt as a funding source to meet cash needs as well as scheduled maturities of
long-term debt. 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, to meet liquidity needs. At June 30, 2008, Southern Company and its subsidiaries had
approximately $194 million of cash and cash equivalents and approximately $4.3 billion of unused
credit arrangements with banks, of which $653 million expire in 2008, $438 million expire in 2009,
and $3.2 billion expire in 2012. Approximately $79 million of the credit facilities expiring in
2008 and 2009 allow for the execution of term loans for an additional two-year period, and $594
million contain provisions allowing one-year term loans. Approximately $1.4 billion of the credit
facilities are dedicated to providing liquidity support to the traditional operating companies
variable rate pollution control bonds. 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 June 30, 2008, the
Southern Company system had outstanding commercial paper of $921 million and short-term bank notes
of $195 million. 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- and/or Baa3 or below. These contracts are primarily for
physical electricity purchases and sales and for construction of new generation. At June 30, 2008,
the maximum potential collateral requirements at a BBB and Baa2 rating were approximately $9
million and at a BBB- or Baa3 rating were approximately $363 million. At June 30, 2008, the
maximum potential collateral requirements at a rating below BBB- and/or Baa3 were approximately
$1.5 billion. 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 June 30, 2008, Southern Companys total exposure to
these types of agreements was approximately $68 million.
Market Price Risk
Southern Companys market risk exposures relative to interest rate changes have not changed
materially compared with the December 31, 2007 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
29
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
contracts shift substantially all fuel cost responsibility
to the purchaser. To mitigate residual risks relative to movements in electricity prices, the
traditional operating companies 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 changes in fair value of energy-related derivative contracts and valuations at June 30, 2008
were as follows:
|
|
|
|
|
|
|
|
|
|
Second Quarter |
Year-to-Date |
|
2008 |
2008 |
|
Changes |
Changes |
|
Fair Value |
|
|
(in millions) |
Contracts outstanding at the beginning of the period, assets
(liabilities), net |
|
$ |
162.1 |
|
|
$ |
4.4 |
|
Contracts realized or settled |
|
|
(57.0 |
) |
|
|
(47.6 |
) |
Current period changes(a) |
|
|
208.1 |
|
|
|
356.4 |
|
|
Contracts outstanding at the end of the period, assets (liabilities), net |
|
$ |
313.2 |
|
|
$ |
313.2 |
|
|
(a) Current period changes also include the changes in fair value of new contracts entered into during the period, if any.
Gains and losses on energy-related derivative contracts related to the traditional operating
companies fuel hedging programs are initially recorded as regulatory liabilities and assets,
respectively, and then are included in fuel expense as they are recovered through the fuel cost
recovery clauses. In addition, gains and losses on energy-related derivatives used by Southern
Power to hedge anticipated purchases and sales are initially deferred in other comprehensive income
before being recognized in income in the same period as the hedged transaction. Gains and losses on
energy-related derivative contracts that are not designated or fail to qualify as hedges are
recognized in the statements of income as incurred.
The fair value gain/(loss) of energy-related derivative contracts outstanding at June 30, 2008 was
reflected in the financial statements as follows:
|
|
|
|
|
|
Amounts |
|
|
(in millions) |
Regulatory liabilities, net |
|
$ |
343.6 |
|
Accumulated other comprehensive income |
|
|
(23.9 |
) |
Net income |
|
|
(6.5 |
) |
|
Total fair value gain/(loss) |
|
$ |
313.2 |
|
|
Unrealized pre-tax gains/(losses) recognized in income for the three months and six months ended
June 30, 2008 for energy-related derivative contracts that are not hedges were $7.6 million and
$(6.6) million, respectively. For the three months and six months ended June 30, 2007, the
unrealized gains recognized in income were $1.7 million and $1.5 million, respectively.
30
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy
in which they fall at June 30, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 Fair Value Measurements |
|
|
Total |
|
Maturity |
|
Fair Value |
|
Year 1 |
|
1-3 Years |
|
|
(in millions) |
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Level 2 |
|
|
313.2 |
|
|
|
224.5 |
|
|
|
88.7 |
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of contracts outstanding at end of period |
|
$ |
313.2 |
|
|
$ |
224.5 |
|
|
$ |
88.7 |
|
|
As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value
measurements and related disclosures, the table above now uses the three-tier fair value hierarchy,
as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously
used descriptions actively quoted, external sources, and models and other methods. The
three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the
previous descriptions focused on the source of the inputs. Because Southern Company uses
over-the-counter contracts that are not exchange traded but are fair valued using prices which are
actively quoted, the valuations of those contracts now appear in Level 2; previously they were
shown as actively quoted.
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 six months of 2008, Southern Companys subsidiaries issued $1.1 billion of senior
notes, and Southern Company issued $235 million of common stock through the Southern Investment
Plan and employee and director stock plans. In addition, Georgia Power, Gulf Power, and
Mississippi Power entered into long-term bank loans of $300 million, $110 million, and $80 million,
respectively. The proceeds were primarily used to repay short-term indebtedness 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 six months of 2008. Also
during the first six months of 2008, interest rate hedges of $405 million notional amount were
settled at a loss of $25.7 million related to the issuances. These losses were deferred in other
comprehensive income and will be amortized to income over the original term of the hedges. See
Note (F) to the Condensed Financial Statements herein for further details. Also during the first
six months of 2008, Southern Company and its subsidiaries repaid at maturity $361.3 million of
long-term debt and also redeemed $125 million of preferred stock.
Also in 2008, Southern Companys subsidiaries converted their entire $1.2 billion of obligations
related to auction rate tax-exempt securities from auction rate modes to other interest rate modes.
Initially, approximately $696 million of the auction rate tax-exempt securities were converted to
fixed interest rate modes and approximately $553 million were converted to daily floating rate
modes. In June 2008, approximately $98 million of the daily floating rate securities were
converted to fixed interest rate modes.
During the second quarter 2008, Southern Company and its subsidiaries did no additional hedging of
interest rate risk.
31
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Subsequent to June 30, 2008, Alabama Power incurred obligations related to the issuance of $120
million pollution control revenue bonds for Alabama Powers Barry Plant Project.
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.
32
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 conducted an
evaluation under the supervision and with the participation of Southern 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 this evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the disclosure controls and
procedures are effective in alerting them in a timely manner to material information relating to
Southern Company (including its consolidated subsidiaries) required to be included in periodic
filings with the SEC.
(b) Changes in internal controls.
There have been no changes in Southern Companys 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 second quarter of 2008 that have materially affected or are reasonably likely to materially
affect Southern Companys internal control over financial reporting.
Item 4T. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this quarterly report, 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 material 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 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 second quarter of
2008 that have materially affected or are reasonably likely to materially affect Alabama Powers,
Georgia Powers, Gulf Powers, Mississippi Powers, or Southern Powers internal control over
financial reporting.
33
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
1,147,786 |
|
|
$ |
1,093,970 |
|
|
$ |
2,182,040 |
|
|
$ |
2,049,743 |
|
Wholesale
revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliates |
|
|
169,971 |
|
|
|
156,061 |
|
|
|
340,011 |
|
|
|
311,183 |
|
Affiliates |
|
|
96,421 |
|
|
|
39,032 |
|
|
|
180,113 |
|
|
|
81,226 |
|
Other revenues |
|
|
55,635 |
|
|
|
47,029 |
|
|
|
104,328 |
|
|
|
91,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
1,469,813 |
|
|
|
1,336,092 |
|
|
|
2,806,492 |
|
|
|
2,533,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
523,348 |
|
|
|
460,909 |
|
|
|
976,497 |
|
|
|
846,981 |
|
Purchased
power |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliates |
|
|
38,450 |
|
|
|
18,070 |
|
|
|
49,669 |
|
|
|
22,708 |
|
Affiliates |
|
|
75,789 |
|
|
|
76,493 |
|
|
|
164,496 |
|
|
|
149,207 |
|
Other operations |
|
|
198,012 |
|
|
|
183,741 |
|
|
|
382,562 |
|
|
|
355,144 |
|
Maintenance |
|
|
108,531 |
|
|
|
97,092 |
|
|
|
233,531 |
|
|
|
215,854 |
|
Depreciation and amortization |
|
|
130,630 |
|
|
|
117,168 |
|
|
|
255,267 |
|
|
|
233,111 |
|
Taxes other than income taxes |
|
|
75,614 |
|
|
|
71,531 |
|
|
|
151,385 |
|
|
|
144,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,150,374 |
|
|
|
1,025,004 |
|
|
|
2,213,407 |
|
|
|
1,967,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
319,439 |
|
|
|
311,088 |
|
|
|
593,085 |
|
|
|
566,040 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction |
|
|
9,235 |
|
|
|
8,376 |
|
|
|
20,539 |
|
|
|
14,962 |
|
Interest income |
|
|
4,258 |
|
|
|
3,613 |
|
|
|
8,900 |
|
|
|
8,007 |
|
Interest expense, net of amounts capitalized |
|
|
(69,646 |
) |
|
|
(69,576 |
) |
|
|
(138,621 |
) |
|
|
(136,766 |
) |
Other income (expense), net |
|
|
(6,707 |
) |
|
|
(3,966 |
) |
|
|
(13,930 |
) |
|
|
(6,890 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(62,860 |
) |
|
|
(61,553 |
) |
|
|
(123,112 |
) |
|
|
(120,687 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
256,579 |
|
|
|
249,535 |
|
|
|
469,973 |
|
|
|
445,353 |
|
Income taxes |
|
|
93,798 |
|
|
|
94,182 |
|
|
|
167,226 |
|
|
|
166,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
162,781 |
|
|
|
155,353 |
|
|
|
302,747 |
|
|
|
278,469 |
|
Dividends on Preferred and Preference Stock |
|
|
9,866 |
|
|
|
8,181 |
|
|
|
19,732 |
|
|
|
16,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income After Dividends on Preferred and
Preference Stock |
|
$ |
152,915 |
|
|
$ |
147,172 |
|
|
$ |
283,015 |
|
|
$ |
262,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net Income After Dividends on Preferred and Preference Stock |
|
$ |
152,915 |
|
|
$ |
147,172 |
|
|
$ |
283,015 |
|
|
$ |
262,106 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $1,172, $1,290, $(1,039), and
$1,188, respectively |
|
|
1,927 |
|
|
|
2,121 |
|
|
|
(1,710 |
) |
|
|
1,953 |
|
Reclassification adjustment for amounts included in net income,
net of tax of $443, $73, $628, and $132, respectively |
|
|
728 |
|
|
|
122 |
|
|
|
1,033 |
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
2,655 |
|
|
|
2,243 |
|
|
|
(677 |
) |
|
|
2,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
$ |
155,570 |
|
|
$ |
149,415 |
|
|
$ |
282,338 |
|
|
$ |
264,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
35
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
302,747 |
|
|
$ |
278,469 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
297,792 |
|
|
|
271,770 |
|
Deferred income taxes and investment tax credits,
net |
|
|
20,648 |
|
|
|
30,076 |
|
Allowance for equity funds used during construction |
|
|
(20,539 |
) |
|
|
(14,962 |
) |
Pension, postretirement, and other employee benefits |
|
|
(12,958 |
) |
|
|
(6,895 |
) |
Stock option expense |
|
|
2,520 |
|
|
|
4,152 |
|
Tax benefit of stock options |
|
|
460 |
|
|
|
968 |
|
Other, net |
|
|
14,499 |
|
|
|
(3,407 |
) |
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
Receivables |
|
|
34,056 |
|
|
|
(74,311 |
) |
Fossil fuel stock |
|
|
(21,879 |
) |
|
|
(22,418 |
) |
Materials and supplies |
|
|
(6,887 |
) |
|
|
(13,846 |
) |
Other current assets |
|
|
(42,632 |
) |
|
|
(19,117 |
) |
Accounts payable |
|
|
(68,407 |
) |
|
|
(72,137 |
) |
Accrued taxes |
|
|
64,490 |
|
|
|
38,526 |
|
Accrued compensation |
|
|
(47,094 |
) |
|
|
(46,154 |
) |
Other current liabilities |
|
|
26,481 |
|
|
|
10,473 |
|
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
543,297 |
|
|
|
361,187 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(714,878 |
) |
|
|
(555,333 |
) |
Investment in restricted cash from pollution control bonds |
|
|
(161 |
) |
|
|
(96,049 |
) |
Distribution of restricted cash from pollution control bonds |
|
|
19,687 |
|
|
|
|
|
Nuclear decommissioning trust fund purchases |
|
|
(180,522 |
) |
|
|
(138,263 |
) |
Nuclear decommissioning trust fund sales |
|
|
180,522 |
|
|
|
138,263 |
|
Cost of removal, net of salvage |
|
|
(18,157 |
) |
|
|
(21,986 |
) |
Other |
|
|
(11,489 |
) |
|
|
(192 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(724,998 |
) |
|
|
(673,560 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Increase (decrease) in notes payable, net |
|
|
24,980 |
|
|
|
(92,703 |
) |
Proceeds |
|
|
|
|
|
|
|
|
Senior notes |
|
|
600,000 |
|
|
|
450,000 |
|
Common stock issued to parent |
|
|
150,000 |
|
|
|
140,000 |
|
Capital contributions |
|
|
12,178 |
|
|
|
|
|
Gross excess tax benefit of stock options |
|
|
858 |
|
|
|
2,160 |
|
Pollution control bonds |
|
|
|
|
|
|
246,500 |
|
Redemptions |
|
|
|
|
|
|
|
|
Senior notes |
|
|
(250,000 |
) |
|
|
(168,500 |
) |
Preferred stock |
|
|
(125,000 |
) |
|
|
|
|
Payment of preferred and preference stock dividends |
|
|
(21,142 |
) |
|
|
(14,698 |
) |
Payment of common stock dividends |
|
|
(245,650 |
) |
|
|
(232,500 |
) |
Other |
|
|
(5,523 |
) |
|
|
(11,843 |
) |
|
|
|
|
|
|
|
Net cash provided from financing activities |
|
|
140,701 |
|
|
|
318,416 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
(41,000 |
) |
|
|
6,043 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
73,616 |
|
|
|
15,539 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
32,616 |
|
|
$ |
21,582 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $9,322 and $7,590 capitalized for 2008
and 2007, respectively) |
|
$ |
126,502 |
|
|
$ |
115,898 |
|
Income taxes (net of refunds) |
|
$ |
124,050 |
|
|
$ |
135,066 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
36
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At June 30, |
|
|
At December 31, |
|
Assets |
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
32,616 |
|
|
$ |
73,616 |
|
Restricted cash |
|
|
206 |
|
|
|
19,732 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
391,505 |
|
|
|
357,355 |
|
Unbilled revenues |
|
|
127,604 |
|
|
|
95,278 |
|
Under recovered regulatory clause revenues |
|
|
15,210 |
|
|
|
232,226 |
|
Other accounts and notes receivable |
|
|
40,567 |
|
|
|
42,745 |
|
Affiliated companies |
|
|
58,851 |
|
|
|
61,250 |
|
Accumulated provision for uncollectible accounts |
|
|
(8,637 |
) |
|
|
(7,988 |
) |
Fossil fuel stock, at average cost |
|
|
208,003 |
|
|
|
182,963 |
|
Materials and supplies, at average cost |
|
|
294,539 |
|
|
|
287,994 |
|
Vacation pay |
|
|
50,499 |
|
|
|
50,266 |
|
Assets from risk management activities |
|
|
78,985 |
|
|
|
2,790 |
|
Prepaid expenses |
|
|
163,672 |
|
|
|
72,952 |
|
Other |
|
|
3,712 |
|
|
|
16,820 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,457,332 |
|
|
|
1,487,999 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
17,357,396 |
|
|
|
16,669,142 |
|
Less accumulated provision for depreciation |
|
|
6,113,163 |
|
|
|
5,950,373 |
|
|
|
|
|
|
|
|
|
|
|
11,244,233 |
|
|
|
10,718,769 |
|
Nuclear fuel, at amortized cost |
|
|
202,831 |
|
|
|
137,146 |
|
Construction work in progress |
|
|
734,741 |
|
|
|
928,182 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
12,181,805 |
|
|
|
11,784,097 |
|
|
|
|
|
|
|
|
Other Property and Investments: |
|
|
|
|
|
|
|
|
Equity investments in unconsolidated subsidiaries |
|
|
52,089 |
|
|
|
48,664 |
|
Nuclear decommissioning trusts, at fair value |
|
|
504,336 |
|
|
|
542,846 |
|
Other |
|
|
31,801 |
|
|
|
31,146 |
|
|
|
|
|
|
|
|
Total other property and investments |
|
|
588,226 |
|
|
|
622,656 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
355,410 |
|
|
|
347,193 |
|
Prepaid pension costs |
|
|
1,022,953 |
|
|
|
989,085 |
|
Deferred under recovered regulatory clause revenues |
|
|
205,347 |
|
|
|
81,650 |
|
Other regulatory assets |
|
|
219,079 |
|
|
|
224,792 |
|
Other |
|
|
234,105 |
|
|
|
209,153 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
2,036,894 |
|
|
|
1,851,873 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
16,264,257 |
|
|
$ |
15,746,625 |
|
|
|
|
|
|
|
|
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 June 30, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
160,156 |
|
|
$ |
535,152 |
|
Notes payable |
|
|
24,980 |
|
|
|
|
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
236,691 |
|
|
|
193,518 |
|
Other |
|
|
207,244 |
|
|
|
308,177 |
|
Customer deposits |
|
|
72,393 |
|
|
|
67,722 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Income taxes |
|
|
2,740 |
|
|
|
45,958 |
|
Other |
|
|
71,623 |
|
|
|
29,198 |
|
Accrued interest |
|
|
57,934 |
|
|
|
55,263 |
|
Accrued vacation pay |
|
|
42,138 |
|
|
|
42,138 |
|
Accrued compensation |
|
|
47,078 |
|
|
|
92,385 |
|
Other regulatory liabilities |
|
|
97,676 |
|
|
|
2,269 |
|
Other |
|
|
58,135 |
|
|
|
53,062 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,078,788 |
|
|
|
1,424,842 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
5,351,090 |
|
|
|
4,750,196 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
2,184,220 |
|
|
|
2,065,264 |
|
Deferred credits related to income taxes |
|
|
91,869 |
|
|
|
93,709 |
|
Accumulated deferred investment tax credits |
|
|
176,600 |
|
|
|
180,578 |
|
Employee benefit obligations |
|
|
357,051 |
|
|
|
349,974 |
|
Asset retirement obligations |
|
|
447,280 |
|
|
|
505,794 |
|
Other cost of removal obligations |
|
|
622,866 |
|
|
|
613,616 |
|
Other regulatory liabilities |
|
|
629,172 |
|
|
|
637,040 |
|
Other |
|
|
28,601 |
|
|
|
31,417 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
4,537,659 |
|
|
|
4,477,392 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
10,967,537 |
|
|
|
10,652,430 |
|
|
|
|
|
|
|
|
Preferred and Preference Stock |
|
|
685,127 |
|
|
|
683,512 |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, par value $40 per share |
|
|
|
|
|
|
|
|
Authorized
- 40,000,000 shares |
|
|
|
|
|
|
|
|
Outstanding
- June 30, 2008: 21,725,000 shares
|
|
|
869,000 |
|
|
|
719,000 |
|
- December 31, 2007: 17,975,000 shares
| |
|
|
|
|
|
|
|
Paid-in capital |
|
|
2,081,189 |
|
|
|
2,065,298 |
|
Retained earnings |
|
|
1,666,528 |
|
|
|
1,630,832 |
|
Accumulated other comprehensive loss |
|
|
(5,124 |
) |
|
|
(4,447 |
) |
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
4,611,593 |
|
|
|
4,410,683 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
16,264,257 |
|
|
$ |
15,746,625 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
38
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER 2008 vs. SECOND QUARTER 2007
AND
YEAR-TO-DATE 2008 vs. YEAR-TO-DATE 2007
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 costs, capital expenditures, and restoration
following major storms. Appropriately balancing the need to recover these increasing costs with
customer prices will continue to challenge Alabama Power for the foreseeable future.
