SOUTHERN COMPANY
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES |
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For the Fiscal Year Ended December 31, 2008
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES |
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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Securities registered pursuant to Section 12(b) of the Act:1
Each of the following classes or series of securities registered pursuant to Section 12(b) of the
Act is listed on the New York Stock Exchange.
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Title of each class |
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Registrant |
Common Stock, $5 par value |
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The Southern Company |
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Class A preferred, cumulative, $25 stated capital |
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Alabama Power Company |
5.20% Series |
5.83% Series |
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5.30% Series |
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Senior Notes |
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5 5/8% Series AA |
5.875% Series II |
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5 7/8% Series GG |
6.375% Series JJ |
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5.875% Series 2007B |
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Class A Preferred Stock, non-cumulative, |
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Georgia Power Company |
Par value $25 per share |
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6 1/8% Series |
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Senior Notes |
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5.90% Series O |
6% Series R |
5.70% Series X |
5.75% Series T |
6% Series W |
5.75% Series G2 |
6.375% Series 2007D |
8.20% Series 2008C |
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Long-term
debt payable to affiliated trusts, $25 liquidation amount |
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5 7/8% Trust Preferred Securities3 |
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Senior Notes |
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Gulf Power Company |
5.25% Series H |
5.75% Series I |
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5.875% Series J |
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As of December 31, 2008. |
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Assumed by Georgia Power Company in connection with its merger with Savannah
Electric and Power Company, effective July 1, 2006. |
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Issued by Georgia Power Capital Trust VII and guaranteed by Georgia Power Company. |
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Senior Notes |
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Mississippi Power Company |
5 5/8% Series E |
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Depositary preferred shares, each representing one-fourth
of a share of preferred stock, cumulative, $100 par value |
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5.25% Series |
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Securities registered pursuant to Section 12(g) of the Act:4
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Title of each class |
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Registrant |
Preferred stock, cumulative, $100 par value |
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Alabama Power Company |
4.20% Series
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4.60% Series
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4.72% Series |
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4.52% Series
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4.64% Series
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4.92% Series |
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Preferred stock, cumulative, $100 par value |
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Mississippi Power Company |
4.40% Series
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4.60% Series |
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4.72% Series |
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As of December 31, 2008. |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
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Registrant |
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Yes |
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No |
The Southern Company
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Alabama Power Company
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Georgia Power Company
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Gulf Power Company
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Mississippi Power Company
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Southern Power Company
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ (Response applicable to all registrants.)
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrants were required to file such reports), and (2) have been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
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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Alabama Power Company
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Georgia Power Company
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Gulf Power Company
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Mississippi Power Company
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Southern Power Company
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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.)
Aggregate market value of The Southern Companys common stock held by non-affiliates of The
Southern Company at June 30, 2008: $26.9 billion. All of the common stock of the other registrants
is held by The Southern Company. A description of each registrants common stock follows:
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Description of |
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Shares Outstanding |
Registrant |
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Common Stock |
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at January 31, 2009 |
The Southern Company |
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Par Value $5 Per Share |
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777,621,764 |
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Alabama Power Company |
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Par Value $40 Per Share |
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25,475,000 |
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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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3,142,717 |
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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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Documents incorporated by reference: specified portions of The Southern Companys Definitive Proxy
Statement on Schedule 14A relating to the 2009 Annual Meeting of Stockholders are incorporated by
reference into PART III. In addition, specified portions of the Definitive Information Statements
on Schedule 14C of Alabama Power Company, Georgia Power Company, and Mississippi Power Company
relating to each of their respective 2009 Annual Meetings of Shareholders are incorporated by
reference into PART III.
Southern Power Company meets the conditions set forth in General Instructions I(1)(a) and (b) of
Form 10-K and is therefore filing this Form 10-K with the reduced disclosure format specified in
General Instructions I(2)(b) and (c) of Form 10-K.
This combined Form 10-K 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 company is filed by such company on its own
behalf. Each company makes no representation as to information relating to the other companies.
DEFINITIONS
When used in Items 1 through 5 and Items 9A through 15, the following terms will have the meanings
indicated.
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Term |
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Meaning |
AFUDC
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Allowance for Funds Used During Construction |
Alabama Power |
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Alabama Power Company |
AMEA |
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Alabama Municipal Electric Authority |
Clean Air Act |
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Clean Air Act Amendments of 1990 |
Dalton |
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Dalton Utilities |
DOE |
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United States Department of Energy |
Duke Energy |
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Duke Energy Corporation |
Energy Act of 1992 |
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Energy Policy Act of 1992 |
Energy Act of 2005 |
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Energy Policy Act of 2005 |
Energy Solutions |
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Southern Company Energy Solutions, Inc. |
EPA |
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United States Environmental Protection Agency |
FASB |
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Financial Accounting Standards Board |
FERC |
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Federal Energy Regulatory Commission |
FMPA |
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Florida Municipal Power Agency |
FP&L |
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Florida Power & Light Company |
Georgia Power |
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Georgia Power Company |
Gulf Power |
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Gulf Power Company |
Hampton |
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City of Hampton, Georgia |
IBEW |
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International Brotherhood of Electrical Workers |
IIC |
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Intercompany Interchange Contract |
IPP |
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Independent Power Producer |
IRP |
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Integrated Resource Plan |
IRS |
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Internal Revenue Service |
KUA |
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Kissimmee Utility Authority |
MEAG |
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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 |
Moodys |
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Moodys Investors Service |
NRC |
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Nuclear Regulatory Commission |
OPC |
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Oglethorpe Power Corporation |
OUC |
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Orlando Utilities Commission |
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 |
PowerSouth |
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PowerSouth Energy Cooperative (formerly, Alabama
Electric Cooperative, Inc.) |
PPA |
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Power Purchase Agreement |
Progress Energy Carolinas
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Carolina Power & Light Company, d/b/a Progress
Energy Carolinas, Inc. |
Progress Energy Florida |
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Florida Power Corporation, d/b/a Progress Energy
Florida, Inc. |
PSC |
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Public Service Commission |
registrants |
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The Southern Company, Alabama Power Company,
Georgia Power Company, Gulf Power Company,
Mississippi Power Company, and Southern Power
Company |
ii
DEFINITIONS
(continued)
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Term |
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Meaning |
RFP |
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Request for Proposal |
RUS |
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Rural Utility Service (formerly Rural Electrification Administration) |
S&P |
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Standard and Poors, a division of The
McGraw-Hill Companies |
Savannah Electric |
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Savannah Electric and Power Company (merged
into Georgia Power on July 1, 2006) |
SCS |
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Southern Company Services, Inc. (the system
service company) |
SEC |
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Securities and Exchange Commission |
SEGCO |
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Southern Electric Generating Company |
SEPA |
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Southeastern Power Administration |
SERC |
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Southeastern Electric Reliability Council |
SMEPA |
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South Mississippi Electric Power Association |
Southern Company |
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The Southern Company |
Southern Company system |
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Southern Company, the traditional operating
companies, Southern Power, SEGCO, Southern
Nuclear, SCS, SouthernLINC Wireless, and
other subsidiaries |
Southern Holdings |
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Southern Company Holdings, Inc. |
SouthernLINC Wireless |
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Southern Communications Services, Inc. |
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 Company, Georgia Power
Company, Gulf Power Company, and
Mississippi Power Company |
TVA |
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Tennessee Valley Authority |
Westinghouse |
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Westinghouse Electric Company LLC |
iii
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K 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
and other rate actions, environmental regulations and expenditures, earnings growth, dividend
payout ratios, access to sources of capital, projections for postretirement benefit and nuclear
decommissioning trust contributions, financing activities, completion of construction projects,
plans and estimated costs for new generation resources, impacts of adoption of new accounting
rules, unrecognized tax benefits related to leveraged lease transactions, estimated sales and
purchases under new power sale and purchase agreements, 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 and other
wholesale customers; |
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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 filed by the registrants from
time to time with the SEC. |
The registrants expressly disclaim any obligation to update any forward-looking statements.
iv
PART I
Item 1. BUSINESS
Southern Company was incorporated under the laws of Delaware on November 9, 1945. Southern Company
is domesticated under the laws of Georgia and is qualified to do business as a foreign corporation
under the laws of Alabama. Southern Company owns all of the outstanding common stock of Alabama
Power, Georgia Power, Gulf Power, and Mississippi Power, each of which is an operating public
utility company. The traditional operating companies supply electric service in the states of
Alabama, Georgia, Florida, and Mississippi. More particular information relating to each of the
traditional operating companies is as follows:
Alabama Power is a corporation organized under the laws of the State of Alabama on November 10,
1927, by the consolidation of a predecessor Alabama Power Company, Gulf Electric Company, and
Houston Power Company. The predecessor Alabama Power Company had been in continuous existence
since its incorporation in 1906.
Georgia Power was incorporated under the laws of the State of Georgia on June 26, 1930, and
admitted to do business in Alabama on September 15, 1948. Effective July 1, 2006, Savannah
Electric, formerly a wholly-owned subsidiary of Southern Company, was merged with and into
Georgia Power.
Gulf Power is a Florida corporation that has had a continuous existence since it was originally
organized under the laws of the State of Maine on November 2, 1925. Gulf Power was admitted to
do business in Florida on January 15, 1926, in Mississippi on October 25, 1976, and in Georgia
on November 20, 1984. Gulf Power became a Florida corporation after being domesticated under
the laws of the State of Florida on November 2, 2005.
Mississippi Power was incorporated under the laws of the State of Mississippi on July 12, 1972,
was admitted to do business in Alabama on November 28, 1972, and effective December 21, 1972, by
the merger into it of the predecessor Mississippi Power Company, succeeded to the business and
properties of the latter company. The predecessor Mississippi Power Company was incorporated
under the laws of the State of Maine on November 24, 1924 and was admitted to do business in
Mississippi on December 23, 1924 and in Alabama on December 7, 1962.
In addition, Southern Company owns all of the common stock of Southern Power, which is also an
operating public utility company. Southern Power constructs, acquires, owns, and manages
generation assets and sells electricity at market-based rates in the wholesale market. Southern
Power is a corporation organized under the laws of Delaware on January 8, 2001 and was admitted to
do business in the States of Alabama, Florida, and Georgia on January 10, 2001, in the State of
Mississippi on January 30, 2001, and in the State of North Carolina on February 19, 2007.
Southern Company also owns all the outstanding common stock or membership interests of SouthernLINC
Wireless, Southern Nuclear, SCS, Southern Holdings, and other direct and indirect subsidiaries.
SouthernLINC Wireless provides digital wireless communications for use by Southern Company and its
subsidiary companies and markets these services to the public and also provides wholesale fiber
optic solutions to telecommunication providers in the Southeast. Southern Nuclear operates and
provides services to Alabama Powers and Georgia Powers nuclear plants. SCS is the system service
company providing, at cost, specialized services to Southern Company and its subsidiary companies.
Southern Holdings is an intermediate holding subsidiary for Southern Companys investments in
leveraged leases and various other energy-related businesses.
Alabama Power and Georgia Power each own 50% of the outstanding common stock of SEGCO. SEGCO is an
operating public utility company that owns electric generating units with an aggregate capacity of
1,019,680 kilowatts at Plant Gaston on the Coosa River near Wilsonville, Alabama. Alabama Power
and Georgia Power are each entitled to one-half of SEGCOs capacity and energy. Alabama Power acts
as SEGCOs agent in the operation of SEGCOs units and furnishes coal to SEGCO as fuel for its
units. SEGCO also owns one 230,000 volt transmission line extending from Plant Gaston to the
Georgia state line at which point connection is made with the Georgia Power transmission line
system.
I-1
Southern Companys segment information is included in Note 11 to the financial statements of
Southern Company in Item 8 herein.
The registrants Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and all amendments to those reports are made available on Southern Companys website,
free of charge, as soon as reasonably practicable after such material is electronically filed with
or furnished to the SEC. Southern Companys internet address is www.southerncompany.com.
The Southern Company System
Traditional Operating Companies
The traditional operating companies own generation, transmission, and distribution facilities. See
PROPERTIES in Item 2 herein for additional information on the traditional operating companies
generating facilities. The transmission facilities of each of the traditional operating companies
are connected to the respective companys own generating plants and other sources of power and are
interconnected with the transmission facilities of the other traditional operating companies and
SEGCO by means of heavy-duty high voltage lines. For information on Georgia Powers integrated
transmission system, see Territory Served by the Traditional Operating Companies and Southern
Power herein.
Operating contracts covering arrangements in effect with principal neighboring utility systems
provide for capacity exchanges, capacity purchases and sales, transfers of economy energy, and
other similar transactions. Additionally, the traditional operating companies have entered into
voluntary reliability agreements with the subsidiaries of Entergy Corporation, Florida Electric
Power Coordinating Group, and TVA and with Progress Energy Carolinas, Duke Energy, South Carolina
Electric & Gas Company, and Virginia Electric and Power Company, each of which provides for the
establishment and periodic review of principles and procedures for planning and operation of
generation and transmission facilities, maintenance schedules, load retention programs, emergency
operations, and other matters affecting the reliability of bulk power supply. The traditional
operating companies have joined with other utilities in the Southeast (including those referred to
above) to form the SERC to augment further the reliability and adequacy of bulk power supply.
Through the SERC, the traditional operating companies are represented on the National Electric
Reliability Council.
The IIC provides for coordinating operations of the power producing facilities of the traditional
operating companies and Southern Power and the capacities available to such companies from
non-affiliated sources and for the pooling of surplus energy available for interchange.
Coordinated operation of the entire interconnected system is conducted through a central power
supply coordination office maintained by SCS. The available sources of energy are allocated to the
traditional operating companies and Southern Power to provide the most economical sources of power
consistent with reliable operation. The resulting benefits and savings are apportioned among each
of the companies. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL FERC
Matters Intercompany Interchange Contract of each registrant in Item 7 herein and Note 3 to the
financial statements of each registrant, all under FERC Matters Intercompany Interchange
Contract in Item 8 herein for information on the settlement of the FERC proceeding related to
the IIC.
Southern Company, each traditional operating company, Southern Power, Southern Nuclear, SEGCO, and
other subsidiaries have contracted with SCS to furnish, at direct or allocated cost and upon
request, the following services: general and design engineering, purchasing, accounting and
statistical analysis, finance and treasury, tax, information resources, marketing, auditing,
insurance and pension administration, human resources, systems and procedures, digital wireless
communications, and other services with respect to business and operations and power pool
transactions. Southern Power and SouthernLINC Wireless have also secured from the traditional
operating companies certain services which are furnished at cost and, in the case of Southern Power
which is subject to FERC regulations, in compliance with such regulations.
Alabama Power and Georgia Power each have a contract with Southern Nuclear to operate Plant Farley
and Plants Hatch and Vogtle, respectively. See Regulation Nuclear Regulation herein for
additional information.
I-2
Southern Power
Southern Power is an electric wholesale generation subsidiary with market-based rate authority from
the FERC. Southern Power constructs, acquires, owns, and manages generation assets and sells
electricity at market-based prices in the wholesale market. Southern Powers business activities
are not subject to traditional state regulation like the traditional operating companies but are
subject to regulation by the FERC. Southern Power has attempted to insulate itself from
significant fuel supply, fuel transportation, and electric transmission risks by making such risks
the responsibility of the counterparties to the PPAs. However, Southern Powers future earnings
will depend on the parameters of the wholesale market, federal regulation, and the efficient
operation of its wholesale generating assets. For additional information on Southern Powers
business activities, see MANAGEMENTS DISCUSSION AND ANALYSIS OVERVIEW Business Activities of
Southern Power in Item 7 herein.
In June 2008, Southern Power completed construction on Plant Franklin Unit 3 which added 659
megawatts to the Southern Company system generating capacity. In December 2008, Southern Power
announced plans to construct a 720 megawatt electric generating plant in North Carolina. This new
plant is expected to go into commercial operation in 2012. As of December 31, 2008, Southern Power
had 7,555 megawatts of nameplate capacity in commercial operation.
Other Businesses
Southern Holdings is an intermediate holding subsidiary for Southern Companys investments in
leveraged leases and various other energy-related businesses.
SouthernLINC Wireless provides digital wireless communications for use by Southern Company and its
subsidiary companies and markets its services to non-affiliates within the Southeast. SouthernLINC
Wireless delivers multiple wireless communication options including push to talk, cellular service,
text messaging, wireless internet access, and wireless data. Its system covers approximately
128,000 square miles in the Southeast. SouthernLINC Wireless also provides wholesale fiber optic
solutions to telecommunication providers in the Southeast under the name Southern Telecom.
These efforts to invest in and develop new business opportunities offer potential returns exceeding
those of rate-regulated operations. However, these activities also involve a higher degree of
risk.
I-3
Construction Programs
The subsidiary companies of Southern Company are engaged in continuous construction programs to
accommodate existing and estimated future loads on their respective systems. For estimated
construction and environmental expenditures for the periods 2009 through 2011, see Note 7 to the
financial statements of each traditional operating company and Southern Power under Construction
Program and Expansion Program, respectively, in Item 8 herein. Estimated construction costs in
2009 are expected to be apportioned approximately as follows: (in millions)
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|
Southern |
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|
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|
Company |
|
Alabama |
|
Georgia |
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Gulf |
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Mississippi |
|
Southern |
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|
System* |
|
Power |
|
Power |
|
Power |
|
Power |
|
Power |
|
|
|
New generation |
|
$ |
1,953 |
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|
$ |
|
|
|
$ |
1,209 |
|
|
$ |
6 |
|
|
$ |
48 |
|
|
$ |
690 |
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Environmental |
|
|
1,448 |
|
|
|
584 |
|
|
|
472 |
|
|
|
335 |
|
|
|
28 |
|
|
|
|
|
Other generating
facilities,
including
associated plant
substations |
|
|
543 |
|
|
|
232 |
|
|
|
178 |
|
|
|
42 |
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|
11 |
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|
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59 |
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New business |
|
|
411 |
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|
196 |
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170 |
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|
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29 |
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16 |
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Transmission |
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434 |
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|
|
76 |
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313 |
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25 |
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20 |
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Distribution |
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404 |
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157 |
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189 |
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|
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29 |
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|
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30 |
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Nuclear fuel |
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|
238 |
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|
90 |
|
|
|
148 |
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|
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|
|
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General plant |
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|
222 |
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|
79 |
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75 |
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12 |
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10 |
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$ |
5,653 |
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$ |
1,414 |
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|
$ |
2,754 |
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|
$ |
478 |
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$ |
163 |
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$ |
749 |
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* |
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These amounts include the traditional operating companies and Southern Power (as detailed in the
table above) as well as the amounts for the other subsidiaries. See Other Businesses herein for
additional information. |
The construction programs are subject to periodic review and revision, and actual construction
costs may vary from these estimates because of numerous factors. These factors include: changes in
business conditions; changes in load projections; changes in environmental statutes and
regulations; changes in nuclear plants to meet new regulatory requirements; changes in FERC rules
and regulations; PSC approvals; 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.
Under Georgia law, Georgia Power is required to file an IRP for approval by the Georgia PSC.
Through the IRP process, the Georgia PSC must pre-certify the construction of new power plants and
new PPAs. See Rate Matters Integrated Resource Planning herein for additional information.
See Regulation Environmental Statutes and Regulations herein for additional information with
respect to certain existing and proposed environmental requirements and PROPERTIES Jointly-Owned
Facilities in Item 2 herein for additional information concerning Alabama Powers, Georgia
Powers, and Southern Powers joint ownership of certain generating units and related facilities
with certain non-affiliated utilities.
Financing Programs
See each of the registrants MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND
LIQUIDITY in Item 7 herein and Note 6 to the financial statements of each registrant in Item 8
herein for information concerning financing programs.
Fuel Supply
The traditional operating companies and SEGCOs supply of electricity is derived predominantly
from coal. Southern Powers supply of electricity is primarily fueled by natural gas. See
MANAGEMENTS DISCUSSION AND ANALYSIS RESULTS OF OPERATION Fuel and Purchased Power Expenses
of Southern Company and each traditional operating company in Item 7 herein for information
regarding the electricity generated and the average cost of fuel in cents per net kilowatt-hour
generated for the years 2006 through 2008.
I-4
The traditional operating companies have agreements in place from which they expect to receive
approximately 100% of their coal burn requirements in 2009. These agreements have terms ranging
between one and seven years. In 2008, the weighted average sulfur content of all coal burned by
the traditional operating companies was 0.74% sulfur. This sulfur level, along with banked and
purchased sulfur dioxide allowances, allowed the traditional operating companies to remain within
limits set by the Phase II acid rain requirements of the Clean Air Act. In 2008, Southern Company
purchased approximately $63.5 million of sulfur dioxide and nitrogen oxide emission allowances to
be used in current and future periods. As additional environmental regulations are proposed that
impact the utilization of coal, the traditional operating companies fuel mix will be monitored to
ensure that the traditional operating companies remain in compliance with applicable laws and
regulations. Additionally, Southern Company and the traditional operating companies will continue
to evaluate the need to purchase additional emission allowances and the timing of capital
expenditures for emission control equipment. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE
EARNINGS POTENTIAL Environmental Matters of Southern Company and each traditional operating
company in Item 7 herein for information on the Clean Air Act and global climate issues.
SCS, acting on behalf of the traditional operating companies and Southern Power, has agreements in
place for the natural gas burn requirements of the Southern Company system. For 2009, SCS has
contracted for 220 billion cubic feet of natural gas supply. These agreements cover remaining
terms up to 10 years. In addition to gas supply, SCS has contracts in place for both firm gas
transportation and storage. Management believes that these contracts provide sufficient natural
gas supplies, transportation, and storage to ensure normal operations of the Southern Company
systems natural gas generating units.
Changes in fuel prices to the traditional operating companies are generally reflected in fuel
adjustment clauses contained in rate schedules. See Rate Matters Rate Structure and Cost
Recovery Plans herein for additional information. Southern Powers PPAs generally provide that
the counterparty is responsible for substantially all of the cost of fuel.
Alabama Power and Georgia Power have numerous contracts covering a portion of their nuclear fuel
needs for uranium, conversion services, enrichment services, and fuel fabrication. These contracts
have varying expiration dates and most of them are for less than 10 years. Management believes
that sufficient capacity for nuclear fuel supplies and processing exists to preclude the impairment
of normal operations of the Southern Company systems nuclear generating units.
Alabama Power and Georgia Power have contracts with the United States, acting through the DOE, that
provide for the permanent disposal of spent nuclear fuel. The DOE failed to begin disposing of
spent fuel in 1998, as required by the contracts, and Alabama Power and Georgia Power are pursuing
legal remedies against the government for breach of contract. See Note 3 to the financial
statements of Southern Company, Alabama Power, and Georgia Power under Nuclear Fuel Disposal
Costs in Item 8 herein for additional information.
Territory Served by the Traditional Operating Companies and Southern Power
The territory in which the traditional operating companies provide electric service comprises most
of the states of Alabama and Georgia together with the northwestern portion of Florida and
southeastern Mississippi. In this territory there are non-affiliated electric distribution systems
which obtain some or all of their power requirements either directly or indirectly from the
traditional operating companies. The territory has an area of approximately 120,000 square miles
and an estimated population of approximately 13 million. Southern Power sells electricity at
market-based prices in the wholesale market to investor-owned utilities, IPPs, municipalities, and
electric cooperatives.
Alabama Power is engaged, within the State of Alabama, in the generation and purchase of
electricity and the transmission, distribution, and sale of such electricity at retail in over 650
communities (including Anniston, Birmingham, Gadsden, Mobile, Montgomery, and Tuscaloosa) and at
wholesale to 15 municipally-owned electric distribution systems, 11 of which are served indirectly
through sales to AMEA, and two rural distributing cooperative associations. Alabama Power owns
coal reserves near its Plant Gorgas and uses the output of coal from the reserves in its generating
plants. Alabama Power also sells, and cooperates with dealers in promoting the sale of, electric
appliances.
I-5
Georgia Power is engaged in the generation and purchase of electricity and the transmission,
distribution, and sale of such electricity within the State of Georgia at retail in over 600
communities (including Athens, Atlanta, Augusta, Columbus, Macon, Rome, and Savannah), as well as
in rural areas, and at wholesale currently to OPC, MEAG, Dalton, Hampton, and 30 electric
cooperatives.
Gulf Power is engaged, within the northwestern portion of Florida, in the generation and purchase
of electricity and the transmission, distribution, and sale of such electricity at retail in 71
communities (including Pensacola, Panama City, and Fort Walton Beach), as well as in rural areas,
and at wholesale to a non-affiliated utility and a municipality.
Mississippi Power is engaged in the generation and purchase of electricity and the transmission,
distribution, and sale of such energy within 23 counties in southeastern Mississippi, at retail in
123 communities (including Biloxi, Gulfport, Hattiesburg, Laurel, Meridian, and Pascagoula), as
well as in rural areas, and at wholesale to one municipality, six rural electric distribution
cooperative associations, and one generating and transmitting cooperative.
For information relating to kilowatt-hour sales by classification for the traditional operating
companies, see MANAGEMENTS DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS of each traditional
operating company in Item 7 herein. Also, for information relating to the sources of revenues for
Southern Company, each traditional operating company, and Southern Power, reference is made to
Item 6 herein.
The RUS has authority to make loans to cooperative associations or corporations to enable them to
provide electric service to customers in rural sections of the country. There are 71 electric
cooperative organizations operating in the territory in which the traditional operating companies
provide electric service at retail or wholesale.
One of these organizations, PowerSouth, is a generating and transmitting cooperative selling power
to several distributing cooperatives, municipal systems, and other customers in south Alabama and
northwest Florida. PowerSouth owns generating units with approximately 1,776 megawatts of
nameplate capacity, including an undivided 8.16% ownership interest in Alabama Powers Plant Miller
Units 1 and 2. PowerSouths facilities were financed with RUS loans secured by long-term contracts
requiring distributing cooperatives to take their requirements from PowerSouth to the extent such
energy is available.
Alabama Power and Gulf Power have entered into separate agreements with PowerSouth involving
interconnection between their respective systems. The delivery of capacity and energy from
PowerSouth to certain distributing cooperatives in the service areas of Alabama Power and Gulf
Power is governed by the Southern Company/PowerSouth Network Transmission Service Agreement. The
rates for this service to PowerSouth are on file with the FERC. See PROPERTIES Jointly-Owned
Facilities in Item 2 herein for details of Alabama Powers joint-ownership with PowerSouth of a
portion of Plant Miller.
Four electric cooperative associations, financed by the RUS, operate within Gulf Powers service
area. These cooperatives purchase their full requirements from PowerSouth and SEPA (a federal
power marketing agency). A non-affiliated utility also operates within Gulf Powers service area
and purchases its full requirements from Gulf Power.
Mississippi Power has an interchange agreement with SMEPA, a generating and transmitting
cooperative, pursuant to which various services are provided, including the furnishing of
protective capacity by Mississippi Power to SMEPA.
There are also 65 municipally-owned electric distribution systems operating in the territory in
which the traditional operating companies provide electric service at retail or wholesale.
Forty-eight municipally-owned electric distribution systems and one county-owned system receive
their requirements through MEAG, which was established by a Georgia state statute in 1975. MEAG
serves these requirements from self-owned generation facilities, some of which are acquired and
jointly-owned with Georgia Power, power purchased from Georgia Power, and purchases from other
resources. MEAG also has a pseudo scheduling and services agreement with
I-6
Georgia Power. Dalton serves its requirements from self-owned generation facilities, some of which
are acquired and jointly-owned with Georgia Power, and through purchases from Georgia Power
pursuant to their partial requirements tariff. In addition, Georgia Power serves the full
requirements of Hamptons electric distribution system under a market-based contract. See
PROPERTIES Jointly-Owned Facilities in Item 2 herein for additional information.
Georgia Power has entered into substantially similar agreements with Georgia Transmission
Corporation (formerly OPCs transmission division), MEAG, and Dalton providing for the
establishment of an integrated transmission system to carry the power and energy of all parties.
The agreements require an investment by each party in the integrated transmission system in
proportion to its respective share of the aggregate system load. See PROPERTIES Jointly-Owned
Facilities in Item 2 herein for additional information.
Southern Power has PPAs with some of the traditional operating companies and with other investor
owned utilities, IPPs, municipalities, and electric cooperatives. See MANAGEMENTS DISCUSSION AND
ANALYSIS FUTURE EARNINGS POTENTIAL Power Sales Agreements of Southern Power in Item 7 herein
for additional information concerning Southern Powers PPAs.
SCS, acting on behalf of the traditional operating companies, also has a contract with SEPA
providing for the use of the traditional operating companies facilities at government expense to
deliver to certain cooperatives and municipalities, entitled by federal statute to preference in
the purchase of power from SEPA, quantities of power equivalent to the amounts of power allocated
to them by SEPA from certain United States government hydroelectric projects.
The retail service rights of all electric suppliers in the State of Georgia are regulated by the
Territorial Electric Service Act of 1973. Pursuant to the provisions of this Act, all areas within
existing municipal limits were assigned to the primary electric supplier therein. Areas outside of
such municipal limits were either to be assigned or to be declared open for customer choice of
supplier by action of the Georgia PSC pursuant to standards set forth in this Act. Consistent with
such standards, the Georgia PSC has assigned substantially all of the land area in the state to a
supplier. Notwithstanding such assignments, this Act provides that any new customer locating
outside of 1973 municipal limits and having a connected load of at least 900 kilowatts may exercise
a one-time choice for the life of the premises to receive electric service from the supplier of its
choice. See Competition herein for additional information.
Pursuant to the 1956 Utility Act, the Mississippi PSC issued Grandfather Certificates of public
convenience and necessity to Mississippi Power and to six distribution rural cooperatives operating
in southeastern Mississippi, then served in whole or in part by Mississippi Power, authorizing them
to distribute electricity in certain specified geographically described areas of the state. The
six cooperatives serve approximately 325,000 retail customers in a certificated area of
approximately 10,300 square miles. In areas included in a Grandfather Certificate, the utility
holding such certificate may, without further certification, extend its lines up to five miles;
other extensions within that area by such utility, or by other utilities, may not be made except
upon a showing of, and a grant of a certificate of, public convenience and necessity. Areas
included in such a certificate which are subsequently annexed to municipalities may continue to be
served by the holder of the certificate, irrespective of whether it has a franchise in the annexing
municipality. On the other hand, the holder of the municipal franchise may not extend service into
such newly annexed area without authorization by the Mississippi PSC.
Competition
The electric utility industry in the United States is continuing to evolve as a result of
regulatory and competitive factors. Among the early primary agents of change was the Energy Act of
1992 which allowed IPPs to access a utilitys transmission network in order to sell electricity to
other utilities.
The competition for retail energy sales among competing suppliers of energy is influenced by
various factors, including price, availability, technological advancements, service, and
reliability. These factors are, in turn, affected by, among other influences, regulatory,
political, and environmental considerations, taxation, and supply.
Generally, the traditional operating companies have experienced, and expect to continue to
experience, competition in their respective retail service territories in varying degrees as the
result of self-generation (as described above) by
I-7
customers and other factors. See also Territory Served by the Traditional Operating Companies and
Southern Power herein for additional information concerning suppliers of electricity operating
within or near the areas served at retail by the traditional operating companies.
Southern Power competes with investor owned utilities, IPPs, and others for wholesale energy sales
primarily in the Southeastern United States wholesale market. The needs of this market are driven
by the demands of end users in the Southeast and the generation available. Southern Powers
success in wholesale energy sales is influenced by various factors including reliability and
availability of Southern Powers plants, availability of transmission to serve the demand, price,
and Southern Powers ability to contain costs.
Alabama Power currently has cogeneration contracts in effect with nine industrial customers. Under
the terms of these contracts, Alabama Power purchases excess generation of such companies. During
2008, Alabama Power purchased approximately 114 million kilowatt-hours from such companies at a
cost of $5.6 million.
Georgia Power currently has contracts in effect with eight small power producers whereby Georgia
Power purchases their excess generation. During 2008, Georgia Power purchased 7.2 million
kilowatt-hours from such companies at a cost of $1.0 million. Georgia Power has PPAs for
electricity with two cogeneration facilities. Payments are subject to reductions for failure to
meet minimum capacity output. During 2008, Georgia Power purchased
222.9 million kilowatt-hours at a cost of $67.9 million from these facilities.
Also during 2008, Georgia Power purchased energy from seven customer-owned generating facilities.
Six of the seven customers provide only energy to Georgia Power. These six customers make no
capacity commitment and are not dispatched by Georgia Power. Georgia Power does have a contract
with the remaining customer for eight megawatts of dispatchable capacity and energy. During 2008,
Georgia Power purchased a total of 59.1 million kilowatt-hours from the seven customers at a cost
of approximately $3.0 million.
Gulf Power currently has agreements in effect with various industrial, commercial, and qualifying
facilities pursuant to which Gulf Power purchases as available energy from customer-owned
generation. During 2008, Gulf Power purchased 41.1 million kilowatt-hours from such companies for
approximately $2.7 million.
Mississippi Power currently has a cogeneration agreement in effect with one of its industrial
customers. Under the terms of this contract, Mississippi Power purchases any excess generation.
During 2008, this customer had no excess generation.
Seasonality
The demand for electric power generation is affected by seasonal differences in the weather. At
the traditional operating companies and Southern Power, the demand for power peaks during the
summer months, with market prices reflecting the demand of power and available generating resources
at that time. Power demand peaks can also be recorded during the winter. As a result, the overall
operating results of Southern Company, the traditional operating companies, and Southern Power in
the future may fluctuate substantially on a seasonal basis. In addition, Southern Company, the
traditional operating companies, and Southern Power have historically sold less power when weather
conditions are milder.
Regulation
State Commissions
The traditional operating companies are subject to the jurisdiction of their respective state PSCs.
The PSCs have broad powers of supervision and regulation over public utilities operating in the
respective states, including their rates, service regulations, sales of securities (except for the
Mississippi PSC), and, in the cases of the Georgia PSC and the Mississippi PSC, in part, retail
service territories. See Territory Served by the Traditional Operating Companies and Southern
Power and Rate Matters herein for additional information.
I-8
Federal Power Act
The traditional operating companies, Southern Power and its generation subsidiaries, and SEGCO are
all public utilities engaged in wholesale sales of energy in interstate commerce and therefore are
subject to the rate, financial, and accounting jurisdiction of the FERC under the Federal Power
Act. The FERC must approve certain financings and allows an at cost standard for services
rendered by system service companies such as SCS. The FERC is also authorized to establish
regional reliability organizations which are authorized to enforce reliability standards, to
address impediments to the construction of transmission, and to prohibit manipulative energy
trading practices.
Alabama Power and Georgia Power are also subject to the provisions of the Federal Power Act or the
earlier Federal Water Power Act applicable to licensees with respect to their hydroelectric
developments. Among the hydroelectric projects subject to licensing by the FERC are 14 existing
Alabama Power generating stations having an aggregate installed capacity of 1,662,400 kilowatts and
18 existing Georgia Power generating stations having an aggregate installed capacity of 1,074,696
kilowatts.
On May 22, 2008, the FERC issued a new 30-year license for the Morgan Falls project, located on the
Chattahoochee River near Atlanta, with an effective start date of March 1, 2009. In 2007, Georgia
Power began the relicensing process for Bartletts Ferry which is located on the Chattahoochee
River near Columbus, Georgia. The current Bartletts Ferry license expires in 2014 and the
application for a new license is expected to be submitted to the FERC in 2012. In July 2005,
Alabama Power filed two applications with the FERC for new 50-year licenses for its seven
hydroelectric developments on the Coosa River (Weiss, Henry, Logan Martin, Lay, Mitchell, Jordan,
and Bouldin) and for the Lewis Smith and Bankhead developments on the Warrior River. The FERC
licenses for all of these nine developments expired in July and August 2007. The FERC issued an
annual license for the Coosa developments in August 2007 and issued an annual license for the
Warrior developments in September 2007. Both of these licenses were automatically renewed in 2008
pursuant to FERC regulations. These annual licenses provide the FERC with additional time to
complete its review of the license applications. In 2006, Alabama Power initiated the process of
developing an application to relicense the Martin hydroelectric project located on the Tallapoosa
River. The current Martin license will expire in 2013 and the application for a new license is
expected to be filed with the FERC in 2011. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE
EARNINGS POTENTIAL FERC Matters Hydro Relicensing of Alabama Power in Item 7 herein for
additional information.
Georgia Power and OPC also have a license, expiring in 2027, for the Rocky Mountain Plant, a pure
pumped storage facility of 847,800 kilowatt capacity. See PROPERTIES Jointly-Owned Facilities
in Item 2 herein for additional information.
Licenses for all projects, excluding those discussed above, expire in the period 2015-2034 in the
case of Alabama Powers projects and in the period 2014-2039 in the case of Georgia Powers
projects.
Upon or after the expiration of each license, the United States Government, by act of Congress, may
take over the project or the FERC may relicense the project either to the original licensee or to a
new licensee. In the event of takeover or relicensing to another, the original licensee is to be
compensated in accordance with the provisions of the Federal Power Act, such compensation to
reflect the net investment of the licensee in the project, not in excess of the fair value of the
property, plus reasonable damages to other property of the licensee resulting from the severance
therefrom of the property. If the FERC does not act on the new license application prior to the
expiration of the existing license, the FERC is required to issue annual licenses, under the same
terms and conditions of the existing license, until a new license is issued.
Nuclear Regulation
Alabama Power, Georgia Power, and Southern Nuclear are subject to regulation by the NRC. The NRC
is responsible for licensing and regulating nuclear facilities and materials and for conducting
research in support of the licensing and regulatory process, as mandated by the Atomic Energy Act
of 1954, as amended; the Energy Reorganization Act of 1974, as amended; and the Nuclear
Nonproliferation Act of 1978; and in accordance with the National Environmental Policy Act of 1969,
as amended, and other applicable statutes. These responsibilities also include protecting public
health and safety, protecting the environment, protecting and safeguarding nuclear
I-9
materials and nuclear power plants in the interest of national security, and assuring conformity
with antitrust laws.
The NRC operating licenses for Plant Vogtle units 1 and 2 currently expire in January 2027 and
February 2029, respectively. In January 2002, the NRC granted Georgia Power a 20-year extension of
the licenses for both units at Plant Hatch which permits the operation of units 1 and 2 until 2034
and 2038, respectively. Georgia Power filed an application with the NRC in June 2007 to extend the
licenses for Plant Vogtle units 1 and 2 for an additional 20 years. Georgia Power anticipates the
NRC may make a decision regarding the license extension for Plant Vogtle in 2009. In May 2005, the
NRC granted Alabama Power a 20-year extension of the licenses for both units at Plant Farley which
permits operation of units 1 and 2 until 2037 and 2041, respectively.
In August 2006, Southern Nuclear, on behalf of Georgia Power, OPC, MEAG, and Dalton (collectively,
Owners), filed an application with the NRC for an early site permit approving two additional
nuclear units on the site of Plant Vogtle. See Note 4 to the financial statements of Southern
Company and Georgia Power in Item 8 herein for additional information on these co-owners. On March
31, 2008, Southern Nuclear filed an application with the NRC for a combined construction and
operating license 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 megawatts each and related facilities,
structures, and improvements at Plant Vogtle. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE
EARNINGS POTENTIAL Construction Projects of Southern Company and MANAGEMENTS DISCUSSION AND
ANALYSIS FUTURE EARNINGS POTENTIAL Nuclear Construction of Georgia Power in Item 7 herein
and Note 3 to the financial statements of Southern Company and Georgia Power under Nuclear and
Nuclear Construction, respectively in Item 8 herein for additional information.
See Notes 1 and 9 to the financial statements of Southern Company, Alabama Power, and Georgia Power
in Item 8 herein for information on nuclear decommissioning costs and nuclear insurance.
FERC Matters
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL FERC Matters of each of
the registrants in Item 7 herein for information on matters regarding the FERC.
