SOUTHERN COMPANY
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission |
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Registrant, State of Incorporation, |
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I.R.S. Employer |
File Number |
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Address and Telephone Number |
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Identification No. |
1-3526
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The Southern Company
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58-0690070 |
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(A Delaware Corporation) |
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30 Ivan Allen Jr. Boulevard, N.W. |
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Atlanta, Georgia 30308 |
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(404) 506-5000 |
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1-3164
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Alabama Power Company
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63-0004250 |
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(An Alabama Corporation) |
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600 North 18th Street |
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Birmingham, Alabama 35291 |
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(205) 257-1000 |
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1-6468
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Georgia Power Company
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58-0257110 |
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(A Georgia Corporation) |
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241 Ralph McGill Boulevard, N.E. |
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Atlanta, Georgia 30308 |
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(404) 506-6526 |
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0-2429
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Gulf Power Company
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59-0276810 |
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(A Florida Corporation) |
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One Energy Place |
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Pensacola, Florida 32520 |
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(850) 444-6111 |
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001-11229
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Mississippi Power Company
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64-0205820 |
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(A Mississippi Corporation) |
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2992 West Beach |
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Gulfport, Mississippi 39501 |
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(228) 864-1211 |
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333-98553
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Southern Power Company
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58-2598670 |
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(A Delaware Corporation) |
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30 Ivan Allen Jr. Boulevard, N.W. |
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Atlanta, Georgia 30308 |
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(404) 506-5000 |
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Indicate by check mark whether the registrants (1) have filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrants were required to file such reports), and (2) have been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrants have submitted electronically and posted on their
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrants were required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large |
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Smaller |
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Accelerated |
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Accelerated |
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Non-accelerated |
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Reporting |
Registrant |
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Filer |
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Filer |
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Filer |
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Company |
The Southern Company |
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X |
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Alabama Power Company |
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X |
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Georgia Power Company |
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X |
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Gulf Power Company |
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X |
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Mississippi Power Company |
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X |
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Southern Power Company |
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X |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) Yes o
No þ (Response applicable to all registrants.)
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Description of |
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Shares Outstanding |
Registrant |
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Common Stock |
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at September 30, 2009 |
The Southern Company |
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Par Value $5 Per Share |
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800,211,378 |
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Alabama Power Company |
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Par Value $40 Per Share |
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28,850,000 |
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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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This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia
Power Company, Gulf Power Company, Mississippi Power Company, and Southern Power Company.
Information contained herein relating to any individual registrant is filed by such registrant on
its own behalf. Each registrant makes no representation as to information relating to the other
registrants.
2
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2009
3
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2009
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Page |
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Number |
PART II OTHER INFORMATION
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Item 1. |
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173 |
Item 1A. |
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173 |
Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds |
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Inapplicable |
Item 3. |
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Defaults Upon Senior Securities |
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Inapplicable |
Item 4. |
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Submission of Matters to a Vote of Security Holders |
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Inapplicable |
Item 5. |
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Other Information |
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Inapplicable |
Item 6. |
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174 |
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177 |
4
DEFINITIONS
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Term |
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Meaning |
2007 Retail Rate Plan
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Georgia Powers retail rate plan for the years 2008 through 2010 |
Alabama Power
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Alabama Power Company |
Clean Air Act
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Clean Air Act Amendments of 1990 |
DOE
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U.S. Department of Energy |
Duke Energy
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Duke Energy Corporation |
ECO Plan
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Mississippi Powers Environmental Compliance Overview Plan |
EPA
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U.S. Environmental Protection Agency |
FASB
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Financial Accounting Standards Board |
FERC
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Federal Energy Regulatory Commission |
Fitch
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Fitch Ratings, Inc. |
Form 10-K
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Combined Annual Report on Form 10-K of Southern Company,
Alabama Power, Georgia Power, Gulf Power, Mississippi Power,
and Southern Power for the year ended December 31, 2008 and,
with respect to Southern Company, the subsequently revised
audited financial statements included in the Current Report on
Form 8-K filed May 8, 2009 |
Georgia Power
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Georgia Power Company |
Gulf Power
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Gulf Power Company |
IGCC
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Integrated coal gasification combined cycle |
IIC
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Intercompany Interchange Contract |
Internal Revenue Code
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Internal Revenue Code of 1986, as amended |
IRS
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Internal Revenue Service |
KWH
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Kilowatt-hour |
LIBOR
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London Interbank Offered Rate |
Mirant
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Mirant Corporation |
Mississippi Power
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Mississippi Power Company |
mmBtu
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Million British thermal unit |
Moodys
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Moodys Investors Service |
MW
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Megawatt |
MWH
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Megawatt-hour |
NRC
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Nuclear Regulatory Commission |
NSR
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New Source Review |
OCI
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Other Comprehensive Income |
PEP
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Performance Evaluation Plan |
Power Pool
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The operating arrangement whereby the integrated generating
resources of the traditional operating companies and Southern
Power are subject to joint commitment and dispatch in order to
serve their combined load obligations |
PPA
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Power Purchase Agreement |
PSC
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Public Service Commission |
Rate ECR
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Alabama Powers energy cost recovery rate mechanism |
registrants
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Southern Company, Alabama Power, Georgia Power, Gulf Power,
Mississippi Power, and Southern Power |
SCS
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Southern Company Services, Inc. |
SEC
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Securities and Exchange Commission |
Southern Company
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The Southern Company |
Southern Company system
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Southern Company, the traditional operating companies, Southern
Power, and other subsidiaries |
5
DEFINITIONS
(continued)
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Term |
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Meaning |
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 |
Standard and Poors
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Standard and Poors Ratings Services, a division of The McGraw Hill Companies, Inc. |
traditional operating companies
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Alabama Power, Georgia Power, Gulf Power, and Mississippi Power |
Westinghouse
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Westinghouse Electric Company LLC |
wholesale revenues
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revenues generated from sales for resale |
6
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking
statements include, among other things, statements concerning the strategic goals for the wholesale
business, retail sales, customer growth, storm damage cost recovery and repairs, fuel cost recovery
and other rate actions, environmental regulations and expenditures, retail return on equity
projections, access to sources of capital, projections for postretirement benefit and nuclear
decommissioning trust contributions, financing activities, start and completion of construction
projects, plans and estimated costs for new generation resources, impacts of adoption of new
accounting rules, potential exemptions from ad valorem taxation of the Kemper IGCC project,
unrecognized tax benefits related to leveraged lease transactions, impact of the American Recovery
and Reinvestment Act of 2009, 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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ability to control costs and avoid cost overruns during the development and construction of
facilities; |
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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 or other influenza, or other similar occurrences; |
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the direct or indirect effects on Southern Companys business resulting from incidents
similar to the August 2003 power outage in the Northeast; |
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the effect of accounting pronouncements issued periodically by standard setting bodies; and |
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other factors discussed elsewhere herein and in other reports (including the Form 10-K)
filed by the registrants from time to time with the SEC. |
Each registrant expressly disclaims any obligation to update any forward-looking statements.
7
THE SOUTHERN COMPANY AND
SUBSIDIARY COMPANIES
8
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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For the Three Months |
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For the Nine Months |
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Ended September 30, |
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Ended September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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(in thousands) |
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(in thousands) |
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Operating Revenues: |
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Retail revenues |
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$ |
3,997,659 |
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$ |
4,478,292 |
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$ |
10,355,330 |
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$ |
10,933,784 |
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Wholesale revenues |
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519,122 |
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774,847 |
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1,408,286 |
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1,880,311 |
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Other electric revenues |
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139,869 |
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142,459 |
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391,070 |
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413,811 |
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Other revenues |
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24,832 |
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30,901 |
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78,267 |
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96,690 |
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Total operating revenues |
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4,681,482 |
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5,426,499 |
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12,232,953 |
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13,324,596 |
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Operating Expenses: |
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Fuel |
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1,733,527 |
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2,152,828 |
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4,588,932 |
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5,226,845 |
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Purchased power |
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166,791 |
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378,259 |
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407,623 |
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668,423 |
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Other operations and maintenance |
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820,889 |
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908,404 |
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2,523,184 |
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2,720,219 |
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MC Asset Recovery litigation settlement |
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202,000 |
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Depreciation and amortization |
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332,117 |
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367,014 |
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1,099,216 |
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1,069,644 |
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Taxes other than income taxes |
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212,882 |
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215,298 |
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620,851 |
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602,612 |
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Total operating expenses |
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3,266,206 |
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4,021,803 |
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9,441,806 |
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10,287,743 |
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Operating Income |
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1,415,276 |
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1,404,696 |
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2,791,147 |
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3,036,853 |
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Other Income and (Expense): |
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Allowance for equity funds used during construction |
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51,061 |
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35,541 |
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141,173 |
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111,612 |
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Interest income |
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6,013 |
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9,744 |
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17,791 |
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20,737 |
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Equity in income (losses) of unconsolidated subsidiaries |
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(34 |
) |
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4,704 |
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(330 |
) |
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6,129 |
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Leveraged lease income (losses) |
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6,578 |
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6,343 |
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24,695 |
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(53,611 |
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Gain on disposition of lease termination |
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26,300 |
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Loss on extinguishment of debt |
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(17,184 |
) |
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Interest expense, net of amounts capitalized |
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(226,345 |
) |
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(219,066 |
) |
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(684,902 |
) |
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(665,123 |
) |
Other income (expense), net |
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(10,432 |
) |
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(10,816 |
) |
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(26,963 |
) |
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(14,385 |
) |
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Total other income and (expense) |
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(173,159 |
) |
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(173,550 |
) |
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(519,420 |
) |
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(594,641 |
) |
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Earnings Before Income Taxes |
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1,242,117 |
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1,231,146 |
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2,271,727 |
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2,442,212 |
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Income taxes |
|
|
435,947 |
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|
434,515 |
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|
828,833 |
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|
837,605 |
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Consolidated Net Income |
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|
806,170 |
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|
|
796,631 |
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|
1,442,894 |
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1,604,607 |
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Dividends on Preferred and Preference Stock of Subsidiaries |
|
|
16,195 |
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|
16,195 |
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|
|
48,585 |
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|
48,585 |
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Consolidated Net Income After Dividends on
Preferred and Preference Stock of Subsidiaries |
|
$ |
789,975 |
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$ |
780,436 |
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$ |
1,394,309 |
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$ |
1,556,022 |
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Common Stock Data: |
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Earnings per share (EPS) - |
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Basic EPS |
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$ |
0.99 |
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$ |
1.01 |
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$ |
1.77 |
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$ |
2.02 |
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Diluted EPS |
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$ |
0.99 |
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$ |
1.00 |
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$ |
1.76 |
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$ |
2.01 |
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Average number of shares of common
stock outstanding (in thousands) |
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Basic |
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|
798,418 |
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|
772,622 |
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|
789,675 |
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|
769,298 |
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Diluted |
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|
800,178 |
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|
776,903 |
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|
|
791,259 |
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|
773,451 |
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Cash dividends paid per share of common stock |
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$ |
0.4375 |
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$ |
0.4200 |
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$ |
1.2950 |
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$ |
1.2425 |
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The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
9
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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For the Nine Months |
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Ended September 30, |
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2009 |
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2008 |
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(in thousands) |
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Operating Activities: |
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|
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Consolidated net income |
|
$ |
1,442,894 |
|
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$ |
1,604,607 |
|
Adjustments to reconcile consolidated net income
to net cash provided from operating activities |
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|
|
|
|
|
|
Depreciation and amortization, total |
|
|
1,310,854 |
|
|
|
1,265,696 |
|
Deferred income taxes and investment tax credits |
|
|
(14,565 |
) |
|
|
46,006 |
|
Deferred revenues |
|
|
(40,781 |
) |
|
|
94,924 |
|
Allowance for equity funds used during construction |
|
|
(141,173 |
) |
|
|
(111,612 |
) |
Equity in income (losses) of unconsolidated subsidiaries |
|
|
330 |
|
|
|
(6,129 |
) |
Leveraged lease income (losses) |
|
|
(24,695 |
) |
|
|
53,611 |
|
Gain on disposition of lease termination |
|
|
(26,300 |
) |
|
|
|
|
Loss on extinguishment of debt |
|
|
17,184 |
|
|
|
|
|
Pension, postretirement, and other employee benefits |
|
|
42,775 |
|
|
|
75,965 |
|
Stock option expense |
|
|
20,850 |
|
|
|
17,730 |
|
Hedge settlements |
|
|
(16,167 |
) |
|
|
17,289 |
|
Other, net |
|
|
10,036 |
|
|
|
(56,200 |
) |
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
-Receivables |
|
|
319,286 |
|
|
|
(522,004 |
) |
-Fossil fuel stock |
|
|
(361,520 |
) |
|
|
(112,328 |
) |
-Materials and supplies |
|
|
(40,811 |
) |
|
|
(25,347 |
) |
-Other current assets |
|
|
(50,977 |
) |
|
|
(33,896 |
) |
-Accounts payable |
|
|
(210,459 |
) |
|
|
(45,079 |
) |
-Accrued taxes |
|
|
238,988 |
|
|
|
409,684 |
|
-Accrued compensation |
|
|
(273,349 |
) |
|
|
(86,436 |
) |
-Other current liabilities |
|
|
157,384 |
|
|
|
49,651 |
|
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
2,359,784 |
|
|
|
2,636,132 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(3,179,009 |
) |
|
|
(2,860,118 |
) |
Investment in restricted cash from pollution control revenue bonds |
|
|
(49,528 |
) |
|
|
(5,454 |
) |
Distribution of restricted cash from pollution control revenue bonds |
|
|
90,088 |
|
|
|
46,782 |
|
Nuclear decommissioning trust fund purchases |
|
|
(1,066,688 |
) |
|
|
(581,171 |
) |
Nuclear decommissioning trust fund sales |
|
|
1,019,401 |
|
|
|
574,291 |
|
Proceeds from property sales |
|
|
339,911 |
|
|
|
5,718 |
|
Cost of removal, net of salvage |
|
|
(85,022 |
) |
|
|
(74,714 |
) |
Change in construction payables |
|
|
110,265 |
|
|
|
(8,703 |
) |
Other investing activities |
|
|
(35,766 |
) |
|
|
(76,402 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(2,856,348 |
) |
|
|
(2,979,771 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Increase in notes payable, net |
|
|
118,124 |
|
|
|
62,302 |
|
Proceeds |
|
|
|
|
|
|
|
|
Long-term debt issuances |
|
|
2,216,010 |
|
|
|
2,416,035 |
|
Common stock issuances |
|
|
668,529 |
|
|
|
381,200 |
|
Redemptions |
|
|
|
|
|
|
|
|
Long-term debt |
|
|
(1,229,484 |
) |
|
|
(769,789 |
) |
Redeemable preferred stock |
|
|
|
|
|
|
(125,000 |
) |
Payment of common stock dividends |
|
|
(1,018,928 |
) |
|
|
(954,438 |
) |
Payment of dividends on preferred and preference stock of subsidiaries |
|
|
(48,675 |
) |
|
|
(49,497 |
) |
Other financing activities |
|
|
(18,732 |
) |
|
|
(11,705 |
) |
|
|
|
|
|
|
|
Net cash provided from financing activities |
|
|
686,844 |
|
|
|
949,108 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
190,280 |
|
|
|
605,469 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
416,581 |
|
|
|
200,550 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
606,861 |
|
|
$ |
806,019 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $59,849 and $54,404 capitalized for 2009 and 2008, respectively) |
|
$ |
589,919 |
|
|
$ |
575,597 |
|
Income taxes (net of refunds) |
|
$ |
644,541 |
|
|
$ |
489,600 |
|
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
10
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Assets |
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
606,861 |
|
|
$ |
416,581 |
|
Restricted cash and cash equivalents |
|
|
66,403 |
|
|
|
102,537 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
1,234,810 |
|
|
|
1,053,674 |
|
Unbilled revenues |
|
|
394,815 |
|
|
|
320,439 |
|
Under recovered regulatory clause revenues |
|
|
416,805 |
|
|
|
646,318 |
|
Other accounts and notes receivable |
|
|
270,348 |
|
|
|
301,028 |
|
Accumulated provision for uncollectible accounts |
|
|
(29,044 |
) |
|
|
(26,326 |
) |
Fossil fuel stock, at average cost |
|
|
1,373,037 |
|
|
|
1,018,314 |
|
Materials and supplies, at average cost |
|
|
795,622 |
|
|
|
756,746 |
|
Vacation pay |
|
|
135,061 |
|
|
|
140,283 |
|
Prepaid expenses |
|
|
372,951 |
|
|
|
301,570 |
|
Other regulatory assets, current |
|
|
193,710 |
|
|
|
275,424 |
|
Other current assets |
|
|
50,554 |
|
|
|
51,044 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
5,881,933 |
|
|
|
5,357,632 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
52,326,502 |
|
|
|
50,618,219 |
|
Less accumulated depreciation |
|
|
18,985,998 |
|
|
|
18,285,800 |
|
|
|
|
|
|
|
|
Plant in service, net of depreciation |
|
|
33,340,504 |
|
|
|
32,332,419 |
|
Nuclear fuel, at amortized cost |
|
|
536,191 |
|
|
|
510,274 |
|
Construction work in progress |
|
|
4,265,084 |
|
|
|
3,035,795 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
38,141,779 |
|
|
|
35,878,488 |
|
|
|
|
|
|
|
|
Other Property and Investments: |
|
|
|
|
|
|
|
|
Nuclear decommissioning trusts, at fair value |
|
|
1,060,161 |
|
|
|
864,396 |
|
Leveraged leases |
|
|
606,165 |
|
|
|
897,338 |
|
Miscellaneous property and investments |
|
|
228,594 |
|
|
|
226,757 |
|
|
|
|
|
|
|
|
Total other property and investments |
|
|
1,894,920 |
|
|
|
1,988,491 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
1,033,025 |
|
|
|
972,781 |
|
Unamortized debt issuance expense |
|
|
209,607 |
|
|
|
207,763 |
|
Unamortized loss on reacquired debt |
|
|
260,077 |
|
|
|
270,919 |
|
Deferred under recovered regulatory clause revenues |
|
|
317,780 |
|
|
|
606,483 |
|
Other regulatory assets, deferred |
|
|
2,404,534 |
|
|
|
2,636,217 |
|
Other deferred charges and assets |
|
|
380,552 |
|
|
|
428,432 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
4,605,575 |
|
|
|
5,122,595 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
50,524,207 |
|
|
$ |
48,347,206 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
11
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
412,295 |
|
|
$ |
616,415 |
|
Notes payable |
|
|
1,064,694 |
|
|
|
953,437 |
|
Accounts payable |
|
|
1,158,560 |
|
|
|
1,249,694 |
|
Customer deposits |
|
|
325,035 |
|
|
|
302,495 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Accrued income taxes |
|
|
176,299 |
|
|
|
195,922 |
|
Unrecognized tax benefits |
|
|
160,649 |
|
|
|
131,641 |
|
Other accrued taxes |
|
|
423,540 |
|
|
|
396,206 |
|
Accrued interest |
|
|
227,821 |
|
|
|
195,500 |
|
Accrued vacation pay |
|
|
168,955 |
|
|
|
178,519 |
|
Accrued compensation |
|
|
191,139 |
|
|
|
446,718 |
|
Liabilities from risk management activities |
|
|
147,464 |
|
|
|
260,977 |
|
Other regulatory liabilities, current |
|
|
422,199 |
|
|
|
78,360 |
|
Other current liabilities |
|
|
297,364 |
|
|
|
220,351 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
5,176,014 |
|
|
|
5,226,235 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
18,010,235 |
|
|
|
16,816,438 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
6,350,882 |
|
|
|
6,080,104 |
|
Deferred credits related to income taxes |
|
|
257,581 |
|
|
|
259,156 |
|
Accumulated deferred investment tax credits |
|
|
435,785 |
|
|
|
455,398 |
|
Employee benefit obligations |
|
|
2,023,883 |
|
|
|
2,057,424 |
|
Asset retirement obligations |
|
|
1,235,309 |
|
|
|
1,182,769 |
|
Other cost of removal obligations |
|
|
1,048,279 |
|
|
|
1,320,558 |
|
Other regulatory liabilities, deferred |
|
|
241,160 |
|
|
|
261,970 |
|
Other deferred credits and liabilities |
|
|
301,167 |
|
|
|
329,534 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
11,894,046 |
|
|
|
11,946,913 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
35,080,295 |
|
|
|
33,989,586 |
|
|
|
|
|
|
|
|
Redeemable Preferred Stock of Subsidiaries |
|
|
374,496 |
|
|
|
374,496 |
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, par value $5 per share |
|
|
|
|
|
|
|
|
Authorized 1 billion shares |
|
|
|
|
|
|
|
|
Issued September 30, 2009: 800,693,706 Shares; |
|
|
|
|
|
|
|
|
December 31, 2008: 777,615,751 Shares |
|
|
|
|
|
|
|
|
Treasury September 30, 2009: 482,328 Shares; |
|
|
|
|
|
|
|
|
December 31, 2008: 423,477 Shares |
|
|
|
|
|
|
|
|
Par value |
|
|
4,003,446 |
|
|
|
3,888,041 |
|
Paid-in capital |
|
|
2,469,185 |
|
|
|
1,892,802 |
|
Treasury, at cost |
|
|
(14,042 |
) |
|
|
(12,279 |
) |
Retained earnings |
|
|
7,987,893 |
|
|
|
7,611,977 |
|
Accumulated other comprehensive loss |
|
|
(84,433 |
) |
|
|
(104,784 |
) |
|
|
|
|
|
|
|
Total Common Stockholders Equity |
|
|
14,362,049 |
|
|
|
13,275,757 |
|
Preferred and Preference Stock of Subsidiaries |
|
|
707,367 |
|
|
|
707,367 |
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
15,069,416 |
|
|
|
13,983,124 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
50,524,207 |
|
|
$ |
48,347,206 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
12
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Consolidated Net Income |
|
$ |
806,170 |
|
|
$ |
796,631 |
|
|
$ |
1,442,894 |
|
|
$ |
1,604,607 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $(1,356), $11,996, $(2,338),
and $579, respectively |
|
|
(2,151 |
) |
|
|
18,603 |
|
|
|
(3,815 |
) |
|
|
690 |
|
Reclassification adjustment for amounts included in net income,
net of tax of $4,610, $1,730, $13,073, and $5,879, respectively |
|
|
7,339 |
|
|
|
2,709 |
|
|
|
20,807 |
|
|
|
9,217 |
|
Marketable securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $(1,056), $163, $239,
and $(2,293), respectively |
|
|
(1,359 |
) |
|
|
86 |
|
|
|
2,310 |
|
|
|
(3,940 |
) |
Reclassification adjustment for amounts included in net income,
net of tax of $-, $3, $-, and $3, respectively |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
4 |
|
Pension and other post retirement benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for amounts included in net income,
net of tax of $222, $237, $665, and $773, respectively |
|
|
350 |
|
|
|
376 |
|
|
|
1,049 |
|
|
|
1,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
4,179 |
|
|
|
21,778 |
|
|
|
20,351 |
|
|
|
7,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred and preference stock of subsidiaries |
|
|
(16,195 |
) |
|
|
(16,195 |
) |
|
|
(48,585 |
) |
|
|
(48,585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
794,154 |
|
|
$ |
802,214 |
|
|
$ |
1,414,660 |
|
|
$ |
1,563,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.