Alabama Power continues to focus on several key performance indicators. These indicators include
customer satisfaction, plant availability, system reliability, and net income after dividends on
preferred and preference stock. 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
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$5.7
|
|
3.9
|
|
$20.9
|
|
8.0 |
|
Alabama Powers net income after dividends on preferred and preference stock for the second quarter
2008 was $152.9 million compared to $147.2 million for the corresponding period in 2007. Alabama
Powers net income after dividends on preferred and preference stock for year-to-date 2008 was
$283.0 million compared to $262.1 million for the corresponding period in 2007. These increases in
earnings for the second quarter and year-to-date 2008 were primarily due to retail base rate
increases resulting from an increase in rates under Rate RSE and Rate CNP for environmental costs
(Rate CNP Environmental) in January 2008, as well as customer and demand growth. 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.
These increases in revenues were partially offset by increases in operations and maintenance
expenses related to steam power associated with environmental mandates and scheduled outages,
routine nuclear operation expenses, and depreciation and amortization expense resulting from
additional plant in service.
39
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$53.8
|
|
4.9
|
|
$132.3
|
|
6.5 |
|
In the second quarter 2008, retail revenues were $1.15 billion compared to $1.09 billion for the
same period in 2007. For year-to-date 2008, retail revenues were $2.18 billion compared to $2.05
billion for the same period in 2007.
Details of the change to retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Year-to-Date |
|
|
2008 |
|
2008 |
|
|
|
(in millions)
|
|
(% change)
|
|
(in millions)
|
|
(% change)
|
Retail prior year
|
|
$ |
1,094.0 |
|
|
|
|
|
|
$ |
2,049.7 |
|
|
|
|
|
Estimated change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rates and pricing
|
|
|
62.9 |
|
|
|
5.7 |
|
|
|
111.4 |
|
|
|
5.5 |
|
Sales growth
|
|
|
9.8 |
|
|
|
0.9 |
|
|
|
29.3 |
|
|
|
1.4 |
|
Weather
|
|
|
(14.0 |
) |
|
|
(1.3 |
) |
|
|
(21.5 |
) |
|
|
(1.0 |
) |
Fuel and other cost recovery
|
|
|
(4.9 |
) |
|
|
(0.4 |
) |
|
|
13.1 |
|
|
|
0.6 |
|
|
Retail current year
|
|
$ |
1,147.8 |
|
|
|
4.9 |
% |
|
$ |
2,182.0 |
|
|
|
6.5 |
% |
|
Revenues associated with changes in rates and pricing increased in the second quarter and
year-to-date 2008 when compared to the same periods in 2007 primarily due to the Rate RSE and Rate
CNP Environmental increases effective in January 2008. 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.
Revenues attributable to sales growth increased in the second quarter 2008 when compared to the
same period in 2007. Weather-adjusted commercial KWH energy sales increased 2.1% due to continued
customer and demand growth. Weather-adjusted residential KWH energy sales increased 0.8% due to
continued customer growth. Industrial KWH energy sales decreased 0.6% due to a decline in sales
demand in the chemical and textile sectors, partially offset by an increase in the primary metals
sector. For year-to-date 2008, revenues attributable to sales growth increased when compared to
the same period in 2007, primarily due to increases in weather-adjusted residential and commercial
KWH energy sales of 3.1% and 1.9%, respectively, related to customer and demand growth. In
addition, industrial KWH energy sales increased by 1.2%, primarily as a result of increased sales
demand in the primary metals sector, partially offset by a decrease in the chemical and textile
sectors.
Revenues resulting from changes in weather decreased due to less favorable weather conditions in
the second quarter 2008 compared to the second quarter 2007, which resulted in decreased KWH energy
sales to residential and commercial customers of 4.9% and 1.4%, respectively. For year-to-date
2008, revenues resulting from changes in weather decreased due to less favorable weather conditions
compared to the same period in 2007, which resulted in decreased KWH energy sales to residential
and commercial customers of 3.6% and 1.2%, respectively.
40
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and other cost recovery revenues decreased in the second quarter 2008 when compared to the
same period in 2007 due to the reduction in the Rate NDR customer billing rate, as a result of the
full recovery of the 2005 storm costs related to Hurricanes Dennis and Katrina, and costs
associated with PPAs certificated by the Alabama PSC, partially offset by increases in fuel costs
and purchased power costs. For year-to-date 2008, fuel and other cost recovery revenues increased
when compared to the same period in 2007 due to increases in fuel costs and purchased power costs.
These costs were offset by a reduction in the Rate NDR customer billing rate due to the full
recovery of the 2005 storm costs related to Hurricanes Dennis and Katrina. Electric rates include
provisions to recognize the full recovery of fuel costs, purchased power costs, PPAs certificated
by the Alabama PSC, and costs associated with the natural disaster reserve. Under these
provisions, fuel and other cost recovery revenues generally equal fuel and other cost recovery
expenses and do not impact net income.
Wholesale Revenues Non-Affiliates
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$13.9
|
|
8.9
|
|
$28.8
|
|
9.3 |
|
Wholesale revenues from non-affiliates will vary depending on the market cost of available energy
compared to the cost of Alabama Power and Southern Company system-owned generation, demand for
energy within the Southern Company service territory, and availability of Southern Company system
generation.
In the second quarter 2008, wholesale revenues from non-affiliates were $170.0 million compared to
$156.1 million for the same period in 2007. This increase was primarily due to a 13.4% increase in
price related to fuel, partially offset by a 3.9% decrease in KWH sales.
For year-to-date 2008, wholesale revenues from non-affiliates were $340.0 million compared to
$311.2 million for the same period in 2007. This increase was primarily due to a 15.7% increase in
price related to fuel, partially offset by a 5.5% decrease in KWH sales.
Wholesale Revenues Affiliates
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$57.4
|
|
147.0
|
|
$98.9
|
|
121.7 |
|
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 the energy is generally sold at marginal cost.
In the second quarter 2008, wholesale revenues from affiliates were $96.4 million compared to $39.0
million for the same period in 2007. This increase was primarily due to a 59.2% increase in KWH
sales and a 55.2% increase in price related to fuel.
For year-to-date 2008, wholesale revenues from affiliates were $180.1 million compared to $81.2
million for the same period in 2007. This increase was primarily due to a 54.9% increase in price
related to fuel and a 43.1% increase in KWH sales.
41
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Revenues
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$8.6
|
|
18.3
|
|
$13.2
|
|
14.5 |
|
In the second quarter 2008, other revenues were $55.6 million compared to $47.0 million in the same
period in 2007. This increase was primarily due to an increase of $6.1 million in revenues from
gas-fueled co-generation steam facilities resulting from higher gas prices and a $2.5 million
increase in revenues from the settlement of transmission service agreements with Calpine
Corporation.
For year-to-date 2008, other revenues were $104.3 million compared to $91.1 million for the same
period in 2007. This increase was primarily due to an increase of $9.2 million in revenues from
gas-fueled co-generation steam facilities resulting from higher gas prices and a $2.5 million
increase in revenues from the settlement of transmission service agreements with Calpine
Corporation.
Co-generation steam fuel revenues do not have a significant impact on earnings since they are
generally offset by fuel expense.
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2008 |
|
|
Year-to-Date 2008 |
|
|
|
vs. |
|
|
vs. |
|
|
|
Second Quarter 2007 |
|
|
Year-to-Date 2007 |
|
|
|
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
Fuel |
|
$ |
62.4 |
|
|
|
13.5 |
|
|
$ |
129.5 |
|
|
|
15.3 |
|
Purchase
power non-affiliates |
|
|
20.4 |
|
|
|
112.8 |
|
|
|
27.0 |
|
|
|
118.7 |
|
Purchased
power affiliates |
|
|
(0.7 |
) |
|
|
(0.9 |
) |
|
|
15.3 |
|
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fuel and purchased power expenses |
|
$ |
82.1 |
|
|
|
|
|
|
$ |
171.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter 2008, total fuel and purchased power expenses were $637.6 million compared to
$555.5 million in the same period in 2007. This increase was primarily due to a $99.1 million
increase in the cost of energy resulting from an increase in the average cost of fuel, partially
offset by a $17.0 million decrease related to fewer KWHs purchased.
For year-to-date 2008, total fuel and purchased power expenses were $1.19 billion compared to $1.02
billion in the same period in 2007. This increase was primarily due to a $170.5 million increase
in the cost of energy resulting from an increase in the average cost of fuel, while the KWHs
purchased remained relatively flat.
Fuel and purchased power transactions do not have a significant impact on earnings since energy
expenses are generally offset by energy revenues through Rate ECR.
42
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of Alabama Powers cost of generation and purchased power are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Second Quarter |
|
Percent |
|
Year-to-Date |
|
Year-to-Date |
|
Percent |
Average Cost |
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
|
(cents per net KWH) |
|
|
|
|
|
(cents per net KWH) |
|
|
|
|
Fuel
|
|
|
2.72 |
|
|
|
2.41 |
|
|
|
12.9 |
|
|
|
2.66 |
|
|
|
2.36 |
|
|
|
12.7 |
|
Purchased power
|
|
|
8.61 |
|
|
|
6.14 |
|
|
|
40.2 |
|
|
|
6.97 |
|
|
|
5.36 |
|
|
|
30.0 |
|
|
In the second quarter 2008, fuel expense was $523.3 million compared to $460.9 million for the same
period in 2007. The increase was due to a 12.9% increase in the average cost of fuel per KWH
generated, primarily due to an increase in fuel commodity prices resulting from demand and
increased transportation costs. The average cost of coal per KWH generated increased 20.9%
primarily as a result of increases in commodity and transportation costs. The average cost of oil
and natural gas per KWH generated increased 29.6% primarily as a result of increases in commodity
prices.
For year-to-date 2008, fuel expense was $976.4 million compared to $846.9 million for the same
period in 2007. The increase was due to a 12.7% increase in the average cost of fuel per KWH
generated. The average cost of coal per KWH generated increased 18.0% primarily as a result of
increases in commodity and transportation costs. The average cost of oil and natural gas per KWH
generated increased 14.0% primarily as a result of increases in commodity prices.
See FUTURE EARNINGS POTENTIAL FERC and Alabama PSC Matters Retail Fuel Cost Recovery herein
for additional information.
Non-Affiliates
In the second quarter 2008, purchased power from non-affiliates was $38.5 million compared to $18.1
million for the same period in 2007. This increase was primarily related to a 68.4% volume
increase in the KWHs purchased from available lower priced market energy alternatives and a 17.6%
increase in price.
For year-to-date 2008, purchased power from non-affiliates was $49.7 million compared to $22.7
million for the same period in 2007. This increase was primarily related to a 50.7% volume
increase in the KWHs purchased from available lower priced market energy alternatives and a 39.5%
increase in price.
Energy purchases from non-affiliates will vary depending on the market cost of available energy
compared to the cost of Southern Company system-generated energy, demand for energy within the
Southern Company system service territory, and availability of Southern Company system generation.
Affiliates
The second quarter 2008 variance in purchased power from affiliates when compared to the same
period in 2007 was not material.
For year-to-date 2008, purchased power from affiliates was $164.5 million compared to $149.2
million for the same period in 2007. This increase was primarily related to a 26.4% increase in
price, partially offset by an 11.3% decrease in the amount of energy purchased.
43
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2008 |
|
|
Year-to-Date 2008 |
|
|
|
vs. |
|
|
vs. |
|
|
|
Second Quarter 2007 |
|
|
Year-to-Date 2007 |
|
|
|
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
Other operations |
|
$ |
14.3 |
|
|
|
7.8 |
|
|
$ |
27.4 |
|
|
|
7.7 |
|
Maintenance |
|
|
11.4 |
|
|
|
11.8 |
|
|
|
17.7 |
|
|
|
8.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operations and maintenance |
|
$ |
25.7 |
|
|
|
|
|
|
$ |
45.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter 2008, other operations and maintenance expenses were $306.5 million compared
to $280.8 million for the corresponding period in 2007. This increase was primarily a result of an
$11.9 million increase in steam power expense associated with compliance with environmental
mandates, scheduled outages, and maintenance cost related to increases in contract labor and
materials, as well as a $5.3 million increase in nuclear production expense related to routine
operations. Also contributing to the increase was a $4.3 million increase in administrative and
general expenses primarily related to an increase in affiliated service company expenses, as well
as a $2.5 million increase related to uncollectible accounts and customer service expense.
For-year-to-date 2008, other operations and maintenance expenses were $616.1 million compared to
$571.0 million for the corresponding period in 2007. This increase was primarily a result of a
$23.0 million increase in steam power expense associated with compliance with environmental
mandates, scheduled outages, and maintenance cost related to increases in contract labor and
materials, as well as a $10.0 million increase in nuclear production expense related to routine
operations. Also contributing to the increase was a $7.2 million increase in administrative and
general expenses primarily related to increases in affiliated service company expenses and employee
group insurance, as well as a $4.2 million increase in customer service expense.
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change)
|
|
(change in millions)
|
|
(% change)
|
$13.4
|
|
11.5 |
|
$22.2 |
|
9.5 |
|
In the second quarter 2008, depreciation and amortization was $130.6 million compared to $117.2
million for the same period in 2007. For year-to-date 2008, depreciation and amortization was
$255.3 million compared to $233.1 million for the same period in 2007. These increases were the
result of an increase in plant in service due to environmental mandates.
Taxes Other Than Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change)
|
|
(change in millions)
|
|
(% change)
|
$4.1
|
|
5.7 |
|
$7.2 |
|
4.9 |
|
In the second quarter 2008, taxes other than income taxes were $75.6 million compared to $71.5
million in the same period in 2007. For year-to-date 2008, taxes other than income taxes were
$151.4 million compared to
44
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$144.2 million for the same period in 2007. 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
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change)
|
|
(change in millions)
|
|
(% change)
|
$0.9
|
|
10.3 |
|
$5.5 |
|
37.3 |
|
The second quarter 2008 variance in allowance for equity funds used during construction when
compared to the same period in 2007 was not material. For year-to-date 2008, allowance for equity
funds used during construction was $20.5 million compared to $15.0 million for the same period in
2007. This increase was primarily due to increases in the amount of construction work in progress
at generating facilities related to environmental mandates, as well as transmission and
distribution projects when compared to the same period in 2007.
Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change)
|
|
(change in millions)
|
|
(% change)
|
$(2.7)
|
|
(69.1) |
|
$(7.0) |
|
(102.2) |
|
In the second quarter 2008, other income (expense), net was $(6.7) million compared to $(4.0)
million for the same period in 2007. This decrease to other income was primarily due to a $1.4
million decrease in merchandise operating income and a $1.4 million increase in miscellaneous
non-regulatory expenses.
For year-to-date 2008, other income (expense), net was $(13.9) million compared to $(6.9) million
for the same period in 2007. This decrease to other income was primarily due to a $3.4 million
decrease in merchandise operating income and a $2.4 million increase in miscellaneous
non-regulatory expenses.
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 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 statutes and regulations
could affect earnings if such costs cannot continue to be fully recovered in rates on a timely
basis. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental
Matters of
45
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Actions
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. On July 24, 2008, the U.S. District Court for the
Northern District of Alabama granted partial summary judgment in favor of Alabama Power regarding
the proper legal test for determining whether projects are routine maintenance, repair, and
replacement and therefore are excluded from NSR permitting. The decision does not resolve the
case, the ultimate outcome of which cannot be determined at this time.
Clean Air Interstate Rule
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 background regarding the Clean Air Interstate Rule (CAIR). On July 11, 2008, in response to
petitions brought by certain states and regulated industries challenging particular aspects of
CAIR, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating
CAIR in its entirety and remanding it to the EPA for further action consistent with its opinion.
Alabama Powers overall environmental compliance strategy has been developed in response to
numerous federal and state regulatory requirements, many of which remain unaffected by the courts
ruling; however, the courts decision has the potential to impact future decision making regarding
capital expenditures, the installation and operation of pollution control equipment, and the
purchase, use, and associated carrying values of emissions allowances. The ultimate impact of the
courts decision cannot be determined at this time and may depend on subsequent legal action,
including issuance of the courts mandate, and future rulemaking and regulatory treatment.
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. In
March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its
stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and
new nonattainment areas within Alabama Powers service territory are expected. The ultimate
outcome of this matter cannot be determined at this time and will depend on subsequent legal action
and/or future nonattainment designations and regulatory plans.
Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the
U.S. District Court for the Northern District of California against several electric utilities
(including Southern Company), several oil companies, and a coal company. The plaintiffs are the
governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being
destroyed by erosion allegedly caused by global
46
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
warming that the plaintiffs attribute to emissions of greenhouse gases by the defendants. The
plaintiffs assert claims for public and private nuisance and contend that the defendants have acted
in concert and are therefore jointly and severally liable for the plaintiffs damages. The suit seeks damages for lost property
values and for the cost of relocating the village, which cost is alleged to be $95 million to $400
million. On June 30, 2008, all defendants filed motions to dismiss this case. Southern Company
believes that these claims are without merit and notes that the complaint cites no statutory or
regulatory basis for the claims. The ultimate outcome of this matter cannot be determined at this
time.
FERC and Alabama PSC Matters
Retail Fuel Cost Recovery
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Retail
Fuel Cost Recovery of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama
Power under Retail Regulatory Matters Fuel Cost Recovery in Item 8 of the Form 10-K for
information regarding Alabama Powers fuel cost recovery. Alabama Powers under recovered fuel
costs as of June 30, 2008 totaled $205.3 million as compared to $279.8 million at December 31,
2007. Alabama Power classified all $205.3 million of the under recovered regulatory clause
revenues as deferred charges and other assets in the Condensed Balance Sheets as of June 30, 2008.
This classification is based on an estimate which includes such factors as weather, generation
availability, energy demand, and the price of energy. A change in any of these factors could have
a material impact on the timing of the recovery of the under recovered fuel costs.
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. At June 30, 2008, Alabama
Power had accumulated a balance of $30.7 million in the target reserve for future storms, which is
included in the Condensed Balance Sheets herein under Other Regulatory Liabilities.
Income Tax Matters
Bonus Depreciation
On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into
law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property
acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. The State of
Alabama income tax law does not allow the bonus depreciation deduction allowed by the Stimulus Act
for state income tax purposes. Alabama Power is currently assessing the financial implications of
the Stimulus Act and estimates the cash flow reduction to tax payments for 2008 to be between $55
million and $100 million.
Other Matters
Alabama Power is involved in various other matters being litigated and regulatory matters that
could affect future earnings. In addition, Alabama Power is subject to certain claims and legal
actions arising in the ordinary course of business. Alabama Powers business activities are
subject to extensive governmental
47
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 and water 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 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.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Alabama Powers financial condition remained stable at June 30, 2008. Net cash provided from
operating activities totaled $543.3 million for the first six months of 2008, compared to $361.2
million for the corresponding period in 2007. The $182.1 million increase in cash provided from
operating activities in the first six months of 2008 is primarily due to an increase in net income,
as previously discussed, as well as an increase in depreciation and amortization, an increase in
accrued tax liability, and a decrease in receivables from under recovered regulatory clauses. Net
cash used for investing activities totaled $725.0 million primarily due to gross property additions
to utility plant of $714.9 million in the first six months of 2008. These additions were primarily
related to construction of transmission and distribution facilities, replacement of steam
generation equipment, purchases of nuclear fuel, and environmental mandates. Net cash provided
from financing activities totaled $140.7 million for the first six months of 2008, compared to
$318.4 million for the corresponding period in 2007. The $177.7 million decrease is primarily due
to greater cash outflows relating to redemptions of senior notes and preferred stock and decreased
cash inflows from the issuance of long-term debt as compared to the first six months of 2007,
partially offset by an increase in notes payable.
Significant balance sheet changes for the first six months of 2008 include an increase of $688.3
million in gross plant primarily due to an increase in environmental-related equipment and an
increase of $600.9 million in long-term debt.
48
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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,
derivative obligations, preferred and preference stock dividends, leases, and other purchase
commitments. Approximately $160.2 million will be required through June 30, 2009 for maturities of
long-term debt.