Environmental Statutes and Regulations
Southern Companys operations are subject to extensive regulation by state and federal
environmental agencies under a variety of statutes and regulations governing environmental media,
including air, water, and land resources. Compliance with these existing environmental
requirements involves significant capital and operating costs, a major portion of which is expected
to be recovered through existing ratemaking provisions. There is no assurance, however, that all
such costs will be recovered.
Compliance with the federal Clean Air Act and resulting regulations has been, and will continue to
be, a significant focus for Southern Company, each traditional operating company, Southern Power,
and SEGCO. In addition, existing environmental laws and regulations may be changed or new laws and
regulations may be adopted or otherwise become applicable to Southern Company, the traditional
operating companies, Southern Power, or SEGCO, including laws and regulations designed to address
global climate change, air quality, water quality, or other environmental, public health, and
welfare concerns. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL
Environmental Matters of Southern Company and each of the traditional
operating companies in Item 7 herein for additional information about the Clean Air Act and other
environmental issues, including the litigation brought by the EPA under the New Source Review
provisions of the Clean Air Act and possible climate change legislation and regulation. Also see
MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters of Southern Power in Item 7 herein for information about the environmental issues
and possible climate change legislation and regulation.
I-10
Southern Company, the traditional operating companies, Southern Power, and SEGCO are unable to
predict at this time what additional steps they may be required to take as a result of the
implementation of existing or future requirements pertaining to climate change, air quality, water
quality, and management of waste materials and combustion byproducts, including coal ash, but such
steps could adversely affect system operations and result in substantial additional costs.
The outcome of the matters mentioned above under Regulation cannot now be determined, except that
these developments may result in delays in obtaining appropriate licenses for generating
facilities, increased construction and operating costs, or reduced generation, the nature and
extent of which, while not determinable at this time, could be substantial.
Rate Matters
Rate Structure and Cost Recovery Plans
The rates and service regulations of the traditional operating companies are uniform for each class
of service throughout their respective service areas. Rates for residential electric service are
generally of the block type based upon kilowatt-hours used and include minimum charges.
Residential and other rates contain separate customer charges. Rates for commercial service are
presently of the block type and, for large customers, the billing demand is generally used to
determine capacity and minimum bill charges. These large customers rates are generally based upon
usage by the customer and include rates with special features to encourage off-peak usage.
Additionally, Alabama Power, Gulf Power, and Mississippi Power are generally allowed by their
respective state PSCs to negotiate the terms and cost of service to large customers. Such terms
and cost of service, however, are subject to final state PSC approval.
Fuel and net purchased energy costs are recovered through specific fuel cost recovery provisions at
the traditional operating companies. These fuel cost recovery provisions are adjusted to reflect
increases or decreases in such costs as needed. Gulf Powers and Mississippi Powers fuel cost
recovery provisions are adjusted annually to reflect increases or decreases in such costs. Georgia
Power expects to file for an adjustment to its fuel cost recovery rate on March 13, 2009. Alabama
Powers fuel clause is adjusted as required. Revenues are adjusted for differences between
recoverable costs and amounts actually recovered in current rates.
Approved environmental compliance and storm damage costs are recovered at Alabama Power, Gulf
Power, and Mississippi Power through cost recovery provisions approved by their respective state
PSCs. Within limits approved by their respective PSCs, these rates are adjusted to reflect
increases or decreases in such costs as required.
Georgia Powers environmental compliance costs were recovered in base rates through 2007. Under
the 2007 retail rate plan, an environmental compliance cost recovery tariff was implemented
effective January 1, 2008 to allow for recovery of most of the costs related to environmental
controls scheduled for completion between 2008 and 2010 that are mandated by state and federal
regulation. Georgia Power has also requested that the Georgia PSC certify the construction of
environmental controls for Plants Branch and Hammond. Georgia Power also continues to recover
storm damage and new plant costs through its base rates. See MANAGEMENTS DISCUSSION AND
ANALYSIS FUTURE EARNINGS POTENTIAL Construction Projects Nuclear of Southern Company and
MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Nuclear Construction of
Georgia Power in Item 7 herein for information regarding legislation currently being considered in
the State of Georgia to allow recovery of financing costs for nuclear construction projects during
the construction period.
Alabama Power recovers the cost of certificated new plant and purchased power capacity and Gulf
Power recovers purchased power capacity and conservation costs through cost recovery provisions
which are adjusted as required to reflect increases or decreases in such costs as needed. Revenues
are adjusted for differences between recoverable costs and amounts actually recovered in current
rates.
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters of Southern
Company and each of the traditional operating companies in Item 7 herein and Note 3 to the
financial statements of Southern Company under Alabama Power Retail Regulatory Matters and
Georgia Power Retail
I-11
Regulatory Matters and Note 3 to the financial statements of each of the traditional operating
companies under Retail Regulatory Matters in Item 8 herein for a discussion of rate matters.
Also, see Note 1 to the financial statements of Southern Company and each of the traditional
operating companies in Item 8 herein for a discussion of recovery of fuel costs, storm damage
costs, and environmental compliance costs through rates.
The traditional operating companies and Southern Power are authorized by the FERC to sell power to
non-affiliates, including short-term opportunity sales, at market-based prices. Specific FERC
approval must be obtained with respect to a market-based contract with an affiliate. See
MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL FERC Matters Market-Based
Rate Authority of each registrant in Item 7 herein and Note 3 to the financial statements of each
registrant under FERC Matters Market-Based Rate Authority in Item 8 herein for a discussion of
rate matters.
Integrated Resource Planning
Triennially, Georgia Power must file an IRP with the Georgia PSC that specifies how it intends to
meet the future electrical needs of its customers through a combination of demand-side and
supply-side resources. The Georgia PSC under state law will certify any new demand-side or
supply-side resources. Once certified, the lesser of actual or certified construction costs and
purchased power costs will be recoverable through rates.
In July 2007, the Georgia PSC approved Georgia Powers 2007 IRP including the following provisions:
(1) retiring the coal units at Plant McDonough and replacing them with combined-cycle natural gas
units; (2) approving new energy efficiency pilot programs and rate recovery of demand-side
management programs; (3) approving pursuit of up to three new renewable generation projects with a
Georgia Power ownership interest; and (4) establishing new nuclear units as a preferred option to
meet demand in the 2015/2016 timeframe (2007 IRP Order).
On August 1, 2008, Georgia Power filed with the Georgia PSC an application for the certification of
Plant Vogtle Units 3 and 4 and the 2008 IRP update (Updated IRP). The application requested that
the Georgia PSC take the following actions: (1) certify the proposed Plant Vogtle Units 3 and 4;
(2) approve the Updated IRP; (3) allow construction work in progress in rate base for Plant Vogtle
Units 3 and 4; (4) institute quarterly construction monitoring and treatment of indexed costs; (5)
approve Georgia Powers recommendation to install emissions controls at Plants Branch and Yates;
and (6) approve the deferral for later cost recovery of the significant expenses incurred in
developing and evaluating coal-fired generation, as required by the 2007 IRP Order. The Georgia
PSC is scheduled to render a decision in March 2009.
Georgia Power also filed with the Georgia PSC an application for certification to convert the
coal-fired unit at Plant Mitchell to a renewable wood biomass facility which would begin service in
June 2012. The Georgia PSC is scheduled to render a decision in March 2009. If certified,
construction on this conversion is expected to begin in the spring of 2011.
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Construction Projects -
Nuclear of Southern Company and MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL
Nuclear Construction of Georgia Power in Item 7 herein for additional information regarding the
proposed Plant Vogtle Units 3 and 4.
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 (Baseload Act). The Baseload
Act authorizes, but does not require, the Mississippi PSC to adopt a cost recovery mechanism
that includes 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. Prior to the passage of the Baseload Act, such costs
would traditionally be recovered only after the plant was placed in service. The Baseload Act
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 Baseload Act authorizes the Mississippi PSC to make a public interest
I-12
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 Southern Company and Mississippi Power cannot now be determined.
On January 16, 2009, Mississippi Power filed for a Certificate of Public Convenience and Necessity
with the Mississippi PSC to allow construction of a new electric generating plant located in Kemper
County, Mississippi. As part of its filing, Mississippi Power has requested certain rate recovery
treatment in accordance with the base load construction legislation. See MANAGEMENTS DISCUSSION
AND ANALYSIS FUTURE EARNINGS POTENTIAL Construction Projects Integrated Coal Gasification
Combined Cycle and Integrated Coal Gasification Combined
Cycle of Southern Company and Mississippi Power,
respectively, in Item 7 herein for additional
information.
Employee Relations
The Southern Company system had a total of 27,276 employees on its payroll at December 31, 2008.
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Employees at December 31, 2008 |
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Alabama Power |
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6,997 |
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Georgia Power* |
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9,337 |
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Gulf Power |
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1,342 |
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Mississippi Power |
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1,317 |
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SCS |
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4,536 |
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Southern Holdings** |
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Southern Nuclear |
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3,346 |
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Southern Power*** |
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Other |
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401 |
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Total |
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27,276 |
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* |
|
Georgia Power has initiated a voluntary attrition plan under which participating employees may
elect to resign from their positions as of March 31, 2009. Approximately 700 employees who have
indicated an interest in participating in the plan have been selected by Georgia Power and are
permitted to resign and receive severance. The ultimate number of employees who resign under the
plan cannot be determined at this time. |
|
** |
|
Southern Holdings has agreements with SCS whereby all employee services are rendered at cost. |
|
*** |
|
Southern Power has no employees. Southern Power has agreements with SCS and the traditional
operating companies whereby employee services are rendered at amounts in compliance with FERC
regulations. |
The traditional operating companies have separate agreements with local unions of the IBEW
generally covering wages, working conditions, and procedures for handling grievances and
arbitration. These agreements apply with certain exceptions to operating, maintenance, and
construction employees.
Alabama Power has agreements with the IBEW on a five-year contract extending to August 15, 2009.
Upon notice given at least 60 days prior to that date, negotiations may be initiated with respect
to agreement terms to be effective after such date.
Georgia Power had an agreement with the IBEW covering wages and working conditions, which was in
effect through June 30, 2008. The terms of the expired agreement are still being followed while
negotiations on a new agreement are ongoing.
Gulf Power has an agreement with the IBEW covering wages and working conditions, which is in effect
through October 14, 2009. Upon notice given at least 60 days prior to that date, negotiations may
be initiated with respect to agreement terms to be effective after such date.
Mississippi Power has an agreement with the IBEW covering wages and working conditions, which is in
effect until
I-13
August 16, 2010. Upon notice given at least 60 days prior to that date, negotiations may be
initiated with respect to agreement terms to be effective after such date.
Southern Nuclear and the IBEW continue in negotiations to ratify a new labor agreement for certain
employees at Plants Hatch and Vogtle. The three-year agreement that was set to expire on June 30,
2008 was extended for one year and remains in full effect. A three-year agreement with the IBEW
representing certain employees at Plant Farley is in effect through August 15, 2009. Upon notice
given at least 60 days prior to August 15, 2009, negotiations may be initiated with respect to a
new agreement after such date.
The agreements also subject the terms of the pension plans for the companies discussed above to
collective bargaining with the unions at either a five-year or a 10-year cycle, depending upon
union and company actions.
I-14
Item 1A. RISK FACTORS
In addition to the other information in this Form 10-K, including MANAGEMENTS DISCUSSION AND
ANALYSIS FUTURE EARNINGS POTENTIAL in Item 7 of each registrant, and other documents filed by
Southern Company and/or its subsidiaries with the SEC from time to time, the following factors
should be carefully considered in evaluating Southern Company and its subsidiaries. Such factors
could affect actual results and cause results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, Southern Company and/or its subsidiaries.
Risks Related to the Energy Industry
Southern Company and its subsidiaries are subject to substantial governmental regulation.
Compliance with current and future regulatory requirements and procurement of necessary approvals,
permits, and certificates may result in substantial costs to Southern Company and its subsidiaries.
Southern Company and its subsidiaries, including the traditional operating companies and Southern
Power, are subject to substantial regulation from federal, state, and local regulatory agencies.
Southern Company and its subsidiaries are required to comply with numerous laws and regulations and
to obtain numerous permits, approvals, and certificates from the governmental agencies that
regulate various aspects of their businesses, including customer rates, service regulations, retail
service territories, sales of securities, asset acquisitions and sales, accounting policies and
practices, and the operation of fossil-fuel, hydroelectric, and nuclear generating facilities. For
example, the rates charged to wholesale customers by the traditional operating companies and by
Southern Power must be approved by the FERC and failure to maintain FERC market-based rate
authority may impact the rates charged to wholesale customers. Additionally, the respective state
PSCs must approve the traditional operating companies rates for retail customers. While the
retail rates approved by the respective state PSCs are designed to provide for recovery of costs
and a return on invested capital, there can be no assurance that a state PSC will not deem certain
costs to be imprudently incurred and not subject to recovery.
Southern Company and its subsidiaries believe the necessary permits, approvals, and certificates
have been obtained for their respective existing operations and that their respective businesses
are conducted in accordance with applicable laws; however, the impact of any future revision or
changes in interpretations of existing regulations or the adoption of new laws and regulations
applicable to Southern Company or any of its subsidiaries cannot now be predicted. Changes in
regulation or the imposition of additional regulations could influence the operating environment of
Southern Company and its subsidiaries and may result in substantial costs.
Risks Related to Environmental and Climate Change Legislation and Regulation
Southern Companys and the traditional operating companies costs of compliance with environmental
laws are significant. The costs of compliance with future environmental laws, including laws and
regulations designed to address global climate change and renewable energy standards, and the
incurrence of environmental liabilities could affect unit retirement decisions and negatively
impact the net income, cash flows, and financial condition of Southern Company, the traditional
operating companies, or Southern Power.
Southern Company, the traditional operating companies, and Southern Power are subject to extensive
federal, state, and local environmental requirements which, among other things, regulate air
emissions, water usage and discharges, and the management of hazardous and solid waste in order to
adequately protect the environment. Compliance with these legal requirements requires Southern
Company, the traditional operating companies, and Southern Power to commit significant expenditures
for installation of pollution control equipment, environmental monitoring, emissions fees, and
permits at all of their respective facilities. These expenditures are significant and Southern
Company, the traditional operating companies, and Southern Power expect that they will increase in
the future. Through 2008, Southern Company had invested approximately $6.3 billion in capital
projects to comply with these requirements, with annual totals of $1.6 billion, $1.5 billion, and
$661 million for 2008, 2007, and 2006, respectively. Southern Company expects that capital
expenditures to assure compliance with existing and new statutes and regulations will be an
additional $1.4 billion, $737 million, and $871 million for 2009, 2010, and 2011, respectively.
Because Southern Companys compliance strategy is impacted by changes to existing environmental
I-15
laws, statutes, and regulations, the cost, availability, and existing inventory of emission
allowances, and Southern Companys fuel mix, the ultimate outcome cannot be determined at this
time.
If Southern Company, any traditional operating company, or Southern Power fails to comply with
environmental laws and regulations, even if caused by factors beyond its control, that failure may
result in the assessment of civil or criminal penalties and fines. The EPA has filed civil actions
against Alabama Power and Georgia Power alleging violations of the new source review provisions of
the Clean Air Act. Southern Company is a party to suits alleging emissions of carbon dioxide, a
greenhouse gas, contribute to global warming. An adverse outcome in any of these cases could
require substantial capital expenditures that cannot be determined at this time and could possibly
require payment of substantial penalties. Such expenditures could affect unit retirement and
replacement decisions, and results of operations, cash flows, and financial condition if such costs
are not recovered through regulated rates.
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.
Existing environmental laws and regulations may be revised or new laws and regulations related to
global climate change, air quality, combustion byproducts, including coal ash, or other
environmental and health concerns may be adopted or become applicable to Southern Company, the
traditional operating companies, and Southern Power. For example, federal legislative proposals
that would impose mandatory requirements on greenhouse gas emissions and renewable energy standards
continue to be strongly considered in Congress, and the reduction of greenhouse gas emissions has
been identified as a high priority by the current Administration. In addition, some states,
including Florida, are considering or have undertaken actions to regulate and reduce greenhouse gas
emissions. In 2007, the U. S. Supreme Court ruled that the EPA has authority to regulate
greenhouse gas emissions from new motor vehicles. The EPA is currently developing its response to
this decision. Regulatory decisions that will follow from this response may have implications for
both new and existing stationary sources, such as power plants.
New or revised laws and regulations or new interpretations of existing laws and regulations, such
as those related to climate change, could affect unit retirement and replacement decisions and/or
result in significant additional expense and operating restrictions on the facilities of the
traditional operating companies or Southern Power or increased compliance costs which may not be
fully recoverable from customers and would therefore reduce the net income of Southern Company, the
traditional operating companies, or Southern Power. The cost impact of such legislation,
regulation, or new interpretations would depend upon the specific requirements enacted and cannot
be determined at this time.
General Risks Related to Operation of Southern Companys Utility Subsidiaries
The regional power market in which Southern Company and its utility subsidiaries compete may have
changing transmission regulatory structures, which could affect the ownership of these assets and
related revenues and expenses.
The traditional operating companies currently own and operate transmission facilities as part of a
vertically integrated utility. Transmission revenues are not separated from generation and
distribution revenues in their approved retail rates. Current FERC efforts that may potentially
change the regulatory and/or operational structure of transmission include rules related to the
standardization of generation interconnection, as well as an inquiry into, among other things,
market power by vertically integrated utilities. The financial condition, net income, and cash
flows of Southern Company and its utility subsidiaries could be adversely affected by future
changes in the federal regulatory or operational structure of transmission.
Deregulation or restructuring in the electric industry may result in increased competition and
unrecovered costs which could negatively impact the net income of Southern Company and the
traditional operating companies and the value of their respective assets.
Increased competition resulting from restructuring efforts could have a significant adverse
financial impact on Southern Company and the traditional operating companies. Any adoption in the
territories served by the traditional
I-16
operating companies of retail competition and the unbundling of regulated energy service could have
a significant adverse financial impact on Southern Company and the traditional operating companies
due to an impairment of assets, a loss of retail customers, lower profit margins, an inability to
recover reasonable costs, or increased costs of capital. Southern Company and the traditional
operating companies cannot predict if or when they may be subject to changes in legislation or
regulation, nor can Southern Company and the traditional operating companies predict the impact of
these changes.
Additionally, the electric utility industry has experienced a substantial increase in competition
at the wholesale level. As a result of changes in federal law and regulatory policy, competition
in the wholesale electricity market has greatly increased due to a greater participation by
traditional electricity suppliers, non-utility generators, IPPs, wholesale power marketers, and
brokers and due to the trading of energy futures contracts on various commodities exchanges. In
addition, FERC rules on transmission service are designed to facilitate competition in the
wholesale market on a nationwide basis by providing greater flexibility and more choices to
wholesale power customers.
Changes to the criteria used by the FERC for approval of market-based rate authority may negatively
impact the traditional operating companies and Southern Powers ability to charge market-based
rates which could negatively impact the net income and cash flow of Southern Company, the
traditional operating companies, and Southern Power.
Each of the traditional operating companies and Southern Power have authorization from the FERC to
sell power to nonaffiliates, including short-term opportunity sales, at market-based prices.
Specific FERC approval must be obtained with respect to a market-based sale to an affiliate.
In 2004, the FERC initiated a proceeding to assess Southern Companys generation dominance within
its retail service territory. The ability to charge market-based rates in other markets is not an
issue in the proceeding. Any new market-based rate sales by any subsidiary of Southern Company in
Southern Companys retail service territory entered into during a 15-month refund period that ended
in May 2006 could be subject to refund to a cost-based rate level.
In November 2007, the presiding administrative law judge issued an initial decision regarding the
methodology to be used in the generation dominance tests. The proceedings are ongoing. The
ultimate outcome of this generation dominance proceeding cannot now be determined, but an adverse
decision by the FERC in a final order could require the traditional operating companies and
Southern Power to charge cost-based rates for certain wholesale sales in the Southern Company
retail service territory, which may be lower than negotiated market-based rates, and could also
result in total refunds of up to $19.7 million, plus interest. Southern Company and its
subsidiaries believe that there is no meritorious basis for an adverse decision in this proceeding
and are vigorously defending themselves in this matter.
In June 2007, the FERC issued its final rule in Order No. 697 regarding market-based rate
authority. The FERC generally retained its current market-based rate standards. Responding to a
number of requests for rehearing, the FERC issued Order No. 697-A on April 21, 2008 and Order No.
697-B on December 12, 2008. These orders largely affirmed the FERCs prior revision and
codification of the regulations governing market-based rates for public utilities. In accordance
with the orders, Southern Company submitted to the FERC an updated market power analysis on
September 2, 2008 related to its continued market-based rate authority. The ultimate outcome of
this matter cannot now be determined.
On October 17, 2008, Southern Company filed with the FERC a revised market-based rate (MBR) tariff
and a new cost-based rate (CBR) tariff. The revised MBR tariff provides for a must offer energy
auction whereby Southern Company offers all of its available energy for sale in a day-ahead auction
and an hour-ahead auction with reserve prices not to exceed the CBR tariff price, after considering
Southern Companys native load requirements, reliability obligations, and sales commitments to
third parties. All sales under the energy auction would be at market clearing prices established
under the auction rules. The new CBR tariff provides for a cost-based price for wholesale sales of
less than a year. On December 18, 2008, the FERC issued an order conditionally accepting the MBR
tariff subject to certain revisions to the auction proposal. On January 21, 2009, Southern Company
made a compliance filing that accepted all the conditions of the MBR tariff order. When this order
becomes final, Southern Company will have 30 days to implement the wholesale auction. On December
31, 2008, the FERC issued an order conditionally accepting
I-17
the CBR tariff subject to providing additional information. On January 30, 2009, Southern Company
filed a response addressing the FERC inquiry to the CBR tariff order. Implementation of the energy
auction in accordance with the MBR tariff order is expected to adequately mitigate going forward
any presumption of market power that Southern Company may have in the Southern Company retail
service territory. The timing of when the FERC may issue final orders on the MBR and CBR tariffs
and the ultimate outcome of these matters cannot be determined at this time.
Risks Related to Southern Company and its Business
Southern Company may be unable to meet its ongoing and future financial obligations and to pay
dividends on its common stock if its subsidiaries are unable to pay upstream dividends or repay
funds to Southern Company.
Southern Company is a holding company and, as such, Southern Company has no operations of its own.
Substantially all of Southern Companys consolidated assets are held by subsidiaries. Southern
Companys ability to meet its financial obligations and to pay dividends on its common stock is
primarily dependent on the net income and cash flows of its subsidiaries and their ability to pay
upstream dividends or to repay funds to Southern Company. Prior to funding Southern Company,
Southern Companys subsidiaries have financial obligations that must be satisfied, including among
others, debt service and preferred and preference stock dividends. Southern Companys subsidiaries
are separate legal entities and have no obligation to provide Southern Company with funds for its
payment obligations.
The financial performance of Southern Company and its subsidiaries may be adversely affected if
they are unable to successfully operate their facilities or perform certain corporate functions.
The financial performance of Southern Company and its subsidiaries depends on the successful
operation of its subsidiaries electric generating, transmission, and distribution facilities.
Operating these facilities involves many risks, including:
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operator error or failure of equipment or processes; |
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operating limitations that may be imposed by environmental or other regulatory
requirements; |
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labor disputes; |
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terrorist attacks; |
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fuel or material supply interruptions; |
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compliance with mandatory reliability standards; |
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information technology system failure; and |
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catastrophic events such as fires, earthquakes, explosions, floods, droughts,
hurricanes, pandemic health events such as an avian influenza, or other similar
occurrences. |
A decrease or elimination of revenues from the electric generation, transmission, or distribution
facilities or an increase in the cost of operating the facilities would reduce the net income and
cash flows and could adversely impact the financial condition of the affected traditional operating
company or Southern Power and of Southern Company.
The traditional operating companies could be subject to higher costs and penalties as a result of
mandatory reliability standards.
As a result of the Energy Policy Act of 2005, owners and operators of bulk power transmission
systems, including the traditional operating companies, are subject to mandatory reliability
standards enacted by the North American
I-18
Reliability Corporation and enforced by the FERC. Compliance with the mandatory reliability
standards may subject the traditional operating companies and Southern Company to higher operating
costs and may result in increased capital expenditures. If any traditional operating company is
found to be in noncompliance with the mandatory reliability standards, the traditional operating
company could be subject to sanctions, including substantial monetary penalties.
The revenues of Southern Company, the traditional operating companies, and Southern Power depend in
part on sales under PPAs. The failure of a counterparty to one of these PPAs to perform its
obligations, or the failure to renew the PPAs, could have a negative impact on the net income and
cash flows of the affected traditional operating company or Southern Power and of Southern Company.
Most of Southern Powers generating capacity has been sold to purchasers under PPAs. In addition,
the traditional operating companies enter into PPAs with non-affiliated parties. Revenues are
dependent on the continued performance by the purchasers of their obligations under these PPAs.
Even though Southern Power and the traditional operating companies have a rigorous credit
evaluation process, the failure of one of the purchasers to perform its obligations could have a
negative impact on the net income and cash flows of the affected traditional operating company or
Southern Power and of Southern Company. Although these credit evaluations take into account the
possibility of default by a purchaser, actual exposure to a default by a purchaser may be greater
than the credit evaluation predicts. Additionally, neither Southern Power nor any traditional
operating company can predict whether the PPAs will be renewed at the end of their respective terms
or on what terms any renewals may be made. If a PPA is not renewed, a replacement PPA cannot be
assured.
Southern Company, the traditional operating companies, and Southern Power may incur additional
costs or delays in the construction of new plants or other facilities and may not be able to
recover their investment. The facilities of the traditional operating companies and Southern Power
require ongoing capital expenditures.
The businesses of the registrants require substantial capital expenditures for investments in new
facilities and capital improvements to transmission, distribution, and generation facilities,
including those to meet environmental standards. Certain of the traditional operating companies
and Southern Power are in the process of constructing new generating facilities and adding
environmental controls equipment at existing generating facilities. Southern Company intends to
continue its strategy of developing and constructing other new facilities, including proposed new
nuclear generating units and a proposed integrated coal gasification combined cycle facility,
expanding existing facilities, and adding environmental control equipment. These types of projects
are long-term in nature and may involve facility designs that have not been finalized or previously
constructed. The completion of these types of projects without delays or cost overruns is subject
to substantial risks, including:
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shortages and inconsistent quality of equipment, materials, and labor; |
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work stoppages; |
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contractor or supplier non-performance under construction or other agreements; |
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delays in or failure to receive necessary permits, approvals, and other regulatory
authorizations; |
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impacts of new and existing laws and regulations, including environmental laws and
regulations; |
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adverse weather conditions; |
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unforeseen engineering problems; |
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changes in project design or scope; |
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environmental and geological conditions; |
I-19
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delays or increased costs to interconnect facilities to transmission grids; |
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unanticipated cost increases, including materials and labor; and |
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attention to other projects. |
If a traditional operating company or Southern Power is unable to complete the development or
construction of a facility or decides to delay or cancel construction of a facility, it may not be
able to recover its investment in that facility and may incur substantial cancellation payments
under equipment purchase orders or construction contracts. Even if a construction project is
completed, the total costs may be higher than estimated and there is no assurance that the
traditional operating company will be able to recover such expenditures through regulated rates.
In addition, construction delays and contractor performance shortfalls can result in the loss of
revenues and may, in turn, adversely affect the net income and financial position of a traditional
operating company or Southern Power and of Southern Company. Furthermore, if construction projects
are not completed according to specification, a traditional operating company or Southern Power and
Southern Company may incur liabilities and suffer reduced plant efficiency, higher operating costs,
and reduced net income.
Once facilities come into commercial operation, ongoing capital expenditures are required to
maintain reliable levels of operation. Significant portions of the traditional operating
companies existing facilities were constructed many years ago. Older generation equipment, even
if maintained in accordance with good engineering practices, may require significant capital
expenditures to maintain efficiency, to comply with changing environmental requirements, or to
provide reliable operations.
Changes in technology may make Southern Companys electric generating facilities owned by the
traditional operating companies and Southern Power less competitive.
A key element of the business model of Southern Company, the traditional operating companies, and
Southern Power is that generating power at central station power plants achieves economies of scale
and produces power at a competitive cost. There are distributed generation technologies that
produce power, including fuel cells, microturbines, wind turbines, and solar cells. It is possible
that advances in technology will reduce the cost of alternative methods of producing power to a
level that is competitive with that of most central station power electric production. If this were
to happen and if these technologies achieved economies of scale, the market share of Southern
Company, the traditional operating companies, and Southern Power could be eroded, and the value of
their respective electric generating facilities could be reduced. It is also possible that rapid
advances in central station power generation technology could reduce the value of the current
electric generating facilities owned by Southern Company, the traditional operating companies, and
Southern Power. Changes in technology could also alter the channels through which electric
customers buy or utilize power, which could reduce the revenues or increase the expenses of
Southern Company, the traditional operating companies, or Southern Power.
Operation of nuclear facilities involves inherent risks, including environmental, health,
regulatory, terrorism, and financial risks, that could result in fines or the closure of Southern
Companys nuclear units owned by Alabama Power or Georgia Power and which may present potential
exposures in excess of insurance coverage.
Alabama Power owns two nuclear units and Georgia Power holds undivided interests in, and contracts
for operation of, four nuclear units. These six units are operated by Southern Nuclear and
represent approximately 3,680 megawatts, or 8.6%, of Southern Companys generation capacity as of
December 31, 2008. These nuclear facilities are subject to environmental, health, and financial
risks such as on-site storage of spent nuclear fuel, the ability to dispose of such spent nuclear
fuel, the ability to maintain adequate reserves for decommissioning, potential liabilities arising
out of the operation of these facilities, and the threat of a possible terrorist attack. Alabama
Power and Georgia Power maintain decommissioning trusts and external insurance coverage to minimize
the financial exposure to these risks; however, it is possible that damages could exceed the amount
of insurance coverage.
The NRC has broad authority under federal law to impose licensing and safety-related requirements
for the operation of nuclear generation facilities. In the event of non-compliance, the NRC has
the authority to impose fines
I-20
or shut down any unit, depending upon its assessment of the severity of the situation, until
compliance is achieved. NRC orders or regulations related to increased security measures and any
future safety requirements promulgated by the NRC could require Alabama Power and Georgia Power to
make substantial operating and capital expenditures at their nuclear plants. In addition, although
Alabama Power, Georgia Power, and Southern Company have no reason to anticipate a serious nuclear
incident at their plants, if an incident did occur, it could result in substantial costs to Alabama
Power or Georgia Power and Southern Company. A major incident at a nuclear facility anywhere in
the world could cause the NRC to limit or prohibit the operation or licensing of any domestic
nuclear unit.
In addition, potential terrorist threats and increased public scrutiny of utilities could result in
increased nuclear licensing or compliance costs that are difficult or impossible to predict.
The generation operations and energy marketing operations of Southern Company, the traditional
operating companies, and Southern Power are subject to risks, many of which are beyond their
control, including changes in power prices and fuel costs, that may reduce Southern Companys, the
traditional operating companies, and Southern Powers revenues and increase costs.
The generation operations and energy marketing operations of Southern Company, the traditional
operating companies, and Southern Power are subject to changes in power prices or fuel costs, which
could increase the cost of producing power or decrease the amount Southern Company, the traditional
operating companies, and Southern Power receive from the sale of power. The market prices for
these commodities may fluctuate significantly over relatively short periods of time. Southern
Company, the traditional operating companies, and Southern Power attempt to mitigate risks
associated with fluctuating fuel costs by passing these costs on to customers through the
traditional operating companies fuel cost recovery clauses or through PPAs. Among the factors
that could influence power prices and fuel costs are:
|
|
|
prevailing market prices for coal, natural gas, uranium, fuel oil, and other
fuels used in the generation facilities of the traditional operating companies and
Southern Power including associated transportation costs, and supplies of such
commodities; |
|
|
|
|
demand for energy and the extent of additional supplies of energy available
from current or new competitors; |
|
|
|
|
liquidity in the general wholesale electricity market; |
|
|
|
|
weather conditions impacting demand for electricity; |
|
|
|
|
seasonality; |
|
|
|
|
transmission or transportation constraints or inefficiencies; |
|
|
|
|
availability of competitively priced alternative energy sources; |
|
|
|
|
forced or unscheduled plant outages for the Southern Company system, its
competitors, or third party providers; |
|
|
|
|
the financial condition of market participants; |
|
|
|
|
the economy in the service territory, the nation, and worldwide, including the
impact of economic conditions on industrial and commercial demand for electricity and
the worldwide demand for fuels; |
|
|
|
|
natural disasters, wars, embargos, acts of terrorism, and other catastrophic
events; and |
|
|
|
|
federal, state, and foreign energy and environmental regulation and
legislation. |
Certain of these factors could increase the expenses of the traditional operating companies or
Southern Power and
I-21
Southern Company. For the traditional operating companies, such increases may not be fully
recoverable through rates. Other of these factors could reduce the revenues of the traditional
operating companies or Southern Power and Southern Company.
The traditional operating companies have experienced underrecovered fuel cost balances and deficits
in their storm cost recovery reserve balances and may continue to experience such balances in the
future. While the traditional operating companies are generally authorized to recover
underrecovered fuel costs through fuel cost recovery clauses and storm recovery costs through
special rate provisions administered by the respective PSCs, recovery may be denied if costs are
deemed to be imprudently incurred and delays in the authorization of such recovery could negatively
impact the cash flows of the affected traditional operating company and Southern Company.
The use of derivative contracts by Southern Company and its subsidiaries in the normal course of
business could result in financial losses that negatively impact the net income of Southern Company
and its subsidiaries.
Southern Company and its subsidiaries, including the traditional operating companies and Southern
Power, use derivative instruments, such as swaps, options, futures, and forwards, to manage their
commodity and interest rate risks and, to a lesser extent, engage in limited trading activities.
Southern Company and its subsidiaries could recognize financial losses as a result of volatility in
the market values of these contracts or if a counterparty fails to perform. In the absence of
actively quoted market prices and pricing information from external sources, the valuation of these
financial instruments can involve managements judgment or use of estimates. As a result, changes
in the underlying assumptions or use of alternative valuation methods could affect the value of the
reported fair value of these contracts.
The traditional operating companies and Southern Power may not be able to obtain adequate fuel
supplies, which could limit their ability to operate their facilities.
The traditional operating companies and Southern Power purchase fuel, including coal, natural gas,
uranium, and fuel oil, from a number of suppliers. Disruption in the delivery of fuel, including
disruptions as a result of, among other things, transportation delays, weather, labor relations,
force majeure events, or environmental regulations affecting any of these fuel suppliers, could
limit the ability of the traditional operating companies and Southern Power to operate their
respective facilities, and thus reduce the net income of the affected traditional operating company
or Southern Power and Southern Company.
The traditional operating companies are dependent on coal for much of their electric generating
capacity. Each traditional operating company has coal supply contracts in place; however, there
can be no assurance that the counterparties to these agreements will fulfill their obligations to
supply coal to the traditional operating companies. The suppliers under these agreements may
experience financial or technical problems which inhibit their ability to fulfill their obligations
to the traditional operating companies. In addition, the suppliers under these agreements may not
be required to supply coal to the traditional operating companies under certain circumstances, such
as in the event of a natural disaster. If the traditional operating companies are unable to obtain
their coal requirements under these contracts, the traditional operating companies may be required
to purchase their coal requirements at higher prices, which may not be fully recoverable through
rates.
In addition, Southern Power in particular, and the traditional operating companies to a lesser
extent, are dependent on natural gas for a portion of their electric generating capacity. Natural
gas supplies can be subject to disruption in the event production or distribution is curtailed,
such as in the event of a hurricane.
In addition, world market conditions for fuels can impact the availability of natural gas, coal,
and uranium.
Demand for power could exceed supply capacity, resulting in increased costs for purchasing capacity
in the open market or building additional generation capabilities.
Through the traditional operating companies and Southern Power, Southern Company is currently
obligated to supply power to retail customers and wholesale customers under long-term PPAs. At
peak times, the demand for power required to meet this obligation could exceed Southern Companys
available generation capacity. Market or
I-22
competitive forces may require that the traditional operating companies or Southern Power purchase
capacity on the open market or build additional generation capabilities. Because regulators may
not permit the traditional operating companies to pass all of these purchase or construction costs
on to their customers, the traditional operating companies may not be able to recover any of these
costs or may have exposure to regulatory lag associated with the time between the incurrence of
costs of purchased or constructed capacity and the traditional operating companies recovery in
customers rates. Under Southern Powers long-term fixed price PPAs, Southern Power would not have
the ability to recover any of these costs. These situations could have negative impacts on net
income and cash flows for the affected traditional operating company or Southern Power and Southern
Company.
Demand for power could decrease or fail to grow at expected rates, resulting in stagnant or reduced
revenues, limited growth opportunities, and potentially stranded generation assets.
Southern Company, the traditional operating companies, and Southern Power collectively engage in a
long-term planning process to determine the optimal mix and timing of new generation assets
required to serve future load obligations. This planning process must look many years into the
future in order to accommodate the long lead times associated with the permitting and construction
of new generation facilities. Inherent risk exists in predicting demand this far into the future
as these future loads are dependent on many uncertain factors, including regional economic
conditions, customer usage patterns, efficiency programs, and customer technology adoption.
Because regulators may not permit the traditional operating companies to adjust rates to recover
the costs of new generation assets while such assets are being constructed, the traditional
operating companies may not be able to fully recover these costs or may have exposure to regulatory
lag associated with the time between the incurrence of costs of additional capacity and the
traditional operating companies recovery in customers rates. Under Southern Powers model of
selling capacity and energy at negotiated market-based rates under long-term PPAs, Southern Power
might not be able to fully execute its business plan if market prices drop below original
forecasts. Southern Power may not be able to extend its existing PPAs or to find new buyers for
existing generation assets as existing PPAs expire, or it may be forced to market these assets at
prices lower than originally intended. These situations could have negative impacts on net income
and cash flows for the affected traditional operating company or Southern Power and Southern
Company.
The operating results of Southern Company, the traditional operating companies, and Southern Power
are affected by weather conditions and may fluctuate on a seasonal and quarterly basis.
Electric power supply is generally a seasonal business. In many parts of the country, demand for
power peaks during the summer months, with market prices also peaking at that time. In other
areas, power demand peaks during the winter. As a result, the overall operating results of
Southern Company, the traditional operating companies, and Southern Power in the future may
fluctuate substantially on a seasonal basis. In addition, Southern Company, the traditional
operating companies, and Southern Power have historically sold less power when weather conditions
are milder. Unusually mild weather in the future could reduce the revenues, net income, available
cash, and borrowing ability of Southern Company, the traditional operating companies, and Southern
Power.
Mirant and The Official Committee of Unsecured Creditors of Mirant Corporation have filed a claim
against Southern Company seeking substantial monetary damages in connection with transfers made by
Mirant to Southern Company prior to the Mirant spin-off. An adverse outcome of this litigation
could negatively impact the net income and cash flows of Southern Company.
Mirant was an energy company with businesses that included independent power projects and energy
trading and risk management companies in the U.S. and selected other countries. It was a
wholly-owned subsidiary of Southern Company until its initial public offering in October 2000. In
April 2001, Southern Company completed a spin-off to its shareholders of its remaining ownership,
and Mirant became an independent corporate entity.
In July 2003, Mirant and certain of its affiliates filed for voluntary reorganization under
Chapter 11 of the Bankruptcy Code. In January 2006, Mirants plan of reorganization became
effective, and Mirant emerged from bankruptcy. As part of the plan, Mirant transferred
substantially all of its assets and its restructured debt to a new corporation that adopted the
name Mirant Corporation (Reorganized Mirant).