13
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2009 vs. THIRD QUARTER 2008
AND
YEAR-TO-DATE 2009 vs. YEAR-TO-DATE 2008
OVERVIEW
Discussion of the results of operations is focused on Southern Companys primary business of
electricity sales in the Southeast by the traditional operating companies Alabama Power, Georgia
Power, Gulf Power, and Mississippi Power and Southern Power. The traditional operating companies
are vertically integrated utilities providing electric service in four Southeastern states.
Southern Power constructs, acquires, owns, and manages generation assets and sells electricity at
market-based rates in the wholesale market. Southern Companys other business activities include
investments in leveraged lease projects and telecommunications. For additional information on
these businesses, see BUSINESS The Southern Company System Traditional Operating Companies,
Southern Power, and Other Businesses in Item 1 of the Form 10-K.
Southern Company continues to focus on several key performance indicators. These indicators include
customer satisfaction, plant availability, system reliability, and earnings per share. For
additional information on these indicators, see MANAGEMENTS DISCUSSION AND ANALYSIS OVERVIEW
Key Performance Indicators of Southern Company in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$9.6
|
|
1.2
|
|
$(161.7)
|
|
(10.4) |
|
Southern Companys third quarter 2009 net income after dividends on preferred and preference stock
of subsidiaries was $790.0 million ($0.99 per share) compared to $780.4 million ($1.01 per share)
for the corresponding period in 2008. The increase for the third quarter 2009 when compared to the
corresponding period in 2008 was primarily the result of an increase in revenues from customer
charges at Alabama Power, increased recognition of environmental compliance cost recovery revenues
at Georgia Power in accordance with its 2007 Retail Rate Plan, lower operations and maintenance
expenses, amortization of the regulatory liability related to other cost of removal obligations at
Georgia Power, and an increase in allowance for equity funds used during construction (AFUDC),
which is not taxable. The increase for the third quarter 2009 was partially offset by a decrease
in revenues from lower KWH demand by industrial customers, a decrease in revenues from
market-response rates to large commercial and industrial customers, and unfavorable weather as
compared to the corresponding period in 2008.
Southern Companys year-to-date 2009 net income after dividends on preferred and preference stock
of subsidiaries was $1.39 billion ($1.77 per share) compared to $1.56 billion ($2.02 per share) for
the corresponding period in 2008. The decrease for year-to-date 2009 when compared to the
corresponding period in 2008 was primarily the result of a litigation settlement with MC Asset
Recovery, LLC (MC Asset Recovery), a decrease in revenues from lower KWH demand by residential and
industrial customers, a decrease in revenues from market-response rates to large commercial and
industrial customers, unfavorable weather, higher depreciation and amortization, and higher
interest expense. The decrease for year-to-date 2009 was partially offset by an increase in
revenues from customer charges at Alabama Power, increased recognition of
environmental compliance cost recovery revenues at Georgia Power in accordance with its 2007 Retail
Rate Plan, lower operations and maintenance expenses, an increase in AFUDC, which is not taxable, a
2008 charge related to tax treatment of leveraged lease investments, and a gain on the early
termination of two international leveraged lease investments.
14
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$(480.6)
|
|
(10.7)
|
|
$(578.5)
|
|
(5.3) |
|
In the third quarter 2009, retail revenues were $4.00 billion compared to $4.48 billion for the
corresponding period in 2008.
For year-to-date 2009, retail revenues were $10.36 billion compared to $10.93 billion for the
corresponding period in 2008.
Details of the change to retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Year-to-Date |
|
|
2009 |
|
2009 |
|
|
(in millions) |
|
(% change) |
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
4,478.3 |
|
|
|
|
|
|
$ |
10,933.8 |
|
|
|
|
|
Estimated change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
4.5 |
|
|
|
0.1 |
|
|
|
92.3 |
|
|
|
0.8 |
|
Sales growth (decline) |
|
|
(54.1 |
) |
|
|
(1.2 |
) |
|
|
(195.3 |
) |
|
|
(1.8 |
) |
Weather |
|
|
(39.6 |
) |
|
|
(0.9 |
) |
|
|
(35.2 |
) |
|
|
(0.3 |
) |
Fuel and other cost recovery |
|
|
(391.4 |
) |
|
|
(8.7 |
) |
|
|
(440.3 |
) |
|
|
(4.0 |
) |
|
Retail current year |
|
$ |
3,997.7 |
|
|
|
(10.7 |
)% |
|
$ |
10,355.3 |
|
|
|
(5.3 |
)% |
|
Revenues associated with changes in rates and pricing increased in the third quarter and for
year-to-date 2009 when compared to the corresponding periods in 2008 primarily as a result of an
increase in revenues from customer charges at Alabama Power and increased recognition of
environmental compliance cost recovery revenues at Georgia Power in accordance with its 2007 Retail
Rate Plan, partially offset by a decrease in revenues from market-response rates to large
commercial and industrial customers.
Revenues attributable to changes in sales declined in the third quarter and for year-to-date 2009
when compared to the corresponding periods in 2008 due to decreases in weather-adjusted retail KWH
sales of 3.4% and 5.3%, respectively, resulting primarily from recessionary economic conditions.
For the third quarter 2009, weather-adjusted residential KWH sales remained flat, weather-adjusted
commercial KWH sales decreased 2.1%, and weather-adjusted industrial KWH sales decreased 9.3%. For
year-to-date 2009, weather-adjusted residential KWH sales remained flat, weather-adjusted
commercial KWH sales decreased 1.3%, and weather-adjusted industrial KWH sales decreased 14.6%.
Reduced demand in the primary metals, fabricated metal, chemical, and textiles sectors, as well as
reduced demand in the stone, clay, and glass sector, contributed most significantly to the
decreases in weather-adjusted industrial KWH sales in the third quarter and for year-to-date 2009
when compared to the corresponding periods in 2008. While weather-adjusted industrial KWH sales
for the third quarter 2009 decreased 9.3% when compared to the corresponding period in 2008,
weather-adjusted industrial KWH sales increased 12.0% when compared to the second quarter 2009.
Revenues resulting from changes in weather decreased in the third quarter and for year-to-date 2009
as a result of unfavorable weather when compared to the corresponding periods in 2008.
15
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and other cost recovery revenues decreased in the third quarter and for year-to-date 2009 when
compared to the corresponding periods in 2008. Electric rates for the traditional operating
companies include provisions to adjust billings for fluctuations in fuel costs, including the
energy component of purchased power costs. Under these provisions, fuel revenues generally equal
fuel expenses, including the fuel component of purchased power costs, and do not affect net income.
Wholesale Revenues
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$(255.7)
|
|
(33.0)
|
|
$(472.0)
|
|
(25.1) |
|
In the third quarter 2009, wholesale revenues were $519.1 million compared to $774.8 million for
the corresponding period in 2008. Wholesale fuel revenues, which are generally offset by wholesale
fuel expenses and do not affect net income, decreased $258.8 million in the third quarter 2009 when
compared to the corresponding period in 2008. Excluding wholesale fuel revenues, wholesale
revenues increased $3.1 million in the third quarter 2009 when compared to the corresponding period
in 2008. The increase was primarily the result of additional revenues associated with a new PPA at
Southern Powers Plant Franklin Unit 3 which began in January 2009.
For year-to-date 2009, wholesale revenues were $1.41 billion compared to $1.88 billion for the
corresponding period in 2008. Wholesale fuel revenues, which are generally offset by wholesale
fuel expenses and do not affect net income, decreased $484.8 million for year-to-date 2009 when
compared to the corresponding period in 2008. Excluding wholesale fuel revenues, wholesale
revenues increased $12.8 million for year-to-date 2009 when compared to the corresponding period in
2008. The increase was primarily the result of additional revenues associated with a new PPA at
Southern Powers Plant Franklin Unit 3 which began in January 2009, partially offset by fewer
short-term opportunity sales due to lower energy prices and reduced margins on short-term
opportunity sales when compared to the corresponding period in 2008.
Short-term opportunity sales are made at market-based rates that generally provide a margin above
Southern Companys variable cost to produce the energy.
Other Electric Revenues
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$(2.6)
|
|
(1.8)
|
|
$(22.7)
|
|
(5.5) |
|
In the third quarter 2009, other electric revenues were $139.9 million compared to $142.5 million
for the corresponding period in 2008. The decrease when compared to the corresponding period in
2008 was not material.
For year-to-date 2009, other electric revenues were $391.1 million compared to $413.8 million for
the corresponding period in 2008. The decrease was primarily the result of a $39.6 million
decrease in co-generation revenues due to lower gas prices and a decline in sales volume, partially
offset by a $7.3 million increase in customer fees. Revenues from co-generation are generally
offset by related expenses and do not affect net income.
16
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Revenues
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$(6.1)
|
|
(19.6)
|
|
$(18.4)
|
|
(19.1) |
|
In the third quarter 2009, other revenues were $24.8 million compared to $30.9 million for the
corresponding period in 2008. The decrease was primarily the result of a $5.9 million decrease in
revenues at SouthernLINC Wireless related to lower average revenue per subscriber and fewer
subscribers as a result of increased competition in the industry when compared to the corresponding
period in 2008.
For year-to-date 2009, other revenues were $78.3 million compared to $96.7 million for the
corresponding period in 2008. The decrease was primarily the result of an $18.0 million decrease
in revenues at SouthernLINC Wireless related to lower average revenue per subscriber and fewer
subscribers as a result of increased competition in the industry when compared to the corresponding
period in 2008.
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2009 |
|
Year-to-Date 2009 |
|
|
vs. |
|
vs. |
|
|
Third Quarter 2008 |
|
Year-to-Date 2008 |
|
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
Fuel* |
|
$ |
(419.3 |
) |
|
|
(19.5 |
) |
|
$ |
(637.9 |
) |
|
|
(12.2 |
) |
Purchased power |
|
|
(211.5 |
) |
|
|
(55.9 |
) |
|
|
(260.8 |
) |
|
|
(39.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fuel and purchased power expenses |
|
$ |
(630.8 |
) |
|
|
|
|
|
$ |
(898.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Fuel includes fuel purchased by the Southern Company system for tolling agreements where
power is generated by the provider and is included in purchased power when determining the average
cost of purchased power.
In the third quarter 2009, fuel and purchased power expenses were $1.90 billion compared to
$2.53 billion for the corresponding period in 2008. The decrease was primarily the result of a
$317.9 million net decrease related to total KWHs generated and purchased and a $312.9 million net
decrease in the average cost of fuel and purchased power when compared to the corresponding period
in 2008. The net decrease in the average cost of fuel and purchased power for the third quarter
2009 resulted primarily from lower gas prices and a significant increase in hydro generation due to
increased rainfall when compared to the corresponding period in 2008.
For year-to-date 2009, fuel and purchased power expenses were $5.00 billion compared to $5.90
billion for the corresponding period in 2008. The decrease was primarily the result of a $602.8
million net decrease related to total KWHs generated and purchased and a $295.9 million net
decrease in the average cost of fuel and purchased power when compared to the corresponding period
in 2008. The net decrease in the average cost of fuel and purchased power for year-to-date 2009
resulted primarily from lower gas prices and a significant increase in hydro generation due to
increased rainfall when compared to the corresponding period in 2008.
Fuel expenses at the traditional operating companies are generally offset by fuel revenues and do
not affect net income. See FUTURE EARNINGS POTENTIAL FERC and State PSC Matters Retail Fuel
Cost Recovery herein for additional information. Fuel expenses incurred under Southern Powers
PPAs are generally the responsibility of the counterparties and do not significantly affect net
income.
17
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of Southern Companys cost of generation and purchased power are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Third Quarter |
|
Percent |
|
Year-to-Date |
|
Year-to-Date |
|
Percent |
Average Cost |
|
2009 |
|
2008 |
|
Change |
|
2009 |
|
2008 |
|
Change |
|
|
(cents per net KWH) |
|
|
|
|
|
(cents per net KWH) |
|
|
|
|
Fuel |
|
|
3.42 |
|
|
|
3.96 |
|
|
|
(13.6 |
) |
|
|
3.39 |
|
|
|
3.46 |
|
|
|
(2.0 |
) |
Purchased power |
|
|
8.00 |
|
|
|
9.70 |
|
|
|
(17.5 |
) |
|
|
6.20 |
|
|
|
9.02 |
|
|
|
(31.3 |
) |
|
Energy purchases will vary depending on demand for energy within the Southern Company service area,
the market cost of available energy as compared to the cost of Southern Company system-generated
energy, and the availability of Southern Company system generation.
Other Operations and Maintenance Expenses
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$(87.5)
|
|
(9.6)
|
|
$(197.0)
|
|
(7.2) |
|
In the third quarter 2009, other operations and maintenance expenses were $820.9 million compared
to $908.4 million for the corresponding period in 2008. The decrease was primarily the result of a
$32.7 million decrease in fossil, hydro, and nuclear expenses mainly due to less planned spending
on outages and maintenance, as well as other cost containment activities, which were the result of
efforts to offset the effects of the recessionary economy; a $16.1 million decrease in transmission
and distribution expenses mainly due to lower maintenance expenses; a $9.6 million decrease in
expenses related to customer service and sales; a $4.3 million decrease in expenses related to
lower sales and fewer subscribers at SouthernLINC Wireless; and a $4.1 million decrease in
administrative and general expenses mainly due to a decrease in accrued expenses for the litigation
and workers compensation reserve.
For year-to-date 2009, other operations and maintenance expenses were $2.52 billion compared to
$2.72 billion for the corresponding period in 2008. The decrease was primarily the result of an
$80.0 million decrease in fossil, hydro, and nuclear expenses mainly due to less planned spending
on outages and maintenance, as well as other cost containment activities, which were the result of
efforts to offset the effects of the recessionary economy; a $57.1 million decrease in transmission
and distribution expenses mainly due to lower maintenance expenses, as well as other cost
containment activities; a $16.5 million decrease in expenses related to customer service and sales;
a $14.4 million decrease in expenses related to lower sales and fewer subscribers at SouthernLINC
Wireless; and a $13.9 million decrease in expenses related to lower litigation costs resulting from
the litigation settlement with MC Asset Recovery in the first quarter 2009, as well as the fourth
quarter 2008 settlement with the IRS regarding several leveraged lease investments. See Note (B)
to the Condensed Financial Statements under Mirant Matters MC Asset Recovery Litigation and
Income Tax Matters Leveraged Leases herein for additional information. Partially offsetting
the year-to-date 2009 decrease was a $15.8 million increase in administration and general expenses
largely related to the $29.4 million charge in the first quarter 2009 in connection with a
voluntary attrition program at Georgia Power under which 579 employees elected to resign their
positions effective March 31, 2009. Through the third quarter 2009, approximately two-thirds of
the $29.4 million charge was offset by lower salary and employee benefits costs, and the remaining
one-third will be offset during the fourth quarter 2009. This charge is not expected to have a
material impact on Southern Company financial statements for the year ending December 31, 2009.
18
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MC Asset Recovery Litigation Settlement
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
|
|
|
|
$202.0
|
|
N/M |
|
N/M Not Meaningful
In the first quarter 2009, Southern Company entered into a litigation settlement agreement
with MC Asset Recovery which resulted in a charge of $202.0 million. See Note (B) to the Condensed
Financial Statements under Mirant Matters MC Asset Recovery Litigation herein for additional
information.
Depreciation and Amortization
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$(34.9)
|
|
(9.5)
|
|
$29.6
|
|
2.8 |
|
In the third quarter 2009, depreciation and amortization was $332.1 million compared to $367.0
million for the corresponding period in 2008. The decrease was primarily the result of $54.0
million of amortization of the regulatory liability related to other cost of removal obligations as
authorized by the Georgia PSC, partially offset by an increase in plant in service related to
environmental, transmission, and distribution projects at Georgia Power.
For year-to-date 2009, depreciation and amortization was $1.10 billion compared to $1.07 billion
for the corresponding period in 2008. The increase was primarily the result of an increase in
plant in service related to environmental, transmission, and distribution projects at Alabama Power
and Georgia Power and the completion of Southern Powers Plant Franklin Unit 3 in June 2008, as
well as an increase in depreciation rates at Southern Power. The increase was partially offset by
$54.0 million of amortization of the regulatory liability related to other cost of removal
obligations as authorized by the Georgia PSC.