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, unsecured debt, common stock, preferred stock, and
preference stock. 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 sometimes exceed current assets because of Alabama Powers debt
due within one year and the periodic use of short-term debt as a funding source primarily 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 June 30, 2008 approximately $32.6 million of cash and cash equivalents, unused committed
lines of credit of approximately $1.3 billion (including $582.4 million of such lines which are
dedicated to funding purchase obligations related to variable rate pollution control bonds), a
commercial paper program, and an extendible commercial note program. Of the unused credit
facilities, $485.1 million will expire at various times in 2008 and 2009 (of which $404 million
allow for one-year term loans). The remaining $800 million of credit facilities expire 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 $2.0 billion of short-term borrowings. At June
30, 2008, Alabama Power had $25.0 million of commercial paper 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.
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. 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 coal purchases and purchases of
emissions allowances. At June 30, 2008, the maximum potential collateral requirements at a BBB- or
Baa3 were approximately $1 million. The maximum potential collateral requirements at a rating
below BBB- or Baa3 were approximately $23.0 million. Generally, collateral may be provided by
cash, letter of credit, or a Southern Company guaranty.
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 Alabama Power and/or Georgia Power. These agreements are primarily for
natural gas and power price risk
49
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
management activities. At June 30, 2008, Alabama Powers exposure related to these agreements was
approximately $68 million.
Market Price Risk
Alabama Powers market risk exposures relative to interest rate changes have not changed materially
compared with the December 31, 2007 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 changes in fair value of energy-related derivative contracts and valuations at June 30, 2008
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
Year-to-Date |
|
|
|
2008 |
|
|
2008 |
|
|
|
Changes |
|
|
Changes |
|
|
Fair Value |
|
|
(in millions)
|
Contracts outstanding at the beginning of the period, assets
(liabilities), net |
|
$ |
55.9 |
|
|
$ |
(0.4 |
) |
Contracts realized or settled |
|
|
(18.1 |
) |
|
|
(13.5 |
) |
Current period changes(a) |
|
|
67.1 |
|
|
|
118.8 |
|
|
Contracts outstanding at the end of the period, assets (liabilities), net |
|
$ |
104.9 |
|
|
$ |
104.9 |
|
|
|
|
|
(a) |
|
Current period changes also include the changes in fair value of new contracts entered into during the period, if any. |
Gains and losses on energy-related derivative contracts related to Alabama Powers fuel hedging
program are initially recorded as regulatory liabilities and assets, respectively, and then are
included in fuel expense as they are recovered through the fuel cost recovery clauses. Certain
other gains and losses on energy-related derivatives, designated as hedges, are initially deferred
in other comprehensive income before being recognized in income in the same period as the hedged
transaction. Gains and losses on energy-related derivative contracts that are not designated as
hedges are recognized in the statements of income as incurred.
The fair value gain/(loss) of energy-related derivative contracts outstanding at June 30, 2008 was
reflected in the financial statements as follows:
|
|
|
|
|
|
|
Amounts |
|
|
|
(in millions) |
|
Regulatory liabilities, net |
|
$ |
104.9 |
|
Accumulated other comprehensive income |
|
|
|
|
Net income |
|
|
|
|
|
Total fair value gain/(loss) |
|
$ |
104.9 |
|
|
50
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unrealized pre-tax gains and losses recognized in income for the three months and six months ended
June 30, 2008 and 2007 for energy-related derivative contracts that are not hedges were not
material.
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy
in which they fall at June 30, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
Total |
|
Maturity |
|
|
Fair Value |
|
Year 1 |
|
1-3 Years |
|
|
|
(in millions)
|
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Level 2 |
|
|
104.9 |
|
|
|
76.2 |
|
|
|
28.7 |
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of contracts
outstanding at end of period |
|
$ |
104.9 |
|
|
$ |
76.2 |
|
|
$ |
28.7 |
|
|
As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value
measurements and related disclosures, the table above now uses the three-tier fair value hierarchy,
as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously
used descriptions actively quoted, external sources, and models and other methods. The
three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the
previous descriptions focused on the source of the inputs. Because Alabama Power uses
over-the-counter contracts that are not exchange traded but are fair valued using prices which are
actively quoted, the valuations of those contracts now appear in Level 2; previously they were
shown as actively quoted.
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
In January 2008, Alabama Power issued $300 million of additional Series 2007D 4.85% Senior Notes
due December 15, 2012. The proceeds were used to repay short-term indebtedness and for other
general corporate purposes. Additionally, Alabama Power redeemed 1,250 shares of its Flexible
Money Market Class A Preferred Stock (Series 2003A), Stated Capital $100,000 Per Share ($125
million aggregate value).
In January 2008, Alabama Power also entered into $330 million notional amount of interest rate
swaps related to variable rate tax-exempt debt to hedge changes in interest rates for the period
February 2008 through February 2010. The weighted average fixed payment rate on these hedges is
2.49% and Alabama Power now has a total of $576 million of such hedges in place, with an overall
weighted average fixed payment rate of 2.69%. See Note (F) to the Condensed Financial Statements
herein for further details.
In February 2008, Alabama Power issued 3,750,000 shares of common stock to Southern Company at $40
a share ($150 million aggregate purchase price). The proceeds were used for general corporate
purposes.
In March 2008, Alabama Power converted its $246.5 million obligations related to auction rate
tax-exempt securities from an auction rate mode to fixed rate interest modes. With the completion
of this conversion, none of the outstanding securities or obligations of Alabama Power is subject
to an auction rate mode.
51
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In May 2008, Alabama Power issued $300 million of Series 2008A 6.125% Senior Notes due May 15,
2038. The proceeds were used to repay short-term indebtedness and for other general corporate
purposes.
In May 2008, Alabama Power paid at maturity $250 million in aggregate principal amount of Series X
3.125% Senior Notes.
Subsequent to June 30, 2008, Alabama Power incurred obligations related to the issuance of $120
million of The Industrial Development Board of the City of Mobile Pollution Control Revenue Bonds
(Alabama Power Barry Plant Project), Series 2008. 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.
Subsequent to June 30, 2008, Alabama Power issued 1,875,000 shares of common stock to Southern
Company at $40 a share ($75 million aggregate purchase price). The proceeds were used for general
corporate purposes.
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.
52
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
1,830,753 |
|
|
$ |
1,585,563 |
|
|
$ |
3,405,760 |
|
|
$ |
2,997,892 |
|
Wholesale revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliates |
|
|
142,276 |
|
|
|
135,055 |
|
|
|
294,968 |
|
|
|
278,822 |
|
Affiliates |
|
|
72,164 |
|
|
|
58,826 |
|
|
|
146,074 |
|
|
|
100,614 |
|
Other revenues |
|
|
65,969 |
|
|
|
64,705 |
|
|
|
129,207 |
|
|
|
123,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
2,111,162 |
|
|
|
1,844,149 |
|
|
|
3,976,009 |
|
|
|
3,501,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
683,299 |
|
|
|
650,830 |
|
|
|
1,321,222 |
|
|
|
1,244,724 |
|
Purchased power |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliates |
|
|
107,723 |
|
|
|
67,670 |
|
|
|
165,754 |
|
|
|
113,763 |
|
Affiliates |
|
|
247,842 |
|
|
|
179,655 |
|
|
|
500,777 |
|
|
|
364,197 |
|
Other operations |
|
|
266,024 |
|
|
|
249,538 |
|
|
|
507,116 |
|
|
|
480,286 |
|
Maintenance |
|
|
125,757 |
|
|
|
136,816 |
|
|
|
253,480 |
|
|
|
261,258 |
|
Depreciation and amortization |
|
|
159,204 |
|
|
|
127,262 |
|
|
|
309,812 |
|
|
|
253,411 |
|
Taxes other than income taxes |
|
|
79,485 |
|
|
|
71,610 |
|
|
|
150,771 |
|
|
|
143,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,669,334 |
|
|
|
1,483,381 |
|
|
|
3,208,932 |
|
|
|
2,861,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
441,828 |
|
|
|
360,768 |
|
|
|
767,077 |
|
|
|
639,729 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction |
|
|
23,981 |
|
|
|
14,687 |
|
|
|
51,738 |
|
|
|
27,866 |
|
Interest income |
|
|
1,050 |
|
|
|
632 |
|
|
|
1,837 |
|
|
|
1,107 |
|
Interest expense, net of amounts capitalized |
|
|
(83,728 |
) |
|
|
(87,080 |
) |
|
|
(170,065 |
) |
|
|
(172,545 |
) |
Other income (expense), net |
|
|
1,372 |
|
|
|
301 |
|
|
|
(1,922 |
) |
|
|
(3,915 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(57,325 |
) |
|
|
(71,460 |
) |
|
|
(118,412 |
) |
|
|
(147,487 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
384,503 |
|
|
|
289,308 |
|
|
|
648,665 |
|
|
|
492,242 |
|
Income taxes |
|
|
132,279 |
|
|
|
100,204 |
|
|
|
216,080 |
|
|
|
171,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
252,224 |
|
|
|
189,104 |
|
|
|
432,585 |
|
|
|
321,058 |
|
Dividends on Preferred and Preference Stock |
|
|
4,346 |
|
|
|
689 |
|
|
|
8,691 |
|
|
|
1,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income After Dividends on Preferred and Preference Stock |
|
$ |
247,878 |
|
|
$ |
188,415 |
|
|
$ |
423,894 |
|
|
$ |
319,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net Income After Dividends on Preferred and Preference Stock |
|
$ |
247,878 |
|
|
$ |
188,415 |
|
|
$ |
423,894 |
|
|
$ |
319,680 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $6,027, $10,812,
$(16), and
$9,730, respectively |
|
|
9,556 |
|
|
|
17,140 |
|
|
|
(24 |
) |
|
|
15,426 |
|
Reclassification adjustment for amounts included in
net income,
net of tax of $489, $31, $695, and $2, respectively |
|
|
774 |
|
|
|
50 |
|
|
|
1,101 |
|
|
|
4 |
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $-, $(6), $-, and
$36, respectively |
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
10,330 |
|
|
|
17,183 |
|
|
|
1,077 |
|
|
|
15,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
$ |
258,208 |
|
|
$ |
205,598 |
|
|
$ |
424,971 |
|
|
$ |
335,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
54
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
432,585 |
|
|
$ |
321,058 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
367,910 |
|
|
|
302,523 |
|
Deferred income taxes and investment tax credits |
|
|
29,175 |
|
|
|
12,347 |
|
Deferred revenues |
|
|
60,898 |
|
|
|
(479 |
) |
Deferred expenses affiliates |
|
|
21,571 |
|
|
|
21,933 |
|
Allowance for equity funds used during construction |
|
|
(51,738 |
) |
|
|
(27,866 |
) |
Pension, postretirement, and other employee benefits |
|
|
6,304 |
|
|
|
6,035 |
|
Hedge settlements |
|
|
(20,486 |
) |
|
|
4,836 |
|
Other, net |
|
|
(20,337 |
) |
|
|
8,336 |
|
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
Receivables |
|
|
(193,372 |
) |
|
|
(46,080 |
) |
Fossil fuel stock |
|
|
(40,214 |
) |
|
|
(51,433 |
) |
Prepaid income taxes |
|
|
4,303 |
|
|
|
(46,479 |
) |
Other current assets |
|
|
(14,873 |
) |
|
|
(9,680 |
) |
Accounts payable |
|
|
102,384 |
|
|
|
814 |
|
Accrued taxes |
|
|
(12,300 |
) |
|
|
(60,944 |
) |
Accrued compensation |
|
|
(49,119 |
) |
|
|
(88,796 |
) |
Other current liabilities |
|
|
54,940 |
|
|
|
35,025 |
|
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
677,631 |
|
|
|
381,150 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(992,317 |
) |
|
|
(753,046 |
) |
Distribution of restricted cash from pollution control bonds |
|
|
13,221 |
|
|
|
|
|
Nuclear decommissioning trust fund purchases |
|
|
(225,477 |
) |
|
|
(184,246 |
) |
Nuclear decommissioning trust fund sales |
|
|
218,597 |
|
|
|
177,366 |
|
Cost of removal, net of salvage |
|
|
(15,957 |
) |
|
|
(18,042 |
) |
Change in construction payables, net of joint owner portion |
|
|
7,200 |
|
|
|
20,517 |
|
Other |
|
|
(16,754 |
) |
|
|
(6,059 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(1,011,487 |
) |
|
|
(763,510 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Increase (decrease) in notes payable, net |
|
|
(347,612 |
) |
|
|
79,495 |
|
Proceeds |
|
|
|
|
|
|
|
|
Senior notes |
|
|
500,000 |
|
|
|
850,000 |
|
Pollution control bonds |
|
|
94,935 |
|
|
|
|
|
Capital contributions from parent company |
|
|
251,262 |
|
|
|
269,949 |
|
Other long-term debt |
|
|
300,000 |
|
|
|
|
|
Redemptions |
|
|
|
|
|
|
|
|
Capital leases |
|
|
(759 |
) |
|
|
(1,957 |
) |
Senior notes |
|
|
(45,812 |
) |
|
|
|
|
Pollution control bonds |
|
|
(41,935 |
) |
|
|
|
|
Other long-term debt |
|
|
|
|
|
|
(453,608 |
) |
Payment of preferred and preference stock dividends |
|
|
(8,309 |
) |
|
|
(1,550 |
) |
Payment of common stock dividends |
|
|
(360,600 |
) |
|
|
(344,950 |
) |
Other |
|
|
(7,671 |
) |
|
|
(4,664 |
) |
|
|
|
|
|
|
|
Net cash provided from financing activities |
|
|
333,499 |
|
|
|
392,715 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
(357 |
) |
|
|
10,355 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
15,392 |
|
|
|
16,850 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
15,035 |
|
|
$ |
27,205 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $21,619 and $11,386 capitalized
for 2008 and 2007, respectively) |
|
$ |
154,225 |
|
|
$ |
157,693 |
|
Income taxes (net of refunds) |
|
$ |
130,091 |
|
|
$ |
158,849 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
55
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At June 30, |
|
|
At December 31, |
|
Assets |
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
15,035 |
|
|
$ |
15,392 |
|
Restricted cash |
|
|
41,198 |
|
|
|
48,279 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
608,671 |
|
|
|
491,389 |
|
Unbilled revenues |
|
|
215,656 |
|
|
|
137,046 |
|
Under recovered regulatory clause revenues |
|
|
404,855 |
|
|
|
384,538 |
|
Other accounts and notes receivable |
|
|
75,819 |
|
|
|
147,498 |
|
Affiliated companies |
|
|
53,397 |
|
|
|
21,699 |
|
Accumulated provision for uncollectible accounts |
|
|
(8,269 |
) |
|
|
(7,636 |
) |
Fossil fuel stock, at average cost |
|
|
433,436 |
|
|
|
393,222 |
|
Materials and supplies, at average cost |
|
|
349,013 |
|
|
|
337,652 |
|
Vacation pay |
|
|
68,639 |
|
|
|
69,394 |
|
Assets from risk management activities |
|
|
127,737 |
|
|
|
4,262 |
|
Prepaid income taxes |
|
|
46,799 |
|
|
|
51,101 |
|
Other |
|
|
67,989 |
|
|
|
50,907 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,499,975 |
|
|
|
2,144,743 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
23,280,746 |
|
|
|
22,011,215 |
|
Less accumulated provision for depreciation |
|
|
8,924,909 |
|
|
|
8,696,668 |
|
|
|
|
|
|
|
|
|
|
|
14,355,837 |
|
|
|
13,314,547 |
|
Nuclear fuel, at amortized cost |
|
|
256,546 |
|
|
|
198,983 |
|
Construction work in progress |
|
|
1,415,177 |
|
|
|
1,797,642 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
16,027,560 |
|
|
|
15,311,172 |
|
|
|
|
|
|
|
|
Other Property and Investments: |
|
|
|
|
|
|
|
|
Equity investments in unconsolidated subsidiaries |
|
|
58,188 |
|
|
|
53,813 |
|
Nuclear decommissioning trusts, at fair value |
|
|
549,815 |
|
|
|
588,952 |
|
Other |
|
|
42,847 |
|
|
|
47,914 |
|
|
|
|
|
|
|
|
Total other property and investments |
|
|
650,850 |
|
|
|
690,679 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
555,156 |
|
|
|
532,539 |
|
Prepaid pension costs |
|
|
1,055,718 |
|
|
|
1,026,985 |
|
Deferred under recovered regulatory clause revenues |
|
|
311,479 |
|
|
|
307,294 |
|
Other regulatory assets |
|
|
628,903 |
|
|
|
541,014 |
|
Other |
|
|
275,780 |
|
|
|
268,335 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
2,827,036 |
|
|
|
2,676,167 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
22,005,421 |
|
|
$ |
20,822,761 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
56
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At June 30, |
|
|
At December 31, |
|
Liabilities and Stockholder's Equity |
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
303,353 |
|
|
$ |
198,576 |
|
Notes payable |
|
|
367,979 |
|
|
|
715,591 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
331,132 |
|
|
|
236,332 |
|
Other |
|
|
486,433 |
|
|
|
463,945 |
|
Customer deposits |
|
|
181,155 |
|
|
|
171,553 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Income taxes |
|
|
104,110 |
|
|
|
68,782 |
|
Other |
|
|
157,797 |
|
|
|
219,585 |
|
Accrued interest |
|
|
79,734 |
|
|
|
74,674 |
|
Accrued vacation pay |
|
|
55,064 |
|
|
|
56,303 |
|
Accrued compensation |
|
|
70,617 |
|
|
|
114,974 |
|
Other regulatory liabilities |
|
|
160,171 |
|
|
|
14,601 |
|
Other |
|
|
88,161 |
|
|
|
88,624 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,385,706 |
|
|
|
2,423,540 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
6,638,738 |
|
|
|
5,937,792 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
2,895,715 |
|
|
|
2,850,655 |
|
Deferred credits related to income taxes |
|
|
144,338 |
|
|
|
146,886 |
|
Accumulated deferred investment tax credits |
|
|
262,672 |
|
|
|
269,125 |
|
Employee benefit obligations |
|
|
704,191 |
|
|
|
678,826 |
|
Asset retirement obligations |
|
|
667,049 |
|
|
|
663,503 |
|
Other cost of removal obligations |
|
|
416,457 |
|
|
|
414,745 |
|
Other regulatory liabilities |
|
|
690,687 |
|
|
|
577,642 |
|
Other |
|
|
177,113 |
|
|
|
158,670 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
5,958,222 |
|
|
|
5,760,052 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
14,982,666 |
|
|
|
14,121,384 |
|
|
|
|
|
|
|
|
Preferred and Preference Stock |
|
|
265,957 |
|
|
|
265,957 |
|
|
|
|
|
|
|
|
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 |
|
|
3,631,784 |
|
|
|
3,374,777 |
|
Retained earnings |
|
|
2,739,357 |
|
|
|
2,676,063 |
|
Accumulated other comprehensive loss |
|
|
(12,816 |
) |
|
|
(13,893 |
) |
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
6,756,798 |
|
|
|
6,435,420 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
22,005,421 |
|
|
$ |
20,822,761 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
57
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER 2008 vs. SECOND QUARTER 2007
AND
YEAR-TO-DATE 2008 vs. YEAR-TO-DATE 2007
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, increasingly stringent
environmental standards, and fuel costs. Appropriately balancing the need to recover these
increasing costs with customer prices will continue to challenge Georgia Power for the foreseeable
future. In December 2007, the 2007 Retail Rate Plan was approved, which should provide earnings
stability over its three-year term. This regulatory action enables the recovery of substantial
capital investments to facilitate the continued reliability of the transmission and distribution
networks, continued generation and other investments as well as the recovery of increased operating
costs. The 2007 Retail Rate Plan also includes a tariff specifically for the recovery of costs
related to environmental controls mandated by state and federal regulations. On May 20, 2008,
Georgia Power received a final order from the Georgia PSC to increase its fuel cost recovery rate
effective June 1, 2008. Georgia Power is required to file its next fuel cost recovery case by
March 1, 2009.