I-23
In December 2004, as a result of concluding an IRS audit for the tax years 2000 and 2001, Southern
Company paid approximately $39 million in additional tax and interest related to Mirant tax items
and filed a claim in Mirants bankruptcy case for that amount. Through December 2008, Southern
Company received from the IRS approximately $38 million in refunds related to Mirant. Southern
Company believes it has a right to recoup the $39 million tax payment owed by Mirant from such tax
refunds. As a result, Southern Company intends to retain the tax refunds and reduce its claim
against Mirant for the payment of Mirant taxes by the amount of such refunds. MC Asset Recovery, a
special purpose subsidiary of Reorganized Mirant, has objected to and sought to equitably
subordinate the Southern Company tax claim in its fraudulent transfer litigation against Southern
Company. Southern Company has reserved the remaining amount with respect to its Mirant tax claim.
If Southern Company is ultimately required to make any additional payments either with respect to
the IRS audit or its contingent obligations under guarantees of Mirant subsidiaries, Mirants
indemnification obligation to Southern Company for these additional payments, if allowed, would
constitute unsecured claims against Mirant, entitled to stock in Reorganized Mirant. The final
outcome of this matter cannot now be determined.
In June 2005, Mirant, as a debtor in possession, and The Official Committee of Unsecured Creditors
of Mirant Corporation filed a complaint against Southern Company in the U.S. Bankruptcy Court for
the Northern District of Texas, which was amended in July 2005, February 2006, May 2006, and March
2007. In January 2006, MC Asset Recovery was substituted as plaintiff. The fourth amended
complaint (the complaint) alleges that Southern Company caused Mirant to engage in certain
fraudulent transfers and to pay illegal dividends to Southern Company prior to the spin-off. The
complaint also seeks to recharacterize certain advances from Southern Company to Mirant for
investments in energy facilities from debt to equity. The complaint further alleges that Southern
Company is liable to Mirants creditors for the full amount of Mirants liability under an alter
ego theory of recovery and that Southern Company breached its fiduciary duties to Mirant and its
creditors, caused Mirant to breach its fiduciary duties to creditors, and aided and abetted
breaches of fiduciary duties by Mirants directors and officers. The complaint also seeks
recoveries under the theories of restitution and unjust enrichment. In addition, the complaint
alleged a claim under the Federal Debt Collection Procedure Act (FDCPA) to avoid certain transfers
from Mirant to Southern Company; however, on July 7, 2008, the court ruled that the FDCPA does not
apply and that Georgia law should apply instead. The complaint seeks monetary damages in excess of
$2 billion plus interest, punitive damages, attorneys fees, and costs. Finally, the complaint
includes an objection to Southern Companys pending claims against Mirant in the Bankruptcy Court
(which relate to reimbursement under the separation agreements of payments such as income taxes,
interest, legal fees, and other guarantees described in Note 7 to the financial statements of
Southern Company in Item 8 herein) and seeks equitable subordination of Southern Companys claims
to the claims of all other creditors. Southern Company served an answer to the complaint in April
2007.
In February 2006, the Companys motion to transfer the case to the U.S. District Court for the
Northern District of Georgia was granted. In May 2006, Southern Company filed a motion for summary
judgment seeking entry of judgment against the plaintiff as to all counts in the complaint. In
December 2006, the U.S. District Court for the Northern District of Georgia granted in part and
denied in part the motion. As a result, certain breach of fiduciary duty claims alleged in earlier
versions of the complaint were barred; all other claims were allowed to proceed. On August 6,
2008, Southern Company filed a second motion for summary judgment. MC Asset Recovery filed its
response to Southern Companys motion for summary judgment on October 20, 2008. On February 5,
2009, the court denied Southern Companys summary judgment motion in connection with the fraudulent
conveyance and illegal dividend claims concerning certain advance return/loan repayments in 1999,
dividends in 1999 and 2000, and transfers in connection with Mirants separation from Southern
Company. The court granted the motion with respect to certain claims, including claims for
restitution and unjust enrichment, claims that Southern Company aided and abetted Mirants
directors breach of fiduciary duties to Mirant, and claims that Southern Company used Mirant as an
alter ego. In addition, the court granted Southern Companys motion in connection with the
fraudulent transfer and illegal dividend claims concerning certain turbine termination payments.
Southern Company believes there is no meritorious basis for the claims in the complaint and is
vigorously defending itself in this action. See Note 3 to the financial statements of Southern
Company under Mirant Matters MC Asset Recovery Litigation in Item 8 herein. The ultimate
outcome of these matters cannot now be determined at this time.
I-24
Risks Related to Market and Economic Volatility
The business of Southern Company, the traditional operating companies, and Southern Power is
dependent on their ability to successfully access funds through capital markets and financial
institutions. The inability of Southern Company, any traditional operating company, or Southern
Power to access funds may limit its ability to execute its business plan by impacting its ability
to fund capital investments or acquisitions that Southern Company, the traditional operating
companies, or Southern Power may otherwise rely on to achieve future earnings and cash flows.
Southern Company, the traditional operating companies, and Southern Power rely on access to both
short-term money markets and longer-term capital markets as a significant source of liquidity for
capital requirements not satisfied by the cash flow from their respective operations. If Southern
Company, any traditional operating company, or Southern Power is not able to access capital at
competitive rates, its ability to implement its business plan will be limited by impacting its
ability to fund capital investments or acquisitions that Southern Company, the traditional
operating companies, or Southern Power may otherwise rely on to achieve future earnings and cash
flows. In addition, Southern Company, the traditional operating companies, and Southern Power rely
on committed bank lending agreements as back-up liquidity which allows them to access low cost
money markets. Each of Southern Company, the traditional operating companies, and Southern Power
believes that it will maintain sufficient access to these financial markets based upon current
credit ratings. However, certain market disruptions or a downgrade of the credit rating of
Southern Company, any traditional operating company, or Southern Power may increase its cost of
borrowing, adversely affect its ability to raise capital through the issuance of securities or
other borrowing arrangements or its ability to secure committed bank lending agreements used as
back-up sources of capital. Such disruptions could include:
|
|
|
an economic downturn or uncertainty; |
|
|
|
|
the bankruptcy of an unrelated energy company or financial institution; |
|
|
|
|
capital markets volatility and interruption; |
|
|
|
|
financial institution distress; |
|
|
|
|
market prices for electricity and gas; |
|
|
|
|
terrorist attacks or threatened attacks on Southern Companys facilities or
unrelated energy companies facilities; |
|
|
|
|
war or threat of war; or |
|
|
|
|
the overall health of the utility and financial institution industries. |
Market performance and other changes may decrease the value of benefit plans and decommissioning
trust assets, which then could require significant additional funding.
The performance of the capital markets affects the values of the assets held in trust under
Southern Companys pension and postretirement benefit plans and the assets held in trust to satisfy
obligations to decommission Alabama Powers and Georgia Powers nuclear plants. Southern Company,
Alabama Power, and Georgia Power have significant obligations in these areas and hold significant
assets in these trusts. These assets are subject to market fluctuations and will yield uncertain
returns, which may fall below projected return rates. A decline in the market value of these
assets, as has been experienced in prior periods, may increase the funding requirements relating to
Southern Companys benefit plan liabilities and Alabama Powers and Georgia Powers decommissioning
obligations. Additionally, changes in interest rates affect the liabilities under Southern
Companys pension and postretirement benefit plans; as interest rates decrease, the liabilities
increase, potentially requiring additional funding. Further, changes in demographics, including
increased numbers of retirements or changes in life expectancy assumptions, may also increase the
funding requirements of the obligations related to the pension benefit plans. If Southern Company
is unable to successfully manage benefit plan assets and Alabama Power and Georgia
I-25
Power are unable to successfully manage the decommissioning trust funds, results of operations and
financial position could be negatively affected.
Southern Company, the traditional operating companies, and Southern Power are subject to risks
associated with a changing economic environment, which could impact their ability to obtain
adequate insurance and the financial stability of the customers of the traditional operating
companies and Southern Power.
The financial condition of some insurance companies, the threat of terrorism, and the hurricanes
that affected the Gulf Coast, among other things, have had disruptive effects on the insurance
industry. The availability of insurance covering risks that Southern Company, the traditional
operating companies, Southern Power, and their respective competitors typically insure against may
decrease, and the insurance that Southern Company, the traditional operating companies, and
Southern Power are able to obtain may have higher deductibles, higher premiums, and more
restrictive policy terms. Additionally, any economic downturn or disruption of financial markets
could negatively affect the financial stability of the customers and counterparties of the
traditional operating companies and Southern Power. These factors could adversely affect Southern
Companys subsidiaries ability to maintain energy sales, thereby decreasing Southern Companys
level of future net income.
Certain of the traditional operating companies have substantial investments in the Atlantic or Gulf
Coast regions which can be subject to major storm activity. The ability of the traditional
operating companies to recover costs and replenish reserves in the event of a major storm, other
natural disaster, terrorist attack, or other catastrophic event generally will require regulatory
action.
Each traditional operating company maintains a reserve for property damage to cover the cost of
damages from major storms to its transmission and distribution lines and the cost of uninsured
damages to its generating facilities and other property. In the event a traditional operating
company experiences a natural disaster, terrorist attack, or other catastrophic event, recovery of
costs in excess of reserves and insurance coverage is subject to the approval of its state PSC.
While the traditional operating companies generally are entitled to recover prudently incurred
costs incurred in connection with such an event, any denial by the applicable state PSC or delay in
recovery of any portion of such costs could have a material negative impact on a traditional
operating companys and Southern Companys results of operations and/or cash flows.
Item 1B. UNRESOLVED STAFF COMMENTS.
None.
I-26
Item 2. PROPERTIES
Electric Properties The Electric Utilities
The traditional operating companies, Southern Power, and SEGCO, at December 31, 2008, owned and/or
operated 34 hydroelectric generating stations, 34 fossil fuel generating stations, three nuclear
generating stations, and 12 combined cycle/cogeneration stations. The amounts of capacity for each
company are shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
Nameplate |
Generating Station |
|
Location |
|
Capacity (1) |
|
|
|
|
(Kilowatts) |
FOSSIL STEAM |
|
|
|
|
|
|
Gadsden |
|
Gadsden, AL |
|
|
120,000 |
|
Gorgas |
|
Jasper, AL |
|
|
1,221,250 |
|
Barry |
|
Mobile, AL |
|
|
1,525,000 |
|
Greene County |
|
Demopolis, AL |
|
|
300,000 |
(2) |
Gaston Unit 5 |
|
Wilsonville, AL |
|
|
880,000 |
|
Miller |
|
Birmingham, AL |
|
|
2,532,288 |
(3) |
|
|
|
|
|
|
|
Alabama Power Total |
|
|
|
|
6,578,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bowen |
|
Cartersville, GA |
|
|
3,160,000 |
|
Branch |
|
Milledgeville, GA |
|
|
1,539,700 |
|
Hammond |
|
Rome, GA |
|
|
800,000 |
|
Kraft |
|
Port Wentworth, GA |
|
|
281,136 |
|
McDonough |
|
Atlanta, GA |
|
|
490,000 |
|
McIntosh |
|
Effingham County, GA |
|
|
163,117 |
|
McManus |
|
Brunswick, GA |
|
|
115,000 |
|
Mitchell |
|
Albany, GA |
|
|
125,000 |
|
Scherer |
|
Macon, GA |
|
|
750,924 |
(4) |
Wansley |
|
Carrollton, GA |
|
|
925,550 |
(5) |
Yates |
|
Newnan, GA |
|
|
1,250,000 |
|
|
|
|
|
|
|
|
Georgia Power Total |
|
|
|
|
9,600,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crist |
|
Pensacola, FL |
|
|
970,000 |
|
Daniel |
|
Pascagoula, MS |
|
|
500,000 |
(6) |
Lansing Smith |
|
Panama City, FL |
|
|
305,000 |
|
Scholz |
|
Chattahoochee, FL |
|
|
80,000 |
|
Scherer Unit 3 |
|
Macon, GA |
|
|
204,500 |
(4) |
|
|
|
|
|
|
|
Gulf Power Total |
|
|
|
|
2,059,500 |
|
|
|
|
|
|
|
|
|
Daniel |
|
Pascagoula, MS |
|
|
500,000 |
(6) |
Eaton |
|
Hattiesburg, MS |
|
|
67,500 |
|
Greene County |
|
Demopolis, AL |
|
|
200,000 |
(2) |
Sweatt |
|
Meridian, MS |
|
|
80,000 |
|
Watson |
|
Gulfport, MS |
|
|
1,012,000 |
|
|
|
|
|
|
|
|
Mississippi Power Total |
|
|
|
|
1,859,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaston Units 1-4 |
|
Wilsonville, AL |
|
|
|
|
SEGCO Total |
|
|
|
|
1,000,000 |
(7) |
|
|
|
|
|
|
|
Total Fossil Steam |
|
|
|
|
21,097,965 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NUCLEAR STEAM |
|
|
|
|
|
|
Farley |
|
Dothan, AL |
|
|
|
|
Alabama Power Total |
|
|
|
|
1,720,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hatch |
|
Baxley, GA |
|
|
899,612 |
(8) |
Vogtle |
|
Augusta, GA |
|
|
1,060,240 |
(9) |
|
|
|
|
|
|
|
Georgia Power Total |
|
|
|
|
1,959,852 |
|
|
|
|
|
|
|
|
Total Nuclear Steam |
|
|
|
|
3,679,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMBUSTION TURBINES |
|
|
|
|
|
|
Greene County |
|
Demopolis, AL |
|
|
|
|
Alabama Power Total |
|
|
|
|
720,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boulevard |
|
Savannah, GA |
|
|
59,100 |
|
Bowen |
|
Cartersville, GA |
|
|
39,400 |
|
Intercession City |
|
Intercession City, FL |
|
|
47,667 |
(10) |
Kraft |
|
Port Wentworth, GA |
|
|
22,000 |
|
McDonough |
|
Atlanta, GA |
|
|
78,800 |
|
McIntosh Units 1 through 8 |
|
Effingham County, GA |
|
|
640,000 |
|
McManus |
|
Brunswick, GA |
|
|
481,700 |
|
Mitchell |
|
Albany, GA |
|
|
118,200 |
|
Robins |
|
Warner Robins, GA |
|
|
158,400 |
|
Wansley |
|
Carrollton, GA |
|
|
26,322 |
|
Wilson |
|
Augusta, GA |
|
|
354,100 |
|
|
|
|
|
|
|
|
Georgia Power Total |
|
|
|
|
2,025,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lansing Smith Unit A |
|
Panama City, FL |
|
|
39,400 |
|
Pea Ridge Units 1-3 |
|
Pea Ridge, FL |
|
|
15,000 |
|
|
|
|
|
|
|
|
Gulf Power Total |
|
|
|
|
54,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chevron
Cogenerating Station |
|
Pascagoula, MS |
|
|
147,292 |
(11) |
Sweatt |
|
Meridian, MS |
|
|
39,400 |
|
I-27
|
|
|
|
|
|
|
|
|
|
|
Nameplate |
Generating Station |
|
Location |
|
Capacity (1) |
|
|
|
|
(Kilowatts) |
Watson |
|
Gulfport, MS |
|
|
39,360 |
|
|
|
|
|
|
|
|
Mississippi Power Total |
|
|
|
|
226,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dahlberg |
|
Jackson County, GA |
|
|
756,000 |
|
DeSoto |
|
Arcadia, FL |
|
|
343,760 |
|
Oleander |
|
Cocoa, FL |
|
|
791,301 |
|
Rowan |
|
Salisbury, NC |
|
|
455,250 |
|
|
|
|
|
|
|
|
Southern Power Total |
|
|
|
|
2,346,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaston (SEGCO) |
|
Wilsonville, AL |
|
|
19,680 |
(7) |
|
|
|
|
|
|
|
Total Combustion Turbines |
|
|
|
|
5,392,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COGENERATION |
|
|
|
|
|
|
Washington County |
|
Washington County, AL |
|
|
123,428 |
|
GE Plastics Project |
|
Burkeville, AL |
|
|
104,800 |
|
Theodore |
|
Theodore, AL |
|
|
236,418 |
|
|
|
|
|
|
|
|
Total Cogeneration |
|
|
|
|
464,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMBINED CYCLE |
|
|
|
|
|
|
Barry |
|
Mobile, AL |
|
|
|
|
Alabama Power Total |
|
|
|
|
1,070,424 |
|
|
|
|
|
|
|
|
McIntosh Units 10&11 |
|
Effingham County, GA |
|
|
|
|
Georgia Power Total |
|
|
|
|
1,318,920 |
|
|
|
|
|
|
|
|
Smith |
|
Lynn Haven, FL |
|
|
|
|
Gulf Power Total |
|
|
|
|
545,500 |
|
|
|
|
|
|
|
|
Daniel (Leased) |
|
Pascagoula, MS |
|
|
|
|
Mississippi Power Total |
|
|
|
|
1,070,424 |
|
|
|
|
|
|
|
|
Franklin |
|
Smiths, AL |
|
|
1,857,820 |
|
Harris |
|
Autaugaville, AL |
|
|
1,318,920 |
|
Rowan |
|
Salisbury, NC |
|
|
530,550 |
|
Stanton Unit A |
|
Orlando, FL |
|
|
428,649 |
(12) |
Wansley |
|
Carrollton, GA |
|
|
1,073,000 |
|
|
|
|
|
|
|
|
Southern Power Total |
|
|
|
|
5,208,939 |
|
|
|
|
|
|
|
|
Total Combined Cycle |
|
|
|
|
9,214,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HYDROELECTRIC FACILITIES |
|
|
|
|
|
|
Bankhead |
|
Holt, AL |
|
|
53,985 |
|
Bouldin |
|
Wetumpka, AL |
|
|
225,000 |
|
Harris |
|
Wedowee, AL |
|
|
132,000 |
|
Henry |
|
Ohatchee, AL |
|
|
72,900 |
|
Holt |
|
Holt, AL |
|
|
46,944 |
|
Jordan |
|
Wetumpka, AL |
|
|
100,000 |
|
Lay |
|
Clanton, AL |
|
|
177,000 |
|
Lewis Smith |
|
Jasper, AL |
|
|
157,500 |
|
Logan Martin |
|
Vincent, AL |
|
|
135,000 |
|
Martin |
|
Dadeville, AL |
|
|
182,000 |
|
Mitchell |
|
Verbena, AL |
|
|
170,000 |
|
Thurlow |
|
Tallassee, AL |
|
|
81,000 |
|
Weiss |
|
Leesburg, AL |
|
|
87,750 |
|
Yates |
|
Tallassee, AL |
|
|
47,000 |
|
|
|
|
|
|
|
|
Alabama Power Total |
|
|
|
|
1,668,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Barnett Shoals (Leased) |
|
Athens, GA |
|
|
2,800 |
|
Bartletts Ferry |
|
Columbus, GA |
|
|
173,000 |
|
Goat Rock |
|
Columbus, GA |
|
|
38,600 |
|
Lloyd Shoals |
|
Jackson, GA |
|
|
14,400 |
|
Morgan Falls |
|
Atlanta, GA |
|
|
16,800 |
|
North Highlands |
|
Columbus, GA |
|
|
29,600 |
|
Oliver Dam |
|
Columbus, GA |
|
|
60,000 |
|
Rocky Mountain |
|
Rome, GA |
|
|
215,256 |
(13) |
Sinclair Dam |
|
Milledgeville, GA |
|
|
45,000 |
|
Tallulah Falls |
|
Clayton, GA |
|
|
72,000 |
|
Terrora |
|
Clayton, GA |
|
|
16,000 |
|
Tugalo |
|
Clayton, GA |
|
|
45,000 |
|
Wallace Dam |
|
Eatonton, GA |
|
|
321,300 |
|
Yonah |
|
Toccoa, GA |
|
|
22,500 |
|
6 Other Plants |
|
|
|
|
18,080 |
|
|
|
|
|
|
|
|
Georgia Power Total |
|
|
|
|
1,090,336 |
|
|
|
|
|
|
|
|
Total Hydroelectric
Facilities |
|
|
|
|
2,758,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Generating Capacity |
|
|
|
|
42,607,217 |
|
|
|
|
|
|
|
|
|
|
|
Notes: |
|
(1) |
|
See Jointly-Owned Facilities herein for additional information. |
|
(2) |
|
Owned by Alabama Power and Mississippi Power as tenants in common in
the proportions of 60% and 40%, respectively. |
|
(3) |
|
Capacity shown is Alabama Powers portion (91.84%) of total plant
capacity. |
|
(4) |
|
Capacity shown for Georgia Power is 8.4% of Units 1 and 2 and 75% of
Unit 3. Capacity shown for Gulf Power is 25% of Unit 3. |
I-28
|
|
|
(5) |
|
Capacity shown is Georgia Powers portion (53.5%) of total plant
capacity. |
|
(6) |
|
Represents 50% of the plant which is owned as tenants in common by
Gulf Power and Mississippi Power. |
|
(7) |
|
SEGCO is jointly-owned by Alabama Power and Georgia Power. See
BUSINESS in Item 1 herein for additional information. |
|
(8) |
|
Capacity shown is Georgia Powers portion (50.1%) of total plant
capacity. |
|
(9) |
|
Capacity shown is Georgia Powers portion (45.7%) of total plant
capacity. |
|
(10) |
|
Capacity shown represents 33 1/3% of total plant capacity. Georgia
Power owns a 1/3 interest in the unit with 100% use of the unit from
June through September. Progress Energy Florida operates the unit. |
|
(11) |
|
Generation is dedicated to a single industrial customer. |
|
(12) |
|
Capacity shown is Southern Powers portion (65%) of total plant
capacity. |
|
(13) |
|
Capacity shown is Georgia Powers portion (25.4%) of total plant
capacity. OPC operates the plant. |
Except as discussed below under Titles to Property, the principal plants and other important
units of the traditional operating companies, Southern Power, and SEGCO are owned in fee by the
respective companies. It is the opinion of management of each such company that its operating
properties are adequately maintained and are substantially in good operating condition.
Mississippi Power owns a 79-mile length of 500-kilovolt transmission line which is leased to
Entergy Gulf States. The line, completed in 1984, extends from Plant Daniel to the Louisiana state
line. Entergy Gulf States is paying a use fee over a 40-year period covering all expenses and the
amortization of the original $57 million cost of the line. At December 31, 2008, the unamortized
portion of this cost was approximately $23 million.
In 2008, the maximum demand on the traditional operating companies, Southern Power, and SEGCO was
37,166,000 kilowatts and occurred on August 6, 2008. The all-time maximum demand of 38,777,000
kilowatts on the traditional operating companies, Southern Power, and SEGCO occurred on August 22,
2007. These amounts exclude demand served by capacity retained by MEAG, OPC, and SEPA. The
reserve margin for the traditional operating companies, Southern Power, and SEGCO in 2008 was
15.3%. See SELECTED FINANCIAL DATA in Item 6 herein for additional information on peak demands.
I-29
Jointly-Owned Facilities
Alabama Power, Georgia Power, and Southern Power have undivided interests in certain generating
plants and other related facilities to or from non-affiliated parties. The percentages of
ownership are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage Ownership |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Progress |
|
|
|
|
|
|
|
|
|
|
Total |
|
Alabama |
|
Power |
|
Georgia |
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy |
|
Southern |
|
|
|
|
|
|
|
|
Capacity |
|
Power |
|
South |
|
Power |
|
OPC |
|
MEAG |
|
Dalton |
|
Florida |
|
Power |
|
OUC |
|
FMPA |
|
KUA |
|
|
(Megawatts) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant
Miller Units 1 and 2 |
|
|
1,320 |
|
|
|
91.8 |
% |
|
|
8.2 |
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
Plant Hatch |
|
|
1,796 |
|
|
|
|
|
|
|
|
|
|
|
50.1 |
|
|
|
30.0 |
|
|
|
17.7 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant Vogtle |
|
|
2,320 |
|
|
|
|
|
|
|
|
|
|
|
45.7 |
|
|
|
30.0 |
|
|
|
22.7 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant Scherer
Units 1 and 2 |
|
|
1,636 |
|
|
|
|
|
|
|
|
|
|
|
8.4 |
|
|
|
60.0 |
|
|
|
30.2 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant Wansley |
|
|
1,779 |
|
|
|
|
|
|
|
|
|
|
|
53.5 |
|
|
|
30.0 |
|
|
|
15.1 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rocky Mountain |
|
|
848 |
|
|
|
|
|
|
|
|
|
|
|
25.4 |
|
|
|
74.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercession City, FL |
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
33.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant Stanton A |
|
|
660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65 |
% |
|
|
28 |
% |
|
|
3.5 |
% |
|
|
3.5 |
% |
|
Alabama Power and Georgia Power have contracted to operate and maintain the respective units in
which each has an interest (other than Rocky Mountain and Intercession City) as agent for the joint
owners. SCS provides operation and maintenance services for Plant Stanton A.
In addition, Georgia Power has commitments regarding a portion of a five percent interest in Plant
Vogtle owned by MEAG that are in effect until the later of retirement of the plant or the latest
stated maturity date of MEAGs bonds issued to finance such ownership interest. The payments for
capacity are required whether any capacity is available. The energy cost is a function of each
units variable operating costs. Except for the portion of the capacity payments related to the
Georgia PSCs disallowances of Plant Vogtle costs, the cost of such capacity and energy is included
in purchased power from non-affiliates in Georgia Powers statements of income in Item 8 herein.
Titles to Property
The traditional operating companies, Southern Powers, and SEGCOs interests in the principal
plants (other than certain pollution control facilities, one small hydroelectric generating station
leased by Georgia Power, combined cycle units at Plant Daniel leased by Mississippi Power, and the
land on which five combustion turbine generators of Mississippi Power are located, which is held by
easement) and other important units of the respective companies are owned in fee by such companies,
subject only to the liens pursuant to pollution control revenue bonds of Alabama Power and Gulf
Power on specific pollution control facilities. See Note 6 to the financial statements of Southern
Company, Alabama Power, and Gulf Power under Assets Subject to Lien and Note 7 to the financial
statements of Mississippi Power under Operating Leases Plant Daniel Combined Cycle Generating
Units in Item 8 herein for additional information. The traditional operating companies own the
fee interests in certain of their principal plants as tenants in common. See Jointly-Owned
Facilities herein for additional information. Properties such as electric transmission and
distribution lines and steam heating mains are constructed principally on rights-of-way which are
maintained under franchise or are held by easement only. A substantial portion of lands submerged
by reservoirs is held under flood right easements.
I-30
Item 3. LEGAL PROCEEDINGS
(1) United States of America v. Alabama Power (United States District Court for the Northern
District of Alabama)
United States of America v. Georgia Power (United States District Court for the Northern
District of Georgia)
See Note 3 to the financial statements of Southern Company and each traditional operating company
under Environmental Matters New Source Review Actions in Item 8 herein for information.
(2) Environmental Remediation
See Note 3 to the financial statements of Southern Company, Georgia Power, Gulf Power, and
Mississippi Power under Environmental Matters Environmental Remediation and Note 3 to the
financial statements of Mississippi Power under Retail Regulatory Matters Environmental
Compliance Overview Plan in Item 8 herein for information related to environmental remediation.
(3) In re: Mirant Corporation, et al. (United States Bankruptcy Court for the Northern District
of Texas)
See Note 3 to the financial statements of Southern Company under Mirant Matters Mirant
Bankruptcy in Item 8 herein for information.
(4) MC Asset Recovery, LLC v. Southern Company (United States District Court for the Northern
District of Georgia) (formerly styled In re: Mirant Corporation, et al. in the United
States Bankruptcy Court for the Northern District of Texas)
See Note 3 to the financial statements of Southern Company under Mirant Matters MC Asset
Recovery Litigation in Item 8 herein for information.
(5) In re: Mirant Corporation Securities Litigation (United States District Court for the Northern
District of Georgia)
See Note 3 to the financial statements of Southern Company under Mirant Matters Mirant
Securities Litigation in Item 8 herein for information.
(6) Right of Way Litigation
See Note 3 to the financial statements of Southern Company and Mississippi Power under Right of
Way Litigation in Item 8 herein for information.
See Note 3 to the financial statements of each registrant in Item 8 herein for descriptions of
additional legal and administrative proceedings discussed therein.
I-31
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power
None.
I-32
EXECUTIVE OFFICERS OF SOUTHERN COMPANY
(Identification of executive officers of Southern Company is inserted in Part I in accordance with
Regulation S-K, Item 401(b), Instruction 3.) The ages of the officers set forth below are as of
December 31, 2008.
David M. Ratcliffe
Chairman, President, Chief Executive Officer, and Director
Age 60
Elected in 1999. President since April 2004; Chairman and Chief Executive Officer since July 2004.
Previously served as Chief Executive Officer of Georgia Power from June 1999 to April 2004.
W. Paul Bowers
Executive Vice President and Chief Financial Officer
Age 52
Elected in 2001. Executive Vice President and Chief Financial Officer since February 2008 and
Executive Vice President since May 2007. Previously served as President of Southern Company
Generation, a business unit of Southern Company, and Executive Vice President of SCS from May 2001
through January 2008; and President and Chief Executive Officer of Southern Power from May 2001
through March 2005.
Thomas A. Fanning
Executive Vice President and Chief Operating Officer
Age 51
Elected in 2003. Executive Vice President and Chief Operating Officer since February 2008.
Previously served as Executive Vice President and Chief Financial Officer from May 2007 through
January 2008 and Executive Vice President, Chief Financial Officer, and Treasurer from April 2003
to May 2007.
Michael D. Garrett
Executive Vice President
Age 59
Elected in 2004. Executive Vice President since January 2004. He also serves as President and
Director of Georgia Power since January 2004 and Chief Executive Officer of Georgia Power since
April 2004.
G. Edison Holland, Jr.
Executive Vice President, General Counsel, and Secretary
Age 56
Elected in 2001. Executive Vice President and General Counsel since April 2001.
C. Alan Martin
President and Chief Executive Officer of SCS
Age 60
Elected in 2008. President and Chief Executive Officer of SCS since February 2008. Previously
served as Executive Vice President of the Customer Service Organization at Alabama Power from May
2001 through January 2008.
Charles D. McCrary
Executive Vice President
Age 57
Elected in 1998. Executive Vice President of Southern Company since February 2002; President,
Chief Executive Officer, and Director of Alabama Power since October 2001.
I-33
James H. Miller, III
President and Chief Executive Officer of Southern Nuclear
Age 59
Elected in 2008. President and Chief Executive Officer of Southern Nuclear since August 27, 2008.
Previously served as Senior Vice President and General Counsel of Georgia Power from March 2004
through August 2008 and Vice President and Associate General Counsel for SCS and Senior Vice
President, General Counsel, and Assistant Secretary of Southern Power from August 2001 through
February 2004.
Christopher C. Womack
Executive Vice President
Age 50
Elected in 2008. Executive Vice President and President of External Affairs since January 1, 2009.
Previously served as Executive Vice President of External Affairs of Georgia Power from March 2006
through December 2008 and Senior Vice President of Fossil and Hydro Generation and Senior
Production Officer of Georgia Power from December 2001 to February 2006.
The officers of Southern Company were elected for a term running from the first meeting of the
directors following the last annual meeting (May 28, 2008) for one year until the first board
meeting after the next annual meeting or until their successors are elected and have qualified,
except for Mr. Miller whose election was effective on August 27, 2008 and Mr. Womack whose election
was effective on January 1, 2009.
I-34
EXECUTIVE OFFICERS OF ALABAMA POWER
(Identification of executive officers of Alabama Power is inserted in Part I in accordance with
Regulation S-K, Item 401(b), Instruction 3.) The ages of the officers set forth below are as of
December 31, 2008.
Charles D. McCrary
President, Chief Executive Officer, and Director
Age 57
Elected in 2001. President, Chief Executive Officer, and Director since October 2001; Executive
Vice President of Southern Company since February 2002.
Art P. Beattie
Executive Vice President, Chief Financial Officer, and Treasurer
Age 54
Elected in 2004. Executive Vice President, Chief Financial Officer, and Treasurer since February
2005. Previously served as Vice President and Comptroller of Alabama Power from 1998 through
January 2005.
Mark A. Crosswhite
Executive Vice President
Age 46
Elected in 2008. Executive Vice President of External Affairs since February 1, 2008. Previously
served as Senior Vice President and Counsel of Alabama Power from July 2006 through January 2008;
Senior Vice President, General Counsel, and Assistant Secretary of Southern Power from March 2004
through January 2005; and
Vice President of SCS from March 2004 through January 2008.
Steven R. Spencer
Executive Vice President
Age 53
Elected in 2001. Executive Vice President of the Customer Service Organization since February 1,
2008. Previously served as Executive Vice President of External Affairs from 2001 through January
2008.
Jerry L. Stewart
Senior Vice President
Age 59
Elected in 1999. Senior Vice President of Fossil and Hydro Generation since 1999.
The officers of Alabama Power were elected for a term running from the last annual organizational
meeting of the directors (April 25, 2008) for one year until the next annual meeting or until their
successors are elected and have qualified.
I-35
EXECUTIVE OFFICERS OF GEORGIA POWER
(Identification of executive officers of Georgia Power is inserted in Part I in accordance with
Regulation S-K, Item 401(b), Instruction 3.) The ages of the officers set forth below are as of
December 31, 2008.
Michael D. Garrett
President, Chief Executive Officer, and Director
Age 59
Elected in 2003. President, Chief Executive Officer, and Director of Georgia Power since April
2004. Previously served as President and Director of Georgia Power from January 2004 to April
2004.
Mickey A. Brown
Executive Vice President
Age 61
Elected in 2001. Executive Vice President of the Customer Service Organization since January 2005.
Previously served as Senior Vice President of Distribution from May 2001 through December 2004.
Cliff S. Thrasher
Executive Vice President, Chief Financial Officer, and Treasurer
Age 58
Elected in 2005. Executive Vice President, Chief Financial Officer, and Treasurer since March
2005. Previously served as Senior Vice President, Comptroller, and Chief Financial Officer of
Southern Power from November 2002 to March 2005 and Vice President of SCS from June 2002 to March
2005.
Judy M. Anderson
Senior Vice President
Age 60
Elected in 2001. Senior Vice President of Charitable Giving since 2001.
W. Craig Barrs
Senior Vice President
Age 51
Elected in 2008. Senior Vice President of External Affairs since January 2009. Previously served
as Vice President of Governmental and Regulatory Affairs from April 2008 to December 2008, Vice
President of the Coastal Region from August 2006 to March 2008, President and Chief Executive
Officer of Savannah Electric and Power Company from January 2006 until its merger with and into
Georgia Power which was completed in July 2006, and Vice President of Community and Economic
Development from November 2002 to December 2005.
Douglas E. Jones
Senior Vice President
Age 50
Elected in 2005. Senior Vice President of Fossil and Hydro Generation since March 2006.
Previously served as Senior Vice President of Customer Service and Sales from January 2005 to
February 2006 and Executive Vice President of Southern Power from January 2004 to January 2005.
Thomas P. Bishop
Senior Vice President, Chief Compliance Officer, and General Counsel
Age 48
Elected in 2008. Senior Vice President, Chief Compliance Officer, and General Counsel since
September 2008. Previously served as Vice President and Associate General Counsel for SCS from
July 2004 to September 2008 and Managing Attorney for SCS from April 1997 to July 2004.
Each of the above is currently an executive officer of Georgia Power, serving a term running from
the last annual organizational meeting of the directors (May 21, 2008) for one year until the next
annual meeting or until their successors are elected and qualified, except for Mr. Bishop and Mr.
Barrs whose elections were effective September 22, 2008 and January 1, 2009, respectively.
I-36
EXECUTIVE OFFICERS OF MISSISSIPPI POWER
(Identification of executive officers of Mississippi Power is inserted in Part I in accordance with
Regulation S-K, Item 401(b), Instruction 3.) The ages of the officers set forth below are as of
December 31, 2008.
Anthony J. Topazi
President, Chief Executive Officer, and Director
Age 58
Elected in 2003. President, Chief Executive Officer, and Director since January 1, 2004.
John W. Atherton
Vice President
Age 48
Elected in 2004. Vice President of External Affairs since January 2005. Previously served as the
Director of Economic Development from September 2003 to January 2005.
Kimberly D. Flowers
Vice President
Age 45
Elected in 2005. Vice President and Senior Production Officer since March 2005. Previously served
as Plant Manager, Plant Bowen, Georgia Power from November 2000 until March 2005.
Donald R. Horsley
Vice President
Age 54
Elected in 2006. Vice President of Customer Services and Retail Marketing since April 2006.
Previously served as Vice President of Transmission at Alabama Power from March 2005 to March 2006
and Manager, Transmission Lines at Alabama Power from February 2001 to March 2005.
Frances Turnage
Vice President, Treasurer, and
Chief Financial Officer
Age 60
Elected in 2005. Vice President, Treasurer, and Chief Financial Officer since March 2005.
Previously served as Comptroller from 1993 to March 2005.
The officers of Mississippi Power were elected for a term running from the last annual
organizational meeting of the directors (April 9, 2008) for one year until the next annual meeting or
until their successors are elected and have qualified.
I-37
PART II
|
|
|
Item 5. |
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES |
(a)(1) The common stock of Southern Company is listed and traded on the New York Stock Exchange.
The common stock is also traded on regional exchanges across the United States. The high and low
stock prices as reported on the New York Stock Exchange for each quarter of the past two years were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
2008 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
40.60 |
|
|
$ |
33.71 |
|
Second Quarter |
|
|
37.81 |
|
|
|
34.28 |
|
Third Quarter |
|
|
40.00 |
|
|
|
34.46 |
|
Fourth Quarter |
|
|
38.18 |
|
|
|
29.82 |
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
37.25 |
|
|
$ |
34.85 |
|
Second Quarter |
|
|
38.90 |
|
|
|
33.50 |
|
Third Quarter |
|
|
37.70 |
|
|
|
33.16 |
|
Fourth Quarter |
|
|
39.35 |
|
|
|
35.15 |
|
|
There is no market for the other registrants common stock, all of which is owned by Southern
Company.
(a)(2) Number of Southern Companys common stockholders of record at December 31, 2008: 97,324
Each of the other registrants have one common stockholder, Southern Company.
(a)(3) Dividends on each registrants common stock are payable at the discretion of their
respective board of directors. The dividends on common stock declared by Southern Company and the
traditional operating companies to their stockholder(s) for the past two years were as follows:
|
|
|
|
|
|
|
|
|
|
|
Registrant |
|
Quarter |
|
2008 |
|
2007 |
|
|
|
|
(in thousands) |
Southern Company |
|
First |
|
$ |
307,960 |
|
|
$ |
290,292 |
|
|
|
Second |
|
|
322,634 |
|
|
|
303,699 |
|
|
|
Third |
|
|
323,844 |
|
|
|
304,775 |
|
|
|
Fourth |
|
|
325,681 |
|
|
|
306,039 |
|
|
|
|
|
|
|
|
|
|
|
|
Alabama Power |
|
First |
|
|
122,825 |
|
|
|
116,250 |
|
|
|
Second |
|
|
122,825 |
|
|
|
116,250 |
|
|
|
Third |
|
|
122,825 |
|
|
|
116,250 |
|
|
|
Fourth |
|
|
122,825 |
|
|
|
116,250 |
|
|
|
|
|
|
|
|
|
|
|
|
Georgia Power |
|
First |
|
|
180,300 |
|
|
|
172,475 |
|
|
|
Second |
|
|
180,300 |
|
|
|
172,475 |
|
|
|
Third |
|
|
180,300 |
|
|
|
172,475 |
|
|
|
Fourth |
|
|
180,300 |
|
|
|
172,475 |
|
|
|
|
|
|
|
|
|
|
|
|
Gulf Power |
|
First |
|
|
20,425 |
|
|
|
18,525 |
|
|
|
Second |
|
|
20,425 |
|
|
|
18,525 |
|
|
|
Third |
|
|
20,425 |
|
|
|
18,525 |
|
|
|
Fourth |
|
|
20,425 |
|
|
|
18,525 |
|
|
|
|
|
|
|
|
|
|
|
|
Mississippi Power |
|
First |
|
|
17,100 |
|
|
|
16,825 |
|
|
|
Second |
|
|
17,100 |
|
|
|
16,825 |
|
|
|
Third |
|
|
17,100 |
|
|
|
16,825 |
|
|
|
Fourth |
|
|
17,100 |
|
|
|
16,825 |
|
II-1
In 2007 and 2008, Southern Power paid dividends to Southern Company as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Registrant |
|
Quarter |
|
2008 |
|
2007 |
|
|
|
|
(in millions) |
Southern Power |
|
First |
|
$ |
23.63 |
|
|
$ |
22.45 |
|
|
|
Second |
|
|
23.63 |
|
|
|
22.45 |
|
|
|
Third |
|
|
23.63 |
|
|
|
22.45 |
|
|
|
Fourth |
|
|
23.63 |
|
|
|
22.45 |
|
|
The dividend paid per share of Southern Companys common stock was 38.75¢ for the first quarter of
2007 and 40.25¢ for the remaining quarters in 2007 and the first quarter of 2008. For the second,
third, and fourth quarters of 2008, the dividend paid per share of Southern Companys common stock
was 42¢.