See FUTURE EARNINGS POTENTIAL FERC and State PSC Matters Retail Rate Matters herein for
additional information regarding the Georgia PSC order.
Taxes Other Than Income Taxes
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$(2.4)
|
|
(1.1)
|
|
$18.3
|
|
3.0 |
|
In the third quarter 2009, taxes other than income taxes were $212.9 million compared to $215.3
million for the corresponding period in 2008. The decrease when compared to the corresponding
period in 2008 was not material.
For year-to-date 2009, taxes other than income taxes were $620.9 million compared to $602.6 million
for the corresponding period in 2008. The increase was primarily the result of increases in state
and municipal public utility license tax bases at Alabama Power and increases in franchise fees at
Gulf Power. Increases in franchise fees are associated with increases in revenues from retail
energy sales.
19
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Allowance for Equity Funds Used During Construction
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$15.6
|
|
43.7
|
|
$29.6
|
|
26.5 |
|
In the third quarter 2009, AFUDC was $51.1 million compared to $35.5 million for the corresponding
period in 2008.
For year-to-date 2009, AFUDC was $141.2 million compared to $111.6 million for the corresponding
period in 2008.
The third quarter and year-to-date 2009 increases were primarily the result of additional
investments in environmental projects at Alabama Power and Gulf Power, as well as additional
investments in transmission and distribution projects at Alabama Power.
Leveraged Lease Income (Losses)
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$0.3
|
|
3.7
|
|
$78.3
|
|
146.1 |
|
In the third quarter 2009, leveraged lease income (losses) was $6.6 million compared to $6.3
million for the corresponding period in 2008. The increase when compared to the corresponding
period in 2008 was not material.
For year-to-date 2009, leveraged lease income (losses) was $24.7 million compared to $(53.6)
million for the corresponding period in 2008. Southern Company has several leveraged lease
investments in 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 year-to-date 2009 increase
was primarily the result of the 2008 application of certain accounting standards related to
leveraged leases, including a second quarter 2008 after tax charge of $51.2 million. See Note (B)
to the Condensed Financial Statements under Income Tax Matters
Leveraged Leases herein for
additional information.
Gain on Disposition of Lease Termination
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
|
|
|
|
$26.3
|
|
N/M |
|
N/M Not Meaningful
In the second quarter 2009, Southern Company terminated two international leveraged lease
investments early, which resulted in a gain of $26.3 million.
20
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loss on Extinguishment of Debt
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
|
|
|
|
$17.2
|
|
N/M |
|
N/M Not Meaningful
In the second quarter 2009, Southern Company terminated two international leveraged lease
investments early. The proceeds from the terminations were required to be used to extinguish all
debt related to leveraged lease investments, a portion of which had make-whole redemption
provisions which resulted in a loss of $17.2 million.
Interest Expense, Net of Amounts Capitalized
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$7.2
|
|
3.3
|
|
$19.8
|
|
3.0 |
|
In the third quarter 2009, interest expense, net of amounts capitalized was $226.3 million compared
to $219.1 million for the corresponding period in 2008. The increase when compared to the
corresponding period in 2008 was not material.
For year-to-date 2009, interest expense, net of amounts capitalized was $684.9 million compared to
$665.1 million for the corresponding period in 2008. The increase in expense was primarily the
result of an $83.0 million increase associated with $1.30 billion in additional debt outstanding at
September 30, 2009 compared to September 30, 2008. See MANAGEMENTS DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND LIQUIDITY Financing Activities of Southern Company in Item 7 of the
Form 10-K and herein for additional information. Partially offsetting this increase was a $44.3
million decrease related to lower average interest rates on existing variable rate debt, including
the impact of hedges, a $13.4 million decrease related to other interest charges, and $5.5 million
of additional capitalized interest when compared to the corresponding period in 2008.
Other Income (Expense), Net
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$0.4
|
|
3.6
|
|
$(12.6)
|
|
(87.4) |
|
In the third quarter 2009, other income (expense), net was $(10.4) million compared to $(10.8)
million for the corresponding period in 2008. The decrease in expense when compared to the
corresponding period in 2008 was not material.
For year-to-date 2009, other income (expense), net was $(27.0) million compared to $(14.4) million
for the corresponding period in 2008. The increase in expense was primarily the result of the
first quarter 2008 recognition of a $6.4 million fee received for participating in an asset auction
and a $6.0 million gain on the sale of an undeveloped tract of land to the Orlando Utilities
Commission.
21
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Taxes
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$1.4
|
|
0.3
|
|
$(8.8)
|
|
(1.0) |
|
In the third quarter 2009, income taxes were $435.9 million compared to $434.5 million for the
corresponding period in 2008. The increase was primarily the result of higher pre-tax earnings,
largely offset by the third quarter 2009 increase in AFUDC, which is not taxable. See Note (G) to
the Condensed Financial Statements under Effective Tax Rate herein for details regarding the
impact of AFUDC on the effective tax rate.
For year-to-date 2009, income taxes were $828.8 million compared to $837.6 million for the
corresponding period in 2008. The decrease was primarily the result of lower pre-tax earnings,
lower tax expense associated with the early termination of one of the international leveraged lease
investments and the extinguishment of the associated debt discussed previously under Gain on
Disposition of Lease Termination and Loss on Extinguishment of Debt, and the year-to-date
increase in AFUDC, which is not taxable. Partially offsetting this decrease was the $202.0 million
charge resulting from the litigation settlement with MC Asset Recovery in the first quarter 2009,
which has not been deducted for tax purposes. See Note (G) to the Condensed Financial Statements
under Effective Tax Rate herein for details regarding the impact of the early lease termination,
AFUDC, and the MC Asset Recovery litigation settlement on the effective tax rate.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Southern Companys
future earnings potential. The level of Southern Companys future earnings depends on numerous
factors that affect the opportunities, challenges, and risks of Southern Companys primary business
of selling electricity. These factors include the traditional operating companies ability to
maintain a constructive regulatory environment that continues to allow for the recovery of
prudently incurred costs during a time of increasing costs and the profitability of the competitive
wholesale supply business. Future earnings for the electricity business in the near term will
depend, in part, upon maintaining energy sales, 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, future acquisitions and construction of generating facilities, and the successful
remarketing of capacity as current contracts expire. Recessionary conditions have negatively
impacted sales for the traditional operating companies and have negatively impacted wholesale
capacity revenues at Southern Power. The current economic recession is expected to continue to
have a negative impact on energy sales, particularly to industrial and commercial customers. The
timing and extent of the economic recovery will impact future earnings. For additional information
relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENTS DISCUSSION AND ANALYSIS
FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental statutes and regulations
could affect earnings if such costs cannot continue to be fully recovered in rates on a timely
basis. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE
EARNINGS POTENTIAL Environmental
Matters of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company
under Environmental Matters in Item 8 of the Form 10-K for additional information.
22
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Carbon Dioxide Litigation
New York Case
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters -
Carbon Dioxide Litigation New York Case of Southern Company in Item 7 and Note 3 to the
financial statements of Southern Company under Environmental Matters Carbon Dioxide Litigation -
New York Case in Item 8 of the Form 10-K for additional information regarding carbon dioxide
litigation. On September 21, 2009, the U.S. Court of Appeals for the Second Circuit reversed the
district courts ruling, vacating the dismissal of the plaintiffs claim, and remanding the case to
the district court. This ruling is subject to potential reconsideration and appeal. Therefore,
the ultimate outcome of these matters cannot be determined at this time.
Kivalina Case
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters -
Carbon Dioxide Litigation Kivalina
Case of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company
under Environmental Matters Carbon Dioxide Litigation Kivalina Case in Item 8 of the Form
10-K for additional information regarding carbon dioxide litigation. On September 30, 2009, the
U.S. District Court for the Northern District of California granted the defendants motions to
dismiss the case based on lack of jurisdiction and ruled that the claims were barred by the
political question doctrine and by the plaintiffs failure to establish the standard for
determining that the defendants conduct caused the injury alleged. The ultimate outcome of this
matter may depend on appeals or other legal proceedings and cannot be determined at this time.
Air Quality
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters -
Environmental Statutes and Regulations Air Quality of Southern Company in Item 7 of the Form
10-K for additional information regarding the eight-hour ozone standard. On September 16, 2009,
the EPA announced that it would reconsider its March 2008 decision regarding the eight-hour ozone
standard, potentially resulting in a more stringent standard and designation of additional
nonattainment areas within Southern Companys service territory. The EPA is expected to propose
any revisions to the standard by December 2009 and issue a final decision by August 2010. The
impact of a more stringent standard will depend on the proposed and final regulations and
resolution of any legal challenges and cannot be determined at this time.
Water Quality
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters -
Environmental Statutes and Regulations Water Quality of Southern Company in Item 7 of the Form
10-K for additional information regarding the EPAs regulation of cooling water intake structures.
On April 1, 2009, the U.S. Supreme Court reversed the U.S. Court of Appeals for the Second
Circuits decision with respect to the rules use of cost-benefit analysis and held that the EPA
could consider costs in arriving at its standards and in providing variances from those standards
for existing power plant cooling water intake structures. Other aspects of the courts decision
were not appealed and remain unaffected by the U.S. Supreme Courts ruling. While the U.S. Supreme
Courts decision may ultimately result in greater flexibility for demonstrating compliance with the
standards, the full scope of the 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.
23
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Global Climate Issues
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters -
Global Climate Issues of Southern Company in Item 7 of the Form 10-K for information regarding the
potential for legislation and regulation addressing greenhouse gas emissions. On April 24, 2009,
the EPA published a proposed finding that certain greenhouse gas emissions from new motor vehicles
endanger public health and welfare due to climate change and, on September 28, 2009, the EPA
published a proposed rule regulating greenhouse gas emissions from new motor vehicles under the
Clean Air Act. The EPA has stated that finalization of this rule will cause carbon dioxide and
other greenhouse gases to become regulated pollutants under the Prevention of Significant
Deterioration preconstruction permit program and the Title V operating permit program, which both
apply to power plants. On October 27, 2009, the EPA published a proposed rule governing how these
programs would be applied to stationary sources, including power plants. The EPA has stated that
it expects to finalize its endangerment finding and proposed rules in March 2010. The ultimate
outcome of the endangerment finding and these proposed rules cannot be determined at this time and
will depend on additional regulatory action and potential legal challenges.
In addition, federal legislative proposals that would impose mandatory requirements related to
greenhouse gas emissions, renewable energy standards, and energy efficiency standards continue to
be actively considered in Congress, and the reduction of greenhouse gas emissions has been
identified as a high priority by the current Administration. On June 26, 2009, the American Clean
Energy and Security Act of 2009, which would impose mandatory greenhouse gas restrictions through
implementation of a cap and trade program, a renewable energy standard, and other measures, was
passed by the House of Representatives. Similar legislation is being considered by the Senate.
The ultimate outcome of these matters cannot be determined at this time; however, mandatory
restrictions on Southern Companys greenhouse gas emissions, or requirements relating to renewable
energy or energy efficiency, 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.
FERC and State PSC Matters
Market-Based Rate Authority
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL FERC Matters Market-Based
Rate Authority of Southern Company in Item 7 and Note 3 to the financial statements of Southern
Company under FERC Matters Market-Based Rate Authority in Item 8 of the Form 10-K for
information regarding market-based rate authority. In October 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 March 5, 2009,
the FERC accepted Southern Companys CBR tariff for filing. On March 25, 2009, the FERC accepted
Southern Companys compliance filing related to the MBR tariff and directed Southern Company to
commence the energy auction in 30 days. Southern Company commenced the energy auction on April 23,
2009. The FERC has determined that implementation of the energy auction in accordance with the MBR
tariff order adequately mitigates going forward any presumption of market power that Southern
Company may have
in the Southern Company retail service territory and adjacent market areas. The original
generation dominance proceeding initiated by the FERC in December 2004 remains pending before the
FERC. The ultimate outcome of this matter cannot be determined at this time.
24
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Fuel Cost Recovery
The traditional operating companies each have established fuel cost recovery rates approved by
their respective state PSCs. Over the past several years, the traditional operating companies have
experienced higher than expected fuel costs for coal, natural gas, and uranium. These higher fuel
costs have resulted in total under recovered fuel costs included in the balance sheets of Georgia
Power and Gulf Power of approximately $697 million at September 30, 2009. During the third quarter
2009, Alabama Power and Mississippi Power collected all previously under recovered fuel costs and,
as of September 30, 2009, have a total over recovered fuel balance of $66 million. The total under
recovered fuel costs included in the balance sheets of the traditional operating companies at
December 31, 2008 was $1.2 billion. Operating revenues are adjusted for differences in actual
recoverable fuel costs
and amounts billed in current regulated rates. Accordingly, changes to the billing factors will
have no significant effect on Southern Companys revenues or net income but will affect cash flow.
The traditional operating companies continuously monitor the under or over recovered fuel cost
balance. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters
Fuel Cost Recovery of Southern Company in Item 7 and Note 3 to the financial statements of
Southern Company under Alabama Power Retail Regulatory Matters, Georgia Power Retail Regulatory
Matters, and Gulf Power Retail Regulatory Matters in Item 8 of the Form 10-K for additional
information.
On March 10, 2009, the Georgia PSC granted Georgia Powers request to delay its fuel case filing
until September 4, 2009 and, on August 27, 2009, the Georgia PSC approved an additional delay in
the filing date to no later than December 15, 2009 (with new rates to be effective April 1, 2010).
Retail Rate Matters
Under the 2007 Retail Rate Plan, Georgia Powers earnings are evaluated against a retail return on
equity (ROE) range of 10.25% to 12.25%. In connection with the 2007 Retail Rate Plan, the Georgia
PSC ordered that Georgia Power file its next general base rate case by July 1, 2010; however, the
2007 Retail Rate Plan provided that Georgia Power may file for a general base rate increase in the
event its projected retail ROE falls below 10.25%.
The economic recession has significantly reduced Georgia Powers revenues upon which retail rates
were set under the 2007 Retail Rate Plan. Despite stringent efforts to reduce expenses, current
projections indicate Georgia Powers retail ROE will be less than 10.25% in both 2009 and 2010.
However, in lieu of filing to increase customer rates as allowed under the 2007 Retail Rate Plan,
on June 29, 2009, Georgia Power filed a request with the Georgia PSC for an accounting order that
would allow Georgia Power to amortize approximately $324 million of its regulatory liability
related to other cost of removal obligations.
On August 27, 2009, the Georgia PSC approved the accounting order. Under the terms of the
accounting order, if Georgia Power does not file for a retail base rate increase in 2009, Georgia
Power will be entitled to amortize up to one-third of the regulatory liability ($108 million) in
2009. Through September 30, 2009, Georgia Power has amortized $54 million of the regulatory
liability. In addition, Georgia Power will be entitled to amortize up to two-thirds of the
regulatory liability ($216 million) in 2010. In the event Georgia Power files for a retail base
rate increase prior to July 1, 2010, then the amortization of the regulatory liability in 2010
would be reduced by one-sixth for each month that such rate case is filed prior to July 1, 2010.
25
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Furthermore, the amortization of the regulatory liability is limited to only the amount that would
allow Georgia Power to earn a retail ROE not more than 9.75% in 2009 and 10.15% in 2010. In
addition, Georgia Power may not file for a base rate increase prior to July 1, 2010 unless economic
conditions beyond its control continue to reduce Georgia Powers projected retail ROE and in no
event unless Georgia Powers projected retail ROE for 2009 or 2010 is less than 9.25% after taking
into consideration amortization of the regulatory liability.
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, which could have a significant impact on the future cash flow
and net income of Southern Company. Southern Company estimates the cash flow reduction to 2009 tax
payments as a result of the bonus depreciation provisions of the ARRA to be between approximately
$225 million and $275 million. On October 27, 2009, Southern Company and its subsidiaries received
notice that an award of $165 million had been granted under its ARRA grant application for
transmission and distribution automation and modernization projects pending final negotiations.
Southern Company continues to assess the other financial implications of the ARRA. The ultimate
impact cannot be determined at this time.
Construction Projects
Integrated Coal Gasification Combined Cycle
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Construction Projects -
Integrated Coal Gasification Combined Cycle of Southern Company in Item 7 and Note 3 to the
financial statements of Southern Company under Integrated Coal Gasification Combined Cycle in
Item 8 of the Form 10-K for information regarding the Kemper IGCC.
On May 11, 2009, Mississippi Power received notification from the IRS formally certifying the
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 May 2014.
On April 6, 2009, the Governor of the State of Mississippi signed into law a bill that will provide
an ad valorem tax exemption for a portion of the assessed value of all property utilized in certain
electric generating facilities with integrated gasification process facilities. This tax
exemption, which may not exceed 50% of the total value of the project, is for projects with a
capital investment from private sources of $1 billion or more. Mississippi Power expects the
Kemper IGCC, including the gasification portion, to be a qualifying project under the law.
On April 6, 2009, Mississippi Power received an accounting order from the Mississippi PSC directing
Mississippi Power to continue to charge all generation resource planning, evaluation, and screening
costs to regulatory assets including those costs associated with activities to obtain a certificate
of public convenience and necessity and costs necessary and prudent to preserve the availability,
economic viability, and/or required schedule of the Kemper IGCC generation resource planning,
evaluation, and screening activities until the Mississippi PSC makes findings and determination as
to the recovery of Mississippi Powers prudent expenditures. The Mississippi PSCs determination
of prudence for Mississippi Powers pre-construction costs is scheduled to occur by May 2010.
As of September 30, 2009, Mississippi Power had spent a total of $64.5 million associated with
Mississippi Powers generation resource planning, evaluation, and screening activities, including
regulatory filing costs. Costs incurred for the nine months ended September 30, 2009 totaled $22.2
million as compared to $18.1 million for the nine months ended September 30, 2008. Of the total
$64.5
million, $59.8 million was deferred in other regulatory assets, $3.9 million was related to land
purchases capitalized, and $0.8 million was previously expensed.
26
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Several motions were filed by intervenors, most of which were procedural in nature and sought to
stay or delay the timely and orderly administration of the docket. In addition to these procedural
motions, a motion was filed by the Attorney General for the State of Mississippi which questioned
whether the Mississippi PSC had authority to approve the gasification portion of the Kemper IGCC.
On June 5, 2009, all of these motions were denied by the Mississippi PSC.
On June 5, 2009, the Mississippi PSC issued an order initiating an evaluation of the Kemper IGCC
and establishing a two-phase procedural schedule. During Phase I, the Mississippi PSC will
determine if a need exists for new generating resources. Hearings for Phase I were held in October
2009, and a decision is expected in November 2009. If it is determined a need exists in Phase I,
the appropriate resource to fill the need as well as the cost recovery of that resource through
application of the State of Mississippis Baseload Act of 2008 will be determined during Phase II.
Hearings regarding Phase II issues are scheduled for February 2010 with a decision by May 2010.
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Mississippi
Base Load Construction Legislation of Southern Company in Item 7 of the Form 10-K for information
regarding the Baseload Act of 2008.
On September 15, 2009, South Mississippi Electric Power Association (SMEPA) signed a non-binding
letter of intent to explore the acquisition of an interest in the Kemper IGCC. Mississippi Power
and SMEPA are evaluating a combination of a joint ownership arrangement and a PPA which would
provide SMEPA with up to 20% of the capacity and associated energy output from the Kemper IGCC.
The ultimate outcome of these matters cannot now be determined.
Nuclear
See Note (B) to the Condensed Financial Statements under Construction Projects Nuclear herein
for information regarding the potential expansion of Plant Vogtle.