Georgia Power continues to focus on several key performance indicators. These indicators include
customer satisfaction, plant availability, system reliability, and net income after dividends on
preferred and preference stock. 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
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$59.5
|
|
31.6
|
|
$104.2
|
|
32.6 |
|
Georgia Powers net income after dividends on preferred and preference stock for the second quarter
2008 was $247.9 million compared to $188.4 million for the corresponding period in 2007. Georgia
Powers net income after dividends on preferred and preference stock for year-to-date 2008 was
$423.9 million compared to $319.7 million for the corresponding period in 2007. These increases
were primarily related to increased contributions from market-response rates to large commercial
and industrial customers, higher retail base rates resulting from the retail rate increase
effective January 1, 2008, and the effects of the allowance for equity funds used during
construction (AFUDC).
58
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$245.2
|
|
15.5
|
|
$407.9
|
|
13.6 |
|
In the second quarter 2008, retail revenues were $1.83 billion compared to $1.59 billion for the
corresponding period in 2007. For year-to-date 2008, retail revenues were $3.41 billion compared
to $3.00 billion for the corresponding period in 2007.
Details of the change to retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Year-to-Date |
|
|
2008 |
|
2008 |
|
|
|
(in millions) |
|
(% change) |
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
1,585.6 |
|
|
|
|
|
|
$ |
2,997.9 |
|
|
|
|
|
Estimated
change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
146.2 |
|
|
|
9.2 |
|
|
|
227.0 |
|
|
|
7.6 |
|
Sales growth |
|
|
(5.2 |
) |
|
|
(0.3 |
) |
|
|
(5.8 |
) |
|
|
(0.2 |
) |
Weather |
|
|
(5.8 |
) |
|
|
(0.3 |
) |
|
|
2.2 |
|
|
|
0.1 |
|
Fuel and other cost recovery |
|
|
110.0 |
|
|
|
6.9 |
|
|
|
184.5 |
|
|
|
6.1 |
|
|
Retail current year |
|
$ |
1,830.8 |
|
|
|
15.5 |
% |
|
$ |
3,405.8 |
|
|
|
13.6 |
% |
|
Revenues associated with changes in rates and pricing increased in the second quarter and
year-to-date 2008 when compared to the corresponding periods in 2007 due to higher market-response
rates for sales to large commercial and industrial customers and the application of new rates
established in January 2008.
Revenues attributable to changes in sales growth decreased in the second quarter and year-to-date
2008 when compared to the corresponding periods in 2007. These decreases were primarily the result
of a slowing economy within the Southeast. Weather-adjusted total retail KWH sales decreased 1.2%
and 0.8% for the second quarter and year-to-date 2008, respectively. Weather-adjusted residential
KWH sales decreased 0.5% and 1.1%, weather-adjusted commercial KWH sales increased 0.5% and 1.1%,
and weather-adjusted industrial sales decreased 4.1% and 2.9% for the second quarter and
year-to-date 2008, respectively, when compared to the corresponding periods in 2007.
Revenues attributable to changes in weather decreased in the second quarter and increased
year-to-date 2008 when compared to the corresponding periods in 2007. The decrease in second
quarter 2008 revenues attributable to weather effects was primarily due to milder weather in April
and May 2008 than in the corresponding periods in 2007. This was partially offset by more
favorable weather in June 2008 than June 2007. The increase in year-to-date 2008 revenues
attributable to weather effects was primarily due to significant weather volatility in January and
June 2008 compared to the corresponding periods in 2007.
Fuel cost recovery revenues increased by $110.0 million in the second quarter 2008 and by $184.5
million year-to-date 2008 when compared to the corresponding periods in 2007 as a result of higher
fuel and purchased power expenses. Georgia Powers 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.
59
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale
Revenues Non-Affiliates
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$7.2
|
|
5.3
|
|
$16.2
|
|
5.8 |
|
Wholesale revenues from 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.
In the second quarter 2008, wholesale revenues from non-affiliates were $142.3 million compared to
$135.1 million for the corresponding period in 2007. For year-to-date 2008, wholesale revenues
from non-affiliates were $295.0 million compared to $278.8 million for the corresponding period in
2007. These increases were primarily driven by the fuel recovery component within non-affiliate
wholesale prices which has increased with the effects of higher fuel and purchased power costs.
These increases were partially offset by 3.1% and 2.0% decreases in KWH energy sales in the second
quarter and year-to-date 2008, respectively, as well as decreased contributions from the emissions
allowance component of market-based wholesale prices.
Wholesale Revenues Affiliates
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$13.4
|
|
22.7
|
|
$45.5
|
|
45.2 |
|
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 the energy is generally sold at marginal cost.
In the second quarter 2008, wholesale revenues from affiliates were $72.2 million compared to $58.8
million for the corresponding period in 2007. For year-to-date 2008, wholesale revenues from
affiliates were $146.1 million compared to $100.6 million for the corresponding period in 2007.
These increases were primarily the result of higher Power Pool rates for these sales due to higher
fuel and purchased power costs. These increases were partially offset by 30.6% and 3.9% decreases
in KWH energy sales in the second quarter and year-to-date 2008, respectively.
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2008 |
|
Year-to-Date 2008 |
|
|
vs. |
|
vs. |
|
|
Second Quarter 2007 |
|
Year-to-Date 2007 |
|
|
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
Fuel |
|
$ |
32.5 |
|
|
|
5.0 |
|
|
$ |
76.5 |
|
|
|
6.1 |
|
Purchased power non-affiliates |
|
|
40.1 |
|
|
|
59.2 |
|
|
|
52.0 |
|
|
|
45.7 |
|
Purchased power affiliates |
|
|
68.1 |
|
|
|
38.0 |
|
|
|
136.6 |
|
|
|
37.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Total fuel and purchased power expenses |
|
$ |
140.7 |
|
|
|
|
|
|
$ |
265.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the second quarter 2008, total fuel and purchased power expenses were $1.04 billion compared to
$898.2 million for the corresponding period in 2007. The increase in fuel and purchased power
expenses was due to a $143.5 million increase in the average cost of fuel and purchased power,
partially offset by a $2.8 million decrease in total KWHs generated and purchased.
For year-to-date 2008, total fuel and purchased power expenses were $1.99 billion compared to $1.72
billion for the corresponding period in 2007. The increase in fuel and purchased power expenses
was due to a $224.2 million increase in the average cost of fuel and purchased power and a $40.9
million increase in total 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 Georgia Powers energy 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Second Quarter |
|
Percent |
|
Year-to-Date |
|
Year-to-Date |
|
Percent |
Average Cost |
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
|
(cents per net KWH)
|
|
|
|
|
|
(cents per net KWH)
|
|
|
|
|
Fuel |
|
|
3.03 |
|
|
|
2.67 |
|
|
|
13.5 |
|
|
|
2.94 |
|
|
|
2.65 |
|
|
|
10.9 |
|
Purchased power |
|
|
8.90 |
|
|
|
7.38 |
|
|
|
20.6 |
|
|
|
8.07 |
|
|
|
6.99 |
|
|
|
15.5 |
|
|
In the second quarter 2008, fuel expense was $683.3 million compared to $650.8 million for the
corresponding period in 2007. For year-to-date 2008, fuel expense was $1.32 billion compared to
$1.24 billion for the corresponding period in 2007. The increases in fuel expense were the result
of 13.5% and 10.9% increases in the average cost of fuel per KWH generated in the second quarter
and year-to-date 2008, respectively. These increases were primarily due to an increase in fuel
commodity prices, resulting from global demand pressures. The average cost of coal per KWH
generated increased 17.0% and 14.6% in the second quarter and year-to-date 2008, respectively. The
average cost of oil and natural gas per KWH generated increased 23.9% and 17.0% in the second
quarter and year-to-date 2008, respectively.
Non-affiliates
In the second quarter 2008, purchased power from non-affiliates was $107.7 million compared to
$67.7 million for the corresponding period in 2007. For year-to-date 2008, purchased power from
non-affiliates was $165.8 million compared to $113.8 million for the corresponding period in 2007.
These increases were primarily the result of 32.7% and 28.8% volume increases in KWHs purchased
from available lower priced market energy alternatives in the second quarter and year-to-date 2008,
respectively, and increases in the average cost per KWH purchased.
Energy purchases from non-affiliates will vary depending on the market cost of available energy
compared to the cost of Southern Company system-generated energy, demand for energy within the
Southern Company system service territory, and availability of Southern Company system generation.
61
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Affiliates
In the second quarter 2008, purchased power from affiliates was $247.8 million compared with $179.7
million for the corresponding period in 2007. For year-to-date 2008, purchased power from
affiliates was $500.8 million compared with $364.2 million for the corresponding period in 2007.
These increases were primarily the result of higher average cost of KWHs purchased due to the
influence of higher fuel costs within the purchase price. Also contributing to the increases in
purchased power from affiliates were 0.9% and 7.8% increases in the volume of KWHs purchased from
available lower cost resources within the Power Pool in the second quarter and year-to-date 2008,
respectively.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2008 |
|
Year-to-Date 2008 |
|
|
vs. |
|
vs. |
|
|
Second Quarter 2007 |
|
Year-to-Date 2007 |
|
|
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
Other operations |
|
$ |
16.5 |
|
|
|
6.6 |
|
|
$ |
26.8 |
|
|
|
5.6 |
|
Maintenance |
|
|
(11.1 |
) |
|
|
(8.1 |
) |
|
|
(7.8 |
) |
|
|
(3.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total other operations and maintenance |
|
$ |
5.4 |
|
|
|
|
|
|
$ |
19.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter 2008, other operations and maintenance expenses were $391.8 million compared
to $386.4 million for the corresponding period in 2007. The increase was primarily the result of a
$3.6 million increase in the accrual for property damage approved under the 2007 Retail Rate Plan.
Also contributing to the increase were customer account expenses of $5.1 million primarily related
to records and collections and uncollectible accounts, as well as $1.8 million related to medical expenses. These
increases were partially offset by a decrease of $5.9 million in transmission operations expenses.
For year-to-date 2008, other operations and maintenance expenses were $760.6 million compared to
$741.6 million for the corresponding period in 2007. The increase was primarily the result of a $7.0
million increase in nuclear expenses and a $7.3 million increase in the accrual for property damage
approved under the 2007 Retail Rate Plan. Also contributing to the increase were customer account
expenses of $10.9 million primarily related to meter reading, records and collections, and
uncollectible accounts, as well as $3.8 million related to medical expenses. These increases were partially
offset by a decrease of $11.8 million in transmission operations expenses.
Depreciation and Amortization
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$31.9
|
|
25.1
|
|
$56.4
|
|
22.3 |
|
In the second quarter 2008, depreciation and amortization was $159.2 million compared to $127.3
million for the corresponding period in 2007. For year-to-date 2008, depreciation and amortization
was $309.8 million compared to $253.4 million for the corresponding period in 2007. These
increases were primarily the result of increases in plant in service related to completed
transmission, distribution, and environmental projects and changes in depreciation rates effective
January 1, 2008 related to the 2007 Retail Rate Plan.
62
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Taxes Other Than Income Taxes
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$7.9
|
|
11.0
|
|
$6.8 |
|
4.7 |
|
In the second quarter 2008, taxes other than income taxes were $79.5 million compared with $71.6
million for the corresponding period in 2007. For year-to-date 2008, taxes other than income taxes
were $150.8 million compared with $144.0 million for the corresponding period in 2007. These
increases were primarily the result of higher municipal franchise fees resulting from retail
revenue increases during these periods.
Allowance for Equity Funds Used During Construction
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$9.3
|
|
63.3
|
|
$23.8
|
|
85.7 |
|
In the second quarter 2008, AFUDC was $24.0 million compared with $14.7 million for the
corresponding period in 2007. For year-to-date 2008, AFUDC was $51.7 million compared with $27.9
million for the corresponding period in 2007. These increases were primarily the result of
increases in construction work in progress balances related to ongoing environmental and
transmission projects as well as three combined cycle generating units at Plant McDonough.
Income Taxes
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$32.1
|
|
32.0
|
|
$44.9
|
|
26.2 |
|
In the second quarter 2008, income taxes were $132.3 million compared with $100.2 million for the
corresponding period in 2007. For year-to-date 2008, income taxes were $216.1 million compared
with $171.2 million for the corresponding period in 2007. These increases were primarily the
result of increased pre-tax income. These increases were partially offset by increases in
non-taxable items, particularly AFUDC, as well as additional state tax credits and an increase in
the federal production activities deduction amount.
Dividends on Preferred and Preference Stock
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$3.6
|
|
N/M
|
|
$7.3
|
|
N/M |
|
N/M Not Meaningful
In the second quarter 2008, dividends on preferred and preference stock were $4.3 million compared
with $0.7 million for the corresponding period in 2007. For year-to-date 2008, dividends on
preferred and preference stock were $8.7 million compared with $1.4 million for the corresponding
period in 2007. These increases in dividends on preferred and preference stock were primarily the
result of the issuance of $225 million of preference stock in the fourth quarter 2007 which has
quarterly dividends of approximately $3.7 million.
63
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 statutes and regulations
could affect earnings if such costs cannot continue to 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.
New Source Review Actions
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
New Source Review Actions of Georgia Power in Item 7 and Note 3 to the financial statements of
Georgia Power under Environmental Matters New Source Review Actions in Item 8 of the Form 10-K
for additional information regarding civil actions brought by the EPA alleging that Georgia Power
and Alabama Power had violated the NSR provisions of the Clean Air Act and related state laws with
respect to certain of their coal-fired generating facilities. The action against Georgia Power has
been administratively closed since 2001, and the case has not been reopened. In the action
involving Alabama Power, on July 24, 2008, the U.S. District Court for the Northern District of
Alabama granted partial summary judgment in favor of Alabama Power regarding the proper legal test
for determining whether projects are routine maintenance, repair, and replacement and therefore are
excluded from NSR permitting. The decision does not resolve the case, the ultimate outcome of
which cannot be determined at this time.
Clean Air Interstate Rule
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 background regarding the Clean Air Interstate Rule (CAIR). On July 11, 2008, in response to
petitions brought by certain states and regulated industries challenging particular aspects of
CAIR, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating
CAIR in its entirety and remanding it to the EPA for further action consistent with its opinion.
Georgia Powers overall environmental compliance strategy has been developed in response to
numerous federal and state regulatory requirements, many of which, including the State of Georgias
Multi-Pollutant Rule, remain unaffected by the courts ruling; however, the courts decision has
the potential to impact future decision making regarding capital expenditures, the installation and
operation of pollution control equipment, and the purchase, use, and associated carrying values of
emissions allowances. The ultimate impact of the courts decision cannot be
64
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
determined at this time and may depend on subsequent legal action, including issuance of the
courts mandate, and future rulemaking and regulatory treatment.
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. In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its
stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and
new nonattainment areas within Georgia Powers service territory are expected. The ultimate
outcome of this matter cannot be determined at this time and will depend on subsequent legal action
and/or future nonattainment designations and regulatory plans.
Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the
U.S. District Court for the Northern District of California against several electric utilities
(including Southern Company), several oil companies, and a coal company. The plaintiffs are the
governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being
destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions
of greenhouse gases by the defendants. The plaintiffs assert claims for public and private
nuisance and contend that the defendants have acted in concert and are therefore jointly and
severally liable for the plaintiffs damages. The suit seeks damages for lost property values and
for the cost of relocating the village, which cost is alleged to be $95 million to $400 million.
On June 30, 2008, all defendants filed motions to dismiss this case. Southern Company believes
that these claims are without merit and notes that the complaint cites no statutory or regulatory
basis for the claims. The ultimate outcome of this matter cannot be determined at this time.
FERC and Georgia PSC Matters
Retail Fuel Cost Recovery
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. On February
29, 2008, Georgia Power filed a request with the Georgia PSC to change the fuel cost recovery rate
effective June 1, 2008. The request was approved on May 20, 2008. Total annual fuel recovery
billings increased by approximately $222 million. The order also required Georgia Power to file
for a new fuel cost recovery rate no later than March 1, 2009. As of June 30, 2008, Georgia Power
had an under recovered fuel balance of approximately $716 million as compared to $692 million at
December 31, 2007. 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. 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 in the billing factor will not have a significant effect on Georgia
Powers revenues or net income, but will affect cash flow.
65
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nuclear
Nuclear Projects
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Nuclear Nuclear
Projects of Georgia Power in Item 7 of the Form 10-K for information regarding the potential
expansion of Plant Vogtle.
In August 2006, Southern Nuclear, on behalf of Georgia Power, OPC, MEAG Power, and Dalton Utilities
(collectively, Owners), filed an application with the NRC for an early site permit approving two
additional nuclear units on the site of Plant Vogtle. On March 31, 2008, Southern Nuclear filed an
application with the NRC for a combined construction and operating license (COL) for the new units.
On April 8, 2008, Georgia Power, acting for itself and as agent for the Owners, and a consortium
consisting of Westinghouse and Stone & Webster (collectively, Consortium) entered into an
engineering, procurement, and construction agreement to design, engineer, procure, construct, and
test two AP1000 nuclear units with electric generating capacity of approximately 1,100 MWs each and
related facilities, structures, and improvements at Plant Vogtle (Vogtle 3 and 4 Agreement).
The Vogtle 3 and 4 Agreement is an arrangement whereby the Consortium supplies and constructs the
entire facility with the exception of certain items provided by the Owners. Under the terms of the
Vogtle 3 and 4 Agreement, the Owners will pay a purchase price that will be subject to certain
price escalation and adjustments, adjustments for change orders, and performance bonuses. Each
Owner is severally (and not jointly) liable for its proportionate share, based on its ownership
interest, of all amounts owed to the Consortium under the Vogtle 3 and 4 Agreement. Georgia
Powers proportionate share, based on its current ownership interest, is 45.7%. Under the terms of
a separate joint development agreement, the Owners finalized their ownership percentages on July 2,
2008, except for allowed changes under certain limited circumstances during the Georgia PSC
certification process.
Georgia Power submitted its self-build nuclear proposal to the Georgia PSC on May 1, 2008 in
connection with its 2016-2017 base load capacity request for proposals (RFP). No other responses
to the RFP were received. On August 1, 2008, Georgia Power submitted an application for the Georgia
PSC to certify the project. A final certification decision is expected in March 2009.
If certified by the Georgia PSC and licensed by the NRC, Vogtle Units 3 and 4 are scheduled to be
placed in service in 2016 and 2017, respectively. The total plant value to be placed in service
will also include financing costs for each of the Owners, the impacts of inflation on costs, and
transmission and other costs that are the responsibility of the Owners. Georgia Powers
proportionate share of the estimated in-service costs, based on its current ownership interest, is
approximately $6.4 billion, subject to adjustments and performance bonuses under the Vogtle 3 and 4
Agreement.
The Owners and the Consortium have agreed to certain liquidated damages upon the Consortiums
failure to comply with the schedule and performance guarantees. The Owners and the Consortium also
have agreed to certain bonuses payable to the Consortium for early completion and unit performance.
The Consortiums liability to the Owners for schedule and performance liquidated damages and
warranty claims is subject to a cap.
The obligations of Westinghouse and Stone & Webster under the Vogtle 3 and 4 Agreement are
guaranteed by Toshiba Corporation and The Shaw Group, Inc., respectively. In the event of certain
credit rating downgrades of any Owner, such Owner will be required to provide a letter of credit or
other credit enhancement.
66
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Vogtle 3 and 4 Agreement is subject to certification by the Georgia PSC. In addition, the
Owners may terminate the Vogtle 3 and 4 Agreement at any time for their convenience, provided that
the Owners will be required to pay certain termination costs and, at certain stages of the work,
cancellation fees to the Consortium. The Consortium may terminate the Vogtle 3 and 4 Agreement
under certain circumstances, including delays in receipt of the COL or delivery of full notice to
proceed, certain Owner suspension or delays of work, action by a governmental authority to
permanently stop work, certain breaches of the Vogtle 3 and 4 Agreement by the Owners, Owner
insolvency, and certain other events.
Income Tax Matters
Bonus Depreciation
On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into
law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property
acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. The State of
Georgia does not allow the bonus depreciation deduction allowed by the Stimulus Act for state
income tax purposes. Georgia Power is currently assessing the financial implications of the
Stimulus Act and estimates the cash flow reduction to tax payments for 2008 to be between $50
million and $90 million.
Other Matters
Georgia Power is involved in various other matters being litigated, regulatory matters, and certain
tax-related issues that could affect future earnings. In addition, Georgia Power is subject to
certain claims and legal actions arising in the ordinary course of business. 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 and water 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. 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.