The traditional operating companies and Southern Power can only pay dividends to Southern Company
out of retained earnings or paid-in-capital.
Southern Powers credit facility and senior note indenture contain potential limitations on the
payment of common stock dividends. At December 31, 2008, Southern Power was in compliance with the
conditions of this credit facility and thus had no restrictions on its ability to pay common stock
dividends. See Note 8 to the financial statements of Southern Company under Common Stock Dividend
Restrictions and Note 6 to the financial statements of Southern Power under Dividend
Restrictions in Item 8 herein for additional information regarding these restrictions.
(a)(4) Securities authorized for issuance under equity compensation plans.
See Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters under the heading Equity Compensation Plan Information herein.
(b) Use of Proceeds
Not applicable.
(c) Issuer Purchases of Equity Securities
None.
Item 6. SELECTED FINANCIAL DATA
Southern Company. See SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA, contained herein at
pages II-106 and II-107.
Alabama Power. See SELECTED FINANCIAL AND OPERATING DATA, contained herein at pages II-170 and
II-171.
Georgia Power. See SELECTED FINANCIAL AND OPERATING DATA, contained herein at pages II-239 and
II-240.
Gulf Power. See SELECTED FINANCIAL AND OPERATING DATA, contained herein at pages II-298 and
II-299.
Mississippi Power. See SELECTED FINANCIAL AND OPERATING DATA, contained herein at pages II-363
and II-364.
Southern Power. See SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA, contained herein at
page II-406.
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southern Company. See MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, contained herein at pages II-12 through II-49.
II-2
Alabama Power. See MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, contained herein at pages II-111 through II-132.
Georgia Power. See MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, contained herein at pages II-175 through II-198.
Gulf Power. See MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, contained herein at pages II-244 through II-265.
Mississippi Power. See MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, contained herein at pages II-303 through II-327.
Southern Power. See MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, contained herein at pages II-368 through II-386.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See MANAGEMENTS DISCUSSION AND ANALYSIS - FINANCIAL CONDITION AND LIQUIDITY Market Price Risk
of each of the registrants in Item 7 herein and Note 1 of each of the registrants financial
statements under Financial Instruments in Item 8 herein. See also Note 6 to the financial
statements of Southern Company, each traditional operating company, and Southern Power under
Financial Instruments in Item 8 herein.
II-3
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO 2008 FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
Page |
The Southern Company and Subsidiary Companies: |
|
|
|
|
|
|
II-9 |
|
|
II-10 |
|
|
II-50 |
|
|
II-51 |
|
|
II-52 |
|
|
II-54 |
|
|
II-56 |
|
|
II-56 |
|
|
II-57 |
|
|
|
|
|
Alabama Power: |
|
|
|
|
|
|
II-109 |
|
|
II-110 |
|
|
II-133 |
|
|
II-134 |
|
|
II-135 |
|
|
II-137 |
|
|
II-139 |
|
|
II-139 |
|
|
II-140 |
|
|
|
|
|
Georgia Power: |
|
|
|
|
|
|
II-173 |
|
|
II-174 |
|
|
II-199 |
|
|
II-200 |
|
|
II-201 |
|
|
II-203 |
|
|
II-204 |
|
|
II-204 |
|
|
II-205 |
|
|
|
|
|
Gulf Power: |
|
|
|
|
|
|
II-242 |
|
|
II-243 |
|
|
II-266 |
|
|
II-267 |
|
|
II-268 |
|
|
II-270 |
|
|
II-271 |
|
|
II-271 |
|
|
II-272 |
II-4
|
|
|
|
|
|
|
Page |
Mississippi Power: |
|
|
|
|
|
|
II-301 |
|
|
II-302 |
|
|
II-328 |
|
|
II-329 |
|
|
II-330 |
|
|
II-332 |
|
|
II-333 |
|
|
II-333 |
|
|
II-334 |
|
|
|
|
|
Southern Power and Subsidiary Companies: |
|
|
|
|
|
|
II-366 |
|
|
II-367 |
|
|
II-387 |
|
|
II-388 |
|
|
II-389 |
|
|
II-391 |
|
|
II-391 |
|
|
II-392 |
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
II-5
Item 9A. CONTROLS AND PROCEDURES
Disclosure Controls And Procedures.
As of the end of the period covered by this annual report, Southern Company conducted an evaluation
under the supervision and with the participation of Southern Companys management, including the
Chief Executive Officer and 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.
Internal Control Over Financial Reporting.
(a) Managements Annual Report on Internal Control Over Financial Reporting.
Southern Companys Managements Report on Internal Control Over Financial Reporting is included on
page II-9 of this Form 10-K.
(b) Attestation Report of the Registered Public Accounting Firm.
The report of Deloitte & Touche LLP, Southern Companys independent registered public accounting
firm, regarding Southern Companys internal control over financial reporting is included on
pages II-10 and II-11 of this Form 10-K.
(c) 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 fourth quarter 2008 that have materially affected or are reasonably likely to materially affect
Southern Companys internal control over financial reporting.
Item 9A(T). CONTROLS AND PROCEDURES
Disclosure Controls And Procedures.
As of the end of the period covered by this annual 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
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.
Internal Control Over Financial Reporting.
(a) Managements Annual Report on Internal Control Over Financial Reporting.
Alabama Powers Managements Report on Internal Control Over Financial Reporting is included on
page II-109 of this Form 10-K.
Georgia Powers Managements Report on Internal Control Over Financial Reporting is included on
page II-173 of this Form 10-K.
Gulf Powers Managements Report on Internal Control Over Financial Reporting is included on
page II-242 of this
Form 10-K.
II-6
Mississippi Powers Managements Report on Internal Control Over Financial Reporting is included on
page II-301 of this Form 10-K.
Southern Powers Managements Report on Internal Control Over Financial Reporting is included on
page II-366 of this Form 10-K.
(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 fourth quarter
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.
Item 9B. OTHER INFORMATION
None.
II-7
THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES
FINANCIAL SECTION
II-8
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Southern Company and Subsidiary Companies 2008 Annual Report
Southern Companys management is responsible for establishing and maintaining an adequate system of
internal control over financial reporting as required by the Sarbanes-Oxley Act of 2002 and as
defined in Exchange Act Rule 13a-15(f). A control system can provide only reasonable, not
absolute, assurance that the objectives of the control system are met.
Under managements supervision, an evaluation of the design and effectiveness of Southern Companys
internal control over financial reporting was conducted based on the framework in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, management concluded that Southern Companys internal
control over financial reporting was effective as of December 31, 2008.
Deloitte & Touche LLP, an independent registered public accounting firm, as auditors of Southern
Companys financial statements, has issued an attestation report on the effectiveness of Southern
Companys internal control over financial reporting as of December 31, 2008. Deloitte & Touche
LLPs report on Southern Companys internal control over financial reporting is included herein.
/s/ David M. Ratcliffe
David M. Ratcliffe
Chairman, President, and Chief Executive Officer
/s/ W. Paul Bowers
W. Paul Bowers
Executive Vice President and Chief Financial Officer
February 25, 2009
II-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Southern Company
We have audited the accompanying consolidated balance sheets and consolidated statements of
capitalization of Southern Company and Subsidiary Companies (the Company) as of December 31, 2008
and 2007, and the related consolidated statements of income, comprehensive income, common
stockholders equity, and cash flows for each of the three years in the period ended December 31,
2008. We also have audited the Companys internal control over financial reporting as of December
31, 2008, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is
responsible for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report on Internal Control Over Financial
Reporting (page II-9). Our responsibility is to express an opinion on these financial statements
and an opinion on the Companys internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
II-10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (continued)
In our opinion, the consolidated financial statements (pages II-50 to II-104) referred to
above present fairly, in all material respects, the financial position of Southern Company and
Subsidiary Companies as of December 31, 2008 and 2007, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2008, in conformity
with accounting principles generally accepted in the United States of America. Also, in our
opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 25, 2009
II-11
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southern Company and Subsidiary Companies 2008 Annual Report
OVERVIEW
Business Activities
The primary business of Southern Company (the Company) is electricity sales in the Southeast
by the traditional operating companies Alabama Power, Georgia Power, Gulf Power, and Mississippi
Power and Southern Power. The four traditional operating companies are vertically integrated
utilities providing electric service in four Southeastern states. Southern Power constructs,
acquires, owns, and manages generation assets and sells electricity at market-based rates in the
wholesale market.
Many factors affect the opportunities, challenges, and risks of Southern Companys electricity
business. These factors include the traditional operating companies ability to maintain a
constructive regulatory environment, to maintain energy sales in the midst of the current economic
downturn, and to effectively manage and secure timely recovery of rising costs. Each of the
traditional operating companies has various regulatory mechanisms that operate to address cost
recovery. Since 2005, the traditional operating companies have completed a number of regulatory
proceedings that provide for the timely recovery of costs. Appropriately balancing required costs
and capital expenditures with customer prices will continue to challenge the Company for the
foreseeable future.
Another major factor is the profitability of the competitive market-based wholesale generating
business and federal regulatory policy, which may impact Southern Companys level of participation
in this market. Southern Power continues to execute its strategy through a combination of
acquiring and constructing new power plants and by entering into power purchase agreements (PPAs)
with investor owned utilities, independent power producers, municipalities, and electric
cooperatives. The Company continues to face regulatory challenges related to transmission and
market power issues at the national level.
Southern Companys other business activities include leveraged lease projects, telecommunications,
and energy-related services. Management continues to evaluate the contribution of each of these
remaining activities to total shareholder return and may pursue acquisitions and dispositions
accordingly.
Key Performance Indicators
In striving to maximize shareholder value while providing cost-effective energy to more than four
million customers, Southern Company continues to focus on several key indicators. These indicators
include customer satisfaction, plant availability, system reliability, and earnings per share
(EPS), excluding charges related to leveraged leases. Southern Companys financial success is
directly tied to the satisfaction of its customers. Key elements of ensuring customer satisfaction
include outstanding service, high reliability, and competitive prices. Management uses customer
satisfaction surveys and reliability indicators to evaluate the Companys results.
Peak season equivalent forced outage rate (Peak Season EFOR) is an indicator of fossil/hydro plant
availability and efficient generation fleet operations during the months when generation needs are
greatest. The rate is calculated by dividing the number of hours of forced outages by total
generation hours. The fossil/hydro 2008 Peak Season EFOR of 1.68% was better than the target. The
nuclear generating fleet also uses Peak Season EFOR as an indicator of availability and efficient
generation fleet operations during the peak season. The nuclear 2008 Peak Season EFOR of 1.98% was
slightly better than the target. Transmission and distribution system reliability performance is
measured by the frequency and duration of outages. Performance targets for reliability are set
internally based on historical performance, expected weather conditions, and expected capital
expenditures. The performance for 2008 was better than the target for these reliability measures.
II-12
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Southern Companys investments include three leveraged lease transactions whose tax deductions have
been challenged by the Internal Revenue Service (IRS). Ongoing settlement negotiations with the
IRS resulted in a charge to income of $83 million, or 11 cents per share, in 2008. Southern
Company management uses EPS, excluding leveraged lease charges, to evaluate the performance of
Southern Companys ongoing business activities. Southern Company believes the presentation of
earnings and EPS excluding the leveraged lease charges is useful for investors because it provides
investors with additional information for purposes of comparing Southern Companys performance for
such periods. The presentation of this additional information is not meant to be considered a
substitute for financial measures prepared in accordance with generally accepted accounting
principles.
Southern Companys 2008 results compared with its targets for some of these key indicators are
reflected in the following chart:
|
|
|
|
|
|
|
|
|
|
|
2008 Target |
|
2008 Actual |
Key Performance Indicator |
|
Performance |
|
Performance |
|
|
Top quartile in |
|
|
Customer Satisfaction |
|
customer surveys |
|
Top quartile |
Peak Season EFOR fossil/hydro |
|
2.75% or less |
|
|
1.68 |
% |
Peak Season EFOR nuclear |
|
2.00% or less |
|
|
1.98 |
% |
Basic EPS |
|
$ |
2.28 $2.36 |
|
|
$ |
2.26 |
|
EPS, excluding leveraged lease charges |
|
|
|
$ |
2.37 |
|
See RESULTS OF OPERATIONS herein for additional information on the Companys financial performance.
The financial performance achieved in 2008 reflects the continued emphasis that management places
on these indicators as well as the commitment shown by employees in achieving or exceeding
managements expectations.
Earnings
Southern Companys net income was $1.74 billion in 2008, an increase of $8 million from the prior
year. Compared with the prior year, increases in retail rates and increases in revenues from
market-response rates to large commercial and industrial customers were mostly offset by higher
asset depreciation, milder summer temperatures compared to 2007, higher non-fuel operations and
maintenance expenses, charges related to the leveraged lease business, and exiting the synthetic
fuel business in 2007. Net income was $1.73 billion in 2007 and $1.57 billion in 2006, reflecting
a 10.2% increase and a 1.1% decrease, respectively, over the prior year. Basic EPS was $2.26 in
2008, $2.29 in 2007, and $2.12 in 2006. Diluted EPS, which factors in additional shares related to
stock-based compensation, was $2.25 in 2008, $2.28 in 2007, and $2.10 in 2006.
Dividends
Southern Company has paid dividends on its common stock since 1948. Dividends paid per share of
common stock were $1.6625 in 2008, $1.595 in 2007, and $1.535 in 2006. In January 2009, Southern
Company declared a quarterly dividend of 42 cents per share. This is the 245th consecutive quarter
that Southern Company has paid a dividend equal to or higher than the previous quarter. The
Company targets a dividend payout ratio of approximately 65% to 70% of net income. For 2008, the
actual payout ratio was 73.5% while the payout ratio of net income excluding leveraged lease
charges was 70.1%.
II-13
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
RESULTS OF OPERATIONS
Electricity Business
Southern Companys electric utilities generate and sell electricity to retail and wholesale
customers in the Southeast.
A condensed statement of income for the electricity business follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
|
Amount |
|
|
from Prior Year |
|
|
|
2008 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Electric operating revenues |
|
$ |
17,000 |
|
|
$ |
1,860 |
|
|
$ |
1,052 |
|
|
$ |
810 |
|
|
Fuel |
|
|
6,817 |
|
|
|
973 |
|
|
|
701 |
|
|
|
655 |
|
Purchased power |
|
|
815 |
|
|
|
300 |
|
|
|
(28 |
) |
|
|
(188 |
) |
Other operations and maintenance |
|
|
3,584 |
|
|
|
111 |
|
|
|
183 |
|
|
|
70 |
|
Depreciation and amortization |
|
|
1,414 |
|
|
|
199 |
|
|
|
51 |
|
|
|
27 |
|
Taxes other than income taxes |
|
|
794 |
|
|
|
56 |
|
|
|
23 |
|
|
|
39 |
|
|
Total electric operating expenses |
|
|
13,424 |
|
|
|
1,639 |
|
|
|
930 |
|
|
|
603 |
|
|
Operating income |
|
|
3,576 |
|
|
|
221 |
|
|
|
122 |
|
|
|
207 |
|
Other income (expense), net |
|
|
145 |
|
|
|
24 |
|
|
|
68 |
|
|
|
(9 |
) |
Interest expense and dividends |
|
|
837 |
|
|
|
25 |
|
|
|
61 |
|
|
|
75 |
|
Income taxes |
|
|
1,037 |
|
|
|
87 |
|
|
|
1 |
|
|
|
50 |
|
|
Net income |
|
$ |
1,847 |
|
|
$ |
133 |
|
|
$ |
128 |
|
|
$ |
73 |
|
|
Electric Operating Revenues
Details of electric operating revenues were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
2008 |
|
2007 |
|
2006 |
|
|
(in millions) |
Retail prior year |
|
$ |
12,639 |
|
|
$ |
11,801 |
|
|
$ |
11,165 |
|
Estimated change in |
|
|
|
|
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
668 |
|
|
|
161 |
|
|
|
9 |
|
Sales growth |
|
|
|
|
|
|
60 |
|
|
|
115 |
|
Weather |
|
|
(106 |
) |
|
|
54 |
|
|
|
35 |
|
Fuel and other cost recovery |
|
|
854 |
|
|
|
563 |
|
|
|
477 |
|
|
Retail current year |
|
|
14,055 |
|
|
|
12,639 |
|
|
|
11,801 |
|
Wholesale revenues |
|
|
2,400 |
|
|
|
1,988 |
|
|
|
1,822 |
|
Other electric operating revenues |
|
|
545 |
|
|
|
513 |
|
|
|
465 |
|
|
Electric operating revenues |
|
$ |
17,000 |
|
|
$ |
15,140 |
|
|
$ |
14,088 |
|
|
Percent change |
|
|
12.3 |
% |
|
|
7.5 |
% |
|
|
6.1 |
% |
|
Retail revenues increased $1.4 billion, $838 million, and $636 million in 2008, 2007, and 2006,
respectively. The significant factors driving these changes are shown in the preceding table. The
increase in rates and pricing in 2008 was primarily due to Alabama Powers increase under its Rate
Stabilization and Equalization Plan (Rate RSE), as ordered by the Alabama Public Service Commission
(PSC), and Georgia Powers increase under its 2007 retail rate
II-14
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
plan, as ordered by the Georgia PSC. See Note 3 to the financial statements under Alabama Power
Retail Regulatory Matters and Georgia Power Retail Regulatory Matters for additional
information. Also contributing to the 2008 increase was an increase in revenues from
market-response rates to large commercial and industrial customers at Georgia Power. The 2007
increase in rates and pricing when compared to the prior year was primarily due to Alabama Powers
increase under its Rate RSE, as ordered by the Alabama PSC. Partially offsetting the 2007 increase
was a decrease in revenues from market-response rates to large commercial and industrial customers
at Georgia Power. The 2006 increase in rates and pricing when compared to the prior year was not
material. See Energy Sales below for a discussion of changes in the volume of energy sold,
including changes related to sales growth and weather.
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, and do not affect net income. The traditional operating companies may also have one or more
regulatory mechanisms to recover other costs such as environmental, storm damage, new plants, and
PPAs.
Wholesale revenues consist of PPAs with investor-owned utilities and electric cooperatives, unit
power sales contracts, and short-term opportunity sales. Short-term opportunity sales are made at
market-based rates that generally provide a margin above the Companys variable cost to produce the
energy. Southern Companys average wholesale contract extends more than 14 years and, as a result,
the Company has significantly limited its remarketing risk.
In 2008, wholesale revenues increased $412 million primarily as a result of a 21.8% increase in the
average cost of fuel per net kilowatt-hour (KWH) generated, as well as revenues resulting from new
and existing PPAs and revenues derived from contracts for Southern Powers Plant Oleander Unit 5
and Plant Franklin Unit 3 placed in operation in December 2007 and June 2008, respectively. The
2008 increase was partially offset by a decrease in short-term opportunity sales and
weather-related generation load reductions.
In 2007, wholesale revenues increased $166 million primarily as a result of a 9.9% increase in the
average cost of fuel per net KWH generated. Excluding fuel, wholesale revenues were flat when
compared to the prior year.
In 2006, wholesale revenues increased $155 million primarily as a result of a 10.0% increase in the
average cost of fuel per net KWH generated, as well as revenues resulting from new PPAs in 2006.
In addition, Southern Company assumed four PPAs through the acquisitions of Plants DeSoto and Rowan
in June and September 2006, respectively. The 2006 increase was partially offset by a decrease in
short-term opportunity sales.
Revenues associated with PPAs and opportunity sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Other power sales |
|
|
|
|
|
|
|
|
|
|
|
|
Capacity and other |
|
$ |
538 |
|
|
$ |
533 |
|
|
$ |
499 |
|
Energy |
|
|
1,319 |
|
|
|
989 |
|
|
|
841 |
|
|
Total |
|
$ |
1,857 |
|
|
$ |
1,522 |
|
|
$ |
1,340 |
|
|
II-15
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Capacity revenues under unit power sales contracts, principally sales to Florida utilities, reflect
the recovery of fixed costs and a return on investment. Unit power KWH sales decreased 2.1% in
2008, decreased 0.8% in 2007, and increased 0.2% in 2006. Fluctuations in oil and natural gas
prices, which are the primary fuel sources for unit power sales customers, influence changes in
these sales. However, because the energy is generally sold at variable cost, these fluctuations
have a minimal effect on earnings. The capacity and energy components of the unit power sales
contracts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
|
(in millions) |
Unit power sales |
|
|
|
|
|
|
|
|
|
|
|
|
Capacity |
|
$ |
223 |
|
|
$ |
202 |
|
|
$ |
208 |
|
Energy |
|
|
320 |
|
|
|
264 |
|
|
|
274 |
|
|
Total |
|
$ |
543 |
|
|
$ |
466 |
|
|
$ |
482 |
|
|
Energy Sales
Changes in revenues are influenced heavily by the change in the volume of energy sold from year to
year. KWH sales for 2008 and the percent change by year were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KWHs |
|
Percent Change |
|
|
|
|
|
2008 |
|
2008 |
|
2007 |
|
2006 |
|
|
(in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
Residential |
|
|
52.3 |
|
|
|
(2.0 |
)% |
|
|
1.8 |
% |
|
|
2.5 |
% |
Commercial |
|
|
54.4 |
|
|
|
(0.4 |
) |
|
|
3.2 |
|
|
|
2.2 |
|
Industrial |
|
|
52.7 |
|
|
|
(3.7 |
) |
|
|
(0.7 |
) |
|
|
(0.2 |
) |
Other |
|
|
0.9 |
|
|
|
(2.9 |
) |
|
|
4.4 |
|
|
|
(7.6 |
) |
|
Total retail |
|
|
160.3 |
|
|
|
(2.1 |
) |
|
|
1.4 |
|
|
|
1.4 |
|
Wholesale |
|
|
39.3 |
|
|
|
(3.4 |
) |
|
|
5.9 |
|
|
|
3.7 |
|
|
Total energy sales |
|
|
199.6 |
|
|
|
(2.3 |
) |
|
|
2.3 |
|
|
|
1.9 |
|
|
KWH sales by quarter for 2008 compared to the same periods in 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
KWHs |
|
Percent Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
Total |
Quarter Ended |
|
Retail |
|
Wholesale |
|
Energy Sales |
|
Retail |
|
Wholesale |
|
Energy Sales |
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
March 2008 |
|
|
38,576 |
|
|
|
9,590 |
|
|
|
48,166 |
|
|
|
1.4 |
% |
|
|
(1.9 |
)% |
|
|
0.7 |
% |
June 2008 |
|
|
39,882 |
|
|
|
10,049 |
|
|
|
49,931 |
|
|
|
(1.2 |
) |
|
|
1.0 |
|
|
|
(0.7 |
) |
September 2008 |
|
|
45,800 |
|
|
|
10,969 |
|
|
|
56,769 |
|
|
|
(4.6 |
) |
|
|
(2.2 |
) |
|
|
(4.1 |
) |
December 2008 |
|
|
36,001 |
|
|
|
8,760 |
|
|
|
44,761 |
|
|
|
(3.3 |
) |
|
|
(10.6 |
) |
|
|
(4.8 |
) |
Changes in retail energy sales are comprised of changes in electricity usage by customers, changes
in weather, and changes in the number of customers. Retail energy sales in 2008 decreased 3.4
billion KWHs as a result of a 1.4% decrease in electricity usage mainly due to a slowing economy
that worsened during the fourth quarter. The 2008 decrease in residential sales resulted primarily
from lower home occupancy rates in Southern Companys service area when compared to 2007.
Throughout the year, reduced demand in the textile sector; the lumber sector; and the stone, clay,
and glass sector contributed to the decrease in 2008 industrial sales. Additional weakness in the
fourth quarter 2008 affected all major industrial segments. Significantly less favorable weather
in 2008 when compared to
II-16
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
2007 also contributed to the 2008 decrease in retail energy sales. These decreases were partially
offset by customer growth of 0.6%. Retail energy sales in 2007 increased 2.3 billion KWHs as a
result of 1.3% customer growth and favorable weather in 2007 when compared to 2006. The 2007
decrease in industrial sales primarily resulted from reduced demand and closures within the textile
sector, as well as decreased demand in the primary metals sector and the stone, clay, and glass
sector. Retail energy sales in 2006 increased 2.3 billion KWHs as a result of customer growth of
1.7%, sustained economic growth primarily in the residential and commercial customer classes, and
favorable weather in 2006 when compared to 2005.
Wholesale energy sales decreased by 1.4 billion KWHs in 2008, increased by 2.3 billion KWHs in
2007, and increased by 1.4 billion KWHs in 2006. The decrease in wholesale energy sales in 2008
was primarily related to longer planned maintenance outages at a fossil unit in 2008 as
compared to 2007 which reduced the availability of this unit for wholesale sales. Lower
short-term opportunity sales primarily related to higher coal prices also contributed to the 2008
decrease. These decreases were partially offset by Plant Oleander Unit 5 and Plant Franklin Unit 3
being placed in operation in December 2007 and June 2008, respectively. The increase in wholesale
energy sales in 2007 was primarily related to new PPAs acquired by Southern Company through the
acquisition of Plant Rowan in September 2006, as well as new contracts with EnergyUnited Electric
Membership Corporation that commenced in September 2006 and January 2007. An increase in KWH sales
under existing PPAs also contributed to the 2007 increase. The increase in wholesale energy sales
in 2006 was related primarily to the new PPAs discussed previously under Electric Operating
Revenues.
Fuel and Purchased Power Expenses
Fuel costs constitute the single largest expense for the electric utilities. The mix of fuel
sources for generation of electricity is determined primarily by demand, the unit cost of fuel
consumed, and the availability of generating units. Additionally, the electric utilities purchase
a portion of their electricity needs from the wholesale market. Details of Southern Companys
electricity generated and purchased were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
Total generation (billions of KWHs) |
|
|
198 |
|
|
|
206 |
|
|
|
201 |
|
Total purchased power (billions of KWHs) |
|
|
11 |
|
|
|
8 |
|
|
|
8 |
|
|
Sources of generation (percent) |
|
|
|
|
|
|
|
|
|
|
|
|
Coal |
|
|
68 |
|
|
|
70 |
|
|
|
70 |
|
Nuclear |
|
|
15 |
|
|
|
14 |
|
|
|
15 |
|
Gas |
|
|
16 |
|
|
|
15 |
|
|
|
13 |
|
Hydro |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
|
Cost of fuel, generated (cents per net KWH) |
|
|
|
|
|
|
|
|
|
|
|
|
Coal |
|
|
3.27 |
|
|
|
2.60 |
|
|
|
2.40 |
|
Nuclear |
|
|
0.50 |
|
|
|
0.50 |
|
|
|
0.47 |
|
Gas |
|
|
7.58 |
|
|
|
6.64 |
|
|
|
6.63 |
|
|
Average cost of fuel, generated (cents per net KWH) |
|
|
3.52 |
|
|
|
2.89 |
|
|
|
2.63 |
|
Average cost of purchased power (cents per net KWH) |
|
|
7.85 |
|
|
|
7.20 |
|
|
|
6.82 |
|
|
In 2008, fuel and purchased power expenses were $7.6 billion, an increase of $1.3 billion or 20.0%
above 2007 costs. This increase was primarily the result of a $1.3 billion net increase in the
average cost of fuel and purchased power partially resulting from a 25.8% increase in the cost of
coal per net KWH generated and a 14.2% increase in the cost of gas per net KWH generated.
In 2007, fuel and purchased power expenses were $6.4 billion, an increase of $673 million or 11.8%
above 2006 costs. This increase was primarily the result of a $543 million net increase in the
average cost of fuel and purchased power partially resulting from a 51.4% decrease in hydro
generation as a result of a severe drought. Also contributing to this increase was a $130 million
increase related to higher net KWHs generated and purchased.
II-17
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
In 2006, fuel and purchased power expenses were $5.7 billion, an increase of $467 million or 8.9%
above the prior year costs. This increase was primarily the result of a $367 million net increase
in the average cost of fuel and purchased power and a $100 million increase related to higher net
KWHs generated and purchased.
Over the last several years, coal prices have been influenced by a worldwide increase in demand
from developing countries, as well as increases in mining and fuel transportation costs. In the
first half of 2008, coal prices reached unprecedented high levels primarily due to increased demand
following more moderate pricing in 2006 and 2007. Despite these fluctuations, fuel inventories
have been adequate and fuel supply markets have been sufficient to meet expected fuel requirements.
Demand for natural gas in the United States also increased in 2007 and the first half of 2008.
However, natural gas supplies increased in the last half of 2008 as a result of increased
production and higher storage levels due in part to weak industrial demand. Both coal and natural
gas prices moderated in the second half of 2008 as the result of a recessionary economy. During
2008, uranium prices continued to moderate from the highs set during 2007. While worldwide uranium
production levels appear to have increased slightly since 2007, secondary supplies and inventories
were still required to meet worldwide reactor demand.
Fuel expenses generally do not affect net income, since they are offset by fuel revenues under the
traditional operating companies fuel cost recovery provisions. See FUTURE EARNINGS POTENTIAL
PSC Matters Fuel Cost Recovery herein for additional information. Likewise, Southern Powers
PPAs generally provide that the purchasers are responsible for substantially all of the cost of
fuel.
Other Operations and Maintenance Expenses
Other operations and maintenance expenses were $3.6 billion, $3.5 billion, and $3.3 billion,
increasing $111 million, $183 million, and $70 million in 2008, 2007, and 2006, respectively.
Discussion of significant variances for components of other operations and maintenance expenses
follows.
Other production expenses at fossil, hydro, and nuclear plants increased $63 million, $128 million,
and $3 million in 2008, 2007, and 2006, respectively. Production expenses fluctuate from year to
year due to variations in outage schedules and normal increases in costs. Other production
expenses increased in 2008 primarily due to a $64 million increase related to expenses incurred for
maintenance outages at generating units and a $30 million increase related to labor and materials
expenses, partially offset by a $15 million decrease in nuclear refueling costs. See Note 1 to the
financial statements under Property, Plant, and Equipment for additional information regarding
nuclear refueling costs. The 2008 increase was also partially offset by a $24 million decrease
related to new facilities, mainly lower costs associated with the 2007 write-off of Southern
Powers integrated coal gasification combined cycle (IGCC) project with the Orlando Utilities
Commission. Other production expenses increased in 2007 primarily due to a $40 million increase
related to expenses incurred for maintenance outages at generating units and a $29 million increase
related to new facilities, mainly costs associated with the write-off of Southern Powers IGCC
project and the acquisitions of Plants DeSoto and Rowan by Southern Power in June and September
2006, respectively. A $25 million increase related to labor and materials expenses and a $22
million increase in nuclear refueling costs also contributed to the 2007 increase. The 2006
increase in other production expenses when compared to the prior year was not material.
Transmission and distribution expenses increased $4 million, $21 million, and $30 million in 2008,
2007, and 2006, respectively. Transmission and distribution expenses fluctuate from year to year
due to variations in maintenance schedules and normal increases in costs. The 2008 increase in
transmission and distribution expenses was not material when compared to the prior year.
Transmission and distribution expenses increased in 2007 primarily as a result of increases in
labor and materials costs and maintenance associated with additional investment to meet customer
growth. Transmission and distribution expenses increased in 2006 primarily due to expenses
associated
II-18
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
with recovery of prior year storm costs through natural disaster recovery clauses in accordance
with an accounting order approved by the Alabama PSC and maintenance associated with additional
investment in distribution to meet customer growth.
Customer sales and service expenses increased $32 million, $7 million, and $9 million in 2008,
2007, and 2006, respectively. Customer sales and service expenses increased in 2008 primarily as a
result of an increase in customer account expenses, including a $13 million increase in
uncollectible accounts expense, a $9 million increase in meter reading and related supervision
expenses, and an $8 million increase for records and collections. The 2007 and 2006 increases in
customer sales and service expenses were not material when compared to the prior years.
Administrative and general expenses increased $10 million, $28 million, and $29 million in 2008,
2007, and 2006, respectively. The 2008 increase in administrative and general expenses was not
material when compared to the prior year. Administrative and general expenses increased in 2007
primarily as a result of a $16 million increase in legal costs and expenses associated with an
increase in employees. Also contributing to the 2007 increase was a $14 million increase in
accrued expenses for the litigation and workers compensation reserve, partially offset by an $8
million decrease in property damage expense. Administrative and general expenses increased in 2006
primarily as a result of a $17 million increase in salaries and wages and a $24 million increase in
pension expense, partially offset by a $16 million reduction in medical expenses.
Depreciation and Amortization
Depreciation and amortization increased $199 million in 2008 primarily as a result of an increase
in plant in service related to environmental, transmission, and distribution projects mainly at
Alabama Power and Georgia Power and generation projects at Georgia Power. An increase in
depreciation rates at Georgia Power and Southern Power also contributed to the 2008 increase, as
well as the expiration of a rate order previously allowing Georgia Power to levelize certain
purchased power capacity costs and the completion of Plant Oleander Unit 5 in December 2007 and
Plant Franklin Unit 3 in June 2008.
Depreciation and amortization increased $51 million in 2007 primarily as a result of an increase in
plant in service related to environmental, transmission, and distribution projects mainly at
Alabama Power and Georgia Power. An increase in the amortization expense of a regulatory
liability recorded in 2003 in connection with the Mississippi PSCs accounting order on Plant
Daniel capacity also contributed to the 2007 increase. Partially offsetting the 2007 increase was
a reduction in amortization expense due to a Georgia Power regulatory liability related to the
levelization of certain purchased power capacity costs as ordered by the Georgia PSC under the
terms of the retail rate order effective January 1, 2005. See Note 1 to the financial statements
under Depreciation and Amortization for additional information.
Depreciation and amortization increased $27 million in 2006 primarily as a result of the
acquisitions of Plants DeSoto, Rowan, and Oleander in June 2006, September 2006, and June 2005,
respectively, and an increase in the amortization expense of the Mississippi Power regulatory
liability related to Plant Daniel capacity. An increase in depreciation rates at Southern Power
also contributed to the 2006 increase. Partially offsetting the 2006 increase was a reduction in
the amortization expense of a Georgia Power regulatory liability related to the levelization of
certain purchased power capacity costs.
Taxes Other Than Income Taxes
Taxes other than income taxes increased $56 million in 2008 primarily as a result of increases in
franchise fees and municipal gross receipt taxes associated with increases in revenues from energy
sales, as well as increases in property taxes associated with property tax actualizations and
additional plant in service. Taxes other than income taxes increased $23 million in 2007 primarily
as a result of increases in franchise and municipal gross receipts taxes
II-19
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
associated with increases
in revenues from energy sales, partially offset by a decrease in property taxes resulting
from the resolution of a dispute with Monroe County, Georgia. Taxes other than income taxes
increased $39 million in 2006 primarily as a result of increases in franchise and municipal gross
receipts taxes associated with increases in revenues from energy sales, as well as increases in
property taxes associated with additional plant in service.
Other Income (Expense), Net
Other income (expense), net increased $24 million in 2008 primarily as a result of an increase in
allowance for equity funds used during construction related to additional investments in
environmental equipment at generating plants at Alabama Power, Georgia Power, and Gulf Power, as
well as additional investments in transmission and distribution projects mainly at Alabama Power
and Georgia Power. Other income (expense), net increased $68 million in 2007 primarily as a result
of an increase in allowance for equity funds used during construction related to additional
investments in environmental equipment at generating plants and transmission and distribution
projects mainly at Alabama Power and Georgia Power. The 2006 decrease in other income (expense),
net when compared to the prior year was not material.
Interest Expense and Dividends
Total interest charges and other financing costs increased by $25 million in 2008 primarily as a
result of an $82 million increase associated with $1.7 billion in additional debt and preference
stock outstanding at December 31, 2008 compared to December 31, 2007. Also contributing to the
2008 increase was $5 million in other interest costs. The 2008 increase was partially offset by
$55 million related to lower average interest rates on existing variable rate debt and $7 million
of additional capitalized interest as compared to 2007.
Total interest charges and other financing costs increased by $61 million in 2007 primarily as a
result of a $72 million increase associated with $1.2 billion in additional debt and preference
stock outstanding at December 31, 2007 compared to December 31, 2006 and higher interest rates
associated with the issuance of new long-term debt. Also contributing to the 2007 increase was $7
million related to higher average interest rates on existing variable rate debt and $19 million in
other interest costs. The 2007 increase was partially offset by $38 million of additional
capitalized interest as compared to 2006.
Total interest charges and other financing costs increased by $75 million in 2006 primarily due to
a $78 million increase associated with $708 million in additional debt outstanding at December 31,
2006 compared to December 31, 2005 and higher interest rates associated with the issuance of new
long-term debt. Also contributing to the 2006 increase was $7 million associated with higher
average interest rates on existing variable rate debt, partially offset by $6 million of additional
capitalized interest associated with construction projects and $3 million in lower other interest
costs.
Income Taxes
Income taxes increased $87 million in 2008 primarily due to higher pre-tax earnings as compared to
2007 and a 2007 deduction for a Georgia Power land donation. The 2008 increase was partially
offset by an increase in allowance for equity funds used during construction, which is not taxable.
See Note 5 to the financial statements under Effective Tax Rate for additional information.
Income taxes were relatively flat in 2007 as higher pre-tax earnings as compared to 2006 were
largely offset due to a deduction for a Georgia Power land donation; an increase in allowance for
equity funds used during construction, which is not taxable; and an increase in the Internal
Revenue Code of 1986, as amended (Internal Revenue Code), Section 199 production activities
deduction.
II-20
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Income taxes increased $50 million in 2006 primarily due to higher pre-tax earnings as compared to
2005 and the impact of a 2005 accounting order approved by the Alabama PSC to return certain
regulatory liabilities related to deferred taxes to Alabama Powers retail customers.
Other Business Activities
Southern Companys other business activities include the parent company (which does not allocate
operating expenses to business units), investments in leveraged lease and synthetic fuel projects,
telecommunications, and energy-related services. These businesses are classified in general
categories and may comprise one or more of the following subsidiaries: Southern Company Holdings
invests in various energy-related projects, including leveraged lease and synthetic fuel projects
that receive tax benefits, which have contributed significantly to the economic results of these
investments; SouthernLINC Wireless provides digital wireless communications for use by Southern
Company and its subsidiary companies and also markets these services to the public and provides
fiber cable services within the Southeast.