On March 17, 2009, the Georgia PSC voted to certify construction of Plant Vogtle Units 3 and 4 at
an in-service cost of $6.4 billion. In addition, the Georgia PSC voted to approve inclusion of the
related construction work in progress accounts in rate base and to recover financing costs during
the construction period beginning in 2011, which reduces the projected in-service cost to
approximately $4.5 billion.
On April 21, 2009, the Governor of the State of Georgia signed into law the Georgia Nuclear Energy
Financing Act that will allow Georgia Power to recover financing costs for nuclear construction
projects by including the related construction work in progress accounts in rate base during the
construction period. The cost recovery provisions will become effective January 1, 2011.
On June 15, 2009, an environmental group filed a petition in the Superior Court of Fulton County,
Georgia seeking review of the Georgia PSCs certification order and challenging the
constitutionality of the Georgia Nuclear Energy Financing Act. Georgia Power believes there is no
meritorious basis for this petition and intends to vigorously defend against the requested actions.
The ultimate outcome of this matter cannot be determined at this time.
On August 26, 2009, the NRC issued the Early Site Permit and Limited Work Authorization for Plant
Vogtle Units 3 and 4. Excavation for the new units is in progress.
27
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On August 27, 2009, the NRC issued letters to Westinghouse revising the review schedules needed to
certify the AP1000 standard design for new reactors and expressing concerns related to the
availability of adequate information and the shield building design. The shield building protects
the containment and provides structural support to the containment cooling water supply. Georgia
Power is continuing to work with Westinghouse and the NRC to resolve these concerns. Any possible
delays in the AP1000 design certification schedule, including those addressed by the NRC in their
letters, are not currently expected to affect the projected commercial operation dates for Plant
Vogtle Units 3 and 4. The ultimate outcome of this matter cannot be determined at this time.
On August 31, 2009, Georgia Power filed with the Georgia PSC its first semi-annual construction
monitoring report for Plant Vogtle Units 3 and 4 for the period ended June 30, 2009 which did not
include any change to the estimated construction cost as certified by the Georgia PSC in March
2009. The Georgia PSC will conduct hearings between November 2009 and January 2010 in review of
this report and is scheduled to render its decision on February 18, 2010. The ultimate outcome of
this matter cannot be determined at this time.
There are pending technical and procedural challenges to the construction and licensing of Plant
Vogtle Units 3 and 4. Similar additional challenges at the state and federal level are expected as
construction proceeds. The ultimate outcome of these matters cannot now be determined.
Nuclear Relicensing
The NRC operating licenses for Plant Vogtle Units 1 and 2 were scheduled to 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. On June 3, 2009,
the NRC approved the extension of the licenses as requested.
Other Matters
Southern Company is involved in various other matters being litigated, regulatory matters, and
certain tax-related issues that could affect future earnings. In addition, Southern Company is
subject to certain claims and legal actions arising in the ordinary course of business. Southern
Companys business activities are subject to extensive governmental regulation related to public
health and the environment, such as regulation of air emissions and water discharges. 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, and common law nuisance
claims for injunctive relief and property damage allegedly caused by greenhouse gas emissions, have
become more frequent. The ultimate outcome of such pending or potential litigation against
Southern Company and its subsidiaries cannot be predicted at this time; however, for current
proceedings not specifically reported herein or in Note 3 to the financial statements of Southern
Company in Item 8 of the Form 10-K, management does not anticipate that the liabilities, if any,
arising from such current proceedings would have a material adverse effect on Southern Companys
financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other
contingencies, regulatory matters, and other matters being litigated which may affect future
earnings potential.
28
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Company prepares its consolidated financial statements in accordance with accounting
principles generally accepted in the United States. Significant accounting policies are described
in Note 1 to the financial statements of Southern Company in Item 8 of the Form 10-K. In the
application of these policies, certain estimates are made that may have a material impact on
Southern Companys results of operations and related disclosures. Different assumptions and
measurements could produce estimates that are significantly different from those recorded in the
financial statements. See MANAGEMENTS DISCUSSION AND ANALYSIS ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates of Southern Company in Item 7 of the
Form 10-K for a complete discussion of Southern Companys critical accounting policies and
estimates related to Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.
New Accounting Standards
Variable Interest Entities
In June 2009, the FASB issued new guidance on the consolidation of variable interest entities,
which replaces the quantitative-based risks and rewards calculation for determining whether an
enterprise is the primary beneficiary in a variable interest entity with an approach that is
primarily qualitative, requires ongoing assessments of whether an enterprise is the primary
beneficiary of a variable interest entity, and requires additional disclosures about an
enterprises involvement in variable interest entities. Southern Company is required to adopt this
new guidance effective January 1, 2010 and is evaluating the impact, if any, it will have on its
financial statements.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Southern Companys financial condition remained stable at September 30, 2009. Throughout the
turmoil in the financial markets, Southern Company and its subsidiaries have maintained adequate
access to capital without drawing on any committed bank credit arrangements used to support
commercial paper programs and variable rate pollution control revenue bonds. 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. Market rates for
committed credit have increased, and Southern Company and its subsidiaries have been and expect to
continue to be subject to higher costs as existing facilities are replaced or renewed. Total
committed credit fees for Southern Company and its subsidiaries currently average less than 1/2 of 1%
per year. Southern Companys interest cost for short-term debt has decreased as market short-term
interest rates have declined from 2008 levels. The ultimate impact on future financing costs as a
result of 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 remained stable
during the third quarter 2009. Southern Company expects that the earliest that cash may have to be
contributed to the pension trust fund is 2012 and such contribution could be significant; however,
projections of the amount vary significantly depending on 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 prior to 2011.
29
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the first nine months of 2009, net cash provided from operating activities totaled $2.4
billion, a decrease of $276 million from the corresponding period in 2008. Significant changes in
operating cash flow for the first nine months of 2009 as compared to the corresponding period in
2008 include a reduction to net income as previously discussed and increased levels of coal
inventory of $249 million. These uses of funds were partially offset by increased cash inflows as
a result of higher fuel cost recovery rates included in customer billings. Net cash used for
investing activities totaled $2.9 billion for the first nine months of 2009 as compared to $3.0
billion for the corresponding period in 2008. While the cash outflows in each of these periods
were primarily related to property additions to utility plant, the decrease in the current period
as compared to the corresponding period in 2008 was primarily due to approximately $340 million in
cash received from the early termination of two leveraged lease investments. For the first nine
months of 2009, net cash provided from financing activities totaled $687 million as compared to
$949 million for the corresponding period in 2008. The funds available from financing activities
were primarily attributable to cash inflows from short-term borrowings, the issuance of new
long-term debt, and common stock issuances, partially offset by cash outflows for repayments of
long-term debt and dividend payments.
Significant balance sheet changes for the first nine months of 2009 include an increase of $2.3
billion in total property, plant, and equipment for the installation of equipment to comply with
environmental standards and construction of generation, transmission, and distribution facilities.
Other significant changes include an increase in long-term debt, excluding amounts due within one
year, of $1.2 billion used primarily for construction expenditures and general corporate purposes
and $1.1 billion of additional equity.
The market price of Southern Companys common stock at September 30, 2009 was $31.67 per share
(based on the closing price as reported on the New York Stock Exchange) and the book value was
$17.95 per share, representing a market-to-book ratio of 176%, compared to $37.00, $17.08, and
217%, respectively, at the end of 2008. The dividend for the third quarter 2009 was $0.4375 per
share compared to $0.42 per share in the third quarter 2008.
Capital Requirements and Contractual Obligations
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Capital
Requirements and Contractual Obligations of Southern Company in Item 7 of the Form 10-K for a
description of Southern Companys capital requirements for its construction programs and other
funding requirements associated with scheduled maturities of long-term debt, as well as the related
interest, preferred and preference stock dividends, leases, trust funding requirements, other
purchase commitments, unrecognized tax benefits and interest, and derivative obligations.
Approximately $412 million will be required through September 30, 2010 to fund maturities of
long-term debt. 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; changes in legislation; the cost and efficiency of
construction labor, equipment, and materials; and the cost of capital. In addition, there can be
no assurance that costs related to capital expenditures will be fully recovered.
Sources of Capital
Southern Company intends to meet its future capital needs through internal cash flow and external
security issuances. Equity capital can be provided from any combination of Southern Companys
stock plans, private placements, or public offerings. The amount and timing of additional equity
capital to be raised in 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
30
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
from sources similar to those used in the past, which were primarily from
operating cash flows, security issuances, term loans, short-term borrowings, and equity
contributions from Southern Company.
However, the amount, type, and timing of any financings, if needed, will depend upon
prevailing market conditions, regulatory approval, and other factors. See MANAGEMENTS DISCUSSION
AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Sources of Capital of Southern Company in Item
7 of the Form 10-K for additional information.
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), to meet liquidity needs. At September 30,
2009, Southern Company and its subsidiaries had approximately $607 million of cash and cash
equivalents and approximately $4.7 billion of unused credit arrangements with banks, of which $99
million expire in 2009, $1.4 billion expire in 2010, $25 million expire in 2011, and $3.2 billion
expire in 2012. Approximately $84 million of the credit facilities expiring in 2009 and 2010 allow
for the execution of term loans for an additional two-year period, and $512 million contain
provisions allowing one-year term loans. At September 30, 2009, approximately $1.6 billion of the
credit facilities were dedicated to providing liquidity support to the traditional operating
companies variable rate pollution control revenue bonds and such credit facilities also serve as
liquidity support for the commercial paper programs. See Note 6 to the financial statements of
Southern Company under Bank Credit Arrangements in Item 8 of the Form 10-K and Note (E) to the
Condensed Financial Statements under Bank Credit Arrangements herein for additional information.
The traditional operating companies may also meet short-term cash needs through a Southern Company
subsidiary organized to issue and sell commercial paper at the request and for the benefit of each
of the traditional operating companies. At September 30, 2009, the Southern Company system had
outstanding commercial paper of $1.1 billion. Management believes that the need for working
capital can be adequately met by utilizing commercial paper programs, lines of credit, and cash.
Off-Balance Sheet Financing Arrangements
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Off-Balance Sheet
Financing Arrangements of Southern Company in Item 7 and Note 7 to the financial statements of
Southern Company under Operating Leases in Item 8 of the Form 10-K for information related to
Mississippi Powers lease of a combined cycle generating facility at Plant Daniel.
Credit Rating Risk
Southern Company does not have any credit arrangements that would require material changes in
payment schedules or terminations as a result of a credit rating downgrade. There are certain
contracts that could require collateral, but not accelerated payment, in the event of a credit
rating change 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 September 30, 2009, 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
$422 million. At September 30, 2009, the maximum potential collateral requirements under these
contracts at a rating below BBB- and/or Baa3 were approximately $2.1 billion. Generally,
collateral may be provided by a Southern Company guaranty, letter of credit, or cash.
Additionally, any credit rating downgrade could impact Southern Companys ability to access capital
markets, particularly the short-term debt market.
31
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On September 2, 2009, Moodys affirmed the credit ratings of Southern Companys senior unsecured
notes and commercial paper of A3/P-1, respectively, and revised the rating outlook for Southern
Company to negative. On October 6, 2009, Standard and Poors affirmed the credit ratings of
Southern Companys senior unsecured notes and commercial paper of A-/A-1, respectively, and
maintained a stable rating outlook. On September 4, 2009, Fitch affirmed Southern Companys
long-term and commercial paper credit ratings of A/F1, respectively, and maintained its stable
rating outlook.
Market Price Risk
Southern Companys market risk exposure relative to interest rate changes has not changed
materially compared with the December 31, 2008 reporting period. Since a significant portion of
outstanding indebtedness is at fixed rates, Southern Company is not aware of any facts or
circumstances that would significantly affect exposures on existing indebtedness in the near term.
However, the impact on future financing costs cannot now be determined.
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, during 2009, Southern Power is exposed to market
volatility in energy-related commodity prices as a result of sales of uncontracted generating
capacity. The traditional operating companies continue to manage fuel-hedging programs implemented
per the guidelines of their respective state PSCs. 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. To mitigate residual risks relative to movements in gas prices, Southern Companys
subsidiaries may enter into fixed-price contracts for natural gas purchases; however, a significant
portion of contracts are priced at market. As such, the traditional operating companies have no
material change in market risk exposure when compared with the December 31, 2008 reporting period.
The changes in fair value of energy-related derivative contracts for the three months and nine
months ended September 30, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Year-to-Date |
|
|
2009 |
|
2009 |
|
|
Changes |
|
Changes |
|
|
Fair Value |
|
|
(in millions) |
Contracts outstanding at the beginning of the period, assets
(liabilities), net |
|
$ |
(302 |
) |
|
$ |
(285 |
) |
Contracts realized or settled |
|
|
131 |
|
|
|
318 |
|
Current period changes(a) |
|
|
8 |
|
|
|
(196 |
) |
|
Contracts outstanding at the end of the period, assets (liabilities), net |
|
$ |
(163 |
) |
|
$ |
(163 |
) |
|
(a) Current period changes also include the changes in fair value of new contracts entered into
during the period, if any.
The changes in the fair value positions of the energy-related derivative contracts for the
three months and nine months ended September 30, 2009 were an increase of $139 million and $122
million, respectively, substantially all of which is due to natural gas positions. These changes
are attributable to both the volume and prices of natural gas. At September 30, 2009, Southern
Company had a net hedge volume of 154 million mmBtu (includes location basis of 2 million mmBtu)
with a weighted average contract cost approximately $1.09 per mmBtu above market prices, compared
to 173 million mmBtu (includes location basis of 2 million mmBtu) at June 30, 2009 with a weighted
average contract cost approximately $1.78 per mmBtu above market prices and compared to 149 million
mmBtu at December 31, 2008 with a weighted average contract cost
32
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
approximately $1.97 per mmBtu above market prices. The majority of the natural gas hedge
settlements are recovered through the traditional operating companies fuel cost recovery clauses.
At September 30, 2009 and December 31, 2008, the net fair value of energy-related derivative
contracts by hedge designation was reflected in the financial statements as follows:
|
|
|
|
|
|
|
|
|
Asset (Liability) Derivatives |
|
September 30, 2009 |
|
December 31, 2008 |
|
|
(in millions) |
Regulatory hedges |
|
$ |
(167 |
) |
|
$ |
(288 |
) |
Cash flow hedges |
|
|
(1 |
) |
|
|
(1 |
) |
Not designated |
|
|
5 |
|
|
|
4 |
|
|
Total fair value |
|
$ |
(163 |
) |
|
$ |
(285 |
) |
|
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 to hedge anticipated purchases and sales
and are initially deferred in OCI 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.
Total net unrealized pre-tax gains recognized in the statements of income for the three months and
nine months ended September 30, 2009 for energy-related derivative contracts that are not hedges
were $2 million and $1 million, respectively. The total net unrealized gain recognized in the
statements of income for the three months ended September 30, 2008 was $7 million and was not
material for the nine months ended September 30, 2008. See Note (E) to the Condensed Financial
Statements herein for further details of these gains (losses).
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy
in which they fall at September 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
Fair Value Measurements |
|
|
Total |
|
Maturity |
|
|
Fair Value |
|
Year 1 |
|
Years 2&3 |
|
Years 4&5 |
|
|
(in millions) |
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Level 2 |
|
|
(163 |
) |
|
|
(123 |
) |
|
|
(40 |
) |
|
|
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of
contracts
outstanding at end
of period |
|
$ |
(163 |
) |
|
$ |
(123 |
) |
|
$ |
(40 |
) |
|
$ |
|
|
|
Southern Company uses over-the-counter contracts that are not exchange traded but are fair valued
using prices which are actively quoted, and thus fall into Level 2. See Note (C) to the Condensed
Financial Statements herein for further discussion on fair value measurements.
For
additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND
LIQUIDITY Market Price Risk of Southern Company in Item 7 and Notes 1 and 6 to the financial
statements of Southern Company under Financial Instruments in Item 8 of the Form 10-K and Note
(E) to the Condensed Financial Statements herein.
33
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financing Activities
In the first nine months of 2009, Southern Company issued $350 million of Series 2009A 4.15% Senior
Notes due May 15, 2014, and its subsidiaries issued $1.3 billion of senior notes and incurred
obligations of $600 million related to the issuance of pollution control revenue bonds. Southern
Company also issued 17 million shares of common stock for $501 million through the Southern
Investment Plan, Dividend Reinvestment Plan, and employee and director stock plans. In addition,
Southern Company issued 6 million shares of common stock through at-the-market issuances pursuant
to sales agency agreements related to Southern Companys continuous equity offering program and
received cash proceeds of $167 million, net of $1.7 million in fees and commissions. The proceeds
were primarily used to fund ongoing construction projects, to repay short-term and long-term
indebtedness, and for general corporate purposes.
In July 2009, Gulf Power entered into a forward starting interest rate swap to mitigate exposure to
interest rate changes related to anticipated debt issuances. The notional amount of the swap is
$50 million, and the swap has been designated as a cash flow hedge.
In July 2009, Southern Company used a portion of the cash received from the early termination of
two leveraged lease investments to extinguish $252.7 million of debt which included all debt
related to leveraged lease investments and to pay make-whole redemption premiums of $17.2 million
associated with such debt.
In August 2009, Georgia Power redeemed its $55 million of Series D 5.50% Senior Insured Quarterly
Notes due November 15, 2017.
In August 2009, Georgia Powers $125 million Series V 4.10% Senior Notes due August 15, 2009
matured.
In August 2009, Alabama Powers $250 million Series BB Floating Rate Senior Notes due August 25,
2009 matured.
Subsequent to September 30, 2009, Southern Company issued $300 million of Series 2009B Floating
Rate Senior Notes due October 21, 2011. The proceeds were used to repay short-term indebtedness
and other general corporate purposes.
Subsequent to September 30, 2009, Georgia Power and Gulf Power entered into forward starting
interest rate swaps to mitigate exposure to interest rate changes related to anticipated debt
issuances. The notional amounts of the swaps totaled $200 million and $50 million, respectively,
and the swaps have been designated as cash flow hedges.
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.
34
PART I
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Market Price Risk
herein for each registrant and Notes 1 and 6 to the financial statements of Southern Company,
Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power under Financial
Instruments in Item 8 of the Form 10-K. Also, see Note (E) to the Condensed Financial Statements
herein for information relating to derivative instruments.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this quarterly report, Southern Company conducted an
evaluation under the supervision and with the participation of Southern Companys management,
including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934). Based upon this evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the disclosure controls and
procedures are effective.
(b) Changes in internal controls over financial reporting.
There have been no changes in Southern Companys internal control over financial reporting (as such
term is defined in Sections 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) during
the third quarter 2009 that have materially affected or are reasonably likely to materially affect
Southern Companys internal control over financial reporting.
Item 4T. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this quarterly report, Alabama Power, Georgia Power, Gulf
Power, Mississippi Power, and Southern Power conducted separate evaluations under the supervision
and with the participation of each companys management, including the Chief Executive Officer and
the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure
controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange
Act of 1934). Based upon these evaluations, the Chief Executive Officer and the Chief Financial
Officer, in each case, concluded that the disclosure controls and procedures are effective.
(b) Changes in internal controls over financial reporting.
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 Sections
13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) during the third quarter 2009 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.