67
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Overview
Georgia Powers financial condition remained stable at June 30, 2008. Net cash provided
from operating activities totaled $677.6 million for the first six months of 2008, compared to
$381.2 million for the corresponding period in 2007. The $296.4 million increase in cash provided
from operating activities in the first six months of 2008 is primarily due to higher retail
operating revenues. Net cash used for investing activities totaled $1.01 billion for the first six
months of 2008 primarily due to gross property additions to utility plant of $1.05 billion. Net
cash provided from financing activities totaled $333.5 million for the first six months of 2008
compared to $392.7 million for the corresponding period in 2007. This was primarily due to the
repayment of notes payable and the timing of financings in 2008 compared to 2007.
Significant balance sheet changes for the first six months of 2008 include a $1.27 billion increase
in plant in service and the refinancing of notes payable to other forms of financing.
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, derivative obligations, preferred and
preference stock dividends, leases, purchase commitments, and trust funding requirements.
Approximately $303 million will be required through June 30, 2009 to fund maturities of long-term
debt. In addition, in connection with entering into the Vogtle 3 and 4 Agreement, as described
under FUTURE EARNINGS POTENTIAL Nuclear Nuclear Projects herein, the Georgia Power Board of
Directors approved revisions to Georgia Powers capital budget of $600 million in 2009 and $700
million in 2010, for a revised estimated total construction program of $2.0 billion in 2008, $2.6
billion in 2009, and $2.5 billion in 2010. Actual construction costs may vary from these estimates
because of changes in such factors as: business conditions; environmental statutes and regulations;
nuclear plant regulations; FERC rules and regulations; load projections; the cost and efficiency of
construction labor, equipment, and materials; and the cost of capital. In addition, there can be
no assurance that costs related to capital expenditures will be fully recovered.
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 June 30, 2008 approximately $15.0
million of cash and cash equivalents and approximately $1.3 billion of unused credit arrangements
with banks. Of the unused credit arrangements, $225 million expire in 2009 and $1.1 billion expire
in 2012.
68
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Of the facilities that expire in 2009, $40 million 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 credit arrangements
provide liquidity support to Georgia Powers commercial paper program and have $743 million
dedicated to funding purchase obligations related to variable rate pollution control bonds.
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 June 30, 2008, Georgia Power
had approximately $268 million of commercial paper and $100 million of short-term bank loans
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- and/or Baa3 or below. These contracts are primarily for physical electricity purchases and
sales and for the construction of new generation. At June 30, 2008, the maximum potential
collateral requirements at a BBB- or Baa3 rating were approximately $27 million. The maximum
potential collateral requirements at a rating below BBB- and/or Baa3 were approximately $829
million. Generally, collateral may be provided by a Southern Company guaranty, letter of credit,
or cash.
Georgia 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 Georgia Power and/or Alabama Power. These agreements are primarily for
natural gas and power price risk management activities. At June 30, 2008, Georgia Powers total
exposure related to these types of agreements was approximately $68 million.
Market Price Risk
Georgia Powers market risk exposures relative to interest rate changes have not changed materially
compared with the December 31, 2007 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.
69
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The change in fair value of energy-related derivative contracts and valuations at June 30, 2008
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Year-to-Date |
|
|
2008 |
|
2008 |
|
|
Changes |
|
Changes |
|
|
|
Fair Value
|
|
|
|
(in millions)
|
Contracts outstanding at the beginning of the period, assets
(liabilities), net |
|
$ |
83.6 |
|
|
$ |
(0.4 |
) |
Contracts realized or settled |
|
|
(27.3 |
) |
|
|
(21.4 |
) |
Current period changes(a) |
|
|
112.2 |
|
|
|
190.3 |
|
|
Contracts outstanding at the end of the period, assets (liabilities), net |
|
$ |
168.5 |
|
|
$ |
168.5 |
|
|
|
|
|
(a) |
|
Current period changes also include the changes in fair value of new contracts entered into
during the period, if any. |
Gains and losses on energy-related derivative contracts related to Georgia Powers fuel hedging
program are initially recorded as regulatory liabilities and assets, respectively, and then are
included in fuel expense as they are recovered through the fuel cost recovery mechanism. Certain
other gains and losses on energy-related derivatives, designated as hedges, are initially deferred
in other comprehensive income before being recognized in income in the same period as the hedged
transaction. Gains and losses on energy-related derivative contracts that are not designated as
hedges are recognized in the statements of income as incurred.
The fair value gain/(loss) of energy-related derivative contracts outstanding at June 30, 2008 was
reflected in the financial statements as follows:
|
|
|
|
|
|
|
Amounts |
|
|
|
(in millions) |
Regulatory liabilities, net |
|
$ |
168.5 |
|
Accumulated other comprehensive income |
|
|
|
|
Net income |
|
|
|
|
|
Total fair value gain/(loss) |
|
$ |
168.5 |
|
|
Unrealized pre-tax gains and losses recognized in income for the three months and six months ended
June 30, 2008 and 2007 for energy-related derivative contracts that are not hedges were not
material.
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy
in which they fall at June 30, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
Fair Value Measurements |
|
|
|
Total |
|
Maturity |
|
|
Fair Value |
|
Year 1 |
|
1-3 Years |
|
|
|
(in millions)
|
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Level 2 |
|
|
168.5 |
|
|
|
120.7 |
|
|
|
47.8 |
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of
contracts outstanding
at end of period |
|
$ |
168.5 |
|
|
$ |
120.7 |
|
|
$ |
47.8 |
|
|
70
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value
measurements and related disclosures, the table above now uses the three-tier fair value hierarchy,
as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously
used descriptions actively quoted, external sources, and models and other methods. The
three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the
previous descriptions focused on the source of the inputs. Because Georgia Power uses
over-the-counter contracts that are not exchange traded but are fair valued using prices which are
actively quoted, the valuations of those contracts now appear in Level 2; previously they were
shown as actively quoted.
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 quarter 2008, Georgia Power issued $250 million of Series 2008A Floating Rate Senior
Notes due March 17, 2010. The proceeds were used to repay a portion of its outstanding short-term
indebtedness. In addition, Georgia Power entered into a three-year $300 million long-term floating
rate bank loan that bears interest based on one-month LIBOR. Proceeds were used to repay a portion
of Georgia Powers short-term indebtedness and for other corporate purposes, including Georgia
Powers continuous construction activities. Related to the bank note, Georgia Power settled
interest rate hedges of $225 million notional amount at a loss of $16 million. These losses were
deferred in other comprehensive income and will be amortized to income over the original term of
the hedges. Also in the first three months of 2008, Georgia Power entered into derivative
transactions designed to mitigate interest rate risk related to taxable floating rate obligations.
The total notional amount of these derivatives was $600 million. See Note (F) to the Condensed
Financial Statements herein for further details.
Also in the first four months of 2008, Georgia Power converted its entire $819 million of
obligations related to auction rate tax-exempt securities from auction rate modes to other interest
rate modes. Initially, approximately $332 million of the auction rate tax-exempt securities were
converted to fixed interest rate modes and approximately $487 million were converted to daily
floating rate modes. Georgia Power also entered into hedges totaling $301 million to hedge
interest rate risk on tax-exempt variable rate demand notes in February. In June 2008, Georgia
Power converted approximately $98 million of its daily floating rate securities to fixed interest
rate modes. See Note (F) to the Condensed Financial Statements herein for further details.
In June 2008, Georgia Power issued $250 million of Series 2008B 5.40% Senior Notes due June 1,
2018. The proceeds were used to repay outstanding short-term indebtedness, a portion of which was
incurred to pay at maturity $45 million aggregate principal amount of its Savannah Electric and
Power Company Series C 6.55% Senior Notes, and for general corporate purposes. Georgia Power also
terminated derivative contracts related to the issuance of $100 million of the Series 2008B Senior
Notes. These contracts were settled at a loss of approximately $5 million, which will be amortized
over the life of the Series 2008B Senior Notes.
Also in June 2008, Georgia Power incurred obligations related to the issuance of $53 million of
pollution control revenue bonds for Georgia Powers Plant Hammond Project. The proceeds will be
held by the trustee and will be transferred to Georgia Power for reimbursement of project costs.
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.
71
GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
284,218 |
|
|
$ |
243,379 |
|
|
$ |
512,182 |
|
|
$ |
462,963 |
|
Wholesale revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliates |
|
|
25,052 |
|
|
|
21,004 |
|
|
|
50,708 |
|
|
|
44,404 |
|
Affiliates |
|
|
26,524 |
|
|
|
20,813 |
|
|
|
69,464 |
|
|
|
60,893 |
|
Other revenues |
|
|
14,073 |
|
|
|
13,198 |
|
|
|
29,048 |
|
|
|
26,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
349,867 |
|
|
|
298,394 |
|
|
|
661,402 |
|
|
|
594,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
165,999 |
|
|
|
133,049 |
|
|
|
316,126 |
|
|
|
279,523 |
|
Purchased
power Non-affiliates |
|
|
6,086 |
|
|
|
1,955 |
|
|
|
9,212 |
|
|
|
3,343 |
|
Affiliates |
|
|
16,685 |
|
|
|
10,469 |
|
|
|
25,428 |
|
|
|
17,510 |
|
Other operations |
|
|
47,023 |
|
|
|
46,963 |
|
|
|
94,879 |
|
|
|
93,013 |
|
Maintenance |
|
|
18,751 |
|
|
|
19,455 |
|
|
|
37,326 |
|
|
|
32,657 |
|
Depreciation and amortization |
|
|
22,206 |
|
|
|
21,203 |
|
|
|
43,910 |
|
|
|
42,300 |
|
Taxes other than income taxes |
|
|
20,803 |
|
|
|
20,283 |
|
|
|
41,499 |
|
|
|
40,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
297,553 |
|
|
|
253,377 |
|
|
|
568,380 |
|
|
|
508,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
52,314 |
|
|
|
45,017 |
|
|
|
93,022 |
|
|
|
85,792 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction |
|
|
2,040 |
|
|
|
485 |
|
|
|
3,523 |
|
|
|
864 |
|
Interest income |
|
|
709 |
|
|
|
1,289 |
|
|
|
1,418 |
|
|
|
2,897 |
|
Interest expense, net of amounts capitalized |
|
|
(10,679 |
) |
|
|
(11,377 |
) |
|
|
(21,675 |
) |
|
|
(22,530 |
) |
Other income (expense), net |
|
|
(343 |
) |
|
|
(325 |
) |
|
|
(1,009 |
) |
|
|
(875 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(8,273 |
) |
|
|
(9,928 |
) |
|
|
(17,743 |
) |
|
|
(19,644 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
44,041 |
|
|
|
35,089 |
|
|
|
75,279 |
|
|
|
66,148 |
|
Income taxes |
|
|
15,499 |
|
|
|
12,989 |
|
|
|
25,656 |
|
|
|
24,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
28,542 |
|
|
|
22,100 |
|
|
|
49,623 |
|
|
|
41,788 |
|
Dividends on Preference Stock |
|
|
1,550 |
|
|
|
825 |
|
|
|
3,101 |
|
|
|
1,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income After Dividends on Preference Stock |
|
$ |
26,992 |
|
|
$ |
21,275 |
|
|
$ |
46,522 |
|
|
$ |
40,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net Income After Dividends on Preference Stock |
|
$ |
26,992 |
|
|
$ |
21,275 |
|
|
$ |
46,522 |
|
|
$ |
40,138 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $404 and $1,978,
$(1,077), and $2,537, respectively |
|
|
643 |
|
|
|
3,149 |
|
|
|
(1,715 |
) |
|
|
4,039 |
|
Reclassification adjustment for amounts included in net
income, net of tax of $103, $76, $157, and $160, respectively |
|
|
162 |
|
|
|
122 |
|
|
|
249 |
|
|
|
255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
805 |
|
|
|
3,271 |
|
|
|
(1,466 |
) |
|
|
4,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
$ |
27,797 |
|
|
$ |
24,546 |
|
|
$ |
45,056 |
|
|
$ |
44,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
73
GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
49,623 |
|
|
$ |
41,788 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
46,439 |
|
|
|
44,827 |
|
Deferred income taxes |
|
|
9,215 |
|
|
|
(12,021 |
) |
Allowance for equity funds used during construction |
|
|
(3,523 |
) |
|
|
(864 |
) |
Pension, postretirement, and other employee benefits |
|
|
554 |
|
|
|
463 |
|
Stock option expense |
|
|
537 |
|
|
|
891 |
|
Tax benefit of stock options |
|
|
109 |
|
|
|
199 |
|
Hedge settlements |
|
|
(5,220 |
) |
|
|
3,030 |
|
Other, net |
|
|
(61 |
) |
|
|
(436 |
) |
Changes in
certain current assets and liabilities Receivables |
|
|
(27,073 |
) |
|
|
(6,015 |
) |
Fossil fuel stock |
|
|
(26,432 |
) |
|
|
(13,473 |
) |
Materials and supplies |
|
|
6,669 |
|
|
|
(1,517 |
) |
Prepaid income taxes |
|
|
|
|
|
|
7,078 |
|
Property damage cost recovery |
|
|
12,463 |
|
|
|
11,440 |
|
Other current assets |
|
|
1,339 |
|
|
|
1,085 |
|
Accounts payable |
|
|
6,419 |
|
|
|
(7,460 |
) |
Accrued taxes |
|
|
4,433 |
|
|
|
6,470 |
|
Accrued compensation |
|
|
(6,952 |
) |
|
|
(7,990 |
) |
Other current liabilities |
|
|
2,838 |
|
|
|
6,149 |
|
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
71,377 |
|
|
|
73,644 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(149,761 |
) |
|
|
(93,207 |
) |
Cost of removal, net of salvage |
|
|
(4,519 |
) |
|
|
(6,432 |
) |
Construction payables |
|
|
5,753 |
|
|
|
(5,993 |
) |
Other |
|
|
(2,883 |
) |
|
|
(132 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(151,410 |
) |
|
|
(105,764 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Decrease in notes payable, net |
|
|
(40,801 |
) |
|
|
(96,612 |
) |
Proceeds |
|
|
|
|
|
|
|
|
Senior Notes |
|
|
|
|
|
|
85,000 |
|
Common stock issued to parent |
|
|
|
|
|
|
80,000 |
|
Gross excess tax benefit of stock options |
|
|
212 |
|
|
|
468 |
|
Capital contributions from parent company |
|
|
73,060 |
|
|
|
|
|
Other long-term debt |
|
|
110,000 |
|
|
|
|
|
Redemptions Senior notes |
|
|
(651 |
) |
|
|
|
|
Payment of preference stock dividends |
|
|
(2,956 |
) |
|
|
(1,650 |
) |
Payment of common stock dividends |
|
|
(40,850 |
) |
|
|
(37,050 |
) |
Other |
|
|
(2,141 |
) |
|
|
(996 |
) |
|
|
|
|
|
|
|
Net cash provided from financing activities |
|
|
95,873 |
|
|
|
29,160 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
15,840 |
|
|
|
(2,960 |
) |
Cash and Cash Equivalents at Beginning of Period |
|
|
5,348 |
|
|
|
7,526 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
21,188 |
|
|
$ |
4,566 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid
during the period for Interest (net of $1,404 and $381 capitalized for 2008 and 2007, respectively) |
|
$ |
19,831 |
|
|
$ |
16,991 |
|
Income taxes (net of refunds) |
|
$ |
17,744 |
|
|
$ |
27,824 |
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
74
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At June 30, |
|
|
At December 31, |
|
Assets |
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
21,188 |
|
|
$ |
5,348 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
68,968 |
|
|
|
63,227 |
|
Unbilled revenues |
|
|
55,314 |
|
|
|
39,000 |
|
Under recovered regulatory clause revenues |
|
|
71,077 |
|
|
|
58,435 |
|
Other accounts and notes receivable |
|
|
6,220 |
|
|
|
7,162 |
|
Affiliated companies |
|
|
7,240 |
|
|
|
19,377 |
|
Accumulated provision for uncollectible accounts |
|
|
(1,277 |
) |
|
|
(1,711 |
) |
Fossil fuel stock, at average cost |
|
|
98,901 |
|
|
|
71,012 |
|
Materials and supplies, at average cost |
|
|
39,094 |
|
|
|
45,763 |
|
Property damage cost recovery |
|
|
4,372 |
|
|
|
18,585 |
|
Other regulatory assets |
|
|
8,896 |
|
|
|
10,220 |
|
Other |
|
|
32,126 |
|
|
|
14,878 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
412,119 |
|
|
|
351,296 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
2,745,010 |
|
|
|
2,678,952 |
|
Less accumulated provision for depreciation |
|
|
951,726 |
|
|
|
931,968 |
|
|
|
|
|
|
|
|
|
|
|
1,793,284 |
|
|
|
1,746,984 |
|
Construction work in progress |
|
|
215,845 |
|
|
|
150,870 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
2,009,129 |
|
|
|
1,897,854 |
|
|
|
|
|
|
|
|
Other Property and Investments |
|
|
4,598 |
|
|
|
4,563 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
21,067 |
|
|
|
17,847 |
|
Prepaid pension costs |
|
|
108,757 |
|
|
|
107,151 |
|
Other regulatory assets |
|
|
105,570 |
|
|
|
97,492 |
|
Other |
|
|
43,257 |
|
|
|
22,784 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
278,651 |
|
|
|
245,274 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,704,497 |
|
|
$ |
2,498,987 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
75
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At June 30, |
|
|
At December 31, |
|
Liabilities and Stockholder's Equity |
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Notes payable |
|
$ |
3,824 |
|
|
$ |
44,625 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
57,387 |
|
|
|
39,375 |
|
Other |
|
|
60,894 |
|
|
|
56,823 |
|
Customer deposits |
|
|
26,609 |
|
|
|
24,885 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Income taxes |
|
|
35,171 |
|
|
|
30,026 |
|
Other |
|
|
16,800 |
|
|
|
10,577 |
|
Accrued interest |
|
|
7,448 |
|
|
|
7,698 |
|
Accrued compensation |
|
|
8,144 |
|
|
|
15,096 |
|
Other regulatory liabilities |
|
|
32,887 |
|
|
|
6,027 |
|
Other |
|
|
20,931 |
|
|
|
32,023 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
270,095 |
|
|
|
267,155 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
849,634 |
|
|
|
740,050 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
244,188 |
|
|
|
240,101 |
|
Accumulated deferred investment tax credits |
|
|
12,121 |
|
|
|
12,988 |
|
Employee benefit obligations |
|
|
76,025 |
|
|
|
74,021 |
|
Other cost of removal obligations |
|
|
175,920 |
|
|
|
172,876 |
|
Other regulatory liabilities |
|
|
89,852 |
|
|
|
82,741 |
|
Other |
|
|
80,525 |
|
|
|
79,802 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
678,631 |
|
|
|
662,529 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
1,798,360 |
|
|
|
1,669,734 |
|
|
|
|
|
|
|
|
Preference Stock |
|
|
97,998 |
|
|
|
97,998 |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common
stock, without par value |
|
|
|
|
|
|
|
|
Authorized
- 20,000,000 shares |
|
|
|
|
|
|
|
|
Outstanding
- 1,792,717 shares |
|
|
118,060 |
|
|
|
118,060 |
|
Paid-in capital |
|
|
508,899 |
|
|
|
435,008 |
|
Retained earnings |
|
|
186,445 |
|
|
|
181,986 |
|
Accumulated other comprehensive loss |
|
|
(5,265 |
) |
|
|
(3,799 |
) |
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
808,139 |
|
|
|
731,255 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
2,704,497 |
|
|
$ |
2,498,987 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
76
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER 2008 vs. SECOND QUARTER 2007
AND
YEAR-TO-DATE 2008 vs. YEAR-TO-DATE 2007
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 costs, and storm restoration costs. Appropriately balancing the need
to recover these increasing costs 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 after dividends on
preference stock. 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
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$5.7
|
|
26.9
|
|
$6.4
|
|
15.9 |
|
Gulf Powers net income after dividends on preference stock for the second quarter 2008 was $27.0
million compared to $21.3 million for the corresponding period in 2007. The increase was primarily
due to more favorable weather, higher wholesale capacity revenues from non-affiliates, and
increased allowance for equity funds used during construction (AFUDC), partially offset by
increased income taxes.