Southern Companys investment in synthetic fuel projects ended at December 31, 2007. A condensed
statement of income for Southern Companys other business activities follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) |
|
|
Amount |
|
from Prior Year |
|
|
2008 |
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
(in millions) |
|
|
|
|
Operating revenues |
|
$ |
127 |
|
|
$ |
(86 |
) |
|
$ |
(55 |
) |
|
$ |
(8 |
) |
|
Other operations and maintenance |
|
|
165 |
|
|
|
(44 |
) |
|
|
(29 |
) |
|
|
(59 |
) |
Depreciation and amortization |
|
|
29 |
|
|
|
(1 |
) |
|
|
(6 |
) |
|
|
(3 |
) |
Taxes other than income taxes |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
Total operating expenses |
|
|
197 |
|
|
|
(45 |
) |
|
|
(35 |
) |
|
|
(63 |
) |
|
Operating income (loss) |
|
|
(70 |
) |
|
|
(41 |
) |
|
|
(20 |
) |
|
|
55 |
|
Equity in income (losses) of
unconsolidated subsidiaries |
|
|
10 |
|
|
|
35 |
|
|
|
35 |
|
|
|
62 |
|
Leveraged lease income (losses) |
|
|
(85 |
) |
|
|
(125 |
) |
|
|
(29 |
) |
|
|
(5 |
) |
Other income (expense), net |
|
|
12 |
|
|
|
(29 |
) |
|
|
73 |
|
|
|
(19 |
) |
Interest expense |
|
|
94 |
|
|
|
(28 |
) |
|
|
(27 |
) |
|
|
48 |
|
Income taxes |
|
|
(122 |
) |
|
|
(7 |
) |
|
|
53 |
|
|
|
136 |
|
|
Net income (loss) |
|
$ |
(105 |
) |
|
$ |
(125 |
) |
|
$ |
33 |
|
|
$ |
(91 |
) |
|
Operating Revenues
Southern Companys non-electric operating revenues from these other businesses decreased $86
million in 2008 primarily as a result of a $60 million decrease associated with Southern Company
terminating its investment in synthetic fuel projects at December 31, 2007 and a $21 million
decrease in revenues at SouthernLINC Wireless related to lower average revenue per subscriber and
fewer subscribers due to increased competition in the industry. Also contributing to the 2008
decrease was a $5 million decrease in revenues from Southern Companys energy-related services
business. The $55 million decrease in 2007 primarily resulted from a $14 million decrease in fuel
procurement service revenues following a contract termination, a $13 million decrease in revenues
at SouthernLINC Wireless related to lower average revenue per subscriber and fewer subscribers due
to increased competition in the industry, and an $11 million decrease in revenues from Southern
Companys energy-related services business. The $8 million decrease in 2006 primarily resulted
from a $21 million decrease in revenues at SouthernLINC Wireless related to lower average revenue
per subscriber and lower equipment and accessory sales. The 2006 decrease was partially offset by
a $12 million increase in fuel procurement service revenues.
II-21
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Other Operations and Maintenance Expenses
Other operations and maintenance expenses for these other businesses decreased $44 million in 2008
primarily as a result of $11 million of lower coal expenses related to Southern Company terminating
its investment in synthetic fuel projects at December 31, 2007; $9 million of lower sales expenses
at SouthernLINC Wireless related to lower sales volume; and $5 million of lower parent company
expenses related to advertising, litigation, and property insurance costs. Other operations and
maintenance expenses decreased $29 million in 2007 primarily as a result of $11 million of lower
production expenses related to the termination of Southern Companys membership interest in one of
the synthetic fuel entities and $8 million attributed to the wind-down of one of the Companys
energy-related services businesses. Other operations and maintenance expenses decreased
$59 million in 2006 primarily as a result of $32 million of lower production expenses related to
the termination of Southern Companys membership interest in one of the synthetic fuel entities,
$13 million attributed to the wind-down of one of the Companys energy-related services businesses,
and $7 million of lower expenses resulting from the March 2006 sale of a subsidiary that provided
rail car maintenance services.
Equity in Income (Losses) of Unconsolidated Subsidiaries
Southern Company made investments in two synthetic fuel production facilities that generated
operating losses. These investments allowed Southern Company to claim federal income tax credits
that offset these operating losses and made the projects profitable. Equity in income of
unconsolidated subsidiaries increased $35 million in 2008 as a result of Southern Company
terminating its investment in synthetic fuel projects at December 31, 2007. Equity in losses of
unconsolidated subsidiaries decreased $35 million in 2007 as a result of terminating Southern
Companys membership interest in one of the synthetic fuel entities which reduced the amount of the
Companys share of the losses and, therefore, the funding obligation for the year. Also
contributing to the 2007 decrease were adjustments to the phase-out of the related federal income
tax credits, partially offset by higher operating expenses due to idled production in 2006 and
decreased production in 2007 in anticipation of exiting the business. Equity in losses of
unconsolidated subsidiaries decreased $62 million in 2006 as a result of terminating Southern
Companys membership interest in one of the synthetic fuel entities which reduced the amount of the
Companys share of the losses and, therefore, the funding obligation for the year. The 2006
decrease also resulted from lower operating expenses while the production facilities at the other
synthetic fuel entity were idled from May to September 2006 due to higher oil prices.
Leveraged Lease Income (Losses)
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. Leveraged lease losses increased $125 million in 2008 as a result of
Southern Companys decision to participate in a settlement with the IRS related to deductions for
several sale-in-lease-out (SILO) transactions and the resulting application of Financial Accounting
Standards Board (FASB) Staff Position No. FAS 13-2, Accounting for a Change or Projected Change in
the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction (FSP
13-2). See Note 3 to the financial statements under Income Tax
Matters Leveraged Leases for
further information. Leveraged lease income decreased $29 million in 2007 as a result of the
adoption of FSP 13-2, as well as an expected decline in leveraged lease income over the terms of
the leases. The 2006 decrease in leveraged lease income when compared to the prior year was not
material.
II-22
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Other Income (Expense), Net
Other income (expense), net for these other businesses decreased $29 million in 2008 primarily as a
result of the 2007 gain on a derivative transaction in the synthetic fuel business which settled on
December 31, 2007. Other income (expense), net increased $73 million in 2007 primarily as a result
of a $60 million increase related to changes in the value of derivative transactions in the
synthetic fuel business and a $16 million increase related to the 2006 impairment of investments in
the synthetic fuel entities, partially offset by the release of $6 million in certain contractual
obligations associated with these investments in 2006. Other income (expense), net decreased
$19 million in 2006 primarily as a result of a $25 million decrease related to changes in
the value of derivative transactions in the synthetic fuel business and the previously mentioned
impairment and release of contractual obligations.
Interest Expense
Total interest charges and other financing costs for these other businesses decreased $28 million
in 2008 primarily as a result of $29 million associated with lower average interest rates on
existing variable rate debt and a $4 million decrease attributed to lower interest rates associated
with new debt issued to replace maturing securities. At December 31, 2008, these other businesses
had $92 million in additional debt outstanding compared to December 31, 2007. The 2008 decrease
was partially offset by a $5 million increase in other interest costs. Total interest charges and
other financing costs decreased by $27 million in 2007 primarily as a result of $16 million of
losses on debt that was reacquired in 2006. Also contributing to the 2007 decrease was $97 million
less debt outstanding at December 31, 2007 compared to December 31, 2006, lower interest rates
associated with the issuance of new long-term debt, and a $4 million decrease in other interest
costs. Total interest charges and other financing costs increased by $48 million in 2006 primarily
as a result of a $19 million increase associated with $149 million in additional debt outstanding
at December 31, 2006 as compared to December 31, 2005 and higher interest rates associated with the
issuance of new long-term debt. Also contributing to the increase were $12 million associated with
higher average interest rates on existing variable rate debt, a $6 million loss on the early
redemption of long-term debt payable to affiliated trusts in January 2006, and a $16 million loss
on the repayment of long-term debt payable to affiliated trusts in December 2006. The 2006
increase was partially offset by $4 million in lower other interest costs.
Income Taxes
Income taxes for these other businesses decreased $7 million in 2008 primarily as a result of
leveraged lease losses discussed previously under Leveraged Lease Income (Losses), partially
offset by a $36 million decrease in net synthetic fuel tax credits as a result of Southern Company
terminating its investment in synthetic fuel projects at December 31, 2007. Income taxes increased
$53 million in 2007 primarily as a result of a $30 million decrease in net synthetic fuel tax
credits as a result of terminating Southern Companys membership interest in one of the synthetic
fuel entities in 2006 and increasing the synthetic fuel tax credit reserves due to an anticipated
phase-out of synthetic fuel tax credits due to higher oil prices. Income taxes increased
$136 million in 2006 primarily as a result of a $111 million decrease in net synthetic fuel tax
credits as a result of terminating Southern Companys membership interest in one of the synthetic
fuel entities, curtailing production at the other synthetic fuel entity from May to September 2006,
and increasing the synthetic fuel tax credit reserves due to an anticipated phase-out of synthetic
fuel tax credits due to higher oil prices. See Note 5 to the financial statements under Effective
Tax Rate for further information.
II-23
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Effects of Inflation
The traditional operating companies and Southern Power are subject to rate regulation and party to
long-term contracts that are generally based on the recovery of historical costs. When historical
costs are included, or when inflation exceeds projected costs used in rate regulation or in
market-based prices, the effects of inflation can create an economic loss since the recovery of
costs could be in dollars that have less purchasing power. In addition, the income tax laws are
based on historical costs. While the inflation rate has been relatively low in recent years, it
continues to have an adverse effect on Southern Company because of the large investment in utility
plant with long economic lives. Conventional accounting for historical cost does not recognize
this economic loss or the partially offsetting gain that arises through financing facilities with
fixed-money obligations such as long-term debt, preferred securities, preferred stock, and
preference stock. Any recognition of inflation by regulatory authorities is reflected in the rate
of return allowed in the traditional operating companies approved electric rates.
FUTURE EARNINGS POTENTIAL
General
The four traditional operating companies operate as vertically integrated utilities providing
electricity to customers within their service areas in the Southeastern United States. Prices for
electricity provided to retail customers are set by state PSCs under cost-based regulatory
principles. Prices for wholesale electricity sales, interconnecting transmission lines, and the
exchange of electric power are regulated by the Federal Energy Regulatory Commission (FERC).
Retail rates and earnings are reviewed and may be adjusted periodically within certain limitations.
Southern Power continues to focus on long-term capacity contracts, optimized by limited energy
trading activities. See ACCOUNTING POLICIES Application of Critical Accounting Policies and
Estimates Electric Utility Regulation herein and Note 3 to the financial statements for
additional information about regulatory matters.
The results of operations for the past three years are not necessarily indicative of 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 constructive regulatory environment that continues to allow for the recovery of all
prudently incurred costs during a time of increasing costs. Other major factors include the
profitability of the competitive wholesale supply business and federal regulatory policy which may
impact Southern Companys level of participation in this market. Future earnings for the
electricity business in the near term will depend, in part, upon maintaining energy sales during
the current economic downturn, which is subject to a number of factors. These factors include
weather, competition, new energy contracts with neighboring utilities and other wholesale
customers, energy conservation practiced by customers, the price of electricity, the price
elasticity of demand, and the rate of economic growth or decline 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. Recent recessionary conditions
have negatively impacted sales growth for the traditional operating companies and may negatively
impact wholesale capacity revenues at Southern Power. The timing and extent of the economic
recovery will impact future earnings.
Southern Company system generating capacity increased 659 megawatts due to Southern Powers
completion of Franklin Unit 3 in June 2008. In general, Southern Company has constructed or
acquired new generating capacity only after entering into long-term capacity contracts for the new
facilities or to meet requirements of Southern Companys regulated retail markets, both of which
are optimized by limited energy trading activities. See FUTURE
EARNINGS POTENTIAL Construction
Projects herein for additional information.
II-24
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
As part of its ongoing effort to adapt to changing market conditions, Southern Company continues to
evaluate and consider a wide array of potential business strategies. These strategies may include
business combinations, partnerships, acquisitions involving other utility or non-utility businesses
or properties, disposition of certain assets, internal restructuring, or some combination thereof.
Furthermore, Southern Company may engage in new business ventures that arise from competitive and
regulatory changes in the utility industry. Pursuit of any of the above strategies, or any
combination thereof, may significantly affect the business operations, risks, and financial
condition of Southern Company.
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. Environmental compliance spending over the next several years may exceed amounts estimated.
Some of the factors driving the potential for such an increase are higher commodity costs, market
demand for labor, and scope additions and clarifications. The timing, specific requirements, and
estimated costs could also change as environmental statutes and regulations are adopted or
modified. See Note 3 to the financial statements under Environmental Matters for additional
information.
New Source Review Actions
In November 1999, the Environmental Protection Agency (EPA) brought a civil action in the U.S.
District Court for the Northern District of Georgia against certain Southern Company subsidiaries,
including Alabama Power and Georgia Power, alleging that these subsidiaries had violated the New
Source Review (NSR) provisions of the Clean Air Act and related state laws at certain coal-fired
generating facilities. Through subsequent amendments and other legal procedures, the EPA filed a
separate action in January 2001 against Alabama Power in the U.S. District Court for the Northern
District of Alabama after Alabama Power was dismissed from the original action. In these lawsuits,
the EPA alleged that NSR violations occurred at eight coal-fired generating facilities operated by
Alabama Power and Georgia Power. The civil actions request penalties and injunctive relief,
including an order requiring the installation of the best available control technology at the
affected units. The action against Georgia Power has been administratively closed since the
spring of 2001, and the case has not been reopened.
In June 2006, the U.S. District Court for the Northern District of Alabama entered a consent decree
between Alabama Power and the EPA, resolving a portion of the Alabama Power lawsuit relating to the
alleged NSR violations at Plant Miller. The consent decree required Alabama Power to pay $100,000
to resolve the governments claim for a civil penalty and to donate $4.9 million of sulfur dioxide
emission allowances to a nonprofit charitable organization. It also formalized specific emissions
reductions to be accomplished by Alabama Power, consistent with other Clean Air Act programs that
require emissions reductions. In August 2006, the district court in Alabama granted Alabama
Powers motion for summary judgment and entered final judgment in favor of Alabama Power on the
EPAs claims related to all of the remaining plants: Plants Barry, Gaston, Gorgas, and Greene
County.
The plaintiffs appealed the district courts decision to the U.S. Court of Appeals for the Eleventh
Circuit, where the appeal was stayed, pending the U.S. Supreme Courts decision in a similar case
against Duke Energy. The Supreme Court issued its decision in the Duke Energy case in April 2007,
and in December 2007, the Eleventh Circuit vacated the district courts decision in the Alabama
Power case and remanded the case back to the district court for consideration of the legal issues
in light of the Supreme Courts decision in the Duke Energy case. 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
did not resolve the case, and the ultimate outcome of these matters cannot be determined at this
time.
II-25
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Southern Company believes that the traditional operating companies complied with applicable laws
and the EPA regulations and interpretations in effect at the time the work in question took place.
The Clean Air Act authorizes maximum civil penalties of $25,000 to $37,500 per day, per violation
at each generating unit, depending on the date of the alleged violation. An adverse outcome in
either of these cases could require substantial capital expenditures or affect the timing of
currently budgeted capital expenditures that cannot be determined at this time and could possibly
require payment of substantial penalties. Such expenditures could affect future results of
operations, cash flows, and financial condition if such costs are not recovered through regulated
rates.
Carbon Dioxide Litigation
New York Case
In July 2004, three environmental groups and attorneys general from eight states, each outside of
Southern Companys service territory, and the corporation counsel for New York City filed
complaints in the U.S. District Court for the Southern District of New York against Southern
Company and four other electric power companies. The complaints allege that the companies
emissions of carbon dioxide, a greenhouse gas, contribute to global warming, which the plaintiffs
assert is a public nuisance. Under common law public and private nuisance theories, the plaintiffs
seek a judicial order (1) holding each defendant jointly and severally liable for creating,
contributing to, and/or maintaining global warming and (2) requiring each of the defendants to cap
its emissions of carbon dioxide and then reduce those emissions by a specified percentage each year
for at least a decade. The plaintiffs have not, however, requested that damages be awarded in
connection with their claims. Southern Company believes these claims are without merit and notes
that the complaint cites no statutory or regulatory basis for the claims. In September 2005, the
U.S. District Court for the Southern District of New York granted Southern Companys and the other
defendants motions to dismiss these cases. The plaintiffs filed an appeal to the U.S. Court of
Appeals for the Second Circuit in October 2005, but no decision has been issued. The ultimate
outcome of these matters cannot be determined at this time.
Kivalina Case
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 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.
Environmental Statutes and Regulations
General
Southern Companys operations are subject to extensive regulation by state and federal
environmental agencies under a variety of statutes and regulations governing environmental media,
including air, water, and land resources. Applicable statutes include the Clean Air Act; the Clean
Water Act; the Comprehensive Environmental Response, Compensation, and Liability Act; the Resource
Conservation and Recovery Act; the Toxic Substances Control Act; the Emergency Planning & Community
Right-to-Know Act; the Endangered Species Act; and related federal and state regulations.
Compliance with these environmental requirements involves significant capital and operating
II-26
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
costs, a major portion of which is expected to be recovered through existing ratemaking provisions.
Through 2008, Southern Company had invested approximately $6.3 billion in capital projects to
comply with these requirements, with annual totals of $1.6 billion, $1.5 billion, and $661 million
for 2008, 2007, and 2006, respectively. The Company expects that capital expenditures to assure
compliance with existing and new statutes and regulations will be an additional $1.4 billion, $737
million, and $871 million for 2009, 2010, and 2011, respectively. The Companys compliance
strategy can be affected by changes to existing environmental laws, statutes, and regulations, the
cost, availability, and existing inventory of emission allowances, and the Companys fuel mix.
Environmental costs that are known and estimable at this time are included in capital expenditures
discussed under FINANCIAL CONDITION AND LIQUIDITY Capital Requirements and Contractual
Obligations herein.
Compliance with any new federal or state legislation or regulations related to global climate
change, air quality, combustion byproducts, including coal ash, or other environmental and health
concerns could also significantly affect Southern Company. Although new or revised environmental
legislation or regulations could affect many areas of Southern Companys operations, the full
impact of any such changes cannot be determined at this time.
Air Quality
Compliance with the Clean Air Act and resulting regulations has been and will continue to be a
significant focus for Southern Company. Through 2008, the Company had spent approximately
$5.4 billion in reducing sulfur dioxide (SO2) and nitrogen oxide (NOx)
emissions and in monitoring emissions pursuant to the Clean Air Act. Additional controls are
currently being installed at several plants to further reduce air emissions, maintain compliance
with existing regulations, and meet new requirements.
In 2004, the EPA designated nonattainment areas under an eight-hour ozone standard. Areas within
Southern Companys service area that were designated as nonattainment under the eight-hour ozone
standard included Macon (Georgia), Birmingham (Alabama), and a 20-county area within metropolitan
Atlanta. The Macon and Birmingham areas have since been redesignated as attainment areas by the
EPA, and maintenance plans to address future exceedances of the standard have been approved for
both areas. State plans for bringing the Atlanta area into attainment with this standard were due
to the EPA in 2007; however, in December 2006, the U.S. Court of Appeals for the District of
Columbia Circuit vacated the EPA rules designed to provide states with the guidance necessary to
develop those plans. State plans could require additional reductions in NOx emissions
from power plants. On March 12, 2008, the EPA issued a final rule establishing a more stringent
eight-hour ozone standard which will likely result in designation of new nonattainment areas within
Southern Companys service territory. The EPA is expected to publish those designations in 2010
and require state implementation plans for any nonattainment areas by 2013.
During 2005, the EPAs annual fine particulate matter nonattainment designations became effective
for several areas within Southern Companys service area in Alabama and Georgia. State plans for
addressing the nonattainment designations for this standard were due by April 5, 2008 but have not
been finalized. These state plans could require further reductions in SO2 and
NOx emissions from power plants. In September 2006, the EPA published a final rule
which increased the stringency of the 24-hour average fine particulate matter air quality standard.
On December 18, 2008, the EPA designated the Birmingham, Alabama area as nonattainment for the
24-hour standard. A state implementation plan for this nonattainment area is due in 2012.
The EPA issued the final Clean Air Interstate Rule (CAIR) in March 2005. This cap-and-trade rule
addresses power plant SO2 and NOx emissions that were found to contribute to
nonattainment of the eight-hour ozone and fine particulate matter standards in downwind states.
Twenty-eight eastern states, including each of the states within Southern Companys service area,
are subject to the requirements of the rule. The rule calls for additional
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MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
reductions of NOx and/or SO2 to be achieved in two phases, 2009/2010 and
2015. 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. On December 23, 2008, however, the U.S. Court of
Appeals for the District of Columbia Circuit altered its July decision in response to a rehearing
petition and remanded CAIR to the EPA without vacatur, thereby leaving CAIR compliance requirements
in place while the EPA develops a revised rule. States in the Southern Company service territory
have completed plans to implement CAIR. Emission reductions are being accomplished by the
installation of emission controls at Southern Companys coal-fired facilities and/or by the
purchase of emission allowances. The full impact of the courts remand and the outcome of the
EPAs future rulemaking in response cannot be determined at this time.
The Clean Air Visibility Rule (formerly called the Regional Haze Rule) was finalized in July 2005.
The goal of this rule is to restore natural visibility conditions in certain areas (primarily
national parks and wilderness areas) by 2064. The rule involves (1) the application of Best
Available Retrofit Technology (BART) to certain sources built between 1962 and 1977 and (2) the
application of any additional emissions reductions which may be deemed necessary for each
designated area to achieve reasonable progress by 2018 toward the natural conditions goal.
Thereafter, for each 10-year planning period, additional emissions reductions will be required to
continue to demonstrate reasonable progress in each area during that period. For power plants, the
Clean Air Visibility Rule allows states to determine that CAIR satisfies BART requirements for
SO2 and NOx. Extensive studies were performed for each of the Companys
affected units to demonstrate that additional particulate matter controls are not necessary under
BART. The states of Alabama and Mississippi have determined that no additional SO2
controls beyond CAIR are needed to satisfy reasonable progress. At the request of the State of
Georgia, additional analyses were performed for certain units in Georgia to demonstrate that no
additional SO2 controls were required to demonstrate reasonable progress. States have
completed or are currently completing implementation plans that contain strategies for BART and any
other measures required to achieve the first phase of reasonable progress.
The impacts of the eight-hour ozone nonattainment designations, the fine particulate matter
nonattainment designations, and the Clean Air Visibility Rule on the Company cannot be determined
at this time and will depend on the resolution of any pending legal challenges and the development
and implementation of rules at the state level. For example, the State of Georgia has approved a
multi-pollutant rule that requires plant-specific emission controls on all but the smallest
generating units in Georgia to be installed according to a schedule set forth in the rule. The
rule is designed to ensure reductions in emissions of SO2, NOx, and mercury
in Georgia.
The Company has developed and continually updates a comprehensive environmental compliance strategy
to assess compliance obligations associated with the continuing and new environmental requirements
discussed above. As part of this strategy, the Company plans to install additional SO2
and NOx emission controls within the next several years to ensure continued
compliance with applicable air quality requirements.
In March 2005, the EPA published the final Clean Air Mercury Rule, a cap-and-trade program for the
reduction of mercury emissions from coal-fired power plants. The final Clean Air Mercury Rule was
challenged in the U.S. Court of Appeals for the District of Columbia Circuit. The petitioners
alleged that the EPA was not authorized to establish a cap-and-trade program for mercury emissions
and instead the EPA must establish maximum achievable control technology standards for coal-fired
electric utility steam generating units. On February 8, 2008, the court ruled in favor of the
petitioners and vacated the Clean Air Mercury Rule. The Companys overall environmental compliance
strategy relies primarily on a combination of SO2 and NOx controls to reduce mercury
emissions. Any significant changes in the strategy will depend on the outcome of any appeals
and/or future federal and state rulemakings. Future rulemakings necessitated by the courts
decision could require emission reductions more stringent than those required by the Clean Air
Mercury Rule.
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MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Water Quality
In July 2004, the EPA published its final technology-based regulations under the Clean Water Act
for the purpose of reducing impingement and entrainment of fish, shellfish, and other forms of
aquatic life at existing power plant cooling water intake structures. The rules require baseline
biological information and, perhaps, installation of fish protection technology near some intake
structures at existing power plants. In January 2007, the U.S. Court of Appeals for the Second
Circuit overturned and remanded several provisions of the rule, including the use of cost-benefit
analysis, to the EPA for revisions. The decision has been appealed to the U.S. Supreme Court. The
full impact of these regulations will depend on subsequent legal proceedings, further rulemaking by
the EPA, the results of studies and analyses performed as part of the rules implementation, and
the actual requirements established by state regulatory agencies and, therefore, cannot be
determined at this time.
Environmental Remediation
Southern Company must comply with other environmental laws and regulations that cover the handling
and disposal of waste and releases of hazardous substances. Under these various laws and
regulations, the traditional operating companies could incur substantial costs to clean up
properties. The traditional operating companies conduct studies to determine the extent of any
required cleanup and have recognized in their respective financial statements the costs to clean up
known sites. Amounts for cleanup and ongoing monitoring costs were not material for any year
presented. The traditional operating companies may be liable for some or all required cleanup
costs for additional sites that may require environmental remediation. See Note 3 to the financial
statements under Environmental Matters Environmental Remediation for additional information.
Global Climate Issues
Federal legislative proposals that would impose mandatory requirements related to greenhouse gas
emissions and renewable energy standards continue to be strongly considered in Congress, and the
reduction of greenhouse gas emissions has been identified as a high priority by the current
Administration. The ultimate outcome of these proposals cannot be determined at this time; however,
mandatory restrictions on the Companys greenhouse gas emissions could result in significant
additional compliance costs that could affect future unit retirement and replacement decisions and
results of operations, cash flows, and financial condition if such costs are not recovered through
regulated rates.
In April 2007, the U.S. Supreme Court ruled that the EPA has authority under the Clean Air Act to
regulate greenhouse gas emissions from new motor vehicles. The EPA is currently developing its
response to this decision. Regulatory decisions that will follow from this response may have
implications for both new and existing stationary sources, such as power plants. The ultimate
outcome of these rulemaking activities cannot be determined at this time; however, as with the
current legislative proposals, mandatory restrictions on the Companys greenhouse gas emissions
could result in significant additional compliance costs that could affect future unit retirement
and replacement decisions and results of operations, cash flows, and financial condition if such
costs are not recovered through regulated rates.
In addition, some states are considering or have undertaken actions to regulate and reduce
greenhouse gas emissions. For example, 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 public utilities, subject to legislative ratification. The impact
of this and any similar legislation on Southern Company will depend on the future development,
adoption, legislative ratification,
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MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
implementation, and potential legal challenges to rules governing greenhouse gas emissions and
mandates regarding the use of renewable energy, and the ultimate outcome cannot be determined at
this time.
International climate change negotiations under the United Nations Framework Convention on Climate
Change also continue. Current efforts focus on a potential successor to the Kyoto Protocol for the
post 2012 timeframe, with a conclusion to this round of negotiations targeted for the end of 2009.
The outcome and impact of the international negotiations cannot be determined at this time.
The Company is actively evaluating and developing electric generating technologies with lower
greenhouse gas emissions. These include new nuclear generation, including proposed construction of
two additional generating units at Plant Vogtle in Georgia; proposed construction of an advanced
IGCC unit with approximately 50% carbon capture in Kemper County, Mississippi; and renewables
investments, including the proposed conversion of Plant Mitchell in Georgia from coal-fired to
biomass generation. The Company is currently considering additional projects and is pursuing
research into the costs and viability of other renewable technologies for the Southeast.
FERC Matters
Market-Based Rate Authority
Each of the traditional operating companies and Southern Power has authorization from the FERC to
sell power to non-affiliates, including short-term opportunity sales, at market-based prices.
Specific FERC approval must be obtained with respect to a market-based contract with an affiliate.
In December 2004, the FERC initiated a proceeding to assess Southern Companys generation dominance
within its retail service territory. The ability to charge market-based rates in other markets is
not an issue in the proceeding. Any new market-based rate sales by any subsidiary of Southern
Company in Southern Companys retail service territory entered into during a 15-month refund period
that ended in May 2006 could be subject to refund to a cost-based rate level.
In November 2007, the presiding administrative law judge issued an initial decision regarding the
methodology to be used in the generation dominance tests. The proceedings are ongoing. The
ultimate outcome of this generation dominance proceeding cannot now be determined, but an adverse
decision by the FERC in a final order could require the traditional operating companies and
Southern Power to charge cost-based rates for certain wholesale sales in the Southern Company
retail service territory, which may be lower than negotiated market-based rates, and could also
result in total refunds of up to $19.7 million, plus interest. Southern Company and its
subsidiaries believe that there is no meritorious basis for an adverse decision in this proceeding
and are vigorously defending themselves in this matter.
In June 2007, the FERC issued its final rule in Order No. 697 regarding market-based rate
authority. The FERC generally retained its current market-based rate standards. Responding to a
number of requests for rehearing, the FERC issued Order No. 697-A on April 21, 2008 and Order No.
697-B on December 12, 2008. These orders largely affirmed the FERCs prior revision and
codification of the regulations governing market-based rates for public utilities. In accordance
with the orders, Southern Company submitted to the FERC an updated market power analysis on
September 2, 2008 related to its continued market-based rate authority. The ultimate outcome of
this matter cannot now be determined.
On October 17, 2008, Southern Company filed with the FERC a revised market-based rate (MBR) tariff
and a new cost-based rate (CBR) tariff. The revised MBR tariff provides for a must offer energy
auction whereby Southern Company offers all of its available energy for sale in a day-ahead auction
and an hour-ahead auction with reserve prices not to exceed the CBR tariff price, after considering
Southern Companys native load requirements, reliability
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MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
obligations, and sales commitments to third parties. All sales under the energy auction would be
at market clearing prices established under the auction rules. The new CBR tariff provides for a
cost-based price for wholesale sales of less than a year. On December 18, 2008, the FERC issued an
order conditionally accepting the MBR tariff subject to certain revisions to the auction proposal.
On January 21, 2009, Southern Company made a compliance filing that accepted all the conditions of
the MBR tariff order. When this order becomes final, Southern Company will have 30 days to
implement the wholesale auction. On December 31, 2008, the FERC issued an order conditionally
accepting the CBR tariff subject to providing additional information concerning one aspect of the
tariff. On January 30, 2009, Southern Company filed a response addressing the FERC inquiry to the
CBR tariff order. Implementation of the energy auction in accordance with the MBR tariff order is
expected to adequately mitigate going forward any presumption of market power that Southern Company
may have in the Southern Company retail service territory. The timing of when the FERC may issue
the final orders on the MBR and CBR tariffs and the ultimate outcome of these matters cannot be
determined at this time.
Generation Interconnection Agreements
In November 2004, generator company subsidiaries of Tenaska, Inc. (Tenaska), as counterparties to
three previously executed interconnection agreements with subsidiaries of Southern Company, filed
complaints at the FERC requesting that the FERC modify the agreements and that those Southern
Company subsidiaries refund a total of $19 million previously paid for interconnection facilities.
No other similar complaints are pending with the FERC.
In January 2007, the FERC issued an order granting Tenaskas requested relief. Although the FERCs
order required the modification of Tenaskas interconnection agreements, under the provisions of
the order, Southern Company determined that no refund was payable to Tenaska. Southern Company
requested rehearing asserting that the FERC retroactively applied a new principle to existing
interconnection agreements. Tenaska requested rehearing of FERCs methodology for determining the
amount of refunds. The requested rehearings were denied, and Southern Company and Tenaska have
appealed the orders to the U.S. Circuit Court for the District of Columbia. The final outcome of
this matter cannot now be determined.
PSC Matters
Alabama Power
Effective January 2007 and thereafter, Rate RSE adjustments are based on forward-looking
information for the applicable upcoming calendar year. Retail rate adjustments for any two-year
period, when averaged together, cannot exceed 4% per year and any annual adjustment is limited to
5%. Retail rates remain unchanged when the retail return on common equity (ROE) is projected to be
between 13.0% and 14.5%. If Alabama Powers actual retail ROE is above the allowed equity return
range, customer refunds will be required; however, there is no provision for additional customer
billings should the actual retail ROE fall below the allowed equity return range.
On October 7, 2008, the Alabama PSC approved a corrective rate package primarily providing for
adjustments associated with customer charges to certain existing rate structures. This package,
effective in January 2009, is expected to generate additional annual revenues of approximately $168
million. Alabama Power agreed to a moratorium on any increase in 2009 under Rate RSE. Alabama
Power also agreed to defer any increase in rates during 2009 under the portion of Rate Certificated
New Plant which permits recovery of costs associated with environmental laws and regulations until
2010. The deferral of the retail rate adjustments will have no significant effect on Southern
Companys revenues or net income, but will have an immaterial impact on annual cash flows. On
December 1, 2008, Alabama Power made its submission of projected data for calendar year 2009. See
Note 3 to the financial statements under Alabama Power Retail Regulatory Matters for further
information.
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MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Georgia Power
In December 2007, the Georgia PSC approved the retail rate plan for the years 2008 through 2010
(2007 Retail Rate Plan). Under the 2007 Retail Rate Plan, Georgia Powers earnings will continue
to be evaluated against a retail ROE range of 10.25% to 12.25%. Two-thirds of any earnings above
12.25% will be applied to rate refunds with the remaining one-third applied to an environmental
compliance cost recovery (ECCR) tariff. Georgia Power has agreed that it will not file for a
general base rate increase during this period unless its projected retail ROE falls below 10.25%.
Retail base rates increased by approximately $99.7 million effective January 1, 2008 to provide for
cost recovery of transmission, distribution, generation, and other investments, as well as
increased operating costs. In addition, the ECCR tariff was implemented to allow for the recovery
of costs for required environmental projects mandated by state and federal regulations. The ECCR
tariff increased rates by approximately $222 million effective January 1, 2008. Georgia Power is
required to file a general rate case by July 1, 2010, in response to which the Georgia PSC would be
expected to determine whether the 2007 Retail Rate Plan should be continued, modified, or
discontinued. See Note 3 to the financial statements under Georgia Power Retail Regulatory
Matters for additional information.
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. The
traditional operating companies continuously monitor the under recovered fuel cost balance in light
of these higher fuel costs. Each of the traditional operating companies received approval in 2007
and/or 2008 to increase its fuel cost recovery factor to recover existing under recovered amounts
as well as projected future costs. At December 31, 2008, the amount of under recovered fuel costs
included in the balance sheets was $1.2 billion compared to $1.1 billion at December 31, 2007.
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, changing the
billing factor has no significant effect on the Companys revenues or net income, but does impact
annual cash flow. Based on their respective state PSC orders, a portion of the under recovered
regulatory clause revenues for Alabama Power and Georgia Power was reclassified from current assets
to deferred charges and other assets in the balance sheets. See Note 1 to the financial statements
under Revenues and Note 3 to the financial statements under Alabama Power Retail Regulatory
Matters, Georgia Power Retail Regulatory Matters, and Gulf Power Retail Regulatory Matters for
additional information.
Storm Damage Cost Recovery
Each traditional operating company maintains a reserve to cover the cost of damages from major
storms to its transmission and distribution lines and generally the cost of uninsured damages to
its generation facilities and other property. In addition, each of the traditional operating
companies has been authorized by its state PSC to defer the portion of the major storm restoration
costs that exceeded the balance in its storm damage reserve account. As of December 31, 2008, the
under recovered balance in Southern Companys storm damage reserve accounts totaled approximately
$27 million, of which approximately $21 million and $6 million, respectively, are included in the
balance sheets herein under Other Current Assets and Other Regulatory Assets.
See Notes 1 and 3 to the financial statements under Storm Damage Reserves and Storm Damage Cost
Recovery, respectively, for additional information on these reserves. The final outcome of these
matters cannot now be determined.
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MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
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 (Baseload Act). The Baseload Act
authorizes, but does not require, the Mississippi PSC to adopt a cost recovery mechanism that
includes 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. Prior to the passage of the Baseload Act, such costs would
traditionally be recovered only after the plant was placed in service. The Baseload Act 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 Baseload Act 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 Southern Company cannot now be determined.
Mirant Matters
Mirant was an energy company with businesses that included independent power projects and energy
trading and risk management companies in the U.S. and selected other countries. It was a
wholly-owned subsidiary of Southern Company until its initial public offering in October 2000. In
April 2001, Southern Company completed a spin-off to its shareholders of its remaining ownership,
and Mirant became an independent corporate entity.
In July 2003, Mirant and certain of its affiliates filed for voluntary reorganization under
Chapter 11 of the Bankruptcy Code. In January 2006, Mirants plan of reorganization became
effective, and Mirant emerged from bankruptcy. As part of the plan, Mirant transferred
substantially all of its assets and its restructured debt to a new corporation that adopted the
name Mirant Corporation (Reorganized Mirant). Southern Company has certain contingent liabilities
associated with guarantees of contractual commitments made by Mirants subsidiaries discussed in
Note 7 to the financial statements under Guarantees and with various lawsuits discussed in Note 3
to the financial statements under Mirant Matters.
In December 2004, as a result of concluding an IRS audit for the tax years 2000 and 2001, Southern
Company paid approximately $39 million in additional tax and interest related to Mirant tax items
and filed a claim in Mirants bankruptcy case for that amount. Through December 2008, Southern
Company received from the IRS approximately $38 million in refunds related to Mirant. Southern
Company believes it has a right to recoup the $39 million tax payment owed by Mirant from such tax
refunds. As a result, Southern Company intends to retain the tax refunds and reduce its claim
against Mirant for the payment of Mirant taxes by the amount of such refunds. MC Asset Recovery, a
special purpose subsidiary of Reorganized Mirant, has objected to and sought to equitably
subordinate the Southern Company tax claim in its fraudulent transfer litigation against Southern
Company. Southern Company has reserved the remaining amount with respect to its Mirant tax claim.
If Southern Company is ultimately required to make any additional payments either with respect to
the IRS audit or its contingent obligations under guarantees of Mirant subsidiaries, Mirants
indemnification obligation to Southern Company for these additional payments, if allowed, would
constitute unsecured claims against Mirant, entitled to stock in Reorganized Mirant. See Note 3 to
the financial statements under Mirant Matters Mirant Bankruptcy.
In June 2005, Mirant, as a debtor in possession, and The Official Committee of Unsecured Creditors
of Mirant Corporation filed a complaint against Southern Company in the U.S. Bankruptcy Court for
the Northern District of Texas, which was amended in July 2005, February 2006, May 2006, and March
2007. In January 2006, MC Asset Recovery was substituted as plaintiff. The fourth amended
complaint (the complaint) alleges that Southern Company caused Mirant to engage in certain
fraudulent transfers and to pay illegal dividends to Southern Company
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MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
prior to the spin-off. The complaint also seeks to recharacterize certain advances from Southern
Company to Mirant for investments in energy facilities from debt to equity. The complaint further
alleges that Southern Company is liable to Mirants creditors for the full amount of Mirants
liability under an alter ego theory of recovery and that Southern Company breached its fiduciary
duties to Mirant and its creditors, caused Mirant to breach its fiduciary duties to creditors, and
aided and abetted breaches of fiduciary duties by Mirants directors and officers. The complaint
also seeks recoveries under the theories of restitution and unjust enrichment. In addition, the
complaint alleged a claim under the Federal Debt Collection Procedure Act (FDCPA) to avoid certain
transfers from Mirant to Southern Company; however, on July 7, 2008, the court ruled that the FDCPA
does not apply and that Georgia law should apply instead. The complaint seeks monetary damages in
excess of $2 billion plus interest, punitive damages, attorneys fees, and costs. Finally, the
complaint includes an objection to Southern Companys pending claims against Mirant in the
Bankruptcy Court (which relate to reimbursement under the separation agreements of payments such as
income taxes, interest, legal fees, and other guarantees described in Note 7 to the financial
statements) and seeks equitable subordination of Southern Companys claims to the claims of all
other creditors. Southern Company served an answer to the complaint in April 2007.