35
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
1,342,665 |
|
|
$ |
1,559,034 |
|
|
$ |
3,520,408 |
|
|
$ |
3,741,074 |
|
Wholesale revenues, non-affiliates |
|
|
170,573 |
|
|
|
196,381 |
|
|
|
483,180 |
|
|
|
536,392 |
|
Wholesale revenues, affiliates |
|
|
34,042 |
|
|
|
60,583 |
|
|
|
170,887 |
|
|
|
240,696 |
|
Other revenues |
|
|
44,876 |
|
|
|
49,084 |
|
|
|
123,963 |
|
|
|
153,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
1,592,156 |
|
|
|
1,865,082 |
|
|
|
4,298,438 |
|
|
|
4,671,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
506,376 |
|
|
|
651,673 |
|
|
|
1,437,095 |
|
|
|
1,628,170 |
|
Purchased power, non-affiliates |
|
|
42,915 |
|
|
|
104,238 |
|
|
|
84,582 |
|
|
|
153,907 |
|
Purchased power, affiliates |
|
|
73,966 |
|
|
|
121,651 |
|
|
|
172,096 |
|
|
|
286,147 |
|
Other operations and maintenance |
|
|
272,118 |
|
|
|
300,967 |
|
|
|
827,275 |
|
|
|
917,060 |
|
Depreciation and amortization |
|
|
136,784 |
|
|
|
132,410 |
|
|
|
406,687 |
|
|
|
387,677 |
|
Taxes other than income taxes |
|
|
77,353 |
|
|
|
76,200 |
|
|
|
239,673 |
|
|
|
227,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,109,512 |
|
|
|
1,387,139 |
|
|
|
3,167,408 |
|
|
|
3,600,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
482,644 |
|
|
|
477,943 |
|
|
|
1,131,030 |
|
|
|
1,071,028 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction |
|
|
21,053 |
|
|
|
11,730 |
|
|
|
56,931 |
|
|
|
32,269 |
|
Interest income |
|
|
4,419 |
|
|
|
4,794 |
|
|
|
12,689 |
|
|
|
13,694 |
|
Interest expense, net of amounts capitalized |
|
|
(75,817 |
) |
|
|
(71,165 |
) |
|
|
(224,792 |
) |
|
|
(209,787 |
) |
Other income (expense), net |
|
|
(6,714 |
) |
|
|
(5,732 |
) |
|
|
(17,577 |
) |
|
|
(19,661 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(57,059 |
) |
|
|
(60,373 |
) |
|
|
(172,749 |
) |
|
|
(183,485 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
425,585 |
|
|
|
417,570 |
|
|
|
958,281 |
|
|
|
887,543 |
|
Income taxes |
|
|
154,050 |
|
|
|
156,109 |
|
|
|
344,416 |
|
|
|
323,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
271,535 |
|
|
|
261,461 |
|
|
|
613,865 |
|
|
|
564,208 |
|
Dividends on Preferred and Preference Stock |
|
|
9,866 |
|
|
|
9,866 |
|
|
|
29,598 |
|
|
|
29,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income After Dividends on Preferred and Preference Stock |
|
$ |
261,669 |
|
|
$ |
251,595 |
|
|
$ |
584,267 |
|
|
$ |
534,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net Income After Dividends on Preferred and Preference Stock |
|
$ |
261,669 |
|
|
$ |
251,595 |
|
|
$ |
584,267 |
|
|
$ |
534,610 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $(187), $50,
$(1,773), and $(989), respectively |
|
|
(307 |
) |
|
|
83 |
|
|
|
(2,916 |
) |
|
|
(1,627 |
) |
Reclassification adjustment for amounts included in net
income, net of tax of $1,217, $82, $3,456, and $710, respectively |
|
|
2,002 |
|
|
|
135 |
|
|
|
5,685 |
|
|
|
1,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
1,695 |
|
|
|
218 |
|
|
|
2,769 |
|
|
|
(459 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
263,364 |
|
|
$ |
251,813 |
|
|
$ |
587,036 |
|
|
$ |
534,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
37
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
613,865 |
|
|
$ |
564,208 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization, total |
|
|
474,250 |
|
|
|
451,182 |
|
Deferred income taxes and investment tax credits, net |
|
|
(32,333 |
) |
|
|
109,459 |
|
Allowance for equity funds used during construction |
|
|
(56,931 |
) |
|
|
(32,269 |
) |
Pension, postretirement, and other employee benefits |
|
|
(2,955 |
) |
|
|
(133 |
) |
Stock option expense |
|
|
3,475 |
|
|
|
2,822 |
|
Tax benefit of stock options |
|
|
79 |
|
|
|
641 |
|
Other, net |
|
|
25,223 |
|
|
|
22,717 |
|
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
-Receivables |
|
|
232,890 |
|
|
|
(92,774 |
) |
-Fossil fuel stock |
|
|
(20,609 |
) |
|
|
(61,753 |
) |
-Materials and supplies |
|
|
(22,783 |
) |
|
|
(19,915 |
) |
-Other current assets |
|
|
(43,436 |
) |
|
|
(33,840 |
) |
-Accounts payable |
|
|
(197,357 |
) |
|
|
(62,186 |
) |
-Accrued taxes |
|
|
168,493 |
|
|
|
92,749 |
|
-Accrued compensation |
|
|
(46,583 |
) |
|
|
(27,786 |
) |
-Other current liabilities |
|
|
70,111 |
|
|
|
22,248 |
|
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
1,165,399 |
|
|
|
935,370 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(896,913 |
) |
|
|
(1,024,668 |
) |
Investment in restricted cash from pollution control revenue bonds |
|
|
(340 |
) |
|
|
(5,454 |
) |
Distribution of restricted cash from pollution control revenue bonds |
|
|
39,866 |
|
|
|
24,585 |
|
Nuclear decommissioning trust fund purchases |
|
|
(177,639 |
) |
|
|
(218,606 |
) |
Nuclear decommissioning trust fund sales |
|
|
177,639 |
|
|
|
218,606 |
|
Cost of removal, net of salvage |
|
|
(21,419 |
) |
|
|
(33,579 |
) |
Other investing activities |
|
|
10,342 |
|
|
|
(26,839 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(868,464 |
) |
|
|
(1,065,955 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Increase (decrease) in notes payable, net |
|
|
(24,995 |
) |
|
|
94,891 |
|
Proceeds |
|
|
|
|
|
|
|
|
Common stock issued to parent |
|
|
135,000 |
|
|
|
225,000 |
|
Capital contributions from parent company |
|
|
17,177 |
|
|
|
15,095 |
|
Gross excess tax benefit of stock options |
|
|
173 |
|
|
|
1,226 |
|
Pollution control revenue bonds |
|
|
53,000 |
|
|
|
131,100 |
|
Senior notes issuances |
|
|
500,000 |
|
|
|
600,000 |
|
Redemptions |
|
|
|
|
|
|
|
|
Preferred stock |
|
|
|
|
|
|
(125,000 |
) |
Pollution control revenue bonds |
|
|
|
|
|
|
(11,100 |
) |
Senior notes |
|
|
(250,000 |
) |
|
|
(250,000 |
) |
Payment of preferred and preference stock dividends |
|
|
(29,602 |
) |
|
|
(31,024 |
) |
Payment of common stock dividends |
|
|
(392,100 |
) |
|
|
(368,475 |
) |
Other financing activities |
|
|
(2,647 |
) |
|
|
(6,467 |
) |
|
|
|
|
|
|
|
Net cash provided from financing activities |
|
|
6,006 |
|
|
|
275,246 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
302,941 |
|
|
|
144,661 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
28,181 |
|
|
|
73,616 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
331,122 |
|
|
$ |
218,277 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $23,813 and $14,649 capitalized for 2009 and 2008, respectively) |
|
$ |
190,014 |
|
|
$ |
183,218 |
|
Income taxes (net of refunds) |
|
$ |
274,486 |
|
|
$ |
197,907 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
38
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Assets |
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
331,122 |
|
|
$ |
28,181 |
|
Restricted cash and cash equivalents |
|
|
40,554 |
|
|
|
80,079 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
422,926 |
|
|
|
350,410 |
|
Unbilled revenues |
|
|
122,056 |
|
|
|
98,921 |
|
Under recovered regulatory clause revenues |
|
|
31,949 |
|
|
|
153,899 |
|
Other accounts and notes receivable |
|
|
30,210 |
|
|
|
44,645 |
|
Affiliated companies |
|
|
58,844 |
|
|
|
70,612 |
|
Accumulated provision for uncollectible accounts |
|
|
(9,891 |
) |
|
|
(8,882 |
) |
Fossil fuel stock, at average cost |
|
|
337,873 |
|
|
|
322,089 |
|
Materials and supplies, at average cost |
|
|
326,964 |
|
|
|
305,880 |
|
Vacation pay |
|
|
52,949 |
|
|
|
52,577 |
|
Prepaid expenses |
|
|
130,487 |
|
|
|
88,219 |
|
Other regulatory assets, current |
|
|
42,121 |
|
|
|
74,825 |
|
Other current assets |
|
|
14,726 |
|
|
|
12,915 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,932,890 |
|
|
|
1,674,370 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
18,078,745 |
|
|
|
17,635,129 |
|
Less accumulated provision for depreciation |
|
|
6,516,289 |
|
|
|
6,259,720 |
|
|
|
|
|
|
|
|
Plant in service, net of depreciation |
|
|
11,562,456 |
|
|
|
11,375,409 |
|
Nuclear fuel, at amortized cost |
|
|
231,110 |
|
|
|
231,862 |
|
Construction work in progress |
|
|
1,474,821 |
|
|
|
1,092,516 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
13,268,387 |
|
|
|
12,699,787 |
|
|
|
|
|
|
|
|
Other Property and Investments: |
|
|
|
|
|
|
|
|
Equity investments in unconsolidated subsidiaries |
|
|
58,469 |
|
|
|
50,912 |
|
Nuclear decommissioning trusts, at fair value |
|
|
465,208 |
|
|
|
403,966 |
|
Miscellaneous property and investments |
|
|
68,488 |
|
|
|
62,782 |
|
|
|
|
|
|
|
|
Total other property and investments |
|
|
592,165 |
|
|
|
517,660 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
390,240 |
|
|
|
362,596 |
|
Prepaid pension costs |
|
|
197,172 |
|
|
|
166,334 |
|
Deferred under recovered regulatory clause revenues |
|
|
|
|
|
|
180,874 |
|
Other regulatory assets, deferred |
|
|
690,530 |
|
|
|
732,367 |
|
Other deferred charges and assets |
|
|
198,898 |
|
|
|
202,018 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
1,476,840 |
|
|
|
1,644,189 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
17,270,282 |
|
|
$ |
16,536,006 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
39
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
|
|
|
$ |
250,079 |
|
Notes payable |
|
|
|
|
|
|
24,995 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
166,865 |
|
|
|
178,708 |
|
Other |
|
|
210,348 |
|
|
|
358,176 |
|
Customer deposits |
|
|
85,242 |
|
|
|
77,205 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Accrued income taxes |
|
|
95,262 |
|
|
|
18,299 |
|
Other accrued taxes |
|
|
96,857 |
|
|
|
30,372 |
|
Accrued interest |
|
|
69,985 |
|
|
|
56,375 |
|
Accrued vacation pay |
|
|
44,217 |
|
|
|
44,217 |
|
Accrued compensation |
|
|
54,687 |
|
|
|
91,856 |
|
Liabilities from risk management activities |
|
|
48,780 |
|
|
|
83,873 |
|
Other regulatory liabilities, current |
|
|
56,616 |
|
|
|
3,462 |
|
Other current liabilities |
|
|
40,140 |
|
|
|
50,315 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
968,999 |
|
|
|
1,267,932 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
6,156,960 |
|
|
|
5,604,791 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
2,281,537 |
|
|
|
2,243,117 |
|
Deferred credits related to income taxes |
|
|
88,961 |
|
|
|
90,083 |
|
Accumulated deferred investment tax credits |
|
|
166,683 |
|
|
|
172,638 |
|
Employee benefit obligations |
|
|
417,991 |
|
|
|
396,923 |
|
Asset retirement obligations |
|
|
483,465 |
|
|
|
461,284 |
|
Other cost of removal obligations |
|
|
667,655 |
|
|
|
634,792 |
|
Other regulatory liabilities, deferred |
|
|
112,111 |
|
|
|
79,151 |
|
Other deferred credits and liabilities |
|
|
35,654 |
|
|
|
45,857 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
4,254,057 |
|
|
|
4,123,845 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
11,380,016 |
|
|
|
10,996,568 |
|
|
|
|
|
|
|
|
Redeemable Preferred Stock |
|
|
341,716 |
|
|
|
341,716 |
|
|
|
|
|
|
|
|
Preference Stock |
|
|
343,412 |
|
|
|
343,412 |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, par value $40 per share |
|
|
|
|
|
|
|
|
Authorized - 40,000,000 shares |
|
|
|
|
|
|
|
|
Outstanding - September 30, 2009: 28,850,000 shares |
|
|
|
|
|
|
|
|
- December 31, 2008: 25,475,000 shares |
|
|
1,154,000 |
|
|
|
1,019,000 |
|
Paid-in capital |
|
|
2,112,359 |
|
|
|
2,091,462 |
|
Retained earnings |
|
|
1,945,959 |
|
|
|
1,753,797 |
|
Accumulated other comprehensive loss |
|
|
(7,180 |
) |
|
|
(9,949 |
) |
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
5,205,138 |
|
|
|
4,854,310 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
17,270,282 |
|
|
$ |
16,536,006 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
40
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2009 vs. THIRD QUARTER 2008
AND
YEAR-TO-DATE 2009 vs. YEAR-TO-DATE 2008
OVERVIEW
Alabama Power operates as a vertically integrated utility providing electricity to retail
customers within its traditional service area located within the State of Alabama and to wholesale
customers in the Southeast. Many factors affect the opportunities, challenges, and risks of
Alabama Powers primary business of selling electricity. These factors include the ability to
maintain a 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.
These costs include those related to projected long-term demand growth, increasingly stringent
environmental standards, fuel prices, capital expenditures, and restoration following major storms.
Appropriately balancing the need to recover these increasing costs with customer prices will
continue to challenge Alabama Power for the foreseeable future.
Alabama Power continues to focus on several key performance indicators. These indicators include
customer satisfaction, plant availability, system reliability, and net income after dividends on
preferred and preference stock. For additional information on these indicators, see MANAGEMENTS
DISCUSSION AND ANALYSIS OVERVIEW Key Performance Indicators of Alabama Power in Item 7 of the
Form 10-K.
RESULTS OF OPERATIONS
Net Income
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$10.1
|
|
4.0
|
|
$49.7
|
|
9.3 |
|
Alabama Powers financial performance remained stable in the third quarter 2009 despite the
continued challenges of a recessionary economy. Alabama Powers net income after dividends on
preferred and preference stock for the third quarter 2009 was $261.7 million compared to $251.6
million for the corresponding period in 2008. The increase was primarily due to the corrective
rate package providing for adjustments associated with customer charges to certain existing rate
structures effective in January 2009, a decrease in other operations and maintenance expense, and
an increase in allowance for equity funds used during construction (AFUDC). The increase was
partially offset by an overall decline in base revenues attributable to a decline in KWH sales,
resulting from a recessionary economy and unfavorable weather conditions.
Alabama Powers net income after dividends on preferred and preference stock for year-to-date 2009
was $584.3 million compared to $534.6 million for the corresponding period in 2008. The increase
was primarily due to a decrease in other operations and maintenance expense, an increase in AFUDC,
and an overall increase in base revenues resulting from a corrective rate package that began in
January 2009, offset by a decline in KWH sales resulting from a recessionary economy and
unfavorable weather conditions.
41
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$(216.4)
|
|
(13.9)
|
|
$(220.7)
|
|
(5.9) |
|
In the third quarter 2009, retail revenues were $1.34 billion compared to $1.56 billion for the
corresponding period in 2008. For year-to-date 2009, retail revenues were $3.52 billion compared
to $3.74 billion for the corresponding period in 2008.
Details of the change to retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Year-to-Date |
|
|
2009 |
|
2009 |
|
|
(in millions) |
|
(% change) |
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
1,559.0 |
|
|
|
|
|
|
$ |
3,741.1 |
|
|
|
|
|
Estimated change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
36.7 |
|
|
|
2.4 |
|
|
|
127.1 |
|
|
|
3.4 |
|
Sales growth (decline) |
|
|
(30.6 |
) |
|
|
(2.0 |
) |
|
|
(103.5 |
) |
|
|
(2.8 |
) |
Weather |
|
|
(17.1 |
) |
|
|
(1.1 |
) |
|
|
(14.4 |
) |
|
|
(0.4 |
) |
Fuel and other cost recovery |
|
|
(205.3 |
) |
|
|
(13.2 |
) |
|
|
(229.9 |
) |
|
|
(6.1 |
) |
|
Retail current year |
|
$ |
1,342.7 |
|
|
|
(13.9 |
)% |
|
$ |
3,520.4 |
|
|
|
(5.9 |
)% |
|
Revenues associated with changes in rates and pricing increased in the third quarter 2009 and
year-to-date 2009 when compared to the corresponding periods in 2008 primarily due to the
corrective rate package increase effective January 2009, which mainly provided for adjustments
associated with customer charges to certain existing rate structures. See MANAGEMENTS DISCUSSION
AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Retail Rate Adjustments of Alabama Power
in Item 7 and Note 3 to the financial statements of Alabama Power under Retail Regulatory Matters
in Item 8 of the Form 10-K for additional information.
Revenues attributable to changes in sales declined in the third quarter 2009 when compared to the
corresponding period in 2008 due to a recessionary economy. Industrial KWH energy sales decreased
11.9% due to a decline in demand across all industrial segments, most significantly in the
chemical, forest products, and primary metal sectors. The weather-adjusted residential KWH energy
sales decline was not material. Weather-adjusted commercial KWH energy sales decreased 3.2% due to
a decline in customer demand resulting from a recessionary economy.
For year-to-date 2009, revenues attributable to changes in sales declined due to a recessionary
economy when compared to the corresponding period in 2008. Industrial KWH energy sales decreased
19.2% due to a decline in demand across all industrial segments, most significantly in the
chemical, forest products, and primary metal sectors. Weather-adjusted residential and commercial
KWH energy sales decreased 1.5% and 2.3%, respectively, driven by a decline in customer demand.
Revenues resulting from changes in weather decreased in the third quarter and year-to-date 2009 due
to unfavorable weather conditions compared to the corresponding period in 2008.
42
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and other cost recovery revenues decreased in the third quarter and year-to-date 2009 when
compared to the corresponding periods in 2008 primarily due to decreases in fuel costs. Electric
rates include provisions to recognize the full recovery of fuel costs, purchased power costs, PPAs
certificated by the Alabama PSC, and costs associated with the natural disaster reserve. Under
these provisions, fuel and other cost recovery revenues generally equal fuel and other cost
recovery expenses and do not impact net income.
Wholesale Revenues Non-Affiliates
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$(25.8)
|
|
(13.1)
|
|
$(53.2)
|
|
(9.9) |
|
Wholesale revenues from non-affiliates will vary depending on the market cost of available energy
compared to the cost of Alabama Power and Southern Company system-owned generation, demand for
energy within the Southern Company service territory, and availability of Southern Company system
generation.
In the third quarter 2009, wholesale revenues from non-affiliates were $170.6 million compared to
$196.4 million for the corresponding period in 2008. The decrease was due to a 9.1% reduction in
the price of energy and a 4.4% decrease in KWH sales primarily caused by the recessionary economy.
For year-to-date 2009, wholesale revenues from non-affiliates were $483.2 million compared to
$536.4 million for the corresponding period in 2008. The decrease was due to a 6.6% reduction in
the price of energy and a 3.6% decrease in KWH sales primarily caused by the recessionary economy.
Wholesale Revenues Affiliates
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$(26.6)
|
|
(43.8)
|
|
$(69.8)
|
|
(29.0) |
|
Wholesale revenues from affiliates will vary depending on demand and the availability and cost of
generating resources at each company within the Southern Company system. These affiliate sales are
made in accordance with the IIC, as approved by the FERC. These transactions do not have a
significant impact on earnings since the energy is generally sold at marginal cost.