Gulf Powers net income after dividends on preference stock for year-to-date 2008 was $46.5 million
compared to $40.1 million for the corresponding period in 2007. The increase was primarily due to
more favorable weather, higher wholesale capacity revenues from non-affiliates, and increased
AFUDC. The increase was partially offset by higher operations and maintenance expenses due to
scheduled maintenance at generation facilities.
Retail Revenues
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$40.8
|
|
16.8
|
|
$49.2
|
|
10.6 |
|
In the second quarter 2008, retail revenues were $284.2 million compared to $243.4 million for the
corresponding period in 2007. For year-to-date 2008, retail revenues were $512.2 million compared
to $463.0 million for the corresponding period in 2007.
77
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the change to retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Year-to-Date |
|
|
2008 |
|
2008 |
|
|
|
(in millions) |
|
(% change) |
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
243.4 |
|
|
|
|
|
|
$ |
463.0 |
|
|
|
|
|
Estimated change in
Rates and pricing |
|
|
1.4 |
|
|
|
0.6 |
|
|
|
2.8 |
|
|
|
0.6 |
|
Sales growth |
|
|
(1.9 |
) |
|
|
(0.8 |
) |
|
|
0.4 |
|
|
|
0.1 |
|
Weather |
|
|
3.3 |
|
|
|
1.4 |
|
|
|
4.4 |
|
|
|
0.9 |
|
Fuel and other cost recovery |
|
|
38.0 |
|
|
|
15.6 |
|
|
|
41.6 |
|
|
|
9.0 |
|
|
Retail current year |
|
$ |
284.2 |
|
|
|
16.8 |
% |
|
$ |
512.2 |
|
|
|
10.6 |
% |
|
Revenues associated with changes in rates and pricing increased in the second quarter and
year-to-date 2008 when compared to the same periods in 2007 primarily due to cost recovery
provisions for 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. These 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 Note 3 to the financial statements of Gulf Power under Environmental
Remediation and Retail Regulatory Matters Environmental Cost Recovery in Item 8 of the Form
10-K for additional information.
Revenues attributable to changes in sales growth decreased in the second quarter 2008 when compared
to the same period in 2007. Weather-adjusted KWH energy sales to residential customers and
commercial customers decreased 6.4% and 1.0%, respectively. The decrease in weather-adjusted KWH
energy sales to residential customers was primarily due to lower home occupancy rates.
Weather-adjusted KWH energy sales to industrial customers increased 18.5%. The increase in
weather-adjusted KWH energy sales to industrial customers was primarily a result of decreased
customer co-generation due to the higher cost of natural gas. Revenues attributable to changes in
sales growth increased year-to-date 2008 when compared to the same period in 2007.
Weather-adjusted KWH energy sales to residential customers decreased 3.9%, primarily due to lower
home occupancy rates. Weather-adjusted KWH energy sales to commercial and industrial customers
increased 0.7% and 12.0%, respectively. The increase in weather-adjusted KWH energy sales to
industrial customers was primarily a result of decreased customer co-generation due to the higher
cost of natural gas.
Revenues attributable to changes in weather increased in the second quarter and year-to-date 2008
when compared to the corresponding periods in 2007. These increases were due to more favorable
weather.
Fuel and other cost recovery revenues increased in the second quarter and year-to-date 2008 when
compared to the corresponding periods in 2007 primarily due to higher fuel and purchased power
expenses. Fuel and other cost recovery revenues include fuel expenses, the energy component of
purchased power costs, purchased power capacity costs, and revenues related to the recovery of
storm damage restoration 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. 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 of Gulf Power under Retail Regulatory Matters Storm Damage
Cost Recovery in Item 8 of the Form 10-K for additional information.
78
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale Revenues Non-Affiliates
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$4.0
|
|
19.3
|
|
$6.3
|
|
14.2 |
|
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.
In the second quarter 2008, wholesale revenues from non-affiliates were $25.0 million compared to
$21.0 million for the corresponding period in 2007. For year-to-date 2008, wholesale revenues from
non-affiliates were $50.7 million compared to $44.4 million for the corresponding period in 2007.
These increases were primarily a result of higher energy revenues caused by increased fuel costs
and higher capacity revenues associated with new and existing territorial wholesale contracts.
Wholesale Revenues Affiliates
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$5.7
|
|
27.4
|
|
$8.6
|
|
14.1 |
|
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.
In the second quarter 2008, wholesale revenues from affiliates were $26.5 million compared to $20.8
million for the corresponding period in 2007. For year-to-date, wholesale revenues from affiliates
were $69.5 million compared to $60.9 million for the corresponding period in 2007. These increases
were primarily a result of higher Power Pool interchange energy rates produced by rising fuel
costs, partially offset by decreased KWH sales.
Other Revenues
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$0.9
|
|
6.6
|
|
$2.7
|
|
10.2 |
|
In the second quarter 2008, other revenues were $14.1 million compared to $13.2 million for the
same period in 2007. For year-to-date 2008, other revenues were $29.0 million compared to $26.3
million for the same period in 2007. These increases were primarily related to the settlement of a
transmission service agreement with Calpine Corporation and increases in other transmission
services.
79
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2008 |
|
Year-to-Date 2008 |
|
|
vs. |
|
vs. |
|
|
Second Quarter 2007 |
|
Year-to-Date 2007 |
|
|
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
Fuel |
|
$ |
33.0 |
|
|
|
24.8 |
|
|
$ |
36.6 |
|
|
|
13.1 |
|
Purchased power non-affiliates |
|
|
4.1 |
|
|
|
211.3 |
|
|
|
5.9 |
|
|
|
175.6 |
|
Purchased power affiliates |
|
|
6.2 |
|
|
|
59.4 |
|
|
|
7.9 |
|
|
|
45.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Total fuel and purchased power expenses |
|
$ |
43.3 |
|
|
|
|
|
|
$ |
50.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter 2008, total fuel and purchased power expenses were $188.8 million compared to
$145.5 million for the corresponding period in 2007. The net increase in fuel and purchased power
expenses was due to a $42.5 million increase in the average cost of fuel and purchased power as
well as a $4.0 million increase in KWHs purchased, partially offset by a $3.2 million decrease in
KWHs generated.
For year-to-date 2008, total fuel and purchased power expenses were $350.7 million compared to
$300.3 million for the corresponding period in 2007. The net increase in fuel and purchased power
expenses was due to a $60.4 million increase in the average cost of fuel and purchased power as
well as a $2.2 million increase in KWHs purchased, partially offset by a $12.2 million decrease in
KWHs generated.
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.
See FUTURE EARNINGS POTENTIAL FERC and Florida PSC Matters Retail Fuel Cost Recovery herein
for additional information.
Details of Gulf Powers cost of generation and purchased power are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Second Quarter |
|
Percent |
|
Year-to-Date |
|
Year-to-Date |
|
Percent |
Average Cost |
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
|
(cents per net KWH) |
|
|
|
|
|
(cents per net KWH) |
|
|
|
|
Fuel |
|
|
4.26 |
|
|
|
3.33 |
|
|
|
27.9 |
|
|
|
4.03 |
|
|
|
3.41 |
|
|
|
18.2 |
|
Purchased power |
|
|
10.73 |
|
|
|
7.71 |
|
|
|
39.2 |
|
|
|
8.90 |
|
|
|
5.92 |
|
|
|
50.3 |
|
|
In the second quarter 2008, fuel expense was $166.0 million compared to $133.0 million in the same
period in 2007. The increase was due to a $36.2 million increase in the average cost of fuel,
partially offset by a $3.2 million decrease related to total KWHs generated. The average cost of
coal per KWH generated increased 20.4% primarily as a result of increases in commodity and
transportation costs. The average cost of oil and natural gas per KWH generated increased 32.3%
primarily as a result of increases in commodity prices.
For year-to-date 2008, fuel expense was $316.1 million compared to $279.5 million in the same
period in 2007. The increase was due to a $48.8 million increase in the average cost of fuel,
partially offset by a $12.2 million decrease related to total KWHs generated. The average cost of
coal per KWH generated increased 17.4% primarily as a result of increases in commodity and
transportation costs. The average cost of oil and natural gas per KWH generated increased 17.6%
primarily as a result of increases in commodity prices.
80
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-affiliates
In the second quarter 2008, purchased power from non-affiliates was $6.1 million compared to $2.0
million for the same period in 2007. The increase was due to a $3.2 million increase resulting
from the higher average cost per KWH and a $0.9 million increase in total KWHs purchased.
For year-to-date 2008, purchased power from non-affiliates was $9.2 million compared to $3.3
million for the same period in 2007. The increase was due to a $5.7 million increase resulting
from the higher average cost per KWH and a $0.2 million increase in total KWHs purchased.
Energy purchases from non-affiliates will vary depending on the market cost of available energy
compared to the cost of Southern Company system-generated energy, demand for energy within the
Southern Company system service territory, and availability of Southern Company system generation.
Affiliates
In the second quarter 2008, purchased power from affiliates was $16.7 million compared to $10.5
million for the corresponding period in 2007. The increase was due to a $3.7 million increase
resulting from the higher average cost per KWH and a $2.5 million increase in total KWHs purchased.
For year-to-date 2008, purchased power from affiliates was $25.4 million compared to $17.5 million
for the corresponding period in 2007. The increase was due to a $5.5 million increase resulting
from the higher average cost per KWH and a $2.4 million increase in total KWHs purchased.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2008 |
|
Year-to-Date 2008 |
|
|
vs. |
|
vs. |
|
|
Second Quarter 2007 |
|
Year-to-Date 2007 |
|
|
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
Other operations |
|
$ |
0.1 |
|
|
|
0.1 |
|
|
$ |
1.8 |
|
|
|
2.0 |
|
Maintenance |
|
|
(0.7 |
) |
|
|
(3.6 |
) |
|
|
4.7 |
|
|
|
14.3 |
|
|
|
|
|
|
|
|
|
|
|
|
Total other operations and maintenance |
|
$ |
(0.6 |
) |
|
|
|
|
|
$ |
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The second quarter 2008 decrease in other operations and maintenance expenses when compared to the
same period in 2007 was not material. For year-to-date 2008, other operations and maintenance
expenses were $132.2 million compared to $125.7 million for the same period in 2007. The increase
was primarily due to a $3.5 million increase in scheduled maintenance at generation facilities and
a $1.4 million increase in distribution contract labor costs.
81
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Allowance for Equity Funds Used During Construction
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$1.5
|
|
320.6
|
|
$2.6
|
|
307.8 |
|
In the second quarter 2008, AFUDC was $2.0 million compared to $0.5 million for the corresponding
period in 2007. For year-to-date 2008, AFUDC was $3.5 million compared to $0.9 million for the
corresponding period in 2007. These increases were primarily due to the construction of
environmental control projects.
Interest Income
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(0.6)
|
|
(45.0)
|
|
$(1.5)
|
|
(51.1) |
|
In the second quarter 2008, interest income was $0.7 million compared to $1.3 million for the same
period in 2007. For year-to-date 2008, interest income was $1.4 million compared to $2.9 million
for the same period in 2007. These decreases were primarily a result of lower variable interest
rates charged against the under recovered fuel balance and a decrease in the property damage
reserve balance. The Florida PSC has authorized the calculation of interest on under recovered
regulatory clause revenues at 30-day commercial paper rates.
Interest Expense, Net of Amounts Capitalized
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(0.7)
|
|
(6.1)
|
|
$(0.8)
|
|
(3.8) |
|
In the second quarter 2008, interest expense was $10.7 million compared to $11.4 million for the
same period in 2007. For year-to-date 2008, interest expense was $21.7 million compared to $22.5
million for the same period in 2007. These decreases were primarily due to capitalization of the
allowance for debt funds used during construction related to the construction of environmental
control projects.
Income Taxes
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$2.5
|
|
19.3
|
|
$1.3
|
|
5.3 |
|
In the second quarter 2008, income taxes were $15.5 million compared to $13.0 million for the same
period in 2007. The increase was primarily a result of higher earnings before income taxes,
partially offset by the tax benefit associated with an increase in AFUDC.
For year-to-date 2008, income taxes were $25.7 million compared to $24.4 million for the same
period in 2007. The increase was primarily a result of higher earnings before income taxes. This
increase was partially offset by an increase in the federal production activities deduction and the
tax benefit associated with an increase in AFUDC.
82
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Dividends on Preference Stock
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$0.7
|
|
87.9
|
|
$1.4
|
|
87.9 |
|
In the second quarter 2008, dividends on preference stock were $1.5 million compared to $0.8
million for the same period in 2007. For year-to-date 2008, dividends on preference stock were
$3.1 million compared to $1.7 million for the same period in 2007. These increases resulted from
the issuance of $45 million of 6.45% Preference Stock in September 2007.
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 statutes and regulations
could affect earnings if such costs cannot continue to 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.
New Source Review Actions
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
New Source Review Actions of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf
Power under Environmental Matters New Source Review Actions in Item 8 of the Form 10-K for
additional information regarding notices of violation issued by the EPA relating to Gulf Powers
Plant Crist and a unit partially owned by Gulf Power at Plant Scherer and civil actions brought by
the EPA against Alabama Power and Georgia Power alleging that these companies had violated the NSR
provisions of the Clean Air Act and related state laws with respect to certain of their coal-fired
generating facilities. In the action involving Alabama Power, on July 24, 2008, the U.S. District
Court for the Northern District of Alabama granted partial summary judgment in favor of Alabama
Power regarding the proper legal test for determining whether projects are routine maintenance,
repair, and replacement and therefore are excluded from NSR permitting. The decision does not
resolve the case, the ultimate outcome of which cannot be determined at this time.
83
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Clean Air Interstate Rule
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
background regarding the Clean Air Interstate Rule (CAIR). On July 11, 2008, in response to
petitions brought by certain states and regulated industries challenging particular aspects of
CAIR, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating
CAIR in its entirety and remanding it to the EPA for further action consistent with its opinion.
Gulf Powers overall environmental compliance strategy has been developed in response to numerous
federal and state regulatory requirements, many of which remain unaffected by the courts ruling;
however, the courts decision has the potential to impact future decision making regarding capital
expenditures, the installation and operation of pollution control equipment, and the purchase, use,
and associated carrying values of emissions allowances. The ultimate impact of the courts
decision cannot be determined at this time and may depend on subsequent legal action, including
issuance of the courts mandate, and future rulemaking and regulatory treatment.
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. In March
2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its stringency.
The EPA plans to designate nonattainment areas based on the new standard by 2010, and new
nonattainment areas within Gulf Powers service territory are expected. The ultimate outcome of
this matter cannot be determined at this time and will depend on subsequent legal action and/or
future nonattainment designations and regulatory plans.
Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the
U.S. District Court for the Northern District of California against several electric utilities
(including Southern Company), several oil companies, and a coal company. The plaintiffs are the
governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being
destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions
of greenhouse gases by the defendants. The plaintiffs assert claims for public and private
nuisance and contend that the defendants have acted in concert and are therefore jointly and
severally liable for the plaintiffs damages. The suit seeks damages for lost property values and
for the cost of relocating the village, which cost is alleged to be $95 million to $400 million.
On June 30, 2008, all defendants filed motions to dismiss this case. Southern Company believes
that these claims are without merit and notes that the complaint cites no statutory or regulatory
basis for the claims. The ultimate outcome of this matter cannot be determined at this time.
Global Climate Issues
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 executive orders issued by the Governor of the State of Florida addressing reduction of
greenhouse gas emissions within the state. On June 25, 2008, Floridas Governor signed
comprehensive energy-related legislation that includes authorization for the Florida Department of
Environmental Protection to
84
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
adopt rules for a cap-and-trade regulatory program to address greenhouse gas emissions from
electric utilities, conditioned upon their ratification by the legislature no sooner than the 2010
legislative session. This legislation also authorizes the Florida PSC to adopt a renewable
portfolio standard for public utilities, subject to legislative ratification. The impact of this
legislation on Gulf Power will depend on the development, adoption, legislative ratification,
implementation, and potential legal challenges in connection with rules governing greenhouse gas
emissions and mandates regarding the use of renewable energy, and the ultimate outcome cannot be
determined at this time.
FERC and Florida PSC Matters
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 revenue 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 indicate if an adjustment to
the fuel cost recovery factor is being requested. Gulf Power filed a petition on June 20, 2008
with the Florida PSC requesting an adjustment to the fuel cost recovery factor. On July 29, 2008,
the Florida PSC approved Gulf Powers request for an increase of approximately 28.3% in the fuel
factor for retail customers. This change represents an increase of 11.3% for a residential
customer billing of 1,000 KWH per month. The increase will result in the recovery of
$38.2 million of the projected under recovered balance during the period September through December
2008. The remaining portion of the projected under recovered balance is expected to be recovered
in 2009. The fuel cost recovery factor will be reviewed again by the Florida PSC in November 2008
as a normal part of its ongoing oversight over fuel cost recovery matters with the resulting
adjustment to rates to take effect in January 2009.
Under recovered fuel costs at June 30, 2008 totaled $77.7 million, compared to $56.6 million at
December 31, 2007. Approximately $68.6 million of the $77.7 million is included in under recovered
regulatory clause revenues and approximately $9.1 million is included in deferred charges and other
assets on Gulf Powers Condensed Balance Sheets herein. 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 change in the billing factor would have no
significant effect on Gulf Powers revenues or net income, but would 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.
Income Tax Matters
Bonus Depreciation
On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008 (Stimulus Act) into
law. The Stimulus Act includes a provision that allows 50% bonus depreciation for certain property
acquired in 2008 and placed in service in 2008 or, in certain limited cases, 2009. The State of
Florida does not allow the bonus depreciation deduction allowed by the Stimulus Act for state
income tax purposes. Gulf Power is currently assessing the financial implications of the Stimulus
Act and estimates the cash flow reduction to tax payments for 2008 to be between $7 million and $12
million.
85
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Matters
Gulf Power is involved in various other matters being litigated and regulatory matters that
could affect future earnings. In addition, Gulf Power is subject to certain claims and legal
actions arising in the ordinary course of business. 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 and water 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 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
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.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Gulf Powers financial condition remained stable at June 30, 2008. Net cash provided from
operating activities totaled $71.4 million for the first six months of 2008, compared to $73.6
million for the corresponding period in 2007. The $2.2 million decrease in cash provided from
operating activities was primarily due to a $21.1 million increase in cash outflow for receivables,
partially offset by an increase in cash inflow of $13.9 million from accounts payable and $8.2
million from materials and supplies in the first six months of 2008. Net cash used for investing
activities totaled $151.4 million primarily due to gross property additions to utility plant of
$149.8 million in the first six months of 2008. These additions were primarily related to
installation of equipment to comply with environmental requirements. Net cash provided from
financing activities totaled $95.9 million for
the first six months of 2008, compared to $29.2 million for the corresponding period in 2007. The
$66.7 million increase in cash provided from financing activities was primarily due to the issuance
of $110 million in
86
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
long-term debt, $73.1 million in capital contributions received from Southern Company, and a $55.8
million decrease in cash flows related to notes payable, partially offset by the issuance of $85.0
million in senior notes in 2007 and an $80.0 million common stock issuance to Southern Company in
2007.
Significant balance sheet changes for the first six months of 2008 include a net increase of $111.3
million in property, plant, and equipment, primarily related to environmental control projects, a
$25.6 million change in energy-related derivative contracts, and a $21.1 million increase in under
recovered regulatory clause revenues related to fuel.
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, maturities of
long-term debt, leases, derivative obligations, preference stock dividends, purchase commitments,
and trust funding requirements. Prior to maturity, Gulf Power repaid $0.7 million of senior notes
in the first six months of 2008. At June 30, 2008 Gulf Power had no scheduled maturities of
long-term debt through June 30, 2009.
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 utilized funds from operating cash
flows, short-term debt, external security offerings, a long term bank note, 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.
Gulf Powers current liabilities frequently exceed current assets because of the continued use of
short-term debt as a funding source to meet 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
June 30, 2008 approximately $21.2 million of cash and cash equivalents and $130 million of unused
committed lines of credit with banks. Of these credit agreements, $110 million expire in 2008, $20
million expire in 2009, and $105 million contain provisions allowing one-year term loans executable
at expiration. During the second quarter 2008, Gulf Power increased an existing committed line of
credit with a local bank by $5 million. 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 commercial paper program and have $70
million dedicated to funding purchase obligations related to variable rate pollution control bonds.