In February 2006, the Companys motion to transfer the case to the U.S. District Court for the
Northern District of Georgia was granted. In May 2006, Southern Company filed a motion for summary
judgment seeking entry of judgment against the plaintiff as to all counts in the complaint. In
December 2006, the U.S. District Court for the Northern District of Georgia granted in part and
denied in part the motion. As a result, certain breach of fiduciary duty claims alleged in earlier
versions of the complaint were barred; all other claims were allowed to proceed. On August 6,
2008, Southern Company filed a second motion for summary judgment. MC Asset Recovery filed its
response to Southern Companys motion for summary judgment on October 20, 2008. On February 5,
2009, the court denied the summary judgment motion in connection with the fraudulent conveyance and
illegal dividend claims concerning certain advance return/loan repayments in 1999, dividends in
1999 and 2000, and transfers in connection with Mirants separation from Southern Company. The
court granted Southern Companys motion for summary judgment with respect to certain claims,
including claims for restitution and unjust enrichment, claims that Southern Company aided and
abetted Mirants directors breach of fiduciary duties to Mirant, and claims that Southern Company
used Mirant as an alter ego. In addition, the court granted Southern Companys motion in
connection with the fraudulent transfer and illegal dividend claims concerning certain turbine
termination payments. Southern Company believes there is no meritorious basis for the claims in
the complaint and is vigorously defending itself in this action. See Note 3 to the financial
statements under Mirant Matters MC Asset Recovery Litigation for additional information. The
ultimate outcome of these matters cannot be determined at this time.
Mirant Securities Litigation
In November 2002, Southern Company, certain former and current senior officers of Southern Company,
and 12 underwriters of Mirants initial public offering were added as defendants in a class action
lawsuit that several Mirant shareholders originally filed against Mirant and certain Mirant
officers in May 2002. Several other similar lawsuits filed subsequently were consolidated into
this litigation in the U.S. District Court for the Northern District of Georgia. The amended
complaint is based on allegations related to alleged improper energy trading and marketing
activities involving the California energy market, alleged false statements and omissions in
Mirants prospectus for its initial public offering and in subsequent public statements by Mirant,
and accounting-related issues previously disclosed by Mirant. The lawsuit purports to include
persons who acquired Mirant securities between September 26, 2000 and September 5, 2002.
In July 2003, the court dismissed all claims based on Mirants alleged improper energy trading and
marketing activities involving the California energy market. The other claims do not allege any
improper trading and marketing activity, accounting errors, or material misstatements or omissions
on the part of Southern Company but seek to impose liability on Southern Company based on
allegations that Southern Company was a control person
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MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
as to Mirant prior to the spin-off date. Southern Company filed an answer to the consolidated
amended class action complaint in September 2003. Plaintiffs also filed a motion for class
certification.
During Mirants Chapter 11 proceeding, the securities litigation was stayed, with the exception of
limited discovery. Since Mirants plan of reorganization has become effective, the stay has been
lifted. In March 2006, the plaintiffs filed a motion for reconsideration requesting that the court
vacate that portion of its July 2003 order dismissing the plaintiffs claims based upon Mirants
alleged improper energy trading and marketing activities involving the California energy market.
Southern Company and the other defendants opposed the plaintiffs motion. In March 2007, the court
granted plaintiffs motion for reconsideration, reinstated the California energy market claims, and
granted in part and denied in part defendants motion to compel certain class certification
discovery. In March 2007, defendants filed renewed motions to dismiss the California energy claims
on grounds originally set forth in their 2003 motions to dismiss, but which were not addressed by
the court. In July 2007, certain defendants, including Southern Company, filed motions for
reconsideration of the courts denial of a motion seeking dismissal of certain federal securities
laws claims based upon, among other things, certain alleged errors included in financial statements
issued by Mirant. On August 6, 2008, the court entered an order in regard to the defendants
motions to dismiss and for partial summary judgment. The court granted the defendants motion for
partial summary judgment in two respects concluding that certain holders of Mirant stock do not
have standing under the securities laws. The court denied the defendants other motions and
granted leave to the plaintiffs to re-plead their claims against the defendants. In accordance
with the courts order, the plaintiffs filed an amended complaint. The plaintiffs added
allegations based upon claims asserted against Southern Company in the MC Asset Recovery
litigation. Southern Company and the remaining defendants filed motions to dismiss the amended
complaint on October 9, 2008. On January 7, 2009, the trial judge dismissed all counts of the
plaintiffs second amended complaint with prejudice. This matter is now concluded.
Income Tax Matters
Legislation
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of
2009 (ARRA). Major tax incentives in the ARRA include an extension of bonus depreciation and
multiple renewable energy incentives. These incentives could have a significant impact on Southern
Companys future cash flow and net income. Additionally, the ARRA includes programs for renewable
energy, transmission and smart grid enhancement, fossil energy and research, and energy efficiency
and conservation. The ultimate impact cannot be determined at this time.
Georgia State Income Tax Credits
Georgia Powers 2005 through 2008 income tax filings for the State of Georgia include state income
tax credits for increased activity through Georgia ports. Georgia Power has also filed similar
claims for the years 2002 through 2004. The Georgia Department of Revenue has not responded to
these claims. In July 2007, Georgia Power filed a complaint in the Superior Court of Fulton County
to recover the credits claimed for the years 2002 through 2004. An unrecognized tax benefit has
been recorded related to these credits. If Georgia Power prevails, these claims could have a
significant, and possibly material, positive effect on Southern Companys net income. If Georgia
Power is not successful, payment of the related state tax could have a significant, and possibly
material, negative effect on Southern Companys cash flow. The ultimate outcome of this matter
cannot now be determined.
Internal Revenue Code Section 199 Domestic Production Deduction
The American Jobs Creation Act of 2004 created a tax deduction for a portion of income attributable
to U.S. production activities as defined in the Internal Revenue Code Section 199 (production
activities deduction). The
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MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
deduction is equal to a stated percentage of qualified production activities net income. The
percentage is phased in over the years 2005 through 2010 with a 3% rate applicable to the years
2005 and 2006, a 6% rate applicable for years 2007 through 2009, and a 9% rate thereafter. The IRS
has not clearly defined a methodology for calculating this deduction. However, Southern Company
has agreed with the IRS on a calculation methodology and signed a closing agreement on December 11,
2008. Therefore, Southern Company reversed the unrecognized tax benefit and adjusted the deduction
to conform to the agreement. The net impact of the reversal of the unrecognized tax benefits
combined with the application of the new methodology had no material effect on the Companys
financial statements. See Note 5 to the financial statements under Effective Tax Rate for
additional information.
Construction Projects
Integrated Coal Gasification Combined Cycle
On January 16, 2009, Mississippi Power filed for a Certificate of Public Convenience and Necessity
with the Mississippi PSC to allow construction of a new electric generating plant located in Kemper
County, Mississippi. The plant would utilize an advanced coal IGCC with an output capacity of 582
megawatts. The Kemper IGCC will use locally mined lignite (an abundant, lower heating value coal)
from a proposed mine adjacent to the plant as fuel. This certificate, if approved by the
Mississippi PSC, would authorize Mississippi Power to acquire, construct and operate the Kemper
IGCC and related facilities. The Kemper IGCC, subject to federal and state environmental reviews
and certain regulatory approvals, is expected to begin commercial operation in November 2013. As
part of its filing, Mississippi Power has requested certain rate recovery treatment in accordance
with the base load construction legislation. See FUTURE EARNINGS
POTENTIAL PSC Matters
Mississippi Base Load Construction Legislation herein for additional information.
Mississippi Power filed an application in June 2006 with the U.S. Department of Energy (DOE) for
certain tax credits available to projects using clean coal technologies under the Energy Policy Act
of 2005. The DOE subsequently certified the Kemper IGCC, and in November 2006 the IRS allocated
Internal Revenue Code Section 48A tax credits of $133 million to Mississippi Power. The
utilization of these credits is dependent upon meeting the certification requirements for the
Kemper IGCC, including an in-service date no later than November 2013. Mississippi Power has
secured all environmental reviews and permits necessary to commence construction of the Kemper IGCC
and has entered into a binding contract for the steam turbine generator, completing two milestone
requirements for the Section 48A credits.
On February 14, 2008, Mississippi Power also requested that the DOE transfer the remaining funds
previously granted to a cancelled Southern Company project that would have been located in Orlando,
Florida. On December 12, 2008, an agreement was reached to assign the remaining funds to the
Kemper IGCC. The estimated construction cost of the Kemper IGCC is approximately $2.2 billion,
which is net of $220 million related to funding to be received from the DOE related to project
construction. The remaining DOE funding of $50 million is projected to be used for demonstration
over the first few years of operation.
Beginning in December 2006, the Mississippi PSC has approved Mississippi Powers requested
accounting treatment to defer the costs associated with Mississippi Powers generation resource
planning, evaluation, and screening activities as a regulatory asset. On December 22, 2008,
Mississippi Power requested an amendment to its original order that would allow these costs to
continue to be charged to and remain in a regulatory asset until January 1, 2010. In its
application, Mississippi Power reported that it anticipated spending approximately $61 million by
or before May 31, 2009. At December 31, 2008, Mississippi Power had spent $42.3 million of the $61
million, of which $3.7 million related to land purchases capitalized. Of the remaining amount,
$0.8 million was expensed and $37.8 million was deferred in other regulatory assets.
The final outcome of this matter cannot now be determined.
II-36
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Nuclear
In August 2006, Southern Nuclear, on behalf of Georgia Power, Oglethorpe Power Corporation, the
Municipal Electric Authority of Georgia, and 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 (collectively, Owners), filed an application with the Nuclear Regulatory
Commission (NRC) for an early site permit relating to two additional nuclear units on the site of
Plant Vogtle. See Note 4 to the financial statements for additional information on these
co-owners. 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 Electric Company LLC and Stone & Webster, Inc. (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 megawatts 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.
On August 1, 2008, Georgia Power submitted an application for the Georgia PSC to certify the
project. Hearings began November 3, 2008 and 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 Electric Company LLC and Stone & Webster, Inc. 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
II-37
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
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.
In connection with the certification application, Georgia Power has requested Georgia PSC approval
to include the construction work in progress accounts for Plant Vogtle Units 3 and 4 in rate base
and allow Georgia Power to recover financing costs during the construction period.
On February 11, 2009, the Georgia State Senate passed Senate Bill 31 that would allow the Company
to recover financing costs for nuclear construction projects by including the related construction
work in progress accounts in rate base during the construction period. A similar bill is being
considered in the Georgia State House of Representatives.
Southern Company also is participating in NuStart Energy Development, LLC (NuStart Energy), a
broad-based nuclear industry consortium formed to share the cost of developing a COL and the
related NRC review. NuStart Energy was organized to complete detailed engineering design work and
to prepare COL applications for two advanced reactor designs. COLs for the two reactor designs were
submitted to the NRC during the fourth quarter of 2007. The COLs ultimately are expected to be
transferred to one or more of the consortium companies; however, at this time, none of them have
committed to build a new nuclear plant.
Southern Company is also exploring other possibilities relating to additional nuclear power
projects, both on its own or in partnership with other utilities.
The final outcome of these matters cannot now be determined.
Nuclear Relicensing
The NRC operating licenses for Plant Vogtle Units 1 and 2 currently expire in January 2027 and
February 2029, respectively. In June 2007, Georgia Power filed an application with the NRC to
extend the licenses for Plant Vogtle Units 1 and 2 for an additional 20 years. Georgia Power
anticipates the NRC may make a decision regarding the license extension for Plant Vogtle in 2009.
Other Matters
Georgia Power has initiated a voluntary attrition plan under which participating employees may
elect to resign from their positions as of March 31, 2009. Approximately 700 employees who have
indicated an interest in participating in the plan have been selected by Georgia Power and are
permitted to resign and receive severance. Each participating employee who resigns under the plan
will be entitled to receive a severance payment equal to his or her annual base salary, accrued
vacation, and pro-rated bonus as of March 31, 2009. Southern Company will record a charge during
the first quarter 2009 in connection with the plan. The ultimate amount of the charge will be
dependent on the total number of employees who elect to resign under the plan. Such charge could
have a material impact on Southern Companys statements of income for the quarter ending March 31,
2009 and statements of cash flow for the six months ending June 30, 2009. The first quarter 2009
charge will generally be offset with lower salary costs for the remainder of the year and is not
expected to have a material impact on Southern Companys financial statements for the year ending
December 31, 2009.
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
II-38
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
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, 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 Note 3 to the financial statements for information regarding material issues.
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. 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. Senior management has discussed the
development and selection of the critical accounting policies and estimates described below with
the Audit Committee of Southern Companys Board of Directors.
Electric Utility Regulation
Southern Companys traditional operating companies, which comprised approximately 95% of Southern
Companys total operating revenues for 2008, are subject to retail regulation by their respective
state PSCs and wholesale regulation by the FERC. These regulatory agencies set the rates the
traditional operating companies are permitted to charge customers based on allowable costs. As a
result, the traditional operating companies apply FASB Statement No. 71, Accounting for the
Effects of Certain Types of Regulation (SFAS No. 71), which requires the financial statements to
reflect the effects of rate regulation. Through the ratemaking process, the regulators may require
the inclusion of costs or revenues in periods different than when they would be recognized by a
non-regulated company. This treatment may result in the deferral of expenses and the recording of
related regulatory assets based on anticipated future recovery through rates or the deferral of
gains or creation of liabilities and the recording of related regulatory liabilities. The
application of SFAS No. 71 has a further effect on the Companys financial statements as a result
of the estimates of allowable costs used in the ratemaking process. These estimates may differ
from those actually incurred by the traditional operating companies; therefore, the accounting
estimates inherent in specific costs such as depreciation, nuclear decommissioning, and pension and
postretirement benefits have less of a direct impact on the Companys results of operations than
they would on a non-regulated company.
As reflected in Note 1 to the financial statements, significant regulatory assets and liabilities
have been recorded. Management reviews the ultimate recoverability of these regulatory assets and
liabilities based on applicable regulatory guidelines and accounting principles generally accepted
in the United States. However, adverse legislative, judicial, or regulatory actions could
materially impact the amounts of such regulatory assets and liabilities and could adversely impact
the Companys financial statements.
Contingent Obligations
Southern Company and its subsidiaries are subject to a number of federal and state laws and
regulations, as well as other factors and conditions that potentially subject them to
environmental, litigation, income tax, and other risks. See FUTURE EARNINGS POTENTIAL herein and
Note 3 to the financial statements for more information regarding certain of these contingencies.
Southern Company periodically evaluates its exposure to such risks and, in
II-39
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
accordance with generally accepted accounting principles, records reserves for those matters where
a non-tax-related loss is considered probable and reasonably estimable and records a tax asset or
liability if it is more likely than not that a tax position will be sustained. The adequacy of
reserves can be significantly affected by external events or conditions that can be unpredictable;
thus, the ultimate outcome of such matters could materially affect Southern Companys financial
statements. These events or conditions include the following:
|
|
Changes in existing state or federal regulation by governmental authorities having
jurisdiction over air quality, water quality, control of toxic substances, hazardous and solid
wastes, and other environmental matters. |
|
|
|
Changes in existing income tax regulations or changes in IRS or state revenue department
interpretations of existing regulations. |
|
|
|
Identification of additional sites that require environmental remediation or the filing of
other complaints in which Southern Company or its subsidiaries may be asserted to be a
potentially responsible party. |
|
|
|
Identification and evaluation of other potential lawsuits or complaints in which Southern
Company or its subsidiaries may be named as a defendant. |
|
|
|
Resolution or progression of new or existing matters through the legislative process, the
court systems, the IRS, the FERC, or the EPA. |
Unbilled Revenues
Revenues related to the retail sale of electricity are recorded when electricity is delivered to
customers. However, the determination of KWH sales to individual customers is based on the
reading of their meters, which is performed on a systematic basis throughout the month. At the
end of each month, amounts of electricity delivered to customers, but not yet metered and billed,
are estimated. Components of the unbilled revenue estimates include total KWH territorial supply,
total KWH billed, estimated total electricity lost in delivery, and customer usage. These
components can fluctuate as a result of a number of factors including weather, generation
patterns, and power delivery volume and other operational constraints. These factors can be
unpredictable and can vary from historical trends. As a result, the overall estimate of unbilled
revenues could be significantly affected, which could have a material impact on the Companys
results of operations.
New Accounting Standards
Business Combinations
In December 2007, the FASB issued FASB Statement No. 141 (revised 2007), Business Combinations
(SFAS No. 141R). Southern Company adopted SFAS No. 141R on January 1, 2009. The adoption of SFAS
No. 141R could have an 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 adopted SFAS No. 160 on January 1, 2009 with no material impact to the financial
statements.
II-40
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
FINANCIAL CONDITION AND LIQUIDITY
Overview
Southern Companys financial condition remained stable at December 31, 2008. Throughout the recent
turmoil in the financial markets, Southern Company has maintained adequate access to capital
without drawing on any of its committed bank credit arrangements used to support its commercial
paper programs and variable rate pollution control revenue bonds. Southern Company and the
traditional operating companies have continued to issue commercial paper at reasonable rates.
Southern Company intends to continue to monitor its access to short-term and long-term capital
markets as well as its bank credit arrangements to meet future capital and liquidity needs. No
material changes in bank credit arrangements have occurred although market rates for committed
credit have increased and the Company may be subject to higher costs as its existing facilities are
replaced or renewed. Southern Companys interest cost for short-term debt has decreased as market
short-term interest rates have declined. The ultimate impact on future financing costs as a result
of the financial turmoil cannot be determined at this time. Southern Company experienced no
material counterparty credit losses as a result of the turmoil in the financial markets. See
Sources of Capital and Financing Activities herein for additional information.
Southern Companys investments in pension and nuclear decommissioning trust funds declined in value
as of December 31, 2008. Southern Company expects that the earliest that cash may have to be
contributed to the pension trust fund is 2011 and such contribution could be significant; however,
projections of the amount vary significantly depending on interpretations of and decisions related
to federal legislation passed during 2008 as well as other key variables including future trust
fund performance and cannot be determined at this time. Southern Company does not expect any
changes to funding obligations to the nuclear decommissioning trusts at this time.
Net cash provided from operating activities in 2008 totaled $3.4 billion, an increase of $3 million
as compared to 2007. Significant changes in operating cash flow for 2008 included a $264 million
increase in the use of funds for fossil fuel inventory as compared to 2007. This use of funds was
offset by an increase in cash of $312 million in accrued taxes primarily due to a difference
between the periods in payments for federal taxes and property taxes. Net cash provided from
operating activities in 2007 totaled $3.4 billion, an increase of $575 million as compared to 2006.
The increase was primarily due to an increase in net income as previously discussed, an increase
in cash collections from previously deferred fuel and storm damage costs, and a reduction in cash
outflows compared to the previous year in fossil fuel inventory. In 2006, net cash provided from
operating activities totaled $2.8 billion, an increase over the previous year of $290 million,
primarily as a result of a decrease in under recovered storm restoration costs, a decrease in
accounts payable from year-end 2005 amounts that included substantial hurricane-related
expenditures, partially offset by an increase in fossil fuel inventory.
Net cash used for investing activities in 2008 totaled $4.1 billion primarily due to property
additions to utility plant of $4.0 billion. Net cash used for investing activities in 2007 totaled
$3.7 billion primarily due to property additions to utility plant of $3.5 billion. In 2006, net
cash used for investing activities was $2.8 billion primarily due to property additions to utility
plant of $3.0 billion, partially offset by proceeds from the sale of Southern Company Gas LLC and
the receipt by Mississippi Power of capital grant proceeds related to Hurricane Katrina.
Net cash provided from financing activities totaled $944 million in 2008 primarily due to long-term
debt issuances. Net cash provided from financing activities totaled $348 million in 2007 primarily
due to replacement of short-term debt with longer term financing and cash raised from common stock
programs. In 2006, net cash used for financing activities was $21 million.
Significant balance sheet changes in 2008 include an increase in total property, plant, and
equipment of $2.5 billion and an increase in long-term debt, excluding amounts due within one year,
of $2.7 billion used primarily for construction expenditures and general corporate purposes. Other
significant balance sheet changes which are
II-41
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
primarily attributable to the decline in market value of the Companys pension trust fund include a
decrease of $2.4 billion in prepaid pension costs, an increase of $1.9 billion in other regulatory
assets, and a decrease of $1.3 billion in other regulatory liabilities.
At the end of 2008, the closing price of Southern Companys common stock was $37.00 per share,
compared with book value of $17.08 per share. The market-to-book value ratio was 217% at the end
of 2008, compared with 239% at year-end 2007.
Southern Company, each of the traditional operating companies, and Southern Power have received
investment grade credit ratings from the major rating agencies with respect to debt, preferred
securities, preferred stock, and/or preference stock. SCS has an investment grade corporate credit
rating.
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 the Companys stock
plans, private placements, or public offerings. The amount and timing of additional equity capital
to be raised in 2009, 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 type and timing of any financings, if
needed, will depend upon prevailing market conditions, regulatory approval, and other factors. The
issuance of securities by the traditional operating companies is generally subject to the approval
of the applicable state PSC. In addition, the issuance of all securities by Mississippi Power and
Southern Power and short-term securities by Georgia Power is generally subject to regulatory
approval by the FERC. Additionally, with respect to the public offering of securities, Southern
Company and certain of its subsidiaries file registration statements with the Securities and
Exchange Commission (SEC) under the Securities Act of 1933, as amended (1933 Act). The amounts of
securities authorized by the appropriate regulatory authorities, as well as the amounts, if any,
registered under the 1933 Act, are continuously monitored and appropriate filings are made to
ensure flexibility in the capital markets.
Southern Company, each traditional operating company, and Southern Power obtain financing
separately without credit support from any affiliate. See Note 6 to the financial statements under
Bank Credit Arrangements for additional information. The Southern Company system does not
maintain a centralized cash or money pool. Therefore, funds of each company are not commingled
with funds of any other company.
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 (which are backed by bank credit facilities).
At December 31, 2008, Southern Company and its subsidiaries had approximately $417 million of cash
and cash equivalents and $4.2 billion of unused credit arrangements with banks, of which
$970 million expire in 2009, $25 million expire in 2011, and $3.2 billion expire in 2012.
Approximately $84 million of the credit facilities expiring in 2009 allow for the execution of term
loans for an additional two-year period, and $544 million allow for the execution of one-year term
loans. Most of these arrangements contain covenants that limit debt levels and typically contain
cross default provisions that are restricted only to the indebtedness of the individual company.
Southern Company and its subsidiaries are currently in compliance with all such covenants. See
Note 6 to the financial statements under Bank Credit Arrangements for additional information.
II-42
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Financing Activities
During 2008, Southern Company and its subsidiaries issued $2.5 billion of senior notes and
$566 million of obligations related to pollution control revenue bonds. In addition, Georgia
Power, Gulf Power, and Mississippi Power entered into long-term bank loans of $300 million, $110
million, and $80 million, respectively. Georgia Power and Gulf Power also entered into short-term
bank loans of $100 million and $50 million, respectively. Interest rate hedges of $405 million
notional amount were settled at a loss of $26 million related to the issuances. Southern Company
issued $474 million of common stock through the Southern Company Investment Plan and employee and
director stock plans. The security issuances were used to redeem or
repay at maturity $1.5 billion
of long-term debt, to reduce short-term indebtedness, to fund Southern Companys ongoing
construction program, and for general corporate purposes. Additionally, interest rate hedges of
$100 million were settled early at a loss of $2 million related to counterparty credit issues.
Also in 2008, the traditional operating companies converted their entire $1.2 billion of
obligations related to auction rate pollution control revenue bonds from auction rate modes to
other interest rate modes. Initially, approximately $696 million of the auction rate pollution
control revenue bonds were converted to fixed interest rate modes and approximately $553 million
were converted to variable rate modes. In June 2008, approximately $98 million of the variable
rate pollution control revenue bonds were converted to fixed interest rate modes.
During the third quarter 2008, Alabama Power, Georgia Power, and Mississippi Power were required to
purchase a total of approximately $96 million of variable rate pollution control revenue bonds that
were tendered by investors. Alabama Power and Mississippi Power remarketed all of their
repurchased variable rate pollution control revenue bonds of $11 million and $8 million,
respectively. Georgia Power remarketed $75 million of its $77 million of tendered bonds. The
remaining $2 million were extinguished.
In the fourth quarter 2008, Georgia Power and Gulf Power converted a total of approximately
$171 million of variable rate pollution control revenue bonds to fixed interest rate modes.
Subsequent to December 31, 2008, Georgia Power issued $500 million of Series 2009A 5.95% Senior
Notes due February 1, 2039. The proceeds were used to repay $150 million of its Series U Floating
Rate Senior Notes at maturity, to repay short-term indebtedness, and for other general corporate
purposes. Georgia Power settled $100 million of hedges related to the issuance at a loss of
approximately $16 million.
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.
Off-Balance Sheet Financing Arrangements
In 2001, Mississippi Power began the initial 10-year term of a lease agreement for a combined cycle
generating facility built at Plant Daniel for approximately $370 million. In 2003, the generating
facility was acquired by Juniper Capital L.P. (Juniper), a limited partnership whose investors are
unaffiliated with Mississippi Power. Simultaneously, Juniper entered into a restructured lease
agreement with Mississippi Power. Juniper has also entered into leases with other parties
unrelated to Mississippi Power. The assets leased by Mississippi Power comprise less than 50% of
Junipers assets. Mississippi Power is not required to consolidate the leased assets and related
liabilities, and the lease with Juniper is considered an operating lease. The lease also provides
for a residual value guarantee, approximately 73% of the acquisition cost, by Mississippi Power
that is due upon termination of the lease in the event that Mississippi Power does not renew the
lease or purchase the assets and that the fair market value is less than the unamortized cost of
the assets. See Note 7 to the financial statements under Operating Leases for additional
information.
II-43
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
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 of certain subsidiaries to BBB and Baa2, or BBB- and/or Baa3 or below. These
contracts are for physical electricity purchases and sales, fuel purchases, fuel transportation and
storage, emissions allowances, energy price risk management, and construction of new generation.
At December 31, 2008, the maximum potential collateral requirements under these contracts at a BBB
and Baa2 rating were approximately $9 million and at a BBB- and/or Baa3 rating were approximately
$395 million. At December 31, 2008, the maximum potential collateral requirements under these
contracts at a rating below BBB- and/or Baa3 were approximately $1.8 billion. Generally,
collateral may be provided by a Southern Company guaranty, letter of credit, or cash.
Additionally, any credit rating downgrade could impact the Companys ability to access capital
markets, particularly the short-term debt market.
Market Price Risk
Southern Company is exposed to market risks, primarily commodity price risk and interest rate risk.
To manage the volatility attributable to these exposures, the Company nets the exposures, where
possible, to take advantage of natural offsets and enters into various derivative transactions for
the remaining exposures pursuant to the Companys policies in areas such as counterparty exposure
and risk management practices. Company policy is that derivatives are to be used primarily for
hedging purposes and mandates strict adherence to all applicable risk management policies.
Derivative positions are monitored using techniques including, but not limited to, market
valuation, value at risk, stress testing, and sensitivity analysis.
To mitigate future exposure to a change in interest rates, the Company enters into forward starting
interest rate swaps and other derivatives that have been designated as hedges. Derivatives
outstanding at December 31, 2008 have a notional amount of $1.4 billion and are related to
anticipated debt issuances and various floating rate obligations over the next two years. The
weighted average interest rate on $1.6 billion of long-term variable interest rate exposure that
has not been hedged at January 1, 2009 was 2.45%. If Southern Company sustained a 100 basis point
change in interest rates for all unhedged variable rate long-term debt, the change would affect
annualized interest expense by approximately $16 million at January 1, 2009. For further
information, see Notes 1 and 6 to the financial statements under Financial Instruments.
Due to cost-based rate regulation, the traditional operating companies continue to have limited
exposure to market volatility in interest rates, commodity fuel prices, and prices of electricity.
In addition, Southern Powers exposure to market volatility in commodity fuel prices and prices of
electricity is limited because its long-term sales contracts shift substantially all fuel cost
responsibility to the purchaser. However, Southern Power has been and may continue to be exposed
to market volatility in energy-related commodity prices as a result of sales of uncontracted
generating capacity. 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 continue to manage
fuel-hedging programs implemented per the guidelines of their respective state PSCs.
II-44
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
The changes in fair value of energy-related derivative contracts were as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
Changes |
|
Changes |
|
|
Fair Value |
|
|
(in millions) |
Contracts outstanding at the beginning of the period, assets
(liabilities), net |
|
$ |
4 |
|
|
$ |
(82 |
) |
Contracts realized or settled |
|
|
(150 |
) |
|
|
80 |
|
Current
period
changes(a) |
|
|
(139 |
) |
|
|
6 |
|
|
Contracts outstanding at the end of the period, assets (liabilities), net |
|
$ |
(285 |
) |
|
$ |
4 |
|
|
(a) |
|
Current period changes also include the changes in fair value of new contracts entered into
during the period, if any. |
The decrease in the fair value positions of the energy-related derivative contracts for the
year-ended December 31, 2008 was $289 million, substantially all of which is due to natural gas
positions. This change is attributable to both the volume and prices of natural gas. At December
31, 2008, Southern Company had a net hedge volume of 148.9 billion cubic feet (Bcf) with a weighted
average contract cost approximately $1.97 per million British thermal units (mmBtu) above market
prices, compared to 99.0 Bcf at December 31, 2007 with a weighted average contract cost
approximately $0.01 per mmBtu above market prices. The majority of the natural gas hedges are
recorded through the traditional operating companies fuel cost recovery clauses.
At December 31, the net fair value of energy-related derivative contracts by hedge designation was
reflected in the financial statements as assets/(liabilities) as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
(in millions) |
Regulatory hedges |
|
$ |
(288 |
) |
|
$ |
|
|
Cash flow hedges |
|
|
(1 |
) |
|
|
1 |
|
Non-accounting hedges |
|
|
4 |
|
|
|
3 |
|
|
Total fair value |
|
$ |
(285 |
) |
|
$ |
4 |
|
|
Energy-related derivative contracts which are designated as regulatory hedges relate to the
traditional operating companies fuel hedging programs, where gains and losses 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. Gains and losses on energy-related
derivatives designated as cash flow hedges are mainly used by Southern Power to hedge anticipated
purchases and sales and 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.
Unrealized pre-tax gains/(losses) recognized in income for energy-related derivative contracts that
are not hedges were not material for any year presented.
II-45
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy
in which they fall at December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
Fair Value Measurements |
|
|
Total |
|
Maturity |
|
|
Fair Value |
|
Year 1 |
|
Years 2&3 |
|
Years 4&5 |
|
|
(in millions) |
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Level 2 |
|
|
(285 |
) |
|
|
(203 |
) |
|
|
(77 |
) |
|
|
(5 |
) |
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of contracts outstanding at end of period |
|
$ |
(285 |
) |
|
$ |
(203 |
) |
|
$ |
(77 |
) |
|
$ |
(5 |
) |
|
As part of the adoption of FASB Statement No. 157, Fair Value Measurements 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 10 to the financial statements,
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.
Southern Company is exposed to market risk in the event of nonperformance by counterparties to
energy-related and interest rate derivative contracts. Southern Companys practice is to enter
into agreements with counterparties that have investment grade credit ratings by Moodys and
Standard & Poors or with counterparties who have posted collateral to cover potential credit
exposure. Therefore, Southern Company does not anticipate market risk exposure from nonperformance
by the counterparties. For additional information, see Notes 1 and 6 to the financial statements
under Financial Instruments.
During 2006 and 2007, Southern Company had derivatives in place to reduce its exposure to a
phase-out of certain income tax credits related to synthetic fuel production in 2007. In
accordance with Internal Revenue Code Section 45K, these tax credits were subject to limitation as
the annual average price of oil increased. Because these transactions were not designated as
hedges, the gains and losses were recognized in the statements of income as incurred. These
derivatives settled on January 1, 2008 and thus there was no income statement impact for the year
ended December 31, 2008. For 2007 and 2006, the fair value gain/(loss) recognized in other
income/(expense) to mark the transactions to market was $27 million and $(32) million,
respectively. For further information, see Notes 1 and 6 to the financial statements under
Financial Instruments.
Capital Requirements and Contractual Obligations
The construction program of Southern Company is currently estimated to be $5.7 billion for 2009,
$5.1 billion for 2010, and $5.8 billion for 2011. These estimates include costs for new generation
construction. Environmental expenditures included in these estimated amounts are $1.4 billion,
$737 million, and $871 million for 2009, 2010, and 2011, respectively. The construction programs
are subject to periodic review and revision, and actual construction costs may vary from these
estimates because of numerous factors. These factors include: changes in business conditions;
changes in load projections; changes in environmental statutes and regulations; changes in nuclear
plants to meet new regulatory requirements; changes in FERC rules and regulations; PSC approvals;
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.
II-46
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
As a result of NRC requirements, Alabama Power and Georgia Power have external trust funds for
nuclear decommissioning costs; however, Alabama Power currently has no additional funding
requirements. For additional information, see Note 1 to the financial statements under Nuclear
Decommissioning.
In addition, as discussed in Note 2 to the financial statements, Southern Company provides
postretirement benefits to substantially all employees and funds trusts to the extent required by
the traditional operating companies respective regulatory commissions.
Other funding requirements related to obligations associated with scheduled maturities of long-term
debt and preferred securities, as well as the related interest, derivative obligations, preferred
and preference stock dividends, leases, and other purchase commitments are as follows. See
Notes 1, 6, and 7 to the financial statements for additional information.
II-47
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010- |
|
2012- |
|
After |
|
Uncertain |
|
|
|
|
2009 |
|
2011 |
|
2013 |
|
2013 |
|
Timing(d) |
|
Total |
|
|
(in millions) |
Long-term debt(a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
$ |
617 |
|
|
$ |
1,972 |
|
|
$ |
2,745 |
|
|
$ |
12,119 |
|
|
$ |
|
|
|
$ |
17,453 |
|
Interest |
|
|
858 |
|
|
|
1,616 |
|
|
|
1,424 |
|
|
|
11,102 |
|
|
|
|
|
|
|
15,000 |
|
Preferred and preference stock dividends(b) |
|
|
65 |
|
|
|
130 |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
325 |
|
Other derivative obligations(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy-related |
|
|
224 |
|
|
|
78 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
307 |
|
Interest |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21 |
|
Operating leases |
|
|
143 |
|
|
|
212 |
|
|
|
81 |
|
|
|
146 |
|
|
|
|
|
|
|
582 |
|
Unrecognized tax benefits and interest(d) |
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16 |
|
|
|
161 |
|
Purchase commitments(e) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital(f) |
|
|
5,467 |
|
|
|
10,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,111 |
|
Limestone(g) |
|
|
13 |
|
|
|
70 |
|
|
|
72 |
|
|
|
144 |
|
|
|
|
|
|
|
299 |
|
Coal |
|
|
4,608 |
|
|
|
5,999 |
|
|
|
2,602 |
|
|
|
3,421 |
|
|
|
|
|
|
|
16,630 |
|
Nuclear fuel |
|
|
187 |
|
|
|
301 |
|
|
|
275 |
|
|
|
43 |
|
|
|
|
|
|
|
806 |
|
Natural gas(h) |
|
|
1,507 |
|
|
|
1,609 |
|
|
|
1,242 |
|
|
|
3,798 |
|
|
|
|
|
|
|
8,156 |
|
Purchased power |
|
|
217 |
|
|
|
455 |
|
|
|
413 |
|
|
|
1,938 |
|
|
|
|
|
|
|
3,023 |
|
Long-term service agreements(i) |
|
|
85 |
|
|
|
203 |
|
|
|
255 |
|
|
|
1,731 |
|
|
|
|
|
|
|
2,274 |
|
Trusts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nuclear decommissioning |
|
|
3 |
|
|
|
7 |
|
|
|
7 |
|
|
|
53 |
|
|
|
|
|
|
|
70 |
|
Postretirement benefits(j) |
|
|
56 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172 |
|
|
Total |
|
$ |
14,216 |
|
|
$ |
23,412 |
|
|
$ |
9,251 |
|
|
$ |
34,495 |
|
|
$ |
16 |
|
|
$ |
81,390 |
|
|
|
|
|
(a) |
|
All amounts are reflected based on final maturity dates. Southern Company and its
subsidiaries plan to continue to retire higher-cost securities and replace these obligations
with lower-cost capital if market conditions permit. Variable rate interest obligations are
estimated based on rates as of January 1, 2009, as reflected in the statements of
capitalization. Fixed rates include, where applicable, the effects of interest rate
derivatives employed to manage interest rate risk. |
|
(b) |
|
Preferred and preference stock do not mature; therefore, amounts are provided for the next
five years only. |
|
(c) |
|
For additional information, see Notes 1 and 6 to the financial statements. |
|
(d) |
|
The timing related to the $16 million in unrecognized tax benefits and interest payments in
individual years beyond 12 months cannot be reasonably and reliably estimated due to
uncertainties in the timing of the effective settlement of tax positions. See Notes 3 and 5
to the financial statements for additional information. |
|
(e) |
|
Southern Company generally does not enter into non-cancelable commitments for other
operations and maintenance expenditures. Total other operations and maintenance expenses for
2008, 2007, and 2006 were $3.8 billion, $3.7 billion, and $3.5 billion, respectively. |
|
(f) |
|
Southern Company forecasts capital expenditures over a three-year period. Amounts represent
current estimates of total expenditures excluding those amounts related to contractual
purchase commitments for nuclear fuel. At December 31, 2008, significant purchase commitments
were outstanding in connection with the construction program. |
|
(g) |
|
As part of Southern Companys program to reduce sulfur dioxide emissions from its coal
plants, the traditional operating companies have begun construction of flue gas
desulfurization projects and have entered into various long-term commitments for the
procurement of limestone to be used in such equipment. |
|
(h) |
|
Natural gas purchase commitments are based on various indices at the time of delivery.
Amounts reflected have been estimated based on the New York Mercantile Exchange future prices
at December 31, 2008. |
|
(i) |
|
Long-term service agreements include price escalation based on inflation indices. |
|
(j) |
|
Southern Company forecasts postretirement trust contributions over a three-year period.
Southern Company expects that the earliest that cash may have to be contributed to the pension
trust fund is 2011 and such contribution could be significant; however, projections of the amount
vary significantly depending on interpretations of and decisions related to federal legislation
passed during 2008 as well as other key variables including future trust fund performance and
cannot be determined at this time. Therefore, no amounts related to the pension trust fund are
included in the table. See Note 2 to the financial statements for additional information related
to the pension and postretirement plans, including estimated benefit payments. Certain benefit
payments will be made through the related trusts. Other benefit payments will be made from
Southern Companys corporate assets. |
II-48
MANAGEMENTS DISCUSSION AND ANALYSIS (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Cautionary Statement Regarding Forward-Looking Statements
Southern Companys 2008 Annual Report 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 and other rate actions, environmental regulations and expenditures, earnings growth,
dividend payout ratios, access to sources of capital, projections for postretirement benefit and
nuclear decommissioning trust contributions, financing activities, completion of construction
projects, plans and estimated costs for new generation resources, impacts of adoption of new
accounting rules, unrecognized tax benefits related to leveraged lease transactions, estimated
sales and purchases under new power sale and purchase agreements, 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:
|
|
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; |
|
|
|
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; |
|
|
|
the effects, extent, and timing of the entry of additional competition in the markets in
which Southern Companys subsidiaries operate; |
|
|
|
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; |
|
|
|
available sources and costs of fuels; |
|
|
|
effects of inflation; |
|
|
|
ability to control costs; |
|
|
|
investment performance of Southern Companys employee benefit plans; |
|
|
|
advances in technology; |
|
|
|
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; |
|
|
|
regulatory approvals related to the potential Plant Vogtle expansion, including Georgia PSC
and NRC approvals; |
|
|
|
the performance of projects undertaken by the non-utility businesses and the success of
efforts to invest in and develop new opportunities; |
|
|
|
internal restructuring or other restructuring options that may be pursued; |
|
|
|
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; |
|
|
|
the ability of counterparties of Southern Company and its subsidiaries to make payments as
and when due and to perform as required; |
|
|
|
the ability to obtain new short- and long-term contracts with neighboring utilities and other
wholesale customers; |
|
|
|
the direct or indirect effect on Southern Companys business resulting from terrorist
incidents and the threat of terrorist incidents; |
|
|
|
interest rate fluctuations and financial market conditions and the results of financing
efforts, including Southern Companys and its subsidiaries credit ratings; |
|
|
|
the ability of Southern Company and its subsidiaries to obtain additional generating capacity
at competitive prices; |
|
|
|
catastrophic events such as fires, earthquakes, explosions, floods, hurricanes, droughts,
pandemic health events such as an avian influenza, or other similar occurrences; |
|
|
|
the direct or indirect effects on Southern Companys business resulting from incidents
similar to the August 2003 power outage in the Northeast; |
|
|
|
the effect of accounting pronouncements issued periodically by standard setting bodies; and |
|
|
|
other factors discussed elsewhere herein and in other reports (including the Form 10-K) filed
by the Company from time to time with the SEC. |
Southern Company expressly disclaims any obligation to update any forward-looking statements.