In the third quarter 2009, wholesale revenues from affiliates were $34.0 million compared to $60.6
million for the corresponding period in 2008. The decrease was due to a 60.4% decrease in fuel
prices, partially offset by a 41.8% increase in KWH sales.
For year-to-date 2009, wholesale revenues from affiliates were $170.9 million compared to $240.7
million for the corresponding period in 2008. The decrease was due to a 41.0% decrease in fuel
prices, partially offset by a 20.4% increase in KWH sales.
43
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Revenues
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$(4.2)
|
|
(8.6)
|
|
$(29.4)
|
|
(19.2) |
|
In the third quarter 2009, the decrease in other revenues when compared to the corresponding period
in 2008 was not material.
For year-to-date 2009, other revenues were $124.0 million compared to $153.4 million for the
corresponding period in 2008. The decrease was primarily due to a $39.6 million decrease in
revenues from gas-fueled co-generation steam facilities resulting from lower gas prices and a
decline in sales volume, partially offset by a $7.3 million increase in customer charges related to
late fees.
Co-generation steam fuel revenues do not have a significant impact on earnings since they are
generally offset by fuel expenses.
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2009 |
|
Year-to-Date 2009 |
|
|
vs. |
|
vs. |
|
|
Third Quarter 2008 |
|
Year-to-Date 2008 |
|
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
Fuel* |
|
$ |
(145.3 |
) |
|
|
(22.3 |
) |
|
$ |
(191.1 |
) |
|
|
(11.7 |
) |
Purchased power non-affiliates |
|
|
(61.3 |
) |
|
|
(58.8 |
) |
|
|
(69.3 |
) |
|
|
(45.0 |
) |
Purchased power affiliates |
|
|
(47.7 |
) |
|
|
(39.2 |
) |
|
|
(114.0 |
) |
|
|
(39.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fuel and purchased power expenses |
|
$ |
(254.3 |
) |
|
|
|
|
|
$ |
(374.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Fuel includes fuel purchased by Alabama Power for tolling agreements where power is generated
by the provider and is included in purchased power when determining the average cost of purchased
power.
In the third quarter 2009, total fuel and purchased power expenses were $623.3 million
compared to $877.6 million for the corresponding period in 2008. The decrease was primarily due to
a $145.7 million decrease in the cost of energy primarily resulting from a decrease in the average
cost of purchased power and natural gas and $108.6 million decrease related to total KWHs generated
and purchased.
For year-to-date 2009, total fuel and purchased power expenses were $1.69 billion compared to $2.07
billion for the corresponding period in 2008. The decrease was primarily due to a $262.1 million
decrease related to total KWHs generated and purchased and a $112.3 million decrease in the cost of
energy primarily resulting from a decrease in the average cost of purchased power and natural gas.
Fuel and purchased power transactions do not have a significant impact on earnings since energy
expenses are generally offset by energy revenues through Rate ECR. See FUTURE EARNINGS POTENTIAL
FERC and Alabama PSC Matters Retail Fuel Cost Recovery herein for additional information.
44
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of Alabama Powers cost of generation and purchased power are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Third Quarter |
|
Percent |
|
Year-to-Date |
|
Year-to-Date |
|
Percent |
Average Cost |
|
2009 |
|
2008 |
|
Change |
|
2009 |
|
2008 |
|
Change |
|
|
(cents per net KWH) |
|
|
|
|
|
(cents per net KWH) |
|
|
|
|
Fuel |
|
|
2.80 |
|
|
|
3.29 |
|
|
|
(14.9 |
) |
|
|
2.83 |
|
|
|
2.88 |
|
|
|
(1.7 |
) |
Purchased power |
|
|
6.45 |
|
|
|
9.21 |
|
|
|
(30.0 |
) |
|
|
6.23 |
|
|
|
7.95 |
|
|
|
(21.6 |
) |
|
In the third quarter 2009, fuel expense was $506.4 million compared to $651.7 million for the
corresponding period in 2008. The decrease was primarily due to a 40.8% and 8.2% decrease in the
average cost of KWHs generated by natural gas and coal, respectively. Lower natural gas prices and
an increase in hydro generation resulted in a decrease in the KWHs generated by coal and an
increase in the KWHs generated by natural gas.
For year-to-date 2009, fuel expense was $1.44 billion compared to $1.63 billion for the
corresponding period in 2008. The decrease was primarily related a 39.3% decrease in the average
cost of KWHs generated by natural gas and a 10.1% increase the average cost of KWHs generated by
coal. Lower natural gas prices and an increase in hydro generation resulted in a decrease in the
KWHs generated by coal and an increase in the KWHs generated by natural gas.
Non-Affiliates
In the third quarter 2009, purchased power from non-affiliates was $42.9 million compared to $104.2
million for the corresponding period in 2008. The decrease was primarily related to a 58.0% volume
decrease in the KWHs purchased primarily caused by reduced demand due to the recessionary economy.
For year-to-date 2009, purchased power from non-affiliates was $84.6 million compared to $153.9
million for the corresponding period in 2008. The decrease was related to a 26.7% decrease in KWHs
purchased primarily caused by reduced demand due to the recessionary economy and a 25.0% decrease
in price.
Energy purchases from non-affiliates will vary depending on the market cost of available energy
being lower than the cost of Southern Company system-generated energy, demand for energy within the
Southern Company system service territory, and availability of Southern Company system generation.
Affiliates
In the third quarter 2009, purchased power from affiliates was $74.0 million compared to $121.7
million for the corresponding period in 2008. The decrease was related to a 22.0% decrease in the
amount of energy purchased and a 22.0% decrease in price.
For year-to-date 2009, purchased power from affiliates was $172.1 million compared to $286.1
million for the corresponding period in 2008. The decrease was related to a 28.6% decrease in the
amount of energy purchased and a 15.8% decrease in price.
Energy purchases from affiliates will vary depending on demand and the availability and cost of
generating resources at each company within the Southern Company system. These purchases are made
in accordance with the IIC, as approved by the FERC.
45
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operations and Maintenance Expenses
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$(28.9)
|
|
(9.6)
|
|
$(89.8)
|
|
(9.8) |
|
In the third quarter 2009, other operations and maintenance expenses were $272.1 million compared
to $301.0 million for the corresponding period in 2008. The decrease was a result of a $7.0
million decrease in transmission and distribution expenses related to a reduction in overhead line
clearing costs and labor, a $6.8 million decrease in nuclear expense related to a reduction in
contract labor and material expenses, a $4.6 million decrease in steam power expense related to
fewer scheduled outages, a $3.9 million decrease in administrative and general expenses related to
a reduction in the injuries and damages reserve, partially offset by an increase in affiliated
service company expenses, and a $2.1 million decrease in customer service expenses.
For year-to-date 2009, other operations and maintenance expenses were $827.3 million compared to
$917.1 million for the corresponding period in 2008. The decrease was a result of a $46.4 million
decrease in steam power expense related to reduction in contract labor and fewer scheduled outages,
a $22.0 million decrease in transmission and distribution expenses related to a reduction in
overhead line clearing and labor, and an $11.0 million decrease in administrative and general
expenses related to reductions in the injuries and damages reserve, and post retirement medical
expense, partially offset by an increase in pension expenses.
Depreciation and Amortization
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$4.4
|
|
3.3
|
|
$19.0
|
|
5.0 |
|
In the third quarter 2009, the increase in depreciation and amortization when compared to the
corresponding period in 2008 was not material.
For year-to-date 2009, depreciation and amortization was $406.7 million compared to $387.7 million
for the corresponding period in 2008. The increase was the result of an increase in property,
plant, and equipment primarily related to environmental mandates and transmission and distribution
projects.
On June 25, 2009, Alabama Power submitted an offer of settlement and stipulation to the FERC
relating to the 2008 depreciation study that was filed in October 2008. The settlement offer
withdraws the requests for authorization to use updated depreciation rates. In lieu of the new
rates, Alabama Power will use those depreciation rates employed prior and up to January 1, 2009
that were previously approved by the FERC. On September 30, 2009, the FERC issued an order
approving the settlement offer.
See MANAGEMENTS DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Depreciation and Amortization
of Alabama Power in Item 7 of the Form 10-K for additional information.
46
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Taxes Other Than Income Taxes
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$1.2
|
|
1.5
|
|
$12.1
|
|
5.3 |
|
In the third quarter 2009, the increase in taxes other than income taxes when compared to the
corresponding period in 2008 was not material.
For year-to-date 2009, taxes other than income taxes were $239.7 million compared to $227.6 million
for the corresponding period in 2008. The increase was primarily due to increases in state and
municipal public utility license tax bases.
Allowance for Equity Funds Used During Construction
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$9.4
|
|
79.5
|
|
$24.6
|
|
76.4 |
|
In the third quarter 2009, AFUDC was $21.1 million compared to $11.7 million for the corresponding
period in 2008. For year-to-date 2009, AFUDC was $56.9 million compared to $32.3 million for the
corresponding period in 2008. These increases were primarily due to increases in the amount of
construction work in progress at generating facilities related to environmental mandates.
Interest Expense, Net of Amounts Capitalized
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$4.7
|
|
6.5
|
|
$15.0
|
|
7.2 |
|
In the third quarter 2009, the increase in interest expense, net of amounts capitalized when
compared to the corresponding period in 2008 was not material.
For year-to-date 2009, interest expense, net of amounts capitalized was $224.8 million compared to
$209.8 million for the corresponding period in 2008. The increase was primarily due to the
issuance of additional long-term debt, partially offset by additional capitalized interest. See
MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Financing Activities
of Alabama Power in Item 7 of the Form 10-K and FINANCIAL CONDITION AND LIQUIDITY Financing
Activities herein for additional information.
Income Taxes
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$(2.0)
|
|
(1.3)
|
|
$21.1
|
|
6.5 |
|
In the third quarter 2009, income taxes were $154.1 million compared to $156.1 million for the
corresponding period in 2008. The decrease was primarily due to the increase in non-taxable AFUDC
and the manufacturers deduction, partially offset by higher pre-tax income and actualization of
the 2008 income tax return.
47
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2009, income taxes were $344.4 million compared to $323.3 million for the
corresponding period in 2008. The increase was primarily due to higher pre-tax income, partially
offset by the increase in non-taxable AFUDC.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Alabama Powers future
earnings potential. The level of Alabama Powers future earnings depends on numerous factors that
affect the opportunities, challenges, and risks of Alabama Powers primary business of selling
electricity. These factors include Alabama Powers ability to maintain a constructive regulatory
environment that continues to allow for the recovery of prudently incurred costs during a time of
increasing costs. Future earnings in the near term will depend, in part, upon maintaining energy
sales, which is subject to a number of factors. These factors include weather, competition, new
energy contracts with neighboring utilities, energy conservation practiced by customers, the price
of electricity, the price elasticity of demand, and the rate of economic growth or decline in
Alabama Powers service area. Recessionary conditions have negatively impacted sales and are
expected to continue to have a negative impact, particularly to industrial and commercial
customers. The timing and extent of the economic recovery will impact future earnings.
For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENTS
DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL of Alabama Power in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental statutes and regulations
could affect earnings if such costs cannot continue to be fully recovered in rates on a timely
basis. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental
Matters of
Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under
Environmental Matters in Item 8 of the Form 10-K for additional information.
Carbon Dioxide Litigation
New York Case
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters -
Carbon Dioxide Litigation New York Case of Alabama Power in Item 7 and Note 3 to the financial
statements of Alabama Power under Environmental Matters Carbon Dioxide Litigation New York
Case in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation.
On September 21, 2009, the U.S. Court of Appeals for the Second Circuit reversed the district
courts ruling, vacating the dismissal of the plaintiffs claim, and remanding the case to the
district court. This ruling is subject to potential reconsideration and appeal. Therefore, the
ultimate outcome of these matters cannot be determined at this time.
48
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Kivalina Case
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters -
Carbon Dioxide Litigation Kivalina Case of Alabama Power in Item 7 and Note 3 to the financial
statements of Alabama Power under Environmental Matters Carbon Dioxide Litigation Kivalina
Case in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation.
On September 30, 2009, the U.S. District Court for the Northern District of California granted the
defendants motions to dismiss the case based on lack of jurisdiction and ruled that the claims
were barred by the political question doctrine and by the plaintiffs failure to establish the
standard for determining that the defendants conduct caused the injury alleged. The ultimate
outcome of this matter may depend on appeals or other legal proceedings and cannot be determined at
this time.
Air Quality
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters -
Environmental Statutes and Regulations Air Quality of Alabama Power in Item 7 of the Form 10-K
for additional information regarding the eight-hour ozone standard. On September 16, 2009, the EPA
announced that it would reconsider its March 2008 decision regarding the eight-hour ozone standard,
potentially resulting in a more stringent standard and designation of additional nonattainment
areas within Alabama Powers service territory. The EPA is expected to propose any revisions to
the standard by December 2009 and issue a final decision by August 2010. The impact of a more
stringent standard will depend on the proposed and final regulations and resolution of any legal
challenges and cannot be determined at this time.
Water Quality
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters -
Environmental Statutes and Regulations Water Quality of Alabama Power in Item 7 of the Form 10-K
for additional information regarding the EPAs regulation of cooling water intake structures. On
April 1, 2009, the U.S. Supreme Court reversed the U.S. Court of Appeals for the Second Circuits
decision with respect to the rules use of cost-benefit analysis and held that the EPA could
consider costs in arriving at its standards and in providing variances from those standards for
existing power plant cooling water intake structures. Other aspects of the courts decision were
not appealed and remain unaffected by the U.S. Supreme Courts ruling. While the U.S. Supreme
Courts decision may ultimately result in greater flexibility for demonstrating compliance with the
standards, the full scope of the 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.
Global Climate Issues
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters -
Global Climate Issues of Alabama Power in Item 7 of the Form 10-K for information regarding the
potential for legislation and regulation addressing greenhouse gas emissions. On April 24, 2009,
the EPA published a proposed finding that certain greenhouse gas emissions from new motor vehicles
endanger public health and welfare due to climate change and, on September 28, 2009, the EPA
published a proposed rule regulating greenhouse gas emissions from new motor vehicles under the
Clean Air Act. The EPA has stated that finalization of this rule will cause carbon dioxide and
other greenhouse gases to become regulated pollutants under the Prevention of Significant
Deterioration preconstruction permit program
and the Title V operating permit program, which both apply to power plants. On October 27, 2009,
the EPA
49
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
published a proposed rule governing how these programs would be applied to stationary
sources, including power plants. The EPA has stated that it expects to finalize its endangerment
finding and proposed rules in March 2010. The ultimate outcome of the endangerment finding and
these proposed rules cannot be determined at this time and will depend on additional regulatory
action and potential legal challenges.
In addition, federal legislative proposals that would impose mandatory requirements related to
greenhouse gas emissions, renewable energy standards, and energy efficiency standards continue to
be actively considered in Congress, and the reduction of greenhouse gas emissions has been
identified as a high priority by the current Administration. On June 26, 2009, the American Clean
Energy and Security Act of 2009, which would impose mandatory greenhouse gas restrictions through
implementation of a cap and trade program, a renewable energy standard, and other measures, was
passed by the House of Representatives. Similar legislation is being considered by the Senate.
The ultimate outcome of these matters cannot be determined at this time; however, mandatory
restrictions on Alabama Powers greenhouse gas emissions, or requirements relating to renewable
energy or energy efficiency, 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.
FERC and Alabama PSC Matters
Market-Based Rate Authority
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL FERC Matters Market-Based
Rate Authority of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power
under FERC Matters Market-Based Rate Authority in Item 8 of the Form 10-K for information
regarding market-based rate authority. In October 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 March 5, 2009, the
FERC accepted Southern Companys CBR tariff for filing. On March 25, 2009, the FERC accepted
Southern Companys compliance filing related to the MBR tariff and directed Southern Company to
commence the energy auction in 30 days. Southern Company commenced the energy auction on April 23,
2009. The FERC has determined that implementation of the energy auction in accordance with the MBR
tariff order adequately mitigates going forward any presumption of market power that Southern
Company may have in the Southern Company retail service territory and adjacent market areas. The
original generation dominance proceeding initiated by the FERC in December 2004 remains pending
before the FERC. The ultimate outcome of this matter cannot be determined at this time.
Retail Fuel Cost Recovery
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Retail Fuel
Cost Recovery of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power
under Retail Regulatory Matters Fuel Cost Recovery in Item 8 of the Form 10-K for information
regarding Alabama Powers fuel cost recovery. Alabama Powers over recovered fuel costs as of
September 30, 2009 totaled $54.9 million as compared to under recovered fuel costs of $305.8
million at
December 31, 2008. These over recovered fuel costs at September 30, 2009 are included in other
regulatory liabilities, current on Alabama Powers Condensed Balance Sheets herein. This
classification is based on an
50
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
estimate which includes such factors as weather, generation
availability, energy demand, and the price of energy. A change in any of these factors could have
a material impact on the timing of any return of the over recovered fuel costs.
On June 2, 2009, the Alabama PSC approved a decrease in Alabama Powers Rate ECR factor from 3.983
cents per KWH to 3.733 cents per KWH for billings beginning June 9, 2009 through October 8, 2010,
which will have no significant effect on Alabama Powers revenues or net income, but will decrease
annual cash flow.
Thereafter, the Rate ECR factor will be 5.910 cents per KWH, absent a contrary order by the Alabama
PSC. Rate ECR revenues, as recorded on the financial statements, are adjusted for differences in
actual recoverable fuel costs and amounts billed in current regulated rates. Alabama Power will be
allowed to include a carrying charge associated with under recovered fuel costs in the fuel expense
calculation. When the Rate ECR factor results in an over recovered position, Alabama Power will
accrue interest on any such over recovered balance at the same rate used to derive the carrying
cost.
Natural Disaster Cost Recovery
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Natural
Disaster Cost Recovery of Alabama Power in Item 7 and Note 3 to the financial statements of
Alabama Power under Retail Regulatory Matters Natural Disaster Cost Recovery in Item 8 of the
Form 10-K for information regarding natural disaster cost recovery. At September 30, 2009, Alabama
Power had accumulated a balance of $34.0 million in the target reserve for future storms, which is
included in the Condensed Balance Sheets herein under Other Regulatory Liabilities.
Steam Service
On February 5, 2009, the Alabama PSC granted a Certificate of Abandonment of Steam Service in the
downtown area of the City of Birmingham. The order allows Alabama Power to discontinue steam
service by the earlier of three years from May 14, 2008 or when it has no remaining steam service
customers. Currently, Alabama Power has contractual obligations to provide steam service until
2013. Impacts related to the abandonment of steam service are recognized in operating income and
are not material to the earnings of Alabama Power.
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, which could have a significant impact on the future cash flow
and net income of Alabama Power. Alabama Power estimates the cash flow reduction to 2009 tax
payments as a result of the bonus depreciation provisions of the ARRA to be between approximately
$75 million and $90 million. On October 27, 2009, Southern Company and its subsidiaries received
notice that an award of $165 million had been granted, of which $65 million relates to Alabama
Power, under its ARRA grant application for transmission and distribution automation and
modernization projects pending final negotiations. Alabama Power continues to assess the other
financial implications of the ARRA. The ultimate impact cannot be determined at this time.