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 June 30, 2008, Gulf Power had no
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.
87
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. These contracts are primarily for physical electricity purchases and
sales. At June 30, 2008, the maximum potential collateral requirements at a BBB- or Baa3 rating
were approximately $42 million. At June 30, 2008, the maximum potential collateral requirements at
a rating below BBB- or Baa3 were approximately $105 million. Generally, collateral may be provided
for by a Southern Company guaranty, letter of credit, or cash.
Gulf Power, along with all members of the Power Pool, is party to certain energy-related derivative
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 June 30, 2008, Gulf
Powers total exposure to these types of agreements was approximately $68 million.
Market Price Risk
Gulf Powers market risk exposures relative to interest rate changes have not changed materially
compared with the December 31, 2007 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.
The changes in fair value of energy-related derivative contracts and valuations at June 30, 2008
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Year-to-Date |
|
|
2008 |
|
2008 |
|
|
Changes |
|
Changes |
|
|
|
Fair Value |
|
|
|
(in millions) |
Contracts outstanding at the beginning of the period, assets
(liabilities), net |
|
$ |
14.0 |
|
|
$ |
(0.2 |
) |
Contracts realized or settled |
|
|
(4.3 |
) |
|
|
(3.1 |
) |
Current period changes(a) |
|
|
15.7 |
|
|
|
28.7 |
|
|
Contracts outstanding at the end of the period, assets (liabilities), net |
|
$ |
25.4 |
|
|
$ |
25.4 |
|
|
|
|
|
(a) |
|
Current period changes also include the changes in fair value of new contracts entered into
during the period, if any. |
Gains and losses on energy-related derivative contracts related to Gulf Powers fuel hedging
program are initially recorded as regulatory liabilities and assets, respectively, and then are
included in fuel expense as they are recovered through the fuel cost recovery clause. Certain other
gains and losses on energy-related derivatives, designated as hedges, are initially deferred in
other comprehensive income before being recognized in income in the same period as the hedged
transaction. Gains and losses on energy-related derivative contracts that are not designated as
hedges are recognized in the statements of income as incurred.
88
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The fair value gain/(loss) of energy-related derivative contracts outstanding at June 30, 2008 was
reflected in the financial statements as follows:
|
|
|
|
|
|
|
Amounts |
|
|
|
(in millions) |
Regulatory liabilities, net |
|
$ |
25.4 |
|
Accumulated other comprehensive income |
|
|
|
|
Net income |
|
|
|
|
|
Total fair value gain/(loss) |
|
$ |
25.4 |
|
|
Unrealized pre-tax gains and losses recognized in income for the three months and six months ended
June 30, 2008 and 2007 for energy-related derivative contracts that are not hedges were not
material.
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy
in which they fall at June 30, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
Fair Value Measurements |
|
|
|
Total |
|
Maturity |
|
|
Fair Value |
|
Year 1 |
|
1-3 Years |
|
|
|
(in millions) |
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Level 2 |
|
|
25.4 |
|
|
|
16.9 |
|
|
|
8.5 |
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of contracts
outstanding at end of period |
|
$ |
25.4 |
|
|
$ |
16.9 |
|
|
$ |
8.5 |
|
|
As part of the adoption of SFAS No. 157 to increase consistency and comparability in fair value
measurements and related disclosures, the table above now uses the three-tier fair value hierarchy,
as discussed in Note (C) to the Condensed Financial Statements herein, as opposed to the previously
used descriptions actively quoted, external sources, and models and other methods. The
three-tier fair value hierarchy focuses on the fair value of the contract itself, whereas the
previous descriptions focused on the source of the inputs. Because Gulf Power uses
over-the-counter contracts that are not exchange traded but are fair valued using prices which are
actively quoted, the valuations of those contracts now appear in Level 2; previously they were
shown as actively quoted.
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.
Financing Activities
In April 2008, Gulf Power entered into a $110 million term loan agreement that bears interest based
on one-month LIBOR and borrowed $80 million under such agreement. In June 2008, Gulf Power
borrowed the remaining $30 million under the term loan agreement. Proceeds were used to repay a
portion of Gulf Powers short-term indebtedness and for other general corporate purposes, including
Gulf Powers continuous construction activities. In connection with the term loan agreement, Gulf
Power terminated $80 million of
89
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
derivative transactions at a loss of $5.2 million. The loss was deferred in accumulated other
comprehensive income and will be amortized over the original life of the hedge, which is a 10-year
period.
Also in 2008, Gulf Power converted its entire $141 million of obligations related to auction rate
tax-exempt securities from auction rate modes to other interest rate modes. Approximately $75
million of the auction rate tax-exempt securities were converted to fixed interest rate modes and
approximately $66 million were converted to daily floating rate modes.
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.
90
MISSISSIPPI POWER COMPANY
91
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
187,121 |
|
|
$ |
182,145 |
|
|
$ |
355,510 |
|
|
$ |
338,269 |
|
Wholesale revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliates |
|
|
83,595 |
|
|
|
76,702 |
|
|
|
168,401 |
|
|
|
153,996 |
|
Affiliates |
|
|
22,546 |
|
|
|
9,657 |
|
|
|
50,925 |
|
|
|
28,572 |
|
Other revenues |
|
|
4,670 |
|
|
|
4,712 |
|
|
|
8,512 |
|
|
|
9,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
297,932 |
|
|
|
273,216 |
|
|
|
583,348 |
|
|
|
530,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
138,857 |
|
|
|
122,158 |
|
|
|
268,973 |
|
|
|
243,917 |
|
Purchased power |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-affiliates |
|
|
5,426 |
|
|
|
1,259 |
|
|
|
7,681 |
|
|
|
2,213 |
|
Affiliates |
|
|
17,484 |
|
|
|
17,040 |
|
|
|
43,482 |
|
|
|
29,464 |
|
Other operations |
|
|
45,618 |
|
|
|
43,109 |
|
|
|
92,303 |
|
|
|
86,956 |
|
Maintenance |
|
|
17,750 |
|
|
|
17,331 |
|
|
|
35,838 |
|
|
|
31,278 |
|
Depreciation and amortization |
|
|
17,101 |
|
|
|
15,153 |
|
|
|
35,098 |
|
|
|
29,381 |
|
Taxes other than income taxes |
|
|
16,286 |
|
|
|
15,495 |
|
|
|
31,851 |
|
|
|
28,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
258,522 |
|
|
|
231,545 |
|
|
|
515,226 |
|
|
|
451,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
39,410 |
|
|
|
41,671 |
|
|
|
68,122 |
|
|
|
78,495 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
184 |
|
|
|
424 |
|
|
|
593 |
|
|
|
999 |
|
Interest expense, net of amounts capitalized |
|
|
(4,393 |
) |
|
|
(4,365 |
) |
|
|
(8,833 |
) |
|
|
(9,437 |
) |
Other income (expense), net |
|
|
2,901 |
|
|
|
5,105 |
|
|
|
4,519 |
|
|
|
4,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(1,308 |
) |
|
|
1,164 |
|
|
|
(3,721 |
) |
|
|
(3,461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
38,102 |
|
|
|
42,835 |
|
|
|
64,401 |
|
|
|
75,034 |
|
Income taxes |
|
|
13,664 |
|
|
|
16,122 |
|
|
|
23,358 |
|
|
|
28,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
24,438 |
|
|
|
26,713 |
|
|
|
41,043 |
|
|
|
46,782 |
|
Dividends on Preferred Stock |
|
|
433 |
|
|
|
433 |
|
|
|
866 |
|
|
|
866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income After Dividends on Preferred Stock |
|
$ |
24,005 |
|
|
$ |
26,280 |
|
|
$ |
40,177 |
|
|
$ |
45,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net Income After Dividends on Preferred Stock |
|
$ |
24,005 |
|
|
$ |
26,280 |
|
|
$ |
40,177 |
|
|
$ |
45,916 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of
$(144), $408, $(1,454),
and $46, respectively |
|
|
(233 |
) |
|
|
657 |
|
|
|
(2,347 |
) |
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME |
|
$ |
23,772 |
|
|
$ |
26,937 |
|
|
$ |
37,830 |
|
|
$ |
45,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
92
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Six Months |
|
|
|
Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
41,043 |
|
|
$ |
46,782 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
37,231 |
|
|
|
34,116 |
|
Deferred income taxes and investment tax credits, net |
|
|
(8,732 |
) |
|
|
(12,089 |
) |
Plant Daniel capacity |
|
|
|
|
|
|
(2,829 |
) |
Pension, postretirement, and other employee benefits |
|
|
3,765 |
|
|
|
3,928 |
|
Stock option expense |
|
|
555 |
|
|
|
830 |
|
Tax benefit of stock options |
|
|
95 |
|
|
|
238 |
|
Hurricane Katrina grant proceeds-property reserve |
|
|
|
|
|
|
60,000 |
|
Other, net |
|
|
(10,640 |
) |
|
|
(15,859 |
) |
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
Receivables |
|
|
(22,108 |
) |
|
|
16,671 |
|
Fossil fuel stock |
|
|
(30,521 |
) |
|
|
(23,319 |
) |
Materials and supplies |
|
|
(13,569 |
) |
|
|
(880 |
) |
Prepaid income taxes |
|
|
1,607 |
|
|
|
19,666 |
|
Other current assets |
|
|
272 |
|
|
|
(764 |
) |
Hurricane Katrina grant proceeds |
|
|
|
|
|
|
14,345 |
|
Hurricane Katrina accounts payable |
|
|
|
|
|
|
5,440 |
|
Other accounts payable |
|
|
14,947 |
|
|
|
(9,313 |
) |
Accrued taxes |
|
|
(20,369 |
) |
|
|
(2,669 |
) |
Accrued compensation |
|
|
(12,379 |
) |
|
|
(13,420 |
) |
Other current liabilities |
|
|
19,802 |
|
|
|
(77 |
) |
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
999 |
|
|
|
120,797 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(57,404 |
) |
|
|
(56,089 |
) |
Cost of removal, net of salvage |
|
|
(424 |
) |
|
|
7,113 |
|
Construction payables |
|
|
(7,275 |
) |
|
|
(408 |
) |
Hurricane Katrina capital grant proceeds |
|
|
7,314 |
|
|
|
10,869 |
|
Other |
|
|
(998 |
) |
|
|
527 |
|
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(58,787 |
) |
|
|
(37,988 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Increase (decrease) in notes payable, net |
|
|
10,669 |
|
|
|
(774 |
) |
Proceeds |
|
|
|
|
|
|
|
|
Capital contributions |
|
|
2,714 |
|
|
|
(3 |
) |
Gross excess tax benefit of stock options |
|
|
253 |
|
|
|
478 |
|
Other long-term debt |
|
|
80,000 |
|
|
|
|
|
Redemptions Long-term debt |
|
|
|
|
|
|
(36,082 |
) |
Payment of preferred stock dividends |
|
|
(866 |
) |
|
|
(866 |
) |
Payment of common stock dividends |
|
|
(34,200 |
) |
|
|
(33,650 |
) |
Other |
|
|
(1,470 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided from (used for) financing activities |
|
|
57,100 |
|
|
|
(70,897 |
) |
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
(688 |
) |
|
|
11,912 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
4,827 |
|
|
|
4,214 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
4,139 |
|
|
$ |
16,126 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $58 and $0 capitalized for 2008 and 2007, respectively) |
|
$ |
7,844 |
|
|
$ |
9,046 |
|
Income taxes (net of refunds) |
|
$ |
32,628 |
|
|
$ |
(270 |
) |
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
93
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At June 30, |
|
|
At December 31, |
|
Assets |
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,139 |
|
|
$ |
4,827 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
51,031 |
|
|
|
43,946 |
|
Unbilled revenues |
|
|
28,243 |
|
|
|
23,163 |
|
Under recovered regulatory clause revenues |
|
|
27,860 |
|
|
|
40,545 |
|
Other accounts and notes receivable |
|
|
11,364 |
|
|
|
5,895 |
|
Affiliated companies |
|
|
33,971 |
|
|
|
11,838 |
|
Accumulated provision for uncollectible accounts |
|
|
(775 |
) |
|
|
(924 |
) |
Fossil fuel stock, at average cost |
|
|
77,987 |
|
|
|
47,466 |
|
Materials and supplies, at average cost |
|
|
38,597 |
|
|
|
27,440 |
|
Assets from risk management activities |
|
|
40,853 |
|
|
|
3,756 |
|
Other regulatory assets |
|
|
28,435 |
|
|
|
32,234 |
|
Other |
|
|
21,208 |
|
|
|
14,666 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
362,913 |
|
|
|
254,852 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
2,163,644 |
|
|
|
2,130,835 |
|
Less accumulated provision for depreciation |
|
|
903,892 |
|
|
|
880,148 |
|
|
|
|
|
|
|
|
|
|
|
1,259,752 |
|
|
|
1,250,687 |
|
Construction work in progress |
|
|
58,433 |
|
|
|
50,015 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
1,318,185 |
|
|
|
1,300,702 |
|
|
|
|
|
|
|
|
Other Property and Investments |
|
|
8,847 |
|
|
|
9,556 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
8,574 |
|
|
|
8,867 |
|
Prepaid pension costs |
|
|
65,773 |
|
|
|
66,099 |
|
Other regulatory assets |
|
|
70,702 |
|
|
|
62,746 |
|
Other |
|
|
32,809 |
|
|
|
24,843 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
177,858 |
|
|
|
162,555 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,867,803 |
|
|
$ |
1,727,665 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
94
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At June 30, |
|
|
At December 31, |
|
Liabilities and Stockholder's Equity |
|
2008 |
|
|
2007 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
41,183 |
|
|
$ |
1,138 |
|
Notes payable |
|
|
20,612 |
|
|
|
9,944 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
48,984 |
|
|
|
40,394 |
|
Other |
|
|
59,842 |
|
|
|
60,758 |
|
Customer deposits |
|
|
10,077 |
|
|
|
9,640 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Income taxes |
|
|
|
|
|
|
|
|
Other |
|
|
28,490 |
|
|
|
48,853 |
|
Accrued interest |
|
|
3,059 |
|
|
|
2,713 |
|
Accrued compensation |
|
|
9,587 |
|
|
|
21,965 |
|
Other regulatory liabilities |
|
|
54,871 |
|
|
|
11,082 |
|
Other |
|
|
32,493 |
|
|
|
23,882 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
309,198 |
|
|
|
230,369 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
321,373 |
|
|
|
281,963 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
205,627 |
|
|
|
206,818 |
|
Deferred credits related to income taxes |
|
|
13,849 |
|
|
|
15,156 |
|
Accumulated deferred investment tax credits |
|
|
14,680 |
|
|
|
15,254 |
|
Employee benefit obligations |
|
|
90,226 |
|
|
|
88,300 |
|
Other cost of removal obligations |
|
|
95,902 |
|
|
|
90,485 |
|
Other regulatory liabilities |
|
|
127,436 |
|
|
|
119,458 |
|
Other |
|
|
35,661 |
|
|
|
33,252 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
583,381 |
|
|
|
568,723 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
1,213,952 |
|
|
|
1,081,055 |
|
|
|
|
|
|
|
|
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 |
|
|
317,935 |
|
|
|
314,324 |
|
Retained earnings |
|
|
267,219 |
|
|
|
261,242 |
|
Accumulated other comprehensive income (loss) |
|
|
(1,774 |
) |
|
|
573 |
|
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
621,071 |
|
|
|
613,830 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
1,867,803 |
|
|
$ |
1,727,665 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
95
MISSISSIPPI
POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SECOND QUARTER 2008 vs. SECOND QUARTER 2007
AND
YEAR-TO-DATE 2008 vs. YEAR-TO-DATE 2007
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 costs, and major storm restoration.
Appropriately balancing the need to recover these increasing costs with customer prices will
continue to challenge Mississippi Power for the foreseeable future.
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 after dividends on preferred stock. 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
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(2.3)
|
|
(8.7)
|
|
$(5.7)
|
|
(12.5) |
|
Mississippi Powers net income after dividends on preferred stock for the second quarter 2008 was
$24.0 million compared to $26.3 million for the corresponding period in 2007. The $2.3 million
decrease was primarily a result of a $2.2 million increase in non-fuel related expenses, a $2.5
million increase in depreciation and amortization primarily due to the amortization of regulatory
items, a $1.4 million decrease in retail revenues for System Restoration Rider (SRR), and a $2.2
million decrease in other income (expense), net, partially offset by a $4.0 million increase in
territorial base revenues primarily due to a retail base rate increase effective January 2008. For
additional information on SRR, see MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS
POTENTIAL PSC Matters System Restoration Rider of Mississippi Power in Item 7 of the Form
10-K.
Mississippi Powers net income after dividends on preferred stock for year-to-date 2008 was $40.2
million compared to $45.9 million for the corresponding period in 2007. The $5.7 million decrease
was primarily a result of an $8.0 million increase in non-fuel related expenses, a $5.1 million
increase in depreciation and amortization primarily due to the amortization of regulatory items, a
$2.5 million decrease in retail revenues for SRR, and a $0.5 million decrease in other income
(expense), net, partially offset by a $7.4 million increase in territorial base revenues primarily
due to a retail base rate increase effective January 2008.
96
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$5.0
|
|
2.7
|
|
$17.2
|
|
5.1 |
|
In the second quarter 2008, retail revenues were $187.1 million compared to $182.1 million for the
same period in 2007. For year-to-date 2008, retail revenues were $355.5 million compared to $338.3
million for the same period in 2007.
Details of the change to retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Year-to-Date |
|
|
2008 |
|
2008 |
|
|
|
(in millions) |
|
(% change) |
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
182.1 |
|
|
|
|
|
|
$ |
338.3 |
|
|
|
|
|
Estimated change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
2.9 |
|
|
|
1.6 |
|
|
|
7.2 |
|
|
|
2.1 |
|
Sales growth |
|
|
(1.9 |
) |
|
|
(1.0 |
) |
|
|
(0.5 |
) |
|
|
(0.2 |
) |
Weather |
|
|
2.2 |
|
|
|
1.1 |
|
|
|
1.4 |
|
|
|
0.5 |
|
Fuel and other cost recovery |
|
|
1.8 |
|
|
|
1.0 |
|
|
|
9.1 |
|
|
|
2.7 |
|
|
Retail current year |
|
$ |
187.1 |
|
|
|
2.7 |
% |
|
$ |
355.5 |
|
|
|
5.1 |
% |
|
Revenues associated with changes in rates and pricing increased in the second quarter and
year-to-date 2008 when compared to the same periods in 2007, primarily due to a base rate increase
effective January 2008 of $4.1 million for the second quarter and $7.5 million year-to-date 2008
and an increase in the ECO Plan rate effective April 2007 of $0.3 million for the second quarter
and $2.2 million year-to-date 2008. These revenues were partially offset by retail revenue
reductions related to SRR revenues of approximately $1.5 million for the second quarter and $2.5
million year-to-date 2008.
Revenues attributable to changes in sales growth decreased in the second quarter 2008 when compared
to the same period in 2007 due to 1.9% and 5.9% decreases in weather-adjusted KWH sales to
residential and industrial customers, respectively, which was partially offset by a 1.0% increase
in weather-adjusted KWH sales to commercial customers. The decrease in industrial sales is
primarily due to lower production levels and maintenance outages experienced by some industrial
customers. Revenues attributable to changes in sales growth decreased slightly year-to-date 2008
when compared to the same period in 2007 due to a 2.8% decrease in weather-adjusted KWH sales to
industrial customers which was partially offset by 1.4% and 1.9% increases in weather-adjusted KWH
sales to residential and commercial customers, respectively. The decrease in industrial sales is
primarily due to lower production levels and maintenance outages experienced by some industrial
customers.
Revenues resulting from changes in weather increased for the second quarter 2008 when compared to
the same period in 2007, primarily due to the warmer weather experienced in May and June 2008 as
compared to the same months in 2007. Revenues resulting from changes in weather increased
year-to-date 2008 when compared to the same period in 2007 primarily due to the warmer weather
experienced in May and June 2008 as compared to the same months in 2007 which was partially offset
by the colder weather experienced in the first three months of 2007 as compared to the same period
in 2008.
97
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and other cost recovery revenues increased in the second quarter and year-to-date 2008 when
compared to the same periods in 2007, primarily as a result of the increase in fuel and purchased
power expenses. Electric rates include provisions to adjust billings for fluctuations in fuel
costs, including the energy component of purchased power costs, and do not affect net income.
Wholesale Revenues Non-Affiliates
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$6.9
|
|
9.0
|
|
$14.4
|
|
9.4 |
|
Wholesale revenues from 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.
In the second quarter 2008, wholesale revenues to non-affiliates were $83.6 million compared to
$76.7 million for the same period in 2007. The increase was due to increased revenues from
customers outside Mississippi Powers service territory of $5.5 million and increased revenues from
customers inside Mississippi Powers service territory of $1.4 million. The $5.5 million increase
in revenues from customers outside Mississippi Powers service territory was primarily due to a
$7.4 million increase associated with higher prices, partially offset by a $1.5 million decrease
associated with decreased sales and a $0.4 million decrease in capacity revenues. Increased prices
were due to the higher marginal cost of fuel which resulted in fewer opportunity sales to customers
outside of Mississippi Powers service territory. The $1.4 million increase in revenues from
customers inside Mississippi Powers service territory is due to a $1.7 million increase in fuel
costs, partially offset by lower demand by customers of approximately $0.3 million.
For year-to-date 2008, wholesale revenues to non-affiliates were $168.4 million compared to $154.0
million for the same period in 2007. The increase was due to increased revenues from customers
outside Mississippi Powers service territory of $10.2 million and increased revenues from
customers inside Mississippi Powers service territory of $4.2 million. The $10.2 million increase
in revenues from customers outside Mississippi Powers service territory was primarily due to an
$11.7 million increase associated with higher prices, partially offset by a $1.2 million decrease
associated with decreased sales and a $0.3 million decrease in capacity revenues. Increased prices
were due to the higher marginal cost of fuel which resulted in fewer opportunity sales to customers
outside of Mississippi Powers service territory. The $4.2 million increase in revenues from
customers inside Mississippi Powers service territory is due to a $5.1 million increase in fuel
costs, partially offset by lower demand by customers of approximately $0.9 million.
Wholesale Revenues Affiliates
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$12.9
|
|
133.5
|
|
$22.4
|
|
78.2 |
|
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 the energy is generally sold at marginal cost.
98
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the second quarter 2008, wholesale revenues from affiliates were $22.5 million compared to $9.7
million for the same period in 2007. The increase was primarily due to a $12.4 million increase in
energy revenues, of which $8.5 million was associated with higher fuel prices and $3.9 million was
associated with increased sales. Capacity revenues increased $0.5 million.
For year-to-date 2008, wholesale revenues from affiliates were $50.9 million compared to $28.6
million for the same period in 2007. The increase was primarily due to a $21.8 million increase in
energy revenues, of which $18.1 million was associated with higher fuel prices and $3.7 million was
associated with increased sales. Capacity revenues increased $0.6 million.
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2008 |
|
Year-to-Date 2008 |
|
|
vs. |
|
vs. |
|
|
Second Quarter 2007 |
|
Year-to-Date 2007 |
|
|
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
Fuel |
|
$ |
16.7 |
|
|
|
13.7 |
|
|
$ |
25.1 |
|
|
|
10.3 |
|
Purchased power non-affiliates |
|
|
4.2 |
|
|
|
331.0 |
|
|
|
5.5 |
|
|
|
247.1 |
|
Purchased power affiliates |
|
|
0.4 |
|
|
|
2.6 |
|
|
|
14.0 |
|
|
|
47.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total fuel and purchased power expenses |
|
$ |
21.3 |
|
|
|
|
|
|
$ |
44.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter 2008, total fuel and purchased power expenses were $161.8 million compared to
$140.5 million for the same period in 2007. The increase in fuel and purchased power expenses was
primarily due to a $20.0 million increase in the cost of fuel and purchased power and a $1.3
million increase related to total KWHs generated and purchased.
For year-to-date 2008, total fuel and purchased power expenses were $320.1 million compared to
$275.5 million for the same period in 2007. The increase in fuel and purchased power expenses was
primarily due to a $41.4 million increase in the cost of fuel and purchased power and a $3.2
million increase related to total KWHs generated and purchased.
Fuel and purchased power transactions do not have a significant impact on earnings since these
costs are generally offset by energy revenues through Mississippi Powers fuel cost recovery
clauses.
Details of Mississippi Powers cost of generation and purchased power are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
Second Quarter |
|
Percent |
|
Year-to-Date |
|
Year-to-Date |
|
Percent |
Average Cost |
|
2008 |
|
2007 |
|
Change |
|
2008 |
|
2007 |
|
Change |
|
|
|
(cents per net KWH) |
|
|
|
|
|
(cents per net KWH) |
|
|
|
|
Fuel |
|
|
4.03 |
|
|
|
3.71 |
|
|
|
8.6 |
|
|
|
3.97 |
|
|
|
3.63 |
|
|
|
9.4 |
|
Purchased power |
|
|
6.77 |
|
|
|
4.14 |
|
|
|
63.5 |
|
|
|
5.94 |
|
|
|
3.77 |
|
|
|
57.6 |
|
|
In the second quarter 2008, fuel expense was $138.9 million compared to $122.2 million for the same
period for 2007. The increase was due to an $11.1 million increase in the prices of coal, gas,
transportation, and emission allowances and a $5.6 million increase in generation from Mississippi
Power-owned facilities.
For year-to-date 2008, fuel expense was $269.0 million compared to $243.9 million for the same
period for 2007. The increase was due to a $22.7 million increase in the prices of coal, gas,
transportation, and emission allowances and a $2.3 million increase in generation from Mississippi
Power-owned facilities.
99
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-affiliates
In the second quarter 2008, purchased power expense from non-affiliates was $5.4 million compared
to $1.3 million for the same period in 2007. The increase was primarily the result of a 199.6%
increase in the average cost of purchased power per KWH and a 43.8% increase in KWH volume
purchased. The increase in prices was due to a higher marginal cost of fuel, while the increase in
volume was a result of lower cost opportunity purchases.
For year-to-date 2008, purchased power expense from non-affiliates was $7.7 million compared to
$2.2 million for the same period in 2007. The increase was primarily the result of a 180.9%
increase in the average cost of purchased power per KWH and a 23.5% increase in KWH volume
purchased. The increase in prices was due to a higher marginal cost of fuel, while the increase in
volume was a result of lower cost opportunity purchases.
Energy purchases from non-affiliates will vary depending on the market cost of available energy
compared to the cost of Southern Company system-generated energy, demand for energy within the
Southern Company system service territory, and availability of Southern Company system generation.
Affiliates
In the second quarter 2008, purchased power from affiliates was $17.5 million compared to $17.0
million for the same period in 2007. The increase was primarily due to a 58.8% increase in the
average cost of purchased power per KWH, partially offset by a 35.4% decrease in KWH volume
purchased.
For year-to-date 2008, purchased power from affiliates was $43.5 million compared to $29.5 million
for the same period in 2007. The increase was primarily due to a 51.2% increase in the average
cost of purchased power per KWH, partially offset by a 2.4% decrease in KWH volume purchased.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter 2008 |
|
Year-to-Date 2008 |
|
|
vs. |
|
vs. |
|
|
Second Quarter 2007 |
|
Year-to-Date 2007 |
|
|
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
Other operations |
|
$ |
2.5 |
|
|
|
5.8 |
|
|
$ |
5.3 |
|
|
|
6.1 |
|
Maintenance |
|
|
0.4 |
|
|
|
2.4 |
|
|
|
4.6 |
|
|
|
14.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Total other operations and maintenance |
|
$ |
2.9 |
|
|
|
|
|
|
$ |
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the second quarter 2008, other operations and maintenance expenses were $63.4 million compared
to $60.4 million for the same period in 2007. The increase in other operations and maintenance
expenses was primarily due to a $2.2 million increase in generation screening and evaluation, a
$1.1 million increase in transmission, and a $1.8 million increase in distribution, primarily due
to the right of way maintenance, partially offset by a $2.1 million decrease in production
primarily due to outage work in 2007.
100
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2008, other operations and maintenance expenses were $128.1 million compared to
$118.2 million for the same period in 2007. The increase in other operations and maintenance
expenses was primarily due to a $3.6 million increase in generation screening and evaluation, a
$1.9 million increase in environmental projects, a $4.2 million increase in distribution, and a
$1.2 million increase in transmission expenses related to right of way maintenance, partially
offset by a $1.4 million decrease in production primarily due to outage work in 2007.
Depreciation and Amortization
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$1.9
|
|
12.9
|
|
$5.7
|
|
19.5 |
|
In the second quarter 2008, depreciation and amortization was $17.1 million compared to $15.2
million for the same period in 2007. The increase was primarily due to a $1.4 million increase in
amortization related to a regulatory liability recorded in 2003 that ended in December 2007 in
connection with the Mississippi PSCs accounting order on Plant Daniel capacity, a $0.6 million
increase for amortization of certain reliability-related maintenance costs deferred in 2007 in
accordance with a Mississippi PSC order, and a $0.5 million increase in depreciation for
transmission and distribution expenditures, partially offset by a $0.7 million decrease in
amortization of environmental costs related to the approved ECO Plan.
For year-to-date 2008, depreciation and amortization was $35.1 million compared to $29.4 million
for the same period in 2007. The increase was primarily due to a $2.8 million increase in
amortization related to a regulatory liability recorded in 2003 that ended in December 2007 in
connection with the Mississippi PSCs accounting order on Plant Daniel capacity, a $1.2 million
increase for amortization of certain reliability-related maintenance costs deferred in 2007 in
accordance with a Mississippi PSC order, a $0.9 million increase in depreciation for transmission
and distribution expenditures, and a $0.4 million increase in amortization of environmental costs
related to the approved ECO Plan.
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.
Taxes Other Than Income Taxes
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$0.8
|
|
5.1
|
|
$3.5
|
|
12.4 |
|
In the second quarter 2008, taxes other than income taxes were $16.3 million compared to $15.5
million for the same period in 2007. The increase was primarily due to a $0.4 million increase in
franchise taxes and a $0.4 million increase in ad valorem taxes.
For year-to-date 2008, taxes other than income taxes were $31.9 million compared to $28.3 million
for the same period in 2007. The increase was primarily due to a $1.0 million increase in
franchise taxes and a $2.4 million increase in ad valorem taxes.
The retail portion of the increase in ad valorem taxes is recoverable under Mississippi Powers ad
valorem tax cost recovery clause and, therefore, does not impact net income.
101
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Income (Expense), Net
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(2.2)
|
|
(43.2)
|
|
$(0.5)
|
|
(9.2) |
|
In the second quarter 2008, other income (expense), net was $2.9 million compared to $5.1 million
for the same period in 2007. The change was primarily the result of a $3.7 million decrease due to
a contract termination in 2007 and a $0.9 million decrease in income associated with customer
projects, partially offset by a $1.3 million increase due to mark to market gains on energy-related
derivative positions and amounts collected from a customer for construction of a substation
project, which had a tax effect of $1.0 million.
For year-to-date 2008, other income (expense), net was $4.5 million compared to $5.0 million for
the same period in 2007. The change was primarily the result of a $3.7 million decrease due to a
contract termination in 2007 and a $0.9 million decrease in income associated with customer
projects partially offset by amounts collected from a customer for construction of a substation
project, which had a tax effect of $2.0 million, and a $1.6 million increase due to mark to market
gains on energy-related derivative positions.
Income Taxes
|
|
|
|
|
|
|
Second Quarter 2008 vs. Second Quarter 2007 |
|
Year-to-Date 2008 vs. Year-to-Date 2007 |
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(2.5)
|
|
(15.2)
|
|
$(4.9)
|
|
(17.3) |
|
In the second quarter 2008, income taxes were $13.7 million compared to $16.1 million for the same
period in 2007. The change of $2.5 million was primarily due to a decrease in pre-tax income.
For year-to-date 2008, income taxes were $23.4 million compared to $28.3 million for the same
period in 2007. The decrease of $4.9 million was primarily due to a decrease in pre-tax income and
the amortization of a regulatory liability of $0.7 million pursuant to a December 2007 regulatory
accounting order from the Mississippi PSC. 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.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Mississippi Powers
future earnings potential. The level of Mississippi Powers future earnings depends on numerous
factors that affect the opportunities, challenges, and risks of Mississippi Powers business of
selling electricity. These factors include Mississippi 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 Mississippi Powers service area in the aftermath of Hurricane Katrina. For additional
information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENTS DISCUSSION AND
ANALYSIS FUTURE EARNINGS POTENTIAL of Mississippi Power in Item 7 of the Form 10-K.
102
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental statutes and regulations
could affect earnings if such costs cannot continue to be fully recovered in rates on a timely
basis. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental
Matters of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power
under Environmental Matters in Item 8 of the Form 10-K for additional information.
New Source Review Actions
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
New Source Review Actions of Mississippi Power in Item 7 and Note 3 to the financial statements of
Mississippi 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, including one facility co-owned by Mississippi
Power. On July 24, 2008, the U.S. District Court for the Northern District of Alabama granted
partial summary judgment in favor of Alabama Power regarding the proper legal test for determining
whether projects are routine maintenance, repair, and replacement and therefore are excluded from
NSR permitting. The decision does not resolve the case, the ultimate outcome of which cannot be
determined at this time.
Clean Air Interstate Rule
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Environmental Statutes and Regulations Air Quality of Mississippi Power in Item 7 of the Form
10-K for background regarding the Clean Air Interstate Rule (CAIR). On July 11, 2008, in response
to petitions brought by certain states and regulated industries challenging particular aspects of
CAIR, the U.S. Court of Appeals for the District of Columbia Circuit issued a decision vacating
CAIR in its entirety and remanding it to the EPA for further action consistent with its opinion.
Mississippi Powers overall environmental compliance strategy has been developed in response to
numerous federal and state regulatory requirements, many of which remain unaffected by the courts
ruling; however, the courts decision has the potential to impact future decision making regarding
capital expenditures, the installation and operation of pollution control equipment, and the
purchase, use, and associated carrying values of emissions allowances. The ultimate impact of the
courts decision cannot be determined at this time and may depend on subsequent legal action,
including issuance of the courts mandate, and future rulemaking and regulatory treatment.
Eight-Hour Ozone Regulations
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Environmental Statutes and Regulations Air Quality of Mississippi Power in Item 7 of the Form
10-K for additional information regarding revisions to the eight-hour ozone air quality standard.
In March 2008, the EPA finalized its revisions to the eight-hour ozone standard, increasing its
stringency. The EPA plans to designate nonattainment areas based on the new standard by 2010, and
new nonattainment areas within Mississippi Powers service territory are expected. The ultimate
outcome of this matter cannot be determined at this time and will depend on subsequent legal action
and/or future nonattainment designations and regulatory plans.
103
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Carbon Dioxide Litigation
On February 26, 2008, the Native Village of Kivalina and the City of Kivalina filed a suit in the
U.S. District Court for the Northern District of California against several electric utilities
(including Southern Company), several oil companies, and a coal company. The plaintiffs are the
governing bodies of an Inupiat village in Alaska. The plaintiffs contend that the village is being
destroyed by erosion allegedly caused by global warming that the plaintiffs attribute to emissions
of greenhouse gases by the defendants. The plaintiffs assert claims for public and private
nuisance and contend that the defendants have acted in concert and are therefore jointly and
severally liable for the plaintiffs damages. The suit seeks damages for lost property values and
for the cost of relocating the village, which cost is alleged to be $95 million to $400 million.
On June 30, 2008, all defendants filed motions to dismiss this case. Southern Company believes
that these claims are without merit and notes that the complaint cites no statutory or regulatory
basis for the claims. The ultimate outcome of this matter cannot be determined at this time.
FERC and Mississippi PSC Matters
Retail Regulatory Matters
Environmental Compliance Overview Plan
See Note 3 to the financial statements of Mississippi Power under Retail Regulatory Matters
Environmental Compliance Overview Plan in Item 8 of the Form 10-K for information on
Mississippi Powers annual environmental filing with the Mississippi PSC. On February 1, 2008,
Mississippi Power filed with the Mississippi PSC its annual ECO Plan evaluation for 2008.
Since the filing of the ECO Plan evaluation on February 1, 2008, the regulations addressing mercury
emissions were altered by a decision issued by the U.S. Court of Appeals for the District of
Columbia Circuit on February 8, 2008. On April 7, 2008, Mississippi Power filed with the
Mississippi PSC a supplemental ECO Plan evaluation in which the projects included in the ECO Plan
evaluation on February 1, 2008 being undertaken primarily for mercury control were removed. See
MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Environmental Statutes and Regulations Air Quality of Mississippi Power in Item 7 of the Form
10-K for a discussion regarding the Clean Air Mercury Rule. In this supplemental ECO Plan filing,
Mississippi Power requested a 15 cent per 1,000 KWH decrease for retail residential customers. The
Mississippi PSC approved the supplemental ECO Plan evaluation on June 11, 2008, with the new rates
effective in June 2008.
Performance Evaluation Plan
See Note 3 to the financial statements of Mississippi Power under Retail Regulatory Matters
Performance Evaluation Plan in Item 8 of the Form 10-K for information on Mississippi Powers base
rates. In a May 2004 order establishing Mississippi Powers forward-looking rate schedule PEP, the
Mississippi PSC ordered that the Mississippi Public Utilities Staff and Mississippi Power review
the operations of the PEP in 2007. By mutual agreement, this review was deferred and is scheduled
to occur in 2008.
In December 2007, Mississippi Power submitted its annual PEP filing for 2008, which resulted in a
rate increase of 1.983%, or $15.5 million annually, effective January 2008. In March 2008,
Mississippi Power submitted its annual PEP lookback filing for 2007, which recommended no surcharge
or refund. The filing is under review by the Mississippi Public Utilities Staff; therefore, the
ultimate outcome of this filing cannot now be determined.
104
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel Cost Recovery
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Fuel Cost
Recovery of Mississippi Power in Item 7 of the Form 10-K for information regarding Mississippi
Powers fuel cost recovery. At June 30, 2008, the under recovered balance of fuel recorded in
Mississippi Powers Condensed Balance Sheets herein was $19.2 million compared to $40.5 million at
December 31, 2007. Mississippi Powers operating revenues are adjusted for differences in actual
recoverable fuel cost and amounts billed in accordance with the currently approved cost recovery
rate. Accordingly, changes to the billing factor will have no significant effect on Mississippi
Powers revenues or net income, but will affect cash flow.
Statewide Electric Generation Needs Review
On April 30, 2008, in accordance with the Mississippi Public Utility Act, the Mississippi PSC
issued an order to develop, publicize, and keep current an analysis of the five-year long-range
needs for expansion of facilities for the generation of electricity in the State of Mississippi.
In its order, the Mississippi PSC directed all affected utilities to submit evidence in support
of their forecasts and plans in accordance with the Mississippi PSCs Public Utilities Rules of
Practice and Procedure. Comments were filed on June 10, 2008, and hearings are scheduled for
August 18, 2008. The ultimate outcome of this matter cannot now be determined.
Mississippi Base Load Construction Legislation
In the 2008 regular session of the Mississippi legislature, a bill was passed and signed by the
Governor on May 9, 2008 to enhance the Mississippi PSCs authority to facilitate development and
construction of base load generation in the State of Mississippi. The bill authorizes, but does
not require, the Mississippi PSC to include in retail base rates, prior to and during
construction, all or a portion of the prudently incurred pre-construction and construction costs
incurred by a utility in constructing a base load electric generating plant. The bill also
provides for periodic prudence reviews by the Mississippi PSC and prohibits the cancellation of
any such generating plant without the approval of the Mississippi PSC. In the event of
cancellation of the construction of the plant without approval of the Mississippi PSC, the bill
authorizes the Mississippi PSC to make a public interest determination as to whether and to what
extent the utility will be afforded rate recovery for costs incurred in connection with