II-49
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2008, 2007, and 2006
Southern Company and Subsidiary Companies 2008 Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
|
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
14,055 |
|
|
$ |
12,639 |
|
|
$ |
11,801 |
|
Wholesale revenues |
|
|
2,400 |
|
|
|
1,988 |
|
|
|
1,822 |
|
Other electric revenues |
|
|
545 |
|
|
|
513 |
|
|
|
465 |
|
Other revenues |
|
|
127 |
|
|
|
213 |
|
|
|
268 |
|
|
Total operating revenues |
|
|
17,127 |
|
|
|
15,353 |
|
|
|
14,356 |
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
6,818 |
|
|
|
5,856 |
|
|
|
5,152 |
|
Purchased power |
|
|
815 |
|
|
|
515 |
|
|
|
543 |
|
Other operations and maintenance |
|
|
3,748 |
|
|
|
3,670 |
|
|
|
3,519 |
|
Depreciation and amortization |
|
|
1,443 |
|
|
|
1,245 |
|
|
|
1,200 |
|
Taxes other than income taxes |
|
|
797 |
|
|
|
741 |
|
|
|
718 |
|
|
Total operating expenses |
|
|
13,621 |
|
|
|
12,027 |
|
|
|
11,132 |
|
|
Operating Income |
|
|
3,506 |
|
|
|
3,326 |
|
|
|
3,224 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction |
|
|
152 |
|
|
|
106 |
|
|
|
50 |
|
Interest income |
|
|
33 |
|
|
|
45 |
|
|
|
41 |
|
Equity in income (losses) of unconsolidated subsidiaries |
|
|
11 |
|
|
|
(24 |
) |
|
|
(57 |
) |
Leveraged lease (losses) income |
|
|
(85 |
) |
|
|
40 |
|
|
|
69 |
|
Impairment loss on equity method investments |
|
|
|
|
|
|
|
|
|
|
(16 |
) |
Interest expense, net of amounts capitalized |
|
|
(866 |
) |
|
|
(886 |
) |
|
|
(866 |
) |
Preferred and preference dividends of subsidiaries |
|
|
(65 |
) |
|
|
(48 |
) |
|
|
(34 |
) |
Other income (expense), net |
|
|
(29 |
) |
|
|
10 |
|
|
|
(58 |
) |
|
Total other income and (expense) |
|
|
(849 |
) |
|
|
(757 |
) |
|
|
(871 |
) |
|
Earnings Before Income Taxes |
|
|
2,657 |
|
|
|
2,569 |
|
|
|
2,353 |
|
Income taxes |
|
|
915 |
|
|
|
835 |
|
|
|
780 |
|
|
Consolidated Net Income |
|
$ |
1,742 |
|
|
$ |
1,734 |
|
|
$ |
1,573 |
|
|
Common Stock Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.26 |
|
|
$ |
2.29 |
|
|
$ |
2.12 |
|
Diluted |
|
|
2.25 |
|
|
|
2.28 |
|
|
|
2.10 |
|
|
Average number of shares of common stock
outstanding (in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
771 |
|
|
|
756 |
|
|
|
743 |
|
Diluted |
|
|
775 |
|
|
|
761 |
|
|
|
748 |
|
|
Cash dividends paid per share of common stock |
|
$ |
1.6625 |
|
|
$ |
1.595 |
|
|
$ |
1.535 |
|
|
The accompanying notes are an integral part of these financial statements.
II-50
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2008, 2007, and 2006
Southern Company and Subsidiary Companies 2008 Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
|
$ |
1,742 |
|
|
$ |
1,734 |
|
|
$ |
1,573 |
|
Adjustments to reconcile consolidated net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,704 |
|
|
|
1,486 |
|
|
|
1,421 |
|
Deferred income taxes and investment tax credits |
|
|
215 |
|
|
|
7 |
|
|
|
202 |
|
Deferred revenues |
|
|
120 |
|
|
|
(2 |
) |
|
|
(1 |
) |
Allowance for equity funds used during construction |
|
|
(152 |
) |
|
|
(106 |
) |
|
|
(50 |
) |
Equity in (income) losses of unconsolidated subsidiaries |
|
|
(11 |
) |
|
|
24 |
|
|
|
57 |
|
Leveraged lease losses (income) |
|
|
85 |
|
|
|
(40 |
) |
|
|
(69 |
) |
Pension, postretirement, and other employee benefits |
|
|
21 |
|
|
|
39 |
|
|
|
46 |
|
Stock based compensation expense |
|
|
20 |
|
|
|
28 |
|
|
|
28 |
|
Derivative fair value adjustments |
|
|
(1 |
) |
|
|
(30 |
) |
|
|
32 |
|
Hedge settlements |
|
|
15 |
|
|
|
10 |
|
|
|
13 |
|
Hurricane Katrina grant proceeds-property reserve |
|
|
|
|
|
|
60 |
|
|
|
|
|
Other, net |
|
|
(97 |
) |
|
|
60 |
|
|
|
51 |
|
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(176 |
) |
|
|
165 |
|
|
|
(69 |
) |
Fossil fuel stock |
|
|
(303 |
) |
|
|
(39 |
) |
|
|
(246 |
) |
Materials and supplies |
|
|
(23 |
) |
|
|
(71 |
) |
|
|
7 |
|
Other current assets |
|
|
(36 |
) |
|
|
|
|
|
|
73 |
|
Accounts payable |
|
|
(74 |
) |
|
|
105 |
|
|
|
(173 |
) |
Hurricane Katrina grant proceeds |
|
|
|
|
|
|
14 |
|
|
|
120 |
|
Accrued taxes |
|
|
293 |
|
|
|
(19 |
) |
|
|
(103 |
) |
Accrued compensation |
|
|
36 |
|
|
|
(40 |
) |
|
|
(24 |
) |
Other current liabilities |
|
|
20 |
|
|
|
10 |
|
|
|
(68 |
) |
|
Net cash provided from operating activities |
|
|
3,398 |
|
|
|
3,395 |
|
|
|
2,820 |
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Property additions |
|
|
(3,961 |
) |
|
|
(3,545 |
) |
|
|
(2,994 |
) |
Investment in restricted cash from pollution control bonds |
|
|
(96 |
) |
|
|
(157 |
) |
|
|
|
|
Distribution of restricted cash from pollution control bonds |
|
|
69 |
|
|
|
78 |
|
|
|
|
|
Nuclear decommissioning trust fund purchases |
|
|
(720 |
) |
|
|
(783 |
) |
|
|
(751 |
) |
Nuclear decommissioning trust fund sales |
|
|
712 |
|
|
|
775 |
|
|
|
743 |
|
Proceeds from property sales |
|
|
34 |
|
|
|
33 |
|
|
|
150 |
|
Hurricane Katrina capital grant proceeds |
|
|
7 |
|
|
|
35 |
|
|
|
153 |
|
Investment in unconsolidated subsidiaries |
|
|
(1 |
) |
|
|
(37 |
) |
|
|
(64 |
) |
Cost of removal net of salvage |
|
|
(123 |
) |
|
|
(108 |
) |
|
|
(90 |
) |
Other |
|
|
(47 |
) |
|
|
|
|
|
|
19 |
|
|
Net cash used for investing activities |
|
|
(4,126 |
) |
|
|
(3,709 |
) |
|
|
(2,834 |
) |
|
Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in notes payable, net |
|
|
(314 |
) |
|
|
(669 |
) |
|
|
683 |
|
Proceeds |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
3,686 |
|
|
|
3,826 |
|
|
|
1,564 |
|
Preferred and preference stock |
|
|
|
|
|
|
470 |
|
|
|
150 |
|
Common stock |
|
|
474 |
|
|
|
538 |
|
|
|
137 |
|
Redemptions |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
(1,469 |
) |
|
|
(2,566 |
) |
|
|
(1,366 |
) |
Preferred and preference stock |
|
|
(125 |
) |
|
|
|
|
|
|
(15 |
) |
Payment of common stock dividends |
|
|
(1,280 |
) |
|
|
(1,205 |
) |
|
|
(1,140 |
) |
Other |
|
|
(28 |
) |
|
|
(46 |
) |
|
|
(34 |
) |
|
Net cash provided from (used for) financing activities |
|
|
944 |
|
|
|
348 |
|
|
|
(21 |
) |
|
Net Change in Cash and Cash Equivalents |
|
|
216 |
|
|
|
34 |
|
|
|
(35 |
) |
Cash and Cash Equivalents at Beginning of Year |
|
|
201 |
|
|
|
167 |
|
|
|
202 |
|
|
Cash and Cash Equivalents at End of Year |
|
$ |
417 |
|
|
$ |
201 |
|
|
$ |
167 |
|
|
The accompanying notes are an integral part of these financial statements.
II-51
CONSOLIDATED BALANCE SHEETS
At December 31, 2008 and 2007
Southern Company and Subsidiary Companies 2008 Annual Report
|
|
|
|
|
|
|
|
|
|
Assets |
|
2008 |
|
|
2007 |
|
|
|
(in millions) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
417 |
|
|
$ |
201 |
|
Restricted cash |
|
|
103 |
|
|
|
68 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
1,054 |
|
|
|
1,000 |
|
Unbilled revenues |
|
|
320 |
|
|
|
294 |
|
Under recovered regulatory clause revenues |
|
|
646 |
|
|
|
716 |
|
Other accounts and notes receivable |
|
|
301 |
|
|
|
348 |
|
Accumulated provision for uncollectible accounts |
|
|
(26 |
) |
|
|
(22 |
) |
Fossil fuel stock, at average cost |
|
|
1,018 |
|
|
|
710 |
|
Materials and supplies, at average cost |
|
|
757 |
|
|
|
725 |
|
Vacation pay |
|
|
140 |
|
|
|
135 |
|
Prepaid expenses |
|
|
302 |
|
|
|
146 |
|
Other |
|
|
326 |
|
|
|
411 |
|
|
Total current assets |
|
|
5,358 |
|
|
|
4,732 |
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
50,618 |
|
|
|
47,176 |
|
Less accumulated depreciation |
|
|
18,286 |
|
|
|
17,413 |
|
|
|
|
|
32,332 |
|
|
|
29,763 |
|
Nuclear fuel, at amortized cost |
|
|
510 |
|
|
|
336 |
|
Construction work in progress |
|
|
3,036 |
|
|
|
3,228 |
|
|
Total property, plant, and equipment |
|
|
35,878 |
|
|
|
33,327 |
|
|
Other Property and Investments: |
|
|
|
|
|
|
|
|
Nuclear decommissioning trusts, at fair value |
|
|
864 |
|
|
|
1,132 |
|
Leveraged leases |
|
|
897 |
|
|
|
984 |
|
Other |
|
|
227 |
|
|
|
238 |
|
|
Total other property and investments |
|
|
1,988 |
|
|
|
2,354 |
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
973 |
|
|
|
910 |
|
Prepaid pension costs |
|
|
|
|
|
|
2,369 |
|
Unamortized debt issuance expense |
|
|
208 |
|
|
|
191 |
|
Unamortized loss on reacquired debt |
|
|
271 |
|
|
|
289 |
|
Deferred under recovered regulatory clause revenues |
|
|
606 |
|
|
|
389 |
|
Other regulatory assets |
|
|
2,637 |
|
|
|
768 |
|
Other |
|
|
428 |
|
|
|
460 |
|
|
Total deferred charges and other assets |
|
|
5,123 |
|
|
|
5,376 |
|
|
Total Assets |
|
$ |
48,347 |
|
|
$ |
45,789 |
|
|
The accompanying notes are an integral part of these financial statements.
II-52
CONSOLIDATED BALANCE SHEETS
At December 31, 2008 and 2007
Southern Company and Subsidiary Companies 2008 Annual Report
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
2008 |
|
|
2007 |
|
|
|
(in millions) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
617 |
|
|
$ |
1,178 |
|
Notes payable |
|
|
953 |
|
|
|
1,272 |
|
Accounts payable |
|
|
1,250 |
|
|
|
1,214 |
|
Customer deposits |
|
|
302 |
|
|
|
274 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Income taxes |
|
|
197 |
|
|
|
52 |
|
Unrecognized tax benefits |
|
|
131 |
|
|
|
165 |
|
Other |
|
|
396 |
|
|
|
330 |
|
Accrued interest |
|
|
196 |
|
|
|
218 |
|
Accrued vacation pay |
|
|
179 |
|
|
|
171 |
|
Accrued compensation |
|
|
447 |
|
|
|
408 |
|
Liabilities from risk management activities |
|
|
261 |
|
|
|
63 |
|
Other |
|
|
297 |
|
|
|
286 |
|
|
Total current liabilities |
|
|
5,226 |
|
|
|
5,631 |
|
|
Long-term Debt (See accompanying statements) |
|
|
16,816 |
|
|
|
14,143 |
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
6,080 |
|
|
|
5,839 |
|
Deferred credits related to income taxes |
|
|
259 |
|
|
|
272 |
|
Accumulated deferred investment tax credits |
|
|
455 |
|
|
|
479 |
|
Employee benefit obligations |
|
|
2,057 |
|
|
|
1,492 |
|
Asset retirement obligations |
|
|
1,183 |
|
|
|
1,200 |
|
Other cost of removal obligations |
|
|
1,321 |
|
|
|
1,308 |
|
Other regulatory liabilities |
|
|
262 |
|
|
|
1,613 |
|
Other |
|
|
330 |
|
|
|
347 |
|
|
Total deferred credits and other liabilities |
|
|
11,947 |
|
|
|
12,550 |
|
|
Total Liabilities |
|
|
33,989 |
|
|
|
32,324 |
|
|
Preferred and Preference Stock of Subsidiaries (See
accompanying statements) |
|
|
1,082 |
|
|
|
1,080 |
|
|
Common Stockholders Equity (See accompanying statements) |
|
|
13,276 |
|
|
|
12,385 |
|
|
Total Liabilities and Stockholders Equity |
|
$ |
48,347 |
|
|
$ |
45,789 |
|
|
Commitments and Contingent Matters (See notes) |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
II-53
CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 2008 and 2007
Southern Company and Subsidiary Companies 2008 Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
(in millions) |
|
|
(percent of total) |
|
|
Long-Term Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt payable to affiliated trusts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity |
|
Interest Rates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2042 through 2044 |
|
5.50% to 5.88% |
|
$ |
412 |
|
|
$ |
412 |
|
|
|
|
|
|
|
|
|
|
Long-term senior notes and debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity |
|
Interest Rates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2.54% to 7.00% |
|
|
|
|
|
|
459 |
|
|
|
|
|
|
|
|
|
2009 |
|
4.10% to 7.00% |
|
|
128 |
|
|
|
127 |
|
|
|
|
|
|
|
|
|
2010 |
|
4.70% |
|
|
102 |
|
|
|
102 |
|
|
|
|
|
|
|
|
|
2011 |
|
4.00% to 5.57% |
|
|
303 |
|
|
|
302 |
|
|
|
|
|
|
|
|
|
2012 |
|
4.85% to 6.25% |
|
|
1,778 |
|
|
|
1,478 |
|
|
|
|
|
|
|
|
|
2013 |
|
4.35% to 6.00% |
|
|
936 |
|
|
|
236 |
|
|
|
|
|
|
|
|
|
2014 through 2048 |
|
4.88% to 8.20% |
|
|
8,437 |
|
|
|
7,824 |
|
|
|
|
|
|
|
|
|
Adjustable rates (at 1/1/09): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
4.94% to 5.00% |
|
|
|
|
|
|
550 |
|
|
|
|
|
|
|
|
|
2009 |
|
2.3288% to 2.36% |
|
|
440 |
|
|
|
440 |
|
|
|
|
|
|
|
|
|
2010 |
|
2.42% to 6.10% |
|
|
1,034 |
|
|
|
202 |
|
|
|
|
|
|
|
|
|
2011 |
|
1.645% to 2.35% |
|
|
490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term senior notes and debt |
|
|
13,648 |
|
|
|
11,720 |
|
|
|
|
|
|
|
|
|
|
Other long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pollution control revenue bonds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity |
|
Interest Rates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 through 2048 |
|
1.95% to 6.00% |
|
|
2,030 |
|
|
|
812 |
|
|
|
|
|
|
|
|
|
Variable rates (at 1/1/09): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 through 2041 |
|
0.80% to 3.00% |
|
|
1,257 |
|
|
|
2,170 |
|
|
|
|
|
|
|
|
|
|
Total other long-term debt |
|
|
|
|
3,287 |
|
|
|
2,982 |
|
|
|
|
|
|
|
|
|
|
Capitalized lease obligations |
|
|
|
|
106 |
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
Unamortized debt premium (discount), net |
|
|
|
|
(20 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
Total long-term debt (annual interest
requirement $858 million) |
|
|
17,433 |
|
|
|
15,196 |
|
|
|
|
|
|
|
|
|
Less amount due within one year |
|
|
|
|
617 |
|
|
|
1,053 |
|
|
|
|
|
|
|
|
|
|
Long-term debt excluding amount due within one year |
|
|
16,816 |
|
|
|
14,143 |
|
|
|
53.9 |
% |
|
|
51.2 |
% |
|
II-54
CONSOLIDATED STATEMENTS OF CAPITALIZATION (continued)
At December 31, 2008 and 2007
Southern Company and Subsidiary Companies 2008 Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(in millions) |
|
|
(percent of total) |
|
|
|
|
|
|
|
|
Preferred and Preference Stock of Subsidiaries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$100 par or stated value 4.20% to 5.44% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized 20 million shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding 1 million shares |
|
|
81 |
|
|
|
81 |
|
|
|
|
|
|
|
|
|
$1 par value 4.95% to 5.83% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized 28 million shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding 12 million shares: $25 stated value |
|
|
294 |
|
|
|
294 |
|
|
|
|
|
|
|
|
|
Outstanding 2008: 0 shares |
|
|
|
|
|
|
123 |
|
|
|
|
|
|
|
|
|
Outstanding 2007: 1,250 shares: $100,000 stated capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cumulative preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$25 par value 6.00% to 6.13% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized 60 million shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding 2 million shares |
|
|
45 |
|
|
|
45 |
|
|
|
|
|
|
|
|
|
Preference stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized 65 million shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding $1 par value 5.63% to 6.50% |
|
|
343 |
|
|
|
343 |
|
|
|
|
|
|
|
|
|
14 million shares (non-cumulative) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$100 par or stated value 6.00% to 6.50% |
|
|
319 |
|
|
|
319 |
|
|
|
|
|
|
|
|
|
3 million shares (non-cumulative) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total preferred and preference stock of subsidiaries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(annual dividend requirement $65 million) |
|
|
1,082 |
|
|
|
1,205 |
|
|
|
|
|
|
|
|
|
Less amount due within one year |
|
|
|
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
Preferred and preference stock of subsidiaries
excluding amount due within one year |
|
|
1,082 |
|
|
|
1,080 |
|
|
|
3.5 |
|
|
|
3.9 |
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $5 per share |
|
|
3,888 |
|
|
|
3,817 |
|
|
|
|
|
|
|
|
|
Authorized 1 billion shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued 2008: 778 million shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007: 764 million shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury 2008: 0.4 million shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007: 0.4 million shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in capital |
|
|
1,893 |
|
|
|
1,454 |
|
|
|
|
|
|
|
|
|
Treasury, at cost |
|
|
(12 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
Retained earnings |
|
|
7,612 |
|
|
|
7,155 |
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss) |
|
|
(105 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
13,276 |
|
|
|
12,385 |
|
|
|
42.6 |
|
|
|
44.9 |
|
|
Total Capitalization |
|
$ |
31,174 |
|
|
$ |
27,608 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
The accompanying notes are an integral part of these financial statements.
II-55
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS EQUITY
For the Years Ended December 31, 2008, 2007, and 2006
Southern Company and Subsidiary Companies 2008 Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
Accumulated |
|
|
|
|
Par |
|
Paid-In |
|
|
|
Retained |
|
Other Comprehensive |
|
|
|
|
Value |
|
Capital |
|
Treasury |
|
Earnings |
|
Income (Loss) |
|
Total |
|
|
(in millions) |
Balance at December 31, 2005 |
|
$ |
3,759 |
|
|
$ |
1,085 |
|
|
$ |
(359 |
) |
|
$ |
6,332 |
|
|
$ |
(128 |
) |
|
$ |
10,689 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,573 |
|
|
|
|
|
|
|
1,573 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
19 |
|
Adjustment to initially apply
FASB Statement No. 158,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52 |
|
|
|
52 |
|
Stock issued |
|
|
|
|
|
|
11 |
|
|
|
168 |
|
|
|
|
|
|
|
|
|
|
|
179 |
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,140 |
) |
|
|
|
|
|
|
(1,140 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
Balance at December 31, 2006 |
|
|
3,759 |
|
|
|
1,096 |
|
|
|
(192 |
) |
|
|
6,765 |
|
|
|
(57 |
) |
|
|
11,371 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,734 |
|
|
|
|
|
|
|
1,734 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
27 |
|
Stock issued |
|
|
58 |
|
|
|
356 |
|
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
597 |
|
Adjustment to initially apply
FIN 48, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
(15 |
) |
Adjustment to initially apply
FSP 13-2, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
(125 |
) |
|
|
|
|
|
|
(125 |
) |
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,204 |
) |
|
|
|
|
|
|
(1,204 |
) |
Other |
|
|
|
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
3,817 |
|
|
|
1,454 |
|
|
|
(11 |
) |
|
|
7,155 |
|
|
|
(30 |
) |
|
|
12,385 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,742 |
|
|
|
|
|
|
|
1,742 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75 |
) |
|
|
(75 |
) |
Stock issued |
|
|
71 |
|
|
|
438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509 |
|
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,279 |
) |
|
|
|
|
|
|
(1,279 |
) |
Other |
|
|
|
|
|
|
1 |
|
|
|
(1 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
(6 |
) |
|
Balance at December 31, 2008 |
|
$ |
3,888 |
|
|
$ |
1,893 |
|
|
$ |
(12 |
) |
|
$ |
7,612 |
|
|
$ |
(105 |
) |
|
$ |
13,276 |
|
|
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2008, 2007, and 2006
Southern Company and Subsidiary Companies 2008 Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(in millions) |
|
Consolidated Net Income |
|
$ |
1,742 |
|
|
$ |
1,734 |
|
|
$ |
1,573 |
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $(19), $(3), and $(5),
respectively |
|
|
(30 |
) |
|
|
(5 |
) |
|
|
(8 |
) |
Reclassification adjustment for amounts included in net income,
net of tax of $7, $6, and $-, respectively |
|
|
11 |
|
|
|
9 |
|
|
|
1 |
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $(4), $3, and $4, respectively |
|
|
(7 |
) |
|
|
4 |
|
|
|
8 |
|
Reclassification adjustment for amounts included in net income,
net of tax of $-, $-, and $-, respectively |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
Pension and other postretirement benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
Benefit plan net gain (loss), net of tax of $(32), $13, and $-,
respectively |
|
|
(51 |
) |
|
|
20 |
|
|
|
|
|
Additional prior service costs from amendment to non-qualified
pension plans, net of tax of $-, $(2), and $-, respectively |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
Change in additional minimum pension liability,
net of tax of $-, $-, and $10, respectively |
|
|
|
|
|
|
|
|
|
|
18 |
|
Reclassification adjustment for amounts included in net income,
net of tax of $1, $1, and $-, respectively |
|
|
2 |
|
|
|
2 |
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(75 |
) |
|
|
27 |
|
|
|
19 |
|
|
Consolidated Comprehensive Income |
|
$ |
1,667 |
|
|
$ |
1,761 |
|
|
$ |
1,592 |
|
|
The accompanying notes are an integral part of these financial statements.
II-56
NOTES TO FINANCIAL STATEMENTS
Southern Company and Subsidiary Companies 2008 Annual Report
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The Southern Company (the Company) is the parent company of four traditional operating companies,
Southern Power Company (Southern Power), Southern Company Services, Inc. (SCS), Southern
Communications Services, Inc. (SouthernLINC Wireless), Southern Company Holdings, Inc. (Southern
Holdings), Southern Nuclear Operating Company, Inc. (Southern Nuclear), and other direct and
indirect subsidiaries. The traditional operating companies, Alabama Power Company (Alabama Power),
Georgia Power Company (Georgia Power), Gulf Power Company (Gulf Power), and Mississippi Power
Company (Mississippi Power), are vertically integrated utilities providing electric service in four
Southeastern states. Southern Power constructs, acquires, owns, and manages generation assets and
sells electricity at market-based rates in the wholesale market. SCS, the system service company,
provides, at cost, specialized services to Southern Company and the subsidiary companies.
SouthernLINC Wireless provides digital wireless communications for use by Southern Company and its
subsidiary companies and also markets these services to the public and provides fiber cable
services within the Southeast. Southern Holdings is an intermediate holding company subsidiary for
Southern Companys investments in leveraged leases and various other energy-related businesses.
Southern Nuclear operates and provides services to Southern Companys nuclear power plants.
The financial statements reflect Southern Companys investments in the subsidiaries on a
consolidated basis. The equity method is used for entities in which the Company has significant
influence but does not control and for variable interest entities where the Company is not the
primary beneficiary. All material intercompany transactions have been eliminated in consolidation.
The traditional operating companies, Southern Power, and certain of their subsidiaries are subject
to regulation by the Federal Energy Regulatory Commission (FERC) and the traditional operating
companies are also subject to regulation by their respective state public service commissions
(PSC). The companies follow accounting principles generally accepted in the United States and
comply with the accounting policies and practices prescribed by their respective commissions. The
preparation of financial statements in conformity with accounting principles generally accepted in
the United States requires the use of estimates, and the actual results may differ from those
estimates.
Reclassifications
Certain prior years data presented in the financial statements have been reclassified to conform
to the current year presentation. The consolidated statements of income for the prior periods
presented have been modified within the operating expenses section to combine the line items Other
operations and Maintenance into a single line item entitled Other operations and maintenance.
The statements of cash flows for the prior periods presented were modified within the operating
activities section to present a separate line item for Deferred revenues previously included in
Other, net. The consolidated balance sheet at December 31, 2007 has been modified within current
liabilities to reflect the amount of Unrecognized tax benefits previously included within
Accrued taxes Income taxes and to present the amount of Liabilities for risk management
activities previously included in Other. These reclassifications had no effect on total assets,
net income, cash flows, or earnings per share.
Related Party Transactions
Alabama Power and Georgia Power purchased synthetic fuel from Alabama Fuel Products, LLC (AFP), an
entity in which Southern Holdings held a 30% ownership interest until July 2006, when its ownership
interest was terminated. Total fuel purchases for January 2006 through June 2006 were
$354 million. Synfuel Services, Inc. (SSI), another subsidiary of Southern Holdings, provided fuel
transportation services to AFP that were ultimately reflected in the cost of the synthetic fuel
billed to Alabama Power and Georgia Power. In connection with these services, the related revenues
of approximately $62 million for January 2006 through June 2006, have been eliminated against fuel
expense in the financial statements. SSI also provided additional services to AFP, as well as
II-57
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
to a
related party of AFP. Revenues from these transactions totaled approximately $24 million for
January 2006 through June 2006.
Subsequent to the termination of Southern Companys membership interest in AFP, Alabama Power and
Georgia Power continued to purchase an additional $6 million, $750 million, and $384 million in
fuel from AFP in 2008, 2007, and 2006, respectively. SSI continued to provide fuel transportation
services of $131 million in 2007 and $62 million in 2006, which were eliminated against fuel
expense in the financial statements. SSI also provided other additional services to AFP and a
related party of AFP totaling $47 million and $21 million in 2007 and 2006, respectively. The
synthetic fuel investments and related party transactions were terminated on December 31, 2007.
Regulatory Assets and Liabilities
The traditional operating companies are subject to the provisions of Financial Accounting Standards
Board (FASB) Statement No. 71, Accounting for the Effects of Certain Types of Regulation
(SFAS No. 71). Regulatory assets represent probable future revenues associated with certain costs
that are expected to be recovered from customers through the ratemaking process. Regulatory
liabilities represent probable future reductions in revenues associated with amounts that are
expected to be credited to customers through the ratemaking process. Regulatory assets and
(liabilities) reflected in the balance sheets at December 31 relate to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
Note |
|
|
(in millions) |
Deferred income tax charges |
|
$ |
972 |
|
|
$ |
911 |
|
|
|
(a |
) |
Asset retirement obligations-asset |
|
|
236 |
|
|
|
50 |
|
|
|
(a |
) |
Asset retirement obligations-liability |
|
|
(5 |
) |
|
|
(154 |
) |
|
|
(a |
) |
Other cost of removal obligations |
|
|
(1,321 |
) |
|
|
(1,308 |
) |
|
|
(a |
) |
Deferred income tax credits |
|
|
(260 |
) |
|
|
(275 |
) |
|
|
(a |
) |
Loss on reacquired debt |
|
|
271 |
|
|
|
289 |
|
|
|
(b |
) |
Vacation pay |
|
|
140 |
|
|
|
135 |
|
|
|
(c |
) |
Under recovered regulatory clause revenues |
|
|
432 |
|
|
|
371 |
|
|
|
(d |
) |
Building lease |
|
|
48 |
|
|
|
49 |
|
|
|
(d |
) |
Generating plant outage costs |
|
|
45 |
|
|
|
46 |
|
|
|
(d |
) |
Under recovered storm damage costs |
|
|
27 |
|
|
|
43 |
|
|
|
(d |
) |
Property damage reserves |
|
|
(97 |
) |
|
|
(90 |
) |
|
|
(d |
) |
Fuel hedging (realized and unrealized) losses |
|
|
314 |
|
|
|
25 |
|
|
|
(d |
) |
Fuel hedging (realized and unrealized) gains |
|
|
(10 |
) |
|
|
(20 |
) |
|
|
(d |
) |
Other assets |
|
|
164 |
|
|
|
88 |
|
|
|
(d |
) |
Environmental remediation-asset |
|
|
67 |
|
|
|
67 |
|
|
|
(d |
) |
Environmental remediation-liability |
|
|
(19 |
) |
|
|
(22 |
) |
|
|
(d |
) |
Deferred purchased power |
|
|
(156 |
) |
|
|
(20 |
) |
|
|
(d |
) |
Other liabilities |
|
|
(25 |
) |
|
|
(21 |
) |
|
|
(d |
) |
Overfunded retiree benefit plans |
|
|
|
|
|
|
(1,288 |
) |
|
|
(e |
) |
Underfunded retiree benefit plans |
|
|
2,068 |
|
|
|
547 |
|
|
|
(e |
) |
|
Total assets (liabilities), net |
|
$ |
2,891 |
|
|
$ |
(577 |
) |
|
|
|
|
|
Note: The recovery and amortization periods for these regulatory assets and (liabilities) are as
follows: |
|
(a) |
|
Asset retirement and removal liabilities are recorded, deferred income tax
assets are recovered, and deferred tax liabilities are amortized over the
related property lives, which may range up to 65 years. Asset retirement and
removal liabilities will be settled and trued up following completion of the related
activities. |
|
(b) |
|
Recovered over either the remaining life of the original issue or, if
refinanced, over the life of the new issue, which may range up to 50 years. |
|
(c) |
|
Recorded as earned by employees and recovered as paid, generally within one year. |
|
(d) |
|
Recorded and recovered or amortized as approved by the appropriate state PSCs. |
|
(e) |
|
Recovered and amortized over the average remaining service period which may
range up to 14 years. See Note 2 for additional information. |
II-58
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
In the event that a portion of a traditional operating companys operations is no longer subject to
the provisions of SFAS No. 71, such company would be required to write off or reclassify to
accumulated other comprehensive income related regulatory assets and liabilities that are not
specifically recoverable through regulated rates. In addition, the traditional operating company
would be required to determine if any impairment to other assets, including plant, exists and write
down the assets, if impaired, to their fair values. All regulatory assets and liabilities are to
be reflected in rates. See Note 3 under Alabama Power Retail Regulatory Matters, Georgia Power
Retail Regulatory Matters, Gulf Power Retail Regulatory Matters, and Storm Damage Cost
Recovery for additional information.
Revenues
Wholesale capacity revenues are generally recognized on a levelized basis over the appropriate
contract periods. Energy and other revenues are recognized as services are provided. Unbilled
revenues related to retail sales are accrued at the end of each fiscal period. Electric rates for
the traditional operating companies include provisions to adjust billings for fluctuations in fuel
costs, fuel hedging, the energy component of purchased power costs, and certain other costs.
Revenues are adjusted for differences between these actual costs and amounts billed in current
regulated rates. Under or over recovered regulatory clause revenues are recorded in the balance
sheets and are recovered or returned to customers through adjustments to the billing factors.
Retail fuel cost recovery mechanisms vary by each traditional operating company, but in general,
the process requires periodic filings with the appropriate state PSC. Alabama Power continuously
monitors the under/over recovered balance and files for a revised fuel rate when management deems
appropriate. Georgia Power is required to file a new fuel case no later than March 1, 2009. On
February 19, 2009, the Georgia PSC approved Georgia Powers request to delay the filing of that
case until March 13, 2009. The new rates are expected to become effective on June 1, 2009. Gulf
Power is required to notify the Florida PSC if the projected fuel cost over or under recovery
exceeds 10% of the projected fuel revenue applicable for the period and indicate if an adjustment
to the fuel cost recovery factor is being requested. Mississippi Power is required to file for an
adjustment to the fuel cost recovery factor annually. See Note 3 under Alabama Power Retail
Regulatory Matters, Georgia Power Retail Regulatory Matters, and Gulf Power Retail Regulatory
Matters for additional information.
Southern Company has a diversified base of customers. No single customer or industry comprises 10%
or more of revenues. For all periods presented, uncollectible accounts averaged less than 1% of
revenues.
Fuel Costs
Fuel costs are expensed as the fuel is used. Fuel expense generally includes the cost of purchased
emission allowances as they are used. Fuel expense also includes the amortization of the cost of
nuclear fuel and a charge, based on nuclear generation, for the permanent disposal of spent nuclear
fuel. See Note 3 under Nuclear Fuel Disposal Costs for additional information.
Income and Other Taxes
Southern Company uses the liability method of accounting for deferred income taxes and provides
deferred income taxes for all significant income tax temporary differences. Investment tax credits
utilized are deferred and amortized to income over the average life of the related property. Taxes
that are collected from customers on behalf of governmental agencies to be remitted to these
agencies are presented net on the statements of income.
In accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
48), Southern Company recognizes tax positions that are more likely than not of being sustained
upon examination by the appropriate taxing authorities. See Note 5 under Unrecognized Tax
Benefits for additional information on FIN 48.
II-59
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Property, Plant, and Equipment
Property, plant, and equipment is stated at original cost less regulatory disallowances and
impairments. Original cost includes: materials; labor; minor items of property; appropriate
administrative and general costs; payroll-related costs such as taxes, pensions, and other
benefits; and the interest capitalized and/or cost of funds used during construction.
Southern Companys property, plant, and equipment consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
(in millions) |
Generation |
|
$ |
26,154 |
|
|
$ |
23,879 |
|
Transmission |
|
|
7,085 |
|
|
|
6,761 |
|
Distribution |
|
|
13,856 |
|
|
|
13,134 |
|
General |
|
|
2,750 |
|
|
|
2,619 |
|
Plant acquisition adjustment |
|
|
43 |
|
|
|
43 |
|
|
Utility plant in service |
|
|
49,888 |
|
|
|
46,436 |
|
|
IT equipment and software |
|
|
240 |
|
|
|
230 |
|
Communications equipment |
|
|
450 |
|
|
|
452 |
|
Other |
|
|
40 |
|
|
|
58 |
|
|
Other plant in service |
|
|
730 |
|
|
|
740 |
|
|
Total plant in service |
|
$ |
50,618 |
|
|
$ |
47,176 |
|
|
The cost of replacements of property, exclusive of minor items of property, is capitalized. The
cost of maintenance, repairs, and replacement of minor items of property is charged to maintenance
expense as incurred or performed with the exception of nuclear refueling costs, which are recorded
in accordance with specific state PSC orders. Alabama Power accrues estimated nuclear refueling
costs in advance of the units next refueling outage. Georgia Power defers and amortizes nuclear
refueling costs over the units operating cycle before the next refueling. The refueling cycles
for Alabama Power and Georgia Power range from 18 to 24 months for each unit. In accordance with a
Georgia PSC order, Georgia Power also defers the costs of certain significant inspection costs for
the combustion turbines at Plant McIntosh and amortizes such costs over 10 years, which
approximates the expected maintenance cycle.
Depreciation and Amortization
Depreciation of the original cost of utility plant in service is provided primarily by using
composite straight-line rates, which approximated 3.2% in 2008, 3.0% in 2007, and 3.0% in 2006.
Depreciation studies are conducted periodically to update the composite rates. These studies are
filed with the respective state PSC for the traditional operating companies. Accumulated
depreciation for utility plant in service totaled $17.9 billion and $17.0 billion at December 31,
2008 and 2007, respectively. When property subject to composite depreciation is retired or
otherwise disposed of in the normal course of business, its original cost, together with the cost
of removal, less salvage, is charged to accumulated depreciation. For other property dispositions,
the applicable cost and accumulated depreciation is removed from the balance sheet accounts and a
gain or loss is recognized. Minor items of property included in the original cost of the plant are
retired when the related property unit is retired.
Under Georgia Powers retail rate plan for the three years ended December 31, 2007 (2004 Retail
Rate Plan), Georgia Power was ordered to recognize Georgia PSC-certified capacity costs in rates
evenly over the three years covered by the 2004 Retail Rate Plan. Georgia Power recorded credits
to amortization of $19 million and $14 million in 2007 and 2006, respectively. See Note 3 under
Georgia Power Retail Regulatory Matters for additional information.
II-60
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
In May 2004, the Mississippi PSC approved Mississippi Powers request to reclassify 266 megawatts
of Plant Daniel units 3 and 4 capacity to jurisdictional cost of service effective January 1, 2004
and authorized Mississippi Power to include the related costs and revenue credits in jurisdictional
rate base, cost of service, and revenue requirement calculations for purposes of retail rate
recovery. Mississippi Power amortized the related regulatory liability pursuant to the Mississippi
PSCs order as follows: $6 million in 2007 and $13 million in 2006, resulting in increases to
earnings in each of those years.
Depreciation of the original cost of other plant in service is provided primarily on a
straight-line basis over estimated useful lives ranging from 3 to 25 years. Accumulated
depreciation for other plant in service totaled $433 million and $429 million at December 31, 2008
and 2007, respectively.
Asset Retirement Obligations and Other Costs of Removal
Asset retirement obligations are computed as the present value of the ultimate costs for an assets
future retirement and are recorded in the period in which the liability is incurred. The costs are
capitalized as part of the related long-lived asset and depreciated over the assets useful life.
The Company has received accounting guidance from the various state PSCs allowing the continued
accrual of other future retirement costs for long-lived assets that the Company does not have a
legal obligation to retire. Accordingly, the accumulated removal costs for these obligations will
continue to be reflected in the balance sheets as a regulatory liability.