51
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Matters
Alabama Power is involved in various other matters being litigated and regulatory matters that
could affect future earnings. In addition, Alabama Power is subject to certain claims and legal
actions arising in the ordinary course of business. Alabama Powers business activities are
subject to extensive governmental regulation related to public health and the environment, such as
regulation of air emissions and water discharges. 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, and common law nuisance claims for
injunctive relief and property damage allegedly caused by greenhouse gas emissions, have become
more frequent. The ultimate outcome of such pending or potential litigation against Alabama Power
cannot be predicted at this time; however, for current proceedings not specifically reported herein
or in Note 3 to the financial statements of Alabama Power in Item 8 of the Form 10-K, management
does not anticipate that the liabilities, if any, arising from such current proceedings would have
a material adverse effect on Alabama Powers financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other
contingencies, regulatory matters, and other matters being litigated which may affect future
earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Alabama Power prepares its financial statements in accordance with accounting principles
generally accepted in the United States. Significant accounting policies are described in Note
1 to the financial statements of Alabama Power in Item 8 of the Form 10-K. In the application
of these policies, certain estimates are made that may have a material impact on Alabama Powers
results of operations and related disclosures. Different assumptions and measurements could
produce estimates that are significantly different from those recorded in the financial
statements. See MANAGEMENTS DISCUSSION AND ANALYSIS ACCOUNTING POLICIES Application of
Critical Accounting Policies and Estimates of Alabama Power in Item 7 of the Form 10-K for a
complete discussion of Alabama Powers critical accounting policies and estimates related to
Electric Utility Regulation, Contingent Obligations, and Unbilled Revenues.
New Accounting Standards
Variable Interest Entities
In June 2009, the FASB issued new guidance on the consolidation of variable interest entities,
which replaces the quantitative-based risks and rewards calculation for determining whether an
enterprise is the primary beneficiary in a variable interest entity with an approach that is
primarily qualitative, requires ongoing assessments of whether an enterprise is the primary
beneficiary of a variable interest entity, and requires additional disclosures about an
enterprises involvement in variable interest entities. Alabama Power is required to adopt this
new guidance effective January 1, 2010 and is evaluating the impact, if any, it will have on its
financial statements.
52
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Overview
Alabama Powers financial condition remained stable at September 30, 2009. Throughout the turmoil
in the financial markets, Alabama Power 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. Alabama Power 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. Market rates for committed credit have increased, and Alabama
Power has been and expects to continue to be subject to higher costs as its existing facilities are
replaced or renewed. Total committed credit fees currently average less than 1/4 of 1% per year for
Alabama Power. Alabama Powers interest cost for short-term debt has decreased as market
short-term interest rates have declined from 2008 levels. The ultimate impact on future financing
costs as a result of financial turmoil cannot be determined at this time. Alabama Power
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.
Alabama Powers investments in pension and nuclear decommissioning trust funds remained stable
during the third quarter 2009. Alabama Power expects that the earliest that cash may have to be
contributed to the pension trust fund is 2012. The projections of the amount vary significantly
depending on key variables including future trust fund performance and cannot be determined at this
time. Alabama Power does not expect any changes to the funding obligations to the nuclear
decommissioning trust at this time.
Net cash provided from operating activities totaled $1.2 billion for the first nine months of 2009,
compared to $935.4 million for the corresponding period in 2008. The $230.0 million increase in
cash provided from operating activities was primarily due to an increase in net income, as
previously discussed, and a decrease in receivables attributable to collections of under recovered
regulatory clauses. Net cash used for investing activities totaled $868.5 million for the first
nine months of 2009, compared to $1.1 billion for the corresponding period in 2008. The $197.5
million decrease was primarily due to a decline in gross property additions related to steam
generation equipment and purchases of nuclear fuel, partially offset by increased construction of
distribution facilities. Net cash provided from financing activities totaled $6.0 million for the
first nine months of 2009, compared to $275.2 million for the corresponding period in 2008. The
$269.2 million decrease was primarily due to fewer issuances of securities and a decrease of notes
payable, partially offset by fewer redemptions of securities in the first nine months of 2009 as
compared to the first nine months of 2008. Fluctuations in cash flow from financing activities
vary from year-to-year based on capital needs and the maturity or redemption of securities.
Significant balance sheet changes for the first nine months of 2009 include an increase of $302.9
million in cash and cash equivalents, an increase of $443.6 million in gross plant primarily due to
increases in environmental mandates and transmission and distribution projects, and an increase of
$382.3 million in construction work in progress. Long-term debt increased $552.2 million.
Capital Requirements and Contractual Obligations
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Capital
Requirements and Contractual Obligations of Alabama Power in Item 7 of the Form 10-K for a
description of Alabama Powers capital requirements for its construction program, scheduled
maturities of long-term debt, as well as the related interest, derivative obligations,
preferred and preference stock dividends,
leases, purchase commitments, and trust funding requirements. There are no maturities of long-term
debt required
53
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
through September 30, 2010. The construction program is 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; Alabama PSC approvals; changes in legislation;
the cost and efficiency of construction labor, equipment, and materials; and the cost of capital.
In addition, there can be no assurance that costs related to capital expenditures will be fully
recovered.
Sources
of Capital
Alabama Power plans to obtain the funds required for construction and other
purposes from sources similar to those utilized in the past. Recently, Alabama Power has primarily
utilized funds from operating cash flows, unsecured debt, common stock, preferred stock, and
preference stock. However, the amount, type, and timing of any future financings, if needed, will
depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENTS
DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Sources of Capital of Alabama Power
in Item 7 of the Form 10-K for additional information.
Alabama Powers current liabilities sometimes exceed current assets because of Alabama Powers debt
due within one year and the periodic use of short-term debt as a funding source primarily to meet
scheduled maturities of long-term debt as well as cash needs which can fluctuate significantly due
to the seasonality of the business. To meet short-term cash needs and contingencies, Alabama Power
had at September 30, 2009 cash and cash equivalents of approximately $331 million, unused committed
lines of credit of approximately $1.3 billion, and commercial paper programs. The credit
facilities provide liquidity support to Alabama Powers commercial paper borrowings and $582
million are dedicated to funding purchase obligations related to variable rate pollution control
revenue bonds. Of the unused credit facilities, $20 million will expire in 2009, $461 million will
expire in 2010, $25 million will expire in 2011, and $765 million will expire in 2012. Of the
facilities that expire in 2009 and 2010, $372 million allow for one-year term loans. Alabama Power
expects to renew its credit facilities, as needed, prior to expiration. See Note 6 to the
financial statements of Alabama Power under Bank Credit Arrangements in Item 8 of the Form 10-K
and Note (E) to the Condensed Financial Statements under Bank Credit Arrangements herein for
additional information. Alabama Power may also meet short-term cash needs through a Southern
Company subsidiary organized to issue and sell commercial paper at the request and for the benefit
of Alabama Power and other Southern Company subsidiaries. At September 30, 2009, Alabama Power had
no commercial paper outstanding and no outstanding borrowings under its committed lines of credit.
Management believes that the need for working capital can be adequately met by utilizing commercial
paper programs, lines of credit, and cash.
Credit Rating Risk
Alabama Power does not have any credit arrangements that would require material changes in payment
schedules or terminations as a result of a credit rating downgrade. There are certain contracts
that could require collateral, but not accelerated payment, in the event of a credit rating change
to BBB- and/or Baa3 or below. These contracts are primarily for physical electricity purchases,
fuel purchases, fuel transportation and storage, emissions allowances, and energy price risk
management. At September 30, 2009, the maximum potential collateral requirements under these
contracts at a BBB- and/or Baa3 rating were approximately $11 million. At September 30, 2009, the
maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3
were approximately $318 million. Included in these amounts are certain agreements that could
require collateral in the event that one or more Power Pool participants has a credit rating change
to
below investment grade. Generally, collateral may be provided by a Southern Company guaranty,
letter of credit, or
54
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
cash. Additionally, any credit rating downgrade could impact Alabama Powers
ability to access capital markets, particularly the short-term debt market.
Market Price Risk
Alabama Powers market risk exposure relative to interest rate changes has not changed materially
compared with the December 31, 2008 reporting period. Since a significant portion of outstanding
indebtedness is at fixed rates, Alabama Power is not aware of any facts or circumstances that would
significantly affect exposures on existing indebtedness in the near term. However, the impact on
future financing costs cannot now be determined.
Due to cost-based rate regulation, Alabama Power continues to have limited exposure to market
volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate
residual risks relative to movements in electricity prices, Alabama Power enters into physical
fixed-price contracts for the purchase and sale of electricity through the wholesale electricity
market. Alabama Power continues to manage a retail fuel-hedging program implemented per the
guidelines of the Alabama PSC. As such, Alabama Power has no material change in market risk
exposure when compared with the December 31, 2008 reporting period.
The changes in fair value of energy-related derivative contracts for the three months and nine
months ended September 30, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Year-to-Date |
|
|
2009 |
|
2009 |
|
|
Changes |
|
Changes |
|
|
Fair Value |
|
|
(in millions) |
Contracts outstanding at the beginning of the period, assets
(liabilities), net |
|
$ |
(91.5 |
) |
|
$ |
(91.9 |
) |
Contracts realized or settled |
|
|
41.6 |
|
|
|
105.5 |
|
Current period changes(a) |
|
|
2.9 |
|
|
|
(60.6 |
) |
|
Contracts outstanding at the end of the period, assets (liabilities), net |
|
$ |
(47.0 |
) |
|
$ |
(47.0 |
) |
|
(a) |
|
Current period changes also include the changes in fair value of new contracts entered into
during the period, if any. |
The increases in the fair value positions of the energy-related derivative contracts for the
three months and nine months ended September 30, 2009 were $44 million and $45 million,
respectively, substantially all of which is due to natural gas positions. These changes are
attributable to both the volume and prices of natural gas. At September 30, 2009, Alabama Power
had a net hedge volume of 40 million mmBtu with a weighted average contract cost approximately
$1.17 per mmBtu above market prices, compared to 49 million mmBtu at June 30, 2009 with a weighted
average contract cost approximately $1.89 per mmBtu above market prices and compared to 45 million
mmBtu at December 31, 2008 with a weighted average contract cost approximately $2.12 per mmBtu
above market prices. The majority of the natural gas hedge settlements are recovered through the
fuel cost recovery clauses.
55
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At September 30, 2009 and December 31, 2008, the net fair value of energy-related derivative
contracts by hedge designation was reflected in the financial statements as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
Asset (Liability) Derivatives |
|
2009 |
|
2008 |
|
|
(in millions) |
Regulatory hedges |
|
$ |
(47.0 |
) |
|
$ |
(91.9 |
) |
Cash flow hedges |
|
|
|
|
|
|
|
|
Not designated |
|
|
|
|
|
|
|
|
|
Total fair value |
|
$ |
(47.0 |
) |
|
$ |
(91.9 |
) |
|
Energy-related derivative contracts which are designated as regulatory hedges relate to Alabama
Powers fuel hedging program 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. Certain other gains and losses on energy-related
derivatives, designated as cash flow hedges, are initially deferred in OCI 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 and losses recognized in income for the three months and nine months ended
September 30, 2009 and 2008 for energy-related derivative contracts that are not hedges were not
material.
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy
in which they fall at September 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
Fair Value Measurements |
|
|
Total |
|
Maturity |
|
|
Fair Value |
|
Year 1 |
|
Years 2&3 |
|
Years 4&5 |
|
|
(in millions) |
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Level 2 |
|
|
(47.0 |
) |
|
|
(40.3 |
) |
|
|
(6.7 |
) |
|
|
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of
contracts
outstanding at end
of period |
|
$ |
(47.0 |
) |
|
$ |
(40.3 |
) |
|
$ |
(6.7 |
) |
|
$ |
|
|
|
Alabama Power uses over-the-counter contracts that are not exchange traded but are fair valued
using prices which are actively quoted, and thus fall into Level 2. See Note (C) to the Condensed
Financial Statements herein for further discussion on fair value measurements.
For
additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND
LIQUIDITY Market Price Risk of Alabama Power in Item 7 and Notes 1 and 6 to the financial
statements of Alabama Power under Financial Instruments in Item 8 of the Form 10-K and Note (E)
to the Condensed Financial Statements herein.
56
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Financing Activities
In March 2009, Alabama Power issued $500 million of Series 2009A 6.00% Senior Notes due March 1,
2039. The proceeds were used to repay short-term indebtedness and for other general corporate
purposes, including Alabama Powers continuous construction program.
In June 2009, Alabama Power incurred obligations related to the issuance of $53 million of The
Industrial Development Board of the City of Mobile Pollution Control Revenue Bonds (Alabama Power
Barry Plant Project), First Series 2009. The proceeds were used to fund pollution control and
environmental improvement facilities at Plant Barry.
In July 2009, Alabama Power issued 3,375,000 shares of common stock to Southern Company at $40 a
share ($135 million aggregate purchase price). The proceeds were used for general corporate
purposes.
In August 2009, Alabama Powers $250 million Series BB Floating Rate Senior Notes due August 25,
2009 matured.
Subsequent to September 30, 2009, Alabama Power issued 1,687,500 shares of common stock to Southern
Company at $40 a share ($67.5 million aggregate purchase price). The proceeds were used for
general corporate purposes.
In addition to any financings that may be necessary to meet capital requirements and contractual
obligations, Alabama Power plans to continue, when economically feasible, a program to retire
higher-cost securities and replace these obligations with lower-cost capital if market conditions
permit.
57
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
2,093,503 |
|
|
$ |
2,317,817 |
|
|
$ |
5,368,123 |
|
|
$ |
5,723,577 |
|
Wholesale revenues, non-affiliates |
|
|
108,521 |
|
|
|
148,933 |
|
|
|
301,077 |
|
|
|
443,901 |
|
Wholesale revenues, affiliates |
|
|
53,687 |
|
|
|
106,659 |
|
|
|
98,520 |
|
|
|
252,733 |
|
Other revenues |
|
|
71,477 |
|
|
|
70,836 |
|
|
|
199,623 |
|
|
|
200,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
2,327,188 |
|
|
|
2,644,245 |
|
|
|
5,967,343 |
|
|
|
6,620,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
830,283 |
|
|
|
859,778 |
|
|
|
2,083,662 |
|
|
|
2,181,000 |
|
Purchased power, non-affiliates |
|
|
86,450 |
|
|
|
192,293 |
|
|
|
219,220 |
|
|
|
358,047 |
|
Purchased power, affiliates |
|
|
158,864 |
|
|
|
247,845 |
|
|
|
528,505 |
|
|
|
748,622 |
|
Other operations and maintenance |
|
|
358,821 |
|
|
|
379,314 |
|
|
|
1,102,876 |
|
|
|
1,139,910 |
|
Depreciation and amortization |
|
|
122,740 |
|
|
|
162,325 |
|
|
|
464,931 |
|
|
|
472,137 |
|
Taxes other than income taxes |
|
|
86,620 |
|
|
|
91,587 |
|
|
|
243,876 |
|
|
|
242,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,643,778 |
|
|
|
1,933,142 |
|
|
|
4,643,070 |
|
|
|
5,142,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
683,410 |
|
|
|
711,103 |
|
|
|
1,324,273 |
|
|
|
1,478,180 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction |
|
|
23,200 |
|
|
|
20,887 |
|
|
|
66,267 |
|
|
|
72,625 |
|
Interest income |
|
|
611 |
|
|
|
1,416 |
|
|
|
1,644 |
|
|
|
3,253 |
|
Interest expense, net of amounts capitalized |
|
|
(95,309 |
) |
|
|
(86,201 |
) |
|
|
(293,124 |
) |
|
|
(256,266 |
) |
Other income (expense), net |
|
|
(4,127 |
) |
|
|
(3,671 |
) |
|
|
(8,316 |
) |
|
|
(5,593 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(75,625 |
) |
|
|
(67,569 |
) |
|
|
(233,529 |
) |
|
|
(185,981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
607,785 |
|
|
|
643,534 |
|
|
|
1,090,744 |
|
|
|
1,292,199 |
|
Income taxes |
|
|
215,720 |
|
|
|
237,358 |
|
|
|
378,030 |
|
|
|
453,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
392,065 |
|
|
|
406,176 |
|
|
|
712,714 |
|
|
|
838,761 |
|
Dividends on Preferred and Preference Stock |
|
|
4,345 |
|
|
|
4,345 |
|
|
|
13,036 |
|
|
|
13,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income After Dividends on Preferred and Preference Stock |
|
$ |
387,720 |
|
|
$ |
401,831 |
|
|
$ |
699,678 |
|
|
$ |
825,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net Income After Dividends on Preferred and Preference Stock |
|
$ |
387,720 |
|
|
$ |
401,831 |
|
|
$ |
699,678 |
|
|
$ |
825,725 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $(430), $(874), $(156), and
$(890), respectively |
|
|
(682 |
) |
|
|
(1,386 |
) |
|
|
(247 |
) |
|
|
(1,410 |
) |
Reclassification adjustment for amounts included in net
income, net of tax of $2,350, $574, $6,520, and $1,269, respectively |
|
|
3,725 |
|
|
|
911 |
|
|
|
10,336 |
|
|
|
2,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
3,043 |
|
|
|
(475 |
) |
|
|
10,089 |
|
|
|
602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
390,763 |
|
|
$ |
401,356 |
|
|
$ |
709,767 |
|
|
$ |
826,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
59
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
712,714 |
|
|
$ |
838,761 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization, total |
|
|
566,741 |
|
|
|
561,986 |
|
Deferred income taxes and investment tax credits |
|
|
111,035 |
|
|
|
97,752 |
|
Deferred revenues |
|
|
(37,210 |
) |
|
|
96,521 |
|
Deferred expenses |
|
|
(39,570 |
) |
|
|
(26,325 |
) |
Allowance for equity funds used during construction |
|
|
(66,267 |
) |
|
|
(72,625 |
) |
Pension, postretirement, and other employee benefits |
|
|
16,713 |
|
|
|
35,067 |
|
Hedge settlements |
|
|
(16,167 |
) |
|
|
(20,486 |
) |
Insurance cash surrender value |
|
|
22,381 |
|
|
|
(73 |
) |
Other, net |
|
|
21,131 |
|
|
|
(14,926 |
) |
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
-Receivables |
|
|
3,648 |
|
|
|
(284,992 |
) |
-Fossil fuel stock |
|
|
(245,777 |
) |
|
|
5,302 |
|
-Prepaid income taxes |
|
|
(20,694 |
) |
|
|
5,185 |
|
-Other current assets |
|
|
505 |
|
|
|
(19,982 |
) |
-Accounts payable |
|
|
40,719 |
|
|
|
(51,661 |
) |
-Accrued taxes |
|
|
131,432 |
|
|
|
151,112 |
|
-Accrued compensation |
|
|
(105,097 |
) |
|
|
(18,839 |
) |
-Other current liabilities |
|
|
35,575 |
|
|
|
30,285 |
|
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
1,131,812 |
|
|
|
1,312,062 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(1,778,030 |
) |
|
|
(1,419,885 |
) |
Distribution of restricted cash from pollution control revenue bonds |
|
|
22,077 |
|
|
|
22,197 |
|
Nuclear decommissioning trust fund purchases |
|
|
(889,049 |
) |
|
|
(362,565 |
) |
Nuclear decommissioning trust fund sales |
|
|
841,763 |
|
|
|
355,685 |
|
Nuclear decommissioning trust securities lending collateral |
|
|
43,824 |
|
|
|
|
|
Cost of removal, net of salvage |
|
|
(41,709 |
) |
|
|
(29,798 |
) |
Change in construction payables, net of joint owner portion |
|
|
45,828 |
|
|
|
(22,264 |
) |
Other investing activities |
|
|
7,519 |
|
|
|
(30,543 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(1,747,777 |
) |
|
|
(1,487,173 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Increase (decrease) in notes payable, net |
|
|
(103,634 |
) |
|
|
172,789 |
|
Proceeds |
|
|
|
|
|
|
|
|
Capital contributions from parent company |
|
|
923,840 |
|
|
|
259,750 |
|
Pollution control revenue bonds issuances |
|
|
416,510 |
|
|
|
94,935 |
|
Senior notes issuances |
|
|
500,000 |
|
|
|
500,000 |
|
Other long-term debt issuances |
|
|
1,100 |
|
|
|
300,000 |
|
Redemptions |
|
|
|
|
|
|
|
|
Pollution control revenue bonds |
|
|
(327,310 |
) |
|
|
(118,555 |
) |
Senior notes |
|
|
(332,841 |
) |
|
|
(122,427 |
) |
Payment of preferred and preference stock dividends |
|
|
(13,121 |
) |
|
|
(12,668 |
) |
Payment of common stock dividends |
|
|
(554,175 |
) |
|
|
(540,900 |
) |
Other financing activities |
|
|
(12,674 |
) |
|
|
(9,357 |
) |
|
|
|
|
|
|
|
Net cash provided from financing activities |
|
|
497,695 |
|
|
|
523,567 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
(118,270 |
) |
|
|
348,456 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
132,739 |
|
|
|
15,392 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
14,469 |
|
|
$ |
363,848 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $28,443 and $30,112 capitalized for 2009 and 2008, respectively) |
|
$ |
239,290 |
|
|
$ |
216,572 |
|
Income taxes (net of refunds) |
|
$ |
115,436 |
|
|
$ |
228,792 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
60
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Assets |
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
14,469 |
|
|
$ |
132,739 |
|
Restricted cash and cash equivalents |
|
|
4,729 |
|
|
|
22,381 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
618,710 |
|
|
|
554,219 |
|
Unbilled revenues |
|
|
186,742 |
|
|
|
147,978 |
|
Under recovered regulatory clause revenues |
|
|
352,978 |
|
|
|
338,780 |
|
Joint owner accounts receivable |
|
|
64,690 |
|
|
|
43,858 |
|
Other accounts and notes receivable |
|
|
56,068 |
|
|
|
54,041 |
|
Affiliated companies |
|
|
9,103 |
|
|
|
13,091 |
|
Accumulated provision for uncollectible accounts |
|
|
(13,927 |
) |
|
|
(10,732 |
) |
Fossil fuel stock, at average cost |
|
|
730,535 |
|
|
|
484,757 |
|
Materials and supplies, at average cost |
|
|
364,685 |
|
|
|
356,537 |
|
Vacation pay |
|
|
65,898 |
|
|
|
71,217 |
|
Prepaid income taxes |
|
|
130,682 |
|
|
|
65,987 |
|
Other regulatory assets, current |
|
|
89,596 |
|
|
|
118,961 |
|
Other current assets |
|
|
115,782 |
|
|
|
63,464 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,790,740 |
|
|
|
2,457,278 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
25,024,035 |
|
|
|
23,975,262 |
|
Less accumulated provision for depreciation |
|
|
9,426,743 |
|
|
|
9,101,474 |
|
|
|
|
|
|
|
|
Plant in service, net of depreciation |
|
|
15,597,292 |
|
|
|
14,873,788 |
|
Nuclear fuel, at amortized cost |
|
|
305,081 |
|
|
|
278,412 |
|
Construction work in progress |
|
|
2,044,835 |
|
|
|
1,434,989 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
17,947,208 |
|
|
|
16,587,189 |
|
|
|
|
|
|
|
|
Other Property and Investments: |
|
|
|
|
|
|
|
|
Equity investments in unconsolidated subsidiaries |
|
|
64,809 |
|
|
|
57,163 |
|
Nuclear decommissioning trusts, at fair value |
|
|
594,954 |
|
|
|
460,430 |
|
Miscellaneous property and investments |
|
|
38,673 |
|
|
|
40,945 |
|
|
|
|
|
|
|
|
Total other property and investments |
|
|
698,436 |
|
|
|
558,538 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
594,974 |
|
|
|
572,528 |
|
Deferred under recovered regulatory clause revenues |
|
|
317,780 |
|
|
|
425,609 |
|
Other regulatory assets, deferred |
|
|
1,285,487 |
|
|
|
1,449,352 |
|
Other deferred charges and assets |
|
|
197,428 |
|
|
|
265,174 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
2,395,669 |
|
|
|
2,712,663 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
23,832,053 |
|
|
$ |
22,315,668 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
61
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
253,668 |
|
|
$ |
280,443 |
|
Notes payable |
|
|
253,461 |
|
|
|
357,095 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
208,455 |
|
|
|
260,545 |
|
Other |
|
|
602,484 |
|
|
|
422,485 |
|
Customer deposits |
|
|
197,539 |
|
|
|
186,919 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Accrued income taxes |
|
|
148,100 |
|
|
|
70,916 |
|
Unrecognized tax benefits |
|
|
157,512 |
|
|
|
128,712 |
|
Other accrued taxes |
|
|
237,638 |
|
|
|
278,172 |
|
Accrued interest |
|
|
106,454 |
|
|
|
79,432 |
|
Accrued vacation pay |
|
|
49,248 |
|
|
|
57,643 |
|
Accrued compensation |
|
|
38,450 |
|
|
|
135,191 |
|
Liabilities from risk management activities |
|
|
59,287 |
|
|
|
113,432 |
|
Other cost of removal obligations, current |
|
|
241,866 |
|
|
|
|
|
Other regulatory liabilities, current |
|
|
94,688 |
|
|
|
60,330 |
|
Other current liabilities |
|
|
127,518 |
|
|
|
75,846 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,776,368 |
|
|
|
2,507,161 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
7,284,759 |
|
|
|
7,006,275 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
3,317,030 |
|
|
|
3,064,580 |
|
Deferred credits related to income taxes |
|
|
131,869 |
|
|
|
140,933 |
|
Accumulated deferred investment tax credits |
|
|
245,927 |
|
|
|
256,218 |
|
Employee benefit obligations |
|
|
898,669 |
|
|
|
882,965 |
|
Asset retirement obligations |
|
|
716,370 |
|
|
|
688,019 |
|
Other cost of removal obligations |
|
|
85,792 |
|
|
|
396,947 |
|
Other regulatory liabilities, deferred |
|
|
42,997 |
|
|
|
115,865 |
|
Other deferred credits and liabilities |
|
|
103,210 |
|
|
|
111,505 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
5,541,864 |
|
|
|
5,657,032 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
15,602,991 |
|
|
|
15,170,468 |
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
44,991 |
|
|
|
44,991 |
|
|
|
|
|
|
|
|
Preference Stock |
|
|
220,966 |
|
|
|
220,966 |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, without par value |
|
|
|
|
|
|
|
|
Authorized - 20,000,000 shares |
|
|
|
|
|
|
|
|
Outstanding - 9,261,500 shares |
|
|
398,473 |
|
|
|
398,473 |
|
Paid-in capital |
|
|
4,584,001 |
|
|
|
3,655,731 |
|
Retained earnings |
|
|
3,003,292 |
|
|
|
2,857,789 |
|
Accumulated other comprehensive loss |
|
|
(22,661 |
) |
|
|
(32,750 |
) |
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
7,963,105 |
|
|
|
6,879,243 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
23,832,053 |
|
|
$ |
22,315,668 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
62
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2009 vs. THIRD QUARTER 2008
AND
YEAR-TO-DATE 2009 vs. YEAR-TO-DATE 2008
OVERVIEW
Georgia Power operates as a vertically integrated utility providing electricity to retail customers
within its traditional service area located within the State of Georgia and to wholesale customers
in the Southeast. Many factors affect the opportunities, challenges, and risks of Georgia Powers
business of selling electricity. These factors include the ability to maintain a 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. These costs include those
related to projected long-term demand growth, increasingly stringent environmental standards,
capital expenditures, and fuel prices. Appropriately balancing the need to recover these
increasing costs with customer prices will continue to challenge Georgia Power for the foreseeable
future. Georgia Power is required to file a general rate case by July 1, 2010, which will determine
whether the 2007 Retail Rate Plan should be continued, modified, or discontinued. On August 27,
2009, the Georgia PSC approved an accounting order that will allow Georgia Power to amortize
approximately $324 million of its regulatory liability related to other cost of removal obligations
over the 18-month period ending December 31, 2010 in lieu of filing a request for a base rate
increase. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL FERC and
Georgia PSC Matters Retail Rate Matters herein for additional information.
Georgia Power continues to focus on several key performance indicators. These indicators include
customer satisfaction, plant availability, system reliability, and net income after dividends on
preferred and preference stock. For additional information on these indicators, see MANAGEMENTS
DISCUSSION AND ANALYSIS OVERVIEW Key Performance Indicators of Georgia Power in Item 7 of
the Form 10-K.
RESULTS OF OPERATIONS
Net Income
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(14.1) |
|
(3.5) |
|
$(126.0) |
|
(15.3) |
|
Georgia Powers third quarter 2009 net income after dividends on preferred and preference stock was
$387.7 million compared to $401.8 million for the corresponding period in 2008. Georgia Powers
year-to-date 2009 net income after dividends on preferred and preference stock was $699.7 million
compared to $825.7 million for the corresponding period in 2008. These decreases were primarily
due to lower commercial and industrial base revenues resulting from the recessionary economy that
were partially offset by cost containment activities and the amortization of the regulatory
liability related to other cost of removal obligations as authorized by the Georgia PSC. Also
contributing to the year-to-date 2009 decrease was a charge in the first quarter 2009 in connection
with a voluntary attrition plan under which 579 employees resigned from their positions effective
March 31, 2009.
63
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(224.3) |
|
(9.7) |
|
$(355.5) |
|
(6.2) |
|
In the third quarter 2009, retail revenues were $2.09 billion compared to $2.32 billion for the
corresponding period in 2008. For year-to-date 2009, retail revenues were $5.37 billion compared
to $5.72 billion for the corresponding period in 2008.
Details of the change to retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Year-to-Date |
|
|
2009 |
|
2009 |
|
|
(in millions) |
|
(% change) |
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
2,317.8 |
|
|
|
|
|
|
$ |
5,723.6 |
|
|
|
|
|
Estimated
change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
(43.7 |
) |
|
|
(1.9 |
) |
|
|
(64.2 |
) |
|
|
(1.1 |
) |
Sales growth (decline) |
|
|
(24.9 |
) |
|
|
(1.1 |
) |
|
|
(87.2 |
) |
|
|
(1.5 |
) |
Weather |
|
|
(17.0 |
) |
|
|
(0.7 |
) |
|
|
(12.5 |
) |
|
|
(0.2 |
) |
Fuel cost recovery |
|
|
(138.7 |
) |
|
|
(6.0 |
) |
|
|
(191.6 |
) |
|
|
(3.4 |
) |
|
Retail current year |
|
$ |
2,093.5 |
|
|
|
(9.7 |
)% |
|
$ |
5,368.1 |
|
|
|
(6.2 |
)% |
|
Revenues associated with changes in rates and pricing decreased in the third quarter and
year-to-date 2009 when compared to the corresponding periods in 2008 due to decreased revenues from
market-response rates to large commercial and industrial customers of $101.2 million and $204.6
million for the third quarter and year-to-date 2009, respectively, partially offset by increased
recognition of environmental compliance cost recovery revenues of $57.5 million and $140.4 million
for the third quarter and year-to-date 2009, respectively, in accordance with the 2007 Retail Rate
Plan.
Revenues attributable to changes in sales declined in the third quarter and year-to-date 2009 when
compared to the corresponding periods in 2008. These decreases were primarily due to the
recessionary economy, partially offset by a 0.2% increase in retail customers. Weather-adjusted
residential KWH sales increased 0.3%, weather-adjusted commercial KWH sales decreased 1.9%, and
weather-adjusted industrial KWH sales decreased 7.9% for the third quarter 2009 when compared to
the corresponding period in 2008. Weather-adjusted residential KWH sales increased 0.1%,
weather-adjusted commercial KWH sales decreased 1.0%, and weather-adjusted industrial KWH sales
decreased 12.2% year-to-date 2009 when compared to the corresponding period in 2008.
Weather-adjusted industrial KWH sales decreased due to a broad decline in demand across all
industrial segments, most significantly in the chemical, primary metals, textiles, and stone, clay,
and glass sectors, for the third quarter and year-to-date 2009.
Revenues resulting from changes in weather decreased in the third quarter and for year-to-date 2009
as a result of unfavorable weather when compared to the corresponding periods in 2008.
64
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel revenues and costs are allocated between retail and wholesale jurisdictions. Retail fuel cost
recovery revenues decreased by $138.7 million in the third quarter 2009 and by $191.6 million
year-to-date 2009 when compared to the corresponding periods in 2008 due to decreased KWH sales and
lower purchased power and natural gas prices, partially offset by higher coal prices. Electric
rates include provisions to adjust billings for fluctuations in fuel costs, including the energy
component of purchased power costs. Under these provisions, fuel revenues generally equal fuel
expenses, including the fuel component of purchased power costs, and do not impact net income.
Wholesale Revenues Non-Affiliates
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(40.4) |
|
(27.1) |
|
$(142.8) |
|
(32.2) |
|
Wholesale revenues from non-affiliates will vary depending on the market cost of available energy
compared to the cost of Georgia Power and Southern Company system-owned generation, demand for
energy within the Southern Company service territory, and the availability of Southern Company
system generation.
In the third quarter 2009, wholesale revenues from non-affiliates were $108.5 million compared to
$148.9 million for the corresponding period in 2008. The decrease was due to a 44.9% decrease in
KWH sales due to lower demand.
For year-to-date 2009, wholesale revenues from non-affiliates were $301.1 million compared to
$443.9 million for the corresponding period in 2008. The decrease was due to a 47.8% decrease in
KWH sales due to lower demand.
Wholesale Revenues Affiliates
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(53.0) |
|
(49.7) |
|
$(154.2) |
|
(61.0) |
|
Wholesale revenues from affiliates will vary depending on demand and the availability and cost of
generating resources at each company within the Southern Company system. These affiliate sales are
made in accordance with the IIC, as approved by the FERC. These transactions do not have a
significant impact on earnings since the energy is generally sold at marginal cost.
In the third quarter 2009, wholesale revenues from affiliates were $53.7 million compared to $106.7
million for the corresponding period in 2008. The decrease was due to lower natural gas prices
partially offset by a 29.7% increase in KWH sales.
For year-to-date 2009, wholesale revenues from affiliates were $98.5 million compared to $252.7
million for the corresponding period in 2008. The decrease was due to lower natural gas prices and
a 29.9% decrease in KWH sales due to lower demand.
65
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2009 |
|
Year-to-Date 2009 |
|
|
vs. |
|
vs. |
|
|
Third Quarter 2008 |
|
Year-to-Date 2008 |
|
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
Fuel* |
|
$(29.5) |
|
(3.4) |
|
$(97.4) |
|
(4.5) |
Purchased power non-affiliates |
|
(105.8) |
|
(55.0) |
|
(138.8) |
|
(38.8) |
Purchased power affiliates |
|
(88.9) |
|
(35.9) |
|
(220.1) |
|
(29.4) |
|
|
|
|
|
|
|
Total fuel and purchased power expenses |
|
$(224.2) |
|
|
|
$(456.3) |
|
|
|
|
|
|
|
|
|
* Fuel includes fuel purchased by Georgia Power for tolling agreements where power is generated
by the provider and is included in purchased power when determining the average cost of purchased
power.
In the third quarter 2009, total fuel and purchased power expenses were $1.08 billion compared
to $1.30 billion for the corresponding period in 2008. The decrease was due to a $130.1 million
decrease related to fewer KWHs generated and purchased and a $94.1 million decrease in the average
cost of purchased power, partially offset by an increase in the average cost of fuel.
For year-to-date 2009, total fuel and purchased power expenses were $2.83 billion compared to $3.29
billion for the corresponding period in 2008. The decrease was due to a $263.0 million decrease
related to fewer KWHs generated and purchased and a $193.3 million decrease in the average cost of
purchased power, partially offset by an increase in the average cost of fuel.
Details of Georgia Powers cost of generation and purchased power are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Third Quarter |
|
Percent |
|
|
|
|
|
|
|
|
|
Percent |
Average Cost |
|
2009 |
|
2008 |
|
Change |
|
Year-to-Date 2009 |
|
Year-to-Date 2008 |
|
Change |
|
|
(cents per net KWH) |
|
|
|
|
|
(cents per net KWH) |
|
|
|
|
Fuel |
|
|
3.50 |
|
|
|
3.32 |
|
|
|
5.4 |
|
|
|
3.39 |
|
|
|
3.07 |
|
|
|
10.4 |
|
Purchased power |
|
|
6.43 |
|
|
|
8.87 |
|
|
|
(27.5 |
) |
|
|
6.14 |
|
|
|
8.39 |
|
|
|
(26.8 |
) |
|
In the third quarter 2009, fuel expense was $830.3 million compared to $859.8 million for the
corresponding period in 2008. The decrease was due to a decrease of 34.8% in natural gas prices
and a decrease of 6.0% in KWHs generated as a result of lower KWH demand, partially offset by an
increase of 15.1% in the average cost of coal per KWH generated.
For year-to-date 2009, fuel expense was $2.08 billion compared to $2.18 billion for the
corresponding period in 2008. The decrease was due to a decrease of 40.6% in natural gas prices
and a decrease of 13.7% in KWHs generated as a result of lower KWH demand, partially offset by an
increase of 21.7% in the average cost of coal per KWH generated.
Fuel and purchased power transactions do not have a significant impact on earnings since energy
expenses are generally offset by energy revenues through Georgia Powers fuel cost recovery clause.
See FUTURE EARNINGS POTENTIAL FERC and Georgia PSC Matters Retail Fuel Cost Recovery
herein for additional information.
66
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-Affiliates
In the third quarter 2009, purchased power from non-affiliates was $86.5 million compared to $192.3
million for the corresponding period in 2008. The decrease was due to a 28.0% decrease in the
average cost of KWH purchased and a 37.5% decrease in the volume of KWHs purchased.
For year-to-date 2009, purchased power from non-affiliates was $219.2 million compared to $358.0
million for the corresponding period in 2008. The decrease was due to a 35.6% decrease in the
average cost of KWH purchased and a 4.9% decrease in the volume of KWHs purchased.
Energy purchases from non-affiliates will vary depending on the market cost of available energy
being lower than the cost of Southern Company system-generated energy, demand for energy within the
Southern Company system service territory, and availability of Southern Company system generation.
Affiliates
In the third quarter 2009, purchased power from affiliates was $158.9 million compared to $247.8
million for the corresponding period in 2008. The decrease was due to a 26.7% decrease in the
average cost per KWH purchased and a 4.7% decrease in the volume of KWHs purchased.
For year-to-date 2009, purchased power from affiliates was $528.5 million compared to $748.6
million for the corresponding period in 2008. The decrease was due to a 23.7% decrease in the
average cost of KWH purchased partially offset by a 1.6% increase in the volume of KWHs purchased.
Energy purchases from affiliates will vary depending on demand and the availability and cost of
generating resources at each company within the Southern Company system. These purchases are made
in accordance with the IIC, as approved by the FERC.
Other Operations and Maintenance Expenses
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(20.5) |
|
(5.4) |
|
$(37.0) |
|
(3.2) |
|
In the third quarter 2009, other operations and maintenance expenses were $358.8 million compared
to $379.3 million for the corresponding period in 2008. The decrease was due to a $9.1 million
decrease in power generation, a $7.2 million decrease in transmission and distribution, and a
decrease of $6.1 million in customer accounting, service, and sales costs, most of which are
related to cost containment activities in an effort to offset the effects of the recessionary
economy.
For year-to-date 2009, other operations and maintenance expenses were $1.10 billion compared to
$1.14 billion for the corresponding period in 2008. The decrease was due to a $24.3 million
decrease in power generation, a $25.5 million decrease in transmission and distribution, and a
$20.6 million decrease in customer accounting, service, and sales costs primarily due to the cost
containment activities described above, partially offset by a $5.7 million increase in
uncollectible accounts, a $2.8 million increase in property insurance, and a $29.4 million charge
in the first quarter 2009 in connection with a voluntary attrition plan under which 579 employees
elected to resign their positions effective March