The liability recognized to retire long-lived assets primarily relates to the Companys nuclear
facilities, Plants Farley, Hatch, and Vogtle. The fair value of assets legally restricted for
settling retirement obligations related to nuclear facilities as of December 31, 2008 was $864
million. In addition, the Company has retirement obligations related to various landfill sites,
underground storage tanks, asbestos removal, and disposal of polychlorinated biphenyls in certain
transformers. The Company also has identified retirement obligations related to certain
transmission and distribution facilities, co-generation
facilities, certain wireless communication towers, and certain structures authorized by the U.S.
Army Corps of Engineers. However, liabilities for the removal of these assets have not been
recorded because the range of time over which the Company may settle these obligations is unknown
and cannot be reasonably estimated. The Company will continue to recognize in the statements of
income allowed removal costs in accordance with its regulatory treatment. Any differences between
costs recognized under FASB Statement No. 143 Accounting for Asset Retirement Obligations and
FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations and those
reflected in rates are recognized as either a regulatory asset or liability, as ordered by the
various state PSCs, and are reflected in the balance sheets. See Nuclear Decommissioning herein
for further information on amounts included in rates.
Details of the asset retirement obligations included in the balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
(in millions) |
Balance beginning of year |
|
$ |
1,203 |
|
|
$ |
1,137 |
|
Liabilities incurred |
|
|
4 |
|
|
|
1 |
|
Liabilities settled |
|
|
(4 |
) |
|
|
(8 |
) |
Accretion |
|
|
75 |
|
|
|
74 |
|
Cash flow revisions |
|
|
(93 |
) |
|
|
(1 |
) |
|
Balance end of year |
|
$ |
1,185 |
|
|
$ |
1,203 |
|
|
Nuclear Decommissioning
The Nuclear Regulatory Commission (NRC) requires licensees of commercial nuclear power reactors to
establish a plan for providing reasonable assurance of funds for future decommissioning. Alabama
Power and Georgia Power have external trust funds (the Funds) to comply with the NRCs regulations.
Use of the Funds is restricted to
II-61
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
nuclear decommissioning activities and the Funds are managed and
invested in accordance with applicable requirements of various regulatory bodies, including the
NRC, the FERC, and state PSCs, as well as the Internal Revenue Service (IRS). The Funds are
invested in a tax-efficient manner in a diversified mix of equity and fixed income securities and
are reported as of December 31, 2008 as trading securities pursuant to FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115).
On January 1, 2008, the Company adopted FASB Statement No. 159, Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115 (SFAS No.
159). This standard permits an entity to choose to measure many financial instruments and certain
other items at fair value. Southern Company elected the fair value option only for investment
securities held in the Funds. The Funds are included in the balance sheets at fair value, as
disclosed in Note 10.
Management elected to continue to record the Funds at fair value because management believes that
fair value best represents the nature of the Funds. Management has delegated day-to-day management
of the investments in the Funds to unrelated third party managers with oversight by Southern
Company, Alabama Power, and Georgia Power management. The managers of the Funds are authorized,
within broad limits, to actively buy and sell securities at their own discretion in order to
maximize the investment return on the Funds investments. Because of the Companys inability to
choose to hold securities that have experienced unrealized losses until recovery of their value,
all unrealized losses incurred during 2006 and 2007, prior to the adoption of SFAS No. 159, were
considered other-than-temporary impairments under SFAS No. 115.
The adoption of SFAS No. 159 had no impact on the results of operations, cash flows, or financial
condition of the Company. For all periods presented, all gains and losses, whether realized,
unrealized, or identified as other-than-temporary, have been and will continue to be recorded in
the regulatory liability for asset retirement obligations in the balance sheets and are not
included in net income or other comprehensive income. Fair value adjustments, realized gains, and
other-than-temporary impairment losses are determined on a specific identification basis.
At December 31, 2008, investment securities in the Funds totaled $862 million consisting of equity
securities of $518 million, debt securities of $323 million, and $21 million of other securities.
These amounts exclude receivables related to investment income and pending investment sales, and
payables related to pending investment purchases.
At December 31, 2007, investment securities in the Funds totaled $1.1 billion consisting of equity
securities of $788 million, debt securities of $312 million, and $32 million of other securities.
Unrealized gains were $256 million for equity securities and $12 million for debt securities.
Other-than-temporary impairments were $(28) million for equity securities and $(5) million for debt
securities.
Sales of the securities held in the Funds resulted in cash proceeds of $712 million, $775 million,
and $743 million, in 2008, 2007, and 2006, respectively, all of which were re-invested. For 2008,
fair value reductions, including reinvested interest and dividends, was $(278) million, of which
$(259) million related to securities held in the Funds at December 31, 2008. Realized gains and
other-than-temporary impairment losses were $78 million and $(76) million, respectively, in 2007
and $40 million and $(30) million, respectively, in 2006. While the investment securities held in
the Funds are reported as trading securities, the Funds continue to be managed with a long-term
focus. Accordingly, all purchases and sales within the Funds are presented separately in the
statement of cash flows as investing cash flows, consistent with the nature of and purpose for
which the securities were acquired.
Amounts previously recorded in internal reserves are being transferred into the external trust
funds over periods approved by the respective state PSCs. The NRCs minimum external funding
requirements are based on a generic estimate of the cost to decommission only the radioactive
portions of a nuclear unit based on the size and type of reactor. Alabama Power and Georgia Power
have filed plans with the NRC designed to ensure that, over time, the deposits and earnings of the
external trust funds will provide the minimum funding amounts prescribed by the NRC.
II-62
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
At December 31, 2008, the accumulated provisions for decommissioning were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant Farley |
|
Plant Hatch |
|
Plant Vogtle |
|
|
(in millions) |
External trust funds |
|
$ |
404 |
|
|
$ |
280 |
|
|
$ |
168 |
|
Internal reserves |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
430 |
|
|
$ |
280 |
|
|
$ |
168 |
|
|
Site study cost is the estimate to decommission a specific facility as of the site study year. The
estimated costs of decommissioning based on the most current studies, which were performed in 2008
for Plant Farley and in 2006 for the Georgia Power plants, were as follows for Alabama Powers
Plant Farley and Georgia Powers ownership interests in Plants Hatch and Vogtle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant Farley |
|
Plant Hatch |
|
Plant Vogtle |
|
Decommissioning periods: |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning year |
|
|
2037 |
|
|
|
2034 |
|
|
|
2027 |
|
Completion year |
|
|
2065 |
|
|
|
2061 |
|
|
|
2051 |
|
|
|
|
(in millions)
|
Site study costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Radiated structures |
|
$ |
1,060 |
|
|
$ |
544 |
|
|
$ |
507 |
|
Non-radiated structures |
|
|
72 |
|
|
|
46 |
|
|
|
67 |
|
|
Total |
|
$ |
1,132 |
|
|
$ |
590 |
|
|
$ |
574 |
|
|
The decommissioning cost estimates are based on prompt dismantlement and removal of the plant from
service. The actual decommissioning costs may vary from the above estimates because of changes in
the assumed date of decommissioning, changes in NRC requirements, or changes in the assumptions
used in making these estimates.
For ratemaking purposes, Alabama Powers decommissioning costs are based on the site study, and
Georgia Powers decommissioning costs are based on the NRC generic estimate to decommission the
radioactive portion of the facilities as of 2006. The estimates used in current rates are
$495 million and $334 million for Plants Hatch and Vogtle, respectively. Amounts expensed were
$3 million in 2008 and $7 million annually for 2007 and 2006 for Plant Vogtle. Significant
assumptions used to determine these costs for ratemaking were an inflation rate of 4.5% and 2.9%
for Alabama Power and Georgia Power, respectively, and a trust earnings rate of 7.0% and 4.9% for
Alabama Power and Georgia Power, respectively. As a result of license extensions, amounts
previously contributed to the external trust funds for Plants Hatch and Farley are currently
projected to be adequate to meet the decommissioning obligations. Georgia Power filed an
application with the NRC in June 2007 to extend the licenses for Plant Vogtle Units 1 and 2 for an
additional 20 years. Georgia Power anticipates the NRC may make a decision regarding the license
extension for Plant Vogtle in 2009.
Allowance for Funds Used During Construction (AFUDC) and Interest Capitalized
In accordance with regulatory treatment, the traditional operating companies record AFUDC, which
represents the estimated debt and equity costs of capital funds that are necessary to finance the
construction of new regulated facilities. While cash is not realized currently from such
allowance, it increases the revenue requirement over the service life of the plant through a higher
rate base and higher depreciation expense. The equity component of AFUDC is not included in
calculating taxable income. Interest related to the construction of new facilities not included in
the traditional operating companies regulated rates is capitalized in accordance with standard
interest capitalization requirements. AFUDC and interest capitalized, net of income taxes were
11.2%, 8.4%, and 4.2% of net income for 2008, 2007, and 2006, respectively.
Cash payments for interest totaled $787 million, $798 million, and $875 million in 2008, 2007, and
2006, respectively, net of amounts capitalized of $71 million, $64 million, and $27 million,
respectively.
II-63
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Impairment of Long-Lived Assets and Intangibles
Southern Company evaluates long-lived assets for impairment when events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. The determination of
whether an impairment has occurred is based on either a specific regulatory disallowance or an
estimate of undiscounted future cash flows attributable to the assets, as compared with the
carrying value of the assets. If an impairment has occurred, the amount of the impairment
recognized is determined by either the amount of regulatory disallowance or by estimating the fair
value of the assets and recording a loss if the carrying value is greater than the fair value. For
assets identified as held for sale, the carrying value is compared to the estimated fair value less
the cost to sell in order to determine if an impairment loss is required. Until the assets are
disposed of, their estimated fair value is re-evaluated when circumstances or events change.
Storm Damage Reserves
Each traditional operating company maintains a reserve to cover the cost of damages from major
storms to its transmission and distribution lines and generally the cost of uninsured damages to
its generation facilities and other property. In accordance with their respective state PSC
orders, the traditional operating companies accrued $40.4 million in 2008. Alabama Power, Gulf
Power, and Mississippi Power also have discretionary authority from their state PSCs to accrue
certain additional amounts as circumstances warrant. There were no material accruals for any year
presented. See Note 3 under Storm Damage Cost Recovery for additional information regarding
these reserves and the deferral of additional costs, as well as additional rate riders or other
cost recovery mechanisms which have been approved by the respective state PSCs to recover the
deferred costs and accrue reserves for future storms.
Leveraged Leases
Southern Company has several leveraged lease agreements, with terms ranging up to 45 years, 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 Company reviews all important
lease assumptions at least annually, or more frequently if events or changes in circumstances
indicate that a change in assumptions has occurred or may occur. These assumptions include the
effective tax rate, the residual value, the credit quality of the lessees, and the timing of
expected tax cash flows.
Southern Companys net investment in domestic leveraged leases consists of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
(in millions) |
Net rentals receivable |
|
$ |
492 |
|
|
$ |
494 |
|
Unearned income |
|
|
(230 |
) |
|
|
(244 |
) |
|
Investment in leveraged leases |
|
|
262 |
|
|
|
250 |
|
Deferred taxes from leveraged leases |
|
|
(189 |
) |
|
|
(163 |
) |
|
Net investment in leveraged leases |
|
$ |
73 |
|
|
$ |
87 |
|
|
A summary of the components of income from domestic leveraged leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
|
(in millions) |
Pretax leveraged lease income |
|
$ |
14 |
|
|
$ |
16 |
|
|
$ |
20 |
|
Income tax expense |
|
|
(6 |
) |
|
|
(7 |
) |
|
|
(9 |
) |
|
Net leveraged lease income |
|
$ |
8 |
|
|
$ |
9 |
|
|
$ |
11 |
|
|
II-64
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Southern Companys net investment in international leveraged leases consists of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
(in millions) |
Net rentals receivable |
|
$ |
1,298 |
|
|
$ |
1,298 |
|
Unearned income |
|
|
(663 |
) |
|
|
(563 |
) |
|
Investment in leveraged leases |
|
|
635 |
|
|
|
735 |
|
Current taxes payable |
|
|
(120 |
) |
|
|
|
|
Deferred taxes from leveraged leases |
|
|
(117 |
) |
|
|
(316 |
) |
|
Net investment in leveraged leases |
|
$ |
398 |
|
|
$ |
419 |
|
|
A summary of the components of income from international leveraged leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
|
(in millions) |
Pretax leveraged lease income (loss) |
|
$ |
(99 |
) |
|
$ |
24 |
|
|
$ |
49 |
|
Income tax benefit (expense) |
|
|
35 |
|
|
|
(8 |
) |
|
|
(17 |
) |
|
Net leveraged lease income (loss) |
|
$ |
(64 |
) |
|
$ |
16 |
|
|
$ |
32 |
|
|
See Note 3 under Income Tax Matters for additional information regarding the leveraged lease
transactions.
Cash and Cash Equivalents
For purposes of the financial statements, temporary cash investments are considered cash
equivalents. Temporary cash investments are securities with original maturities of 90 days or
less.
Materials and Supplies
Generally, materials and supplies include the average costs of transmission, distribution, and
generating plant materials. Materials are charged to inventory when purchased and then expensed or
capitalized to plant, as appropriate, at weighted average cost when installed.
Fuel Inventory
Fuel inventory includes the average costs of oil, coal, natural gas, and emission allowances. Fuel
is charged to inventory when purchased and then expensed as used and recovered by the traditional
operating companies through fuel cost recovery rates approved by each state PSC. Emission
allowances granted by the Environmental Protection Agency (EPA) are included in inventory at zero
cost.
Financial Instruments
Southern Company uses derivative financial instruments to limit exposure to fluctuations in
interest rates, the prices of certain fuel purchases, and electricity purchases and sales. All
derivative financial instruments are recognized as either assets or liabilities (categorized in
Other or shown separately as Risk Management Activities) and are measured at fair value. See
Note 10 for additional information. Substantially all of Southern Companys bulk energy purchases
and sales contracts that meet the definition of a derivative are exempt from fair value accounting
requirements and are accounted for under the accrual method. Other derivative contracts qualify as
cash flow hedges of anticipated transactions or are recoverable through the traditional operating
companies fuel hedging programs. This results in the deferral of related gains and losses in
other comprehensive income or regulatory assets and liabilities, respectively, until the hedged
transactions occur. Any ineffectiveness arising from cash flow hedges is recognized currently in
net income. Other derivative contracts, including derivatives related to synthetic fuel
II-65
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
investments, are marked to market through current period income and are recorded on a net basis in
the statements of income. See Note 6 under Financial Instruments for additional information.
The Company does not offset fair value amounts recognized for multiple derivative instruments
executed with the same counterparty under a master netting arrangement. At December 31, 2008, the
Company has recognized $8.5 million for the obligation to return cash collateral arising from
derivative instruments, which is included in Accounts payable in the balance sheets.
Southern Company is exposed to losses related to financial instruments in the event of
counterparties nonperformance. The Company has established controls to determine and monitor the
creditworthiness of counterparties in order to mitigate the Companys exposure to counterparty
credit risk.
The other Southern Company financial instruments for which the carrying amount did not equal fair
value at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount |
|
Fair Value |
|
|
(in millions) |
Long-term debt: |
|
|
|
|
|
|
|
|
2008 |
|
$ |
17,327 |
|
|
$ |
17,114 |
|
2007 |
|
$ |
15,095 |
|
|
$ |
14,931 |
|
The fair values were based on either closing market prices (Level 1) or closing prices of
comparable instruments (Level 2). See Note 10 for all other items recognized at fair value in the
financial statements.
Comprehensive Income
The objective of comprehensive income is to report a measure of all changes in common stock equity
of an enterprise that result from transactions and other economic events of the period other than
transactions with owners. Comprehensive income consists of net income, changes in the fair value
of qualifying cash flow hedges and marketable securities, and certain changes in pension and other
post retirement benefit plans, less income taxes and reclassifications for amounts included in net
income.
Accumulated other comprehensive income (loss) balances, net of tax effects, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Other |
|
Accumulated Other |
|
|
Qualifying |
|
Marketable |
|
Postretirement |
|
Comprehensive |
|
|
Hedges |
|
Securities |
|
Benefit Plans |
|
Income (Loss) |
|
|
(in millions) |
|
Balance at December 31, 2007 |
|
$ |
(54 |
) |
|
$ |
13 |
|
|
$ |
11 |
|
|
$ |
(30 |
) |
Current period change |
|
|
(19 |
) |
|
|
(7 |
) |
|
|
(49 |
) |
|
|
(75 |
) |
|
Balance at December 31, 2008 |
|
$ |
(73 |
) |
|
$ |
6 |
|
|
$ |
(38 |
) |
|
$ |
(105 |
) |
|
Variable Interest Entities
The primary beneficiary of a variable interest entity must consolidate the related assets and
liabilities. Southern Company has established certain wholly-owned trusts to issue preferred
securities. See Note 6 under Long-Term Debt Payable to Affiliated Trusts for additional
information. However, Southern Company and the traditional operating companies are not considered
the primary beneficiaries of the trusts. Therefore, the investments in these trusts are reflected
as Other Investments, and the related loans from the trusts are included in Long-term Debt in the
balance sheets.
II-66
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
2. RETIREMENT BENEFITS
Southern Company has a defined benefit, trusteed, pension plan covering substantially all
employees. The plan is funded in accordance with requirements of the Employee Retirement Income
Security Act of 1974, as amended (ERISA). No contributions to the plan are expected for the year
ending December 31, 2009. Southern Company also provides certain defined benefit pension plans for
a selected group of management and highly compensated employees. Benefits under these
non-qualified pension plans are funded on a cash basis. In addition, Southern Company provides
certain medical care and life insurance benefits for retired employees through other postretirement
benefit plans. The traditional operating companies fund related trusts to the extent required by
their respective regulatory commissions. For the year ending December 31, 2009, postretirement
trust contributions are expected to total approximately $56 million.
The measurement date for plan assets and obligations for 2008 was December 31 while the measurement
date for prior years was September 30. Pursuant to FASB Statement No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans (SFAS No. 158), Southern Company was
required to change the measurement date for its defined benefit postretirement plans from September
30 to December 31 beginning with the year ended December 31, 2008. As permitted, Southern Company
adopted the measurement date provisions of SFAS No. 158 effective January 1, 2008 resulting in an
increase in long-term liabilities of approximately $28 million and an increase in prepaid pension
costs of approximately $16 million.
Pension Plans
The total accumulated benefit obligation for the pension plans was $5.5 billion in 2008 and $5.3
billion in 2007. Changes during the 15-month period ended December 31, 2008 and the 12-month
period ended September 30, 2007 in the projected benefit obligations and the fair value of plan
assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(in millions) |
|
Change in benefit obligation |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
5,660 |
|
|
$ |
5,491 |
|
Service cost |
|
|
182 |
|
|
|
147 |
|
Interest cost |
|
|
435 |
|
|
|
324 |
|
Benefits paid |
|
|
(324 |
) |
|
|
(241 |
) |
Plan amendments |
|
|
|
|
|
|
50 |
|
Actuarial gain |
|
|
(74 |
) |
|
|
(111 |
) |
|
Balance at end of year |
|
|
5,879 |
|
|
|
5,660 |
|
|
Change in plan assets |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
|
7,624 |
|
|
|
6,693 |
|
Actual return (loss) on plan assets |
|
|
(2,234 |
) |
|
|
1,153 |
|
Employer contributions |
|
|
27 |
|
|
|
19 |
|
Benefits paid |
|
|
(324 |
) |
|
|
(241 |
) |
|
Fair value of plan assets at end of year |
|
|
5,093 |
|
|
|
7,624 |
|
|
Funded status at end of year |
|
|
(786 |
) |
|
|
1,964 |
|
Fourth quarter contributions |
|
|
|
|
|
|
5 |
|
|
(Accrued liability) prepaid pension asset |
|
$ |
(786 |
) |
|
$ |
1,969 |
|
|
At December 31, 2008, the projected benefit obligations for the qualified and non-qualified pension
plans were $5.5 billion and $0.4 billion, respectively. All pension plan assets are related to the
qualified pension plan.
II-67
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Pension plan assets are managed and invested in accordance with all applicable requirements,
including ERISA and the Internal Revenue Code of 1986, as amended (Internal Revenue Code). The
Companys investment policy covers a diversified mix of assets, including equity and fixed income
securities, real estate, and private equity. Derivative instruments are used primarily as hedging
tools but may also be used to gain efficient exposure to the various asset classes. The Company
primarily minimizes the risk of large losses through diversification but also monitors and manages
other aspects of risk. The actual composition of the Companys pension plan assets as of the end
of year, along with the targeted mix of assets, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target |
|
2008 |
|
2007 |
|
Domestic equity |
|
|
36 |
% |
|
|
34 |
% |
|
|
38 |
% |
International equity |
|
|
24 |
|
|
|
23 |
|
|
|
24 |
|
Fixed income |
|
|
15 |
|
|
|
14 |
|
|
|
15 |
|
Real estate |
|
|
15 |
|
|
|
19 |
|
|
|
16 |
|
Private equity |
|
|
10 |
|
|
|
10 |
|
|
|
7 |
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
Amounts recognized in the consolidated balance sheets related to the Companys pension plans
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
(in millions) |
Prepaid pension costs |
|
$ |
|
|
|
$ |
2,369 |
|
Other regulatory assets |
|
|
1,579 |
|
|
|
188 |
|
Current liabilities, other |
|
|
(23 |
) |
|
|
(21 |
) |
Other regulatory liabilities |
|
|
|
|
|
|
(1,288 |
) |
Employee benefit obligations |
|
|
(763 |
) |
|
|
(379 |
) |
Accumulated other comprehensive income |
|
|
54 |
|
|
|
(26 |
) |
|
Presented below are the amounts included in accumulated other comprehensive income, regulatory
assets, and regulatory liabilities at December 31, 2008 and 2007 related to the defined benefit
pension plans that had not yet been recognized in net periodic pension cost along with the
estimated amortization of such amounts for 2009.
|
|
|
|
|
|
|
|
|
|
|
Prior Service Cost |
|
Net(Gain)Loss |
|
|
(in millions) |
Balance at December 31, 2008: |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
12 |
|
|
$ |
42 |
|
Regulatory assets |
|
|
220 |
|
|
|
1,359 |
|
Regulatory liabilities |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
232 |
|
|
$ |
1,401 |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007: |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
14 |
|
|
$ |
(40 |
) |
Regulatory assets |
|
|
66 |
|
|
|
122 |
|
Regulatory liabilities |
|
|
198 |
|
|
|
(1,486 |
) |
|
Total |
|
$ |
278 |
|
|
$ |
(1,404 |
) |
|
|
|
|
|
|
|
|
|
|
Estimated amortization in net periodic
pension cost in 2009: |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
2 |
|
|
$ |
|
|
Regulatory assets |
|
|
33 |
|
|
|
7 |
|
Regulatory liabilities |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
35 |
|
|
$ |
7 |
|
|
II-68
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
The components of other comprehensive income, along with the changes in the balances of regulatory
assets and regulatory liabilities, related to the defined benefit pension plans for the 15-month
period ended December 31, 2008 and the 12-month period ended September 30, 2007 are presented in
the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
Comprehensive Income |
|
Regulatory
Assets |
|
Regulatory
Liabilities |
|
|
(in millions) |
Balance at December 31, 2006 |
|
$ |
|
|
|
$ |
158 |
|
|
$ |
(507 |
) |
Net gain |
|
|
(28 |
) |
|
|
|
|
|
|
(753 |
) |
Change in prior service costs |
|
|
4 |
|
|
|
46 |
|
|
|
|
|
Reclassification adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service costs |
|
|
(2 |
) |
|
|
(7 |
) |
|
|
(28 |
) |
Amortization of net gain |
|
|
|
|
|
|
(9 |
) |
|
|
|
|
|
Total reclassification adjustments |
|
|
(2 |
) |
|
|
(16 |
) |
|
|
(28 |
) |
|
Total change |
|
|
(26 |
) |
|
|
30 |
|
|
|
(781 |
) |
|
Balance at December 31, 2007 |
|
|
(26 |
) |
|
|
188 |
|
|
|
(1,288 |
) |
Net loss |
|
|
83 |
|
|
|
1,412 |
|
|
|
1,322 |
|
Change in prior service costs |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service costs |
|
|
(2 |
) |
|
|
(10 |
) |
|
|
(34 |
) |
Amortization of net gain |
|
|
(1 |
) |
|
|
(11 |
) |
|
|
|
|
|
Total reclassification adjustments |
|
|
(3 |
) |
|
|
(21 |
) |
|
|
(34 |
) |
|
Total change |
|
|
80 |
|
|
|
1,391 |
|
|
|
1,288 |
|
|
Balance at December 31, 2008 |
|
$ |
54 |
|
|
$ |
1,579 |
|
|
$ |
|
|
|
Components of net periodic pension cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
|
(in millions) |
Service cost |
|
$ |
146 |
|
|
$ |
147 |
|
|
$ |
153 |
|
Interest cost |
|
|
348 |
|
|
|
324 |
|
|
|
300 |
|
Expected return on plan assets |
|
|
(525 |
) |
|
|
(481 |
) |
|
|
(456 |
) |
Recognized net loss |
|
|
9 |
|
|
|
10 |
|
|
|
16 |
|
Net amortization |
|
|
37 |
|
|
|
35 |
|
|
|
26 |
|
|
Net periodic pension cost |
|
$ |
15 |
|
|
$ |
35 |
|
|
$ |
39 |
|
|
Net periodic pension cost is the sum of service cost, interest cost, and other costs netted against
the expected return on plan assets. The expected return on plan assets is determined by
multiplying the expected rate of return on plan assets and the market-related value of plan assets.
In determining the market-related value of plan assets, the Company has elected to amortize
changes in the market value of all plan assets over five years rather than recognize the changes
immediately. As a result, the accounting value of plan assets that is used to calculate the
expected return on plan assets differs from the current fair value of the plan assets.
Future benefit payments reflect expected future service and are estimated based on assumptions used
to measure the projected benefit obligation for the pension plans. At December 31, 2008, estimated
benefit payments were as follows:
|
|
|
|
|
|
|
Benefit Payments |
|
|
(in millions) |
2009 |
|
$ |
289 |
|
2010 |
|
|
304 |
|
2011 |
|
|
322 |
|
2012 |
|
|
341 |
|
2013 |
|
|
362 |
|
2014 to 2018 |
|
|
2,187 |
|
|
II-69
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Other Postretirement Benefits
Changes during the 15-month period ended December 31, 2008 and the 12-month period ended September
30, 2007 in the accumulated postretirement benefit obligations (APBO) and in the fair value of plan
assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
(in millions) |
Change in benefit obligation |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
1,797 |
|
|
$ |
1,830 |
|
Service cost |
|
|
36 |
|
|
|
27 |
|
Interest cost |
|
|
138 |
|
|
|
107 |
|
Benefits paid |
|
|
(108 |
) |
|
|
(83 |
) |
Actuarial gain |
|
|
(139 |
) |
|
|
(90 |
) |
Retiree drug subsidy |
|
|
9 |
|
|
|
6 |
|
|
Balance at end of year |
|
|
1,733 |
|
|
|
1,797 |
|
|
Change in plan assets |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
|
820 |
|
|
|
731 |
|
Actual return (loss) on plan assets |
|
|
(232 |
) |
|
|
105 |
|
Employer contributions |
|
|
142 |
|
|
|
61 |
|
Benefits paid |
|
|
(99 |
) |
|
|
(77 |
) |
|
Fair value of plan assets at end of year |
|
|
631 |
|
|
|
820 |
|
|
Funded status at end of year |
|
|
(1,102 |
) |
|
|
(977 |
) |
Fourth quarter contributions |
|
|
|
|
|
|
65 |
|
|
Accrued liability |
|
$ |
(1,102 |
) |
|
$ |
(912 |
) |
|
Other postretirement benefit plan assets are managed and invested in accordance with all applicable
requirements, including ERISA and the Internal Revenue Code. The Companys investment policy
covers a diversified mix of assets, including equity and fixed income securities, real estate, and
private equity. Derivative instruments are used primarily as hedging tools but may also be used to
gain efficient exposure to the various asset classes. The Company primarily minimizes the risk of
large losses through diversification but also monitors and manages other aspects of risk. The
actual composition of the Companys other postretirement benefit plan assets as of the end of year,
along with the targeted mix of assets, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target |
|
2008 |
|
2007 |
|
Domestic equity |
|
|
44 |
% |
|
|
34 |
% |
|
|
45 |
% |
International equity |
|
|
17 |
|
|
|
18 |
|
|
|
20 |
|
Fixed income |
|
|
30 |
|
|
|
38 |
|
|
|
26 |
|
Real estate |
|
|
5 |
|
|
|
7 |
|
|
|
6 |
|
Private equity |
|
|
4 |
|
|
|
3 |
|
|
|
3 |
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
Amounts recognized in the balance sheets related to the Companys other postretirement benefit
plans consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
(in millions) |
|
Other regulatory assets |
|
$ |
489 |
|
|
$ |
360 |
|
Current liabilities, other |
|
|
(3 |
) |
|
|
(3 |
) |
Employee benefit obligations |
|
|
(1,099 |
) |
|
|
(909 |
) |
Accumulated other comprehensive income |
|
|
8 |
|
|
|
8 |
|
|
II-70
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Presented below are the amounts included in accumulated other comprehensive income and regulatory
assets at December 31, 2008 and 2007, related to the other postretirement benefit plans that had
not yet been recognized in net periodic postretirement benefit cost along with the estimated
amortization of such amounts for 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior Service |
|
Net(Gain) |
|
Transition |
|
|
Cost |
|
Loss |
|
Obligation |
|
|
(in millions) |
Balance at December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
3 |
|
|
$ |
5 |
|
|
$ |
|
|
Regulatory assets |
|
|
88 |
|
|
|
335 |
|
|
|
66 |
|
|
Total |
|
$ |
91 |
|
|
$ |
340 |
|
|
$ |
66 |
|
|
Balance at December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
4 |
|
|
$ |
4 |
|
|
$ |
|
|
Regulatory assets |
|
|
99 |
|
|
|
177 |
|
|
|
84 |
|
|
Total |
|
$ |
103 |
|
|
$ |
181 |
|
|
$ |
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated amortization as net periodic
postretirement benefit cost in 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Regulatory assets |
|
|
9 |
|
|
|
5 |
|
|
|
15 |
|
|
Total |
|
$ |
9 |
|
|
$ |
5 |
|
|
$ |
15 |
|
|
The components of other comprehensive income, along with the changes in the balance of regulatory
assets, related to the other postretirement benefit plans for the 15-month period ended December
31, 2008 and the 12-month period ended September 30, 2007 are presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
Comprehensive
Income |
|
Regulatory
Assets |
|
|
(in millions) |
Balance at December 31, 2006 |
|
$ |
14 |
|
|
$ |
539 |
|
Net gain |
|
|
(6 |
) |
|
|
(141 |
) |
Change in prior service costs |
|
|
|
|
|
|
|
|
Reclassification adjustments: |
|
|
|
|
|
|
|
|
Amortization of transition obligation |
|
|
|
|
|
|
(15 |
) |
Amortization of prior service costs |
|
|
|
|
|
|
(9 |
) |
Amortization of net gain |
|
|
|
|
|
|
(14 |
) |
|
Total reclassification adjustments |
|
|
|
|
|
|
(38 |
) |
|
Total change |
|
|
(6 |
) |
|
|
(179 |
) |
|
Balance at December 31, 2007 |
|
|
8 |
|
|
|
360 |
|
Net loss |
|
|
1 |
|
|
|
166 |
|
Change in prior service costs |
|
|
|
|
|
|
|
|
Reclassification adjustments: |
|
|
|
|
|
|
|
|
Amortization of transition obligation |
|
|
|
|
|
|
(18 |
) |
Amortization of prior service costs |
|
|
(1 |
) |
|
|
(11 |
) |
Amortization of net gain |
|
|
|
|
|
|
(8 |
) |
|
Total reclassification adjustments |
|
|
(1 |
) |
|
|
(37 |
) |
|
Total change |
|
|
|
|
|
|
129 |
|
|
Balance at December 31, 2008 |
|
$ |
8 |
|
|
$ |
489 |
|
|
II-71
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Components of the other postretirement benefit plans net periodic cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
|
(in millions) |
Service cost |
|
$ |
28 |
|
|
$ |
27 |
|
|
$ |
30 |
|
Interest cost |
|
|
111 |
|
|
|
107 |
|
|
|
98 |
|
Expected return on plan assets |
|
|
(59 |
) |
|
|
(52 |
) |
|
|
(49 |
) |
Net amortization |
|
|
31 |
|
|
|
38 |
|
|
|
43 |
|
|
Net postretirement cost |
|
$ |
111 |
|
|
$ |
120 |
|
|
$ |
122 |
|
|
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Medicare Act) provides
a 28% prescription drug subsidy for Medicare eligible retirees. The effect of the subsidy reduced
Southern Companys expenses for the years ended December 31, 2008, 2007, and 2006 by approximately
$35 million, $35 million, and $39 million, respectively.
Future benefit payments, including prescription drug benefits, reflect expected future service and
are estimated based on assumptions used to measure the accumulated benefit obligation for the
postretirement plans. Estimated benefit payments are reduced by drug subsidy receipts expected as
a result of the Medicare Act as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Payments |
|
Subsidy Receipts |
|
Total |
|
|
(in millions) |
2009 |
|
$ |
100 |
|
|
$ |
(8 |
) |
|
$ |
92 |
|
2010 |
|
|
110 |
|
|
|
(10 |
) |
|
|
100 |
|
2011 |
|
|
120 |
|
|
|
(11 |
) |
|
|
109 |
|
2012 |
|
|
127 |
|
|
|
(13 |
) |
|
|
114 |
|
2013 |
|
|
134 |
|
|
|
(14 |
) |
|
|
120 |
|
2014 to 2018 |
|
|
746 |
|
|
|
(100 |
) |
|
|
646 |
|
|
Actuarial Assumptions
The weighted average rates assumed in the actuarial calculations used to determine both the benefit
obligations as of the measurement date and the net periodic costs for the pension and other
postretirement benefit plans for the following year are presented below. Net periodic benefit
costs were calculated in 2005 for the 2006 plan year using a discount rate of 5.50%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
Discount |
|
|
6.75 |
% |
|
|
6.30 |
% |
|
|
6.00 |
% |
Annual salary increase |
|
|
3.75 |
|
|
|
3.75 |
|
|
|
3.50 |
|
Long-term return on plan assets |
|
|
8.50 |
|
|
|
8.50 |
|
|
|
8.50 |
|
|
The Company determined the long-term rate of return based on historical asset class returns and
current market conditions, taking into account the diversification benefits of investing in
multiple asset classes.
An additional assumption used in measuring the APBO was a weighted average medical care cost trend
rate of 9.15% for 2009, decreasing gradually to 5.50% through the year 2015 and remaining at that
level thereafter. An annual increase or decrease in the assumed medical care cost trend rate of 1%
would affect the APBO and the service and interest cost components at December 31, 2008 as follows:
|
|
|
|
|
|
|
|
|
|
|
1 Percent |
|
1 Percent |
|
|
Increase |
|
Decrease |
|
|
(in millions) |
Benefit obligation |
|
$ |
122 |
|
|
$ |
126 |
|
Service and interest costs |
|
|
9 |
|
|
|
7 |
|
|
II-72
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
Employee Savings Plan
Southern Company also sponsors a 401(k) defined contribution plan covering substantially all
employees. The Company provides an 85% matching contribution up to 6% of an employees base
salary. Prior to November 2006, the Company matched employee contributions at a rate of 75% up to
6% of the employees base salary. Total matching contributions made to the plan for 2008, 2007,
and 2006 were $76 million, $73 million, and $62 million, respectively.
3. CONTINGENCIES AND REGULATORY MATTERS
General Litigation Matters
Southern Company is subject to certain claims and legal actions arising in the ordinary course of
business. In addition, Southern Companys business activities are subject to extensive
governmental regulation related to public health and the environment. Litigation over
environmental issues and claims of various types, including property damage, personal injury,
common law nuisance, and citizen enforcement of environmental requirements such as opacity and air
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, 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.
Mirant Matters
Mirant Corporation (Mirant) was an energy company with businesses that included independent power
projects and energy trading and risk management companies in the U.S. and selected other countries.
It was a wholly-owned subsidiary of Southern Company until its initial public offering in October
2000. In April 2001, Southern Company completed a spin-off to its shareholders of its remaining
ownership, and Mirant became an independent corporate entity.
Mirant Bankruptcy
In July 2003, Mirant and certain of its affiliates filed voluntary petitions for relief under
Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the Northern District of Texas.
The Bankruptcy Court entered an order confirming Mirants plan of reorganization in December 2005,
and Mirant announced that this plan became effective in January 2006. As part of the plan, Mirant
transferred substantially all of its assets and its restructured debt to a new corporation that
adopted the name Mirant Corporation (Reorganized Mirant).
Southern Company has certain contingent liabilities associated with guarantees of contractual
commitments made by Mirants subsidiaries discussed in Note 7 under Guarantees and with various
lawsuits related to Mirant discussed below. Also, Southern Company has joint and several liability
with Mirant regarding the joint consolidated federal income tax returns through 2001, as discussed
in Note 5. In December 2004, as a result of concluding an IRS audit for the tax years 2000 and
2001, Southern Company paid approximately $39 million in additional tax and interest related to
Mirant tax items and filed a claim in Mirants bankruptcy case for that amount. Through December
2008, Southern Company received from the IRS approximately $38 million in refunds related to
Mirant. Southern Company believes it has a right to recoup the $39 million tax payment owed by
Mirant from such tax refunds. As a result, Southern Company intends to retain the tax refunds and
reduce its claim against Mirant for the payment of Mirant taxes by the amount of such refunds. MC
Asset Recovery, a special purpose subsidiary of Reorganized Mirant, has objected to and sought to
equitably subordinate the Southern Company tax claim in its fraudulent
II-73
NOTES (continued)
Southern Company and Subsidiary Companies 2008 Annual Report
transfer litigation against Southern Company. Southern Company has reserved the remaining amount
with respect to its Mirant tax claim.
Under the terms of the separation agreements entered into in connection with the spin-off, Mirant
agreed to indemnify Southern Company for costs associated with these guarantees, lawsuits, and
additional IRS assessments. However, as a result of Mirants bankruptcy, Southern Company sought
reimbursement as an unsecured creditor in Mirants Chapter 11 proceeding. As part of a complaint
filed against Southern Company in June 2005 and amended thereafter, Mirant and The Official
Committee of Unsecured Creditors of Mirant Corporation (Unsecured Creditors Committee) objected to
and sought equitable subordination of Southern Companys claims, and Mirant moved to reject the
separation agreements entered into in connection with the spin-off. MC Asset Recovery has been
substituted as plaintiff in the complaint. If Southern Companys claims for indemnification with
respect to these, or any additional future payments, are allowed, then Mirants indemnity
obligations to Southern Company would constitute unsecured claims against Mirant entitled to stock
in Reorganized Mirant. The final outcome of this matter cannot now be determined.
MC Asset Recovery Litigation
In June 2005, Mirant, as a debtor in possession, and the Unsecured Creditors Committee filed a
complaint against Southern Company in the U.S. Bankruptcy Court for the Northern District of Texas,
which was amended in July 2005, February 2006, May 2006, and March 2007.
In December 2005, the Bankruptcy Court entered an order authorizing the transfer of this
proceeding, along with certain other actions, to MC Asset Recovery. Under that order, Reorganized
Mirant is obligated to fund up to $20 million in professional fees in connection with the lawsuits,
as well as certain additional amounts. Any net recoveries from these lawsuits will be distributed
to, and shared equally by, certain unsecured creditors and the original equity holders. In January
2006, the U.S. District Court for the Northern District of Texas substituted MC Asset Recovery as
plaintiff.
The complaint, as amended in March 2007, alleges that Southern Company caused Mirant to engage in
certain fraudulent transfers and to pay illegal dividends to Southern Company prior to the
spin-off. The alleged fraudulent transfers and illegal dividends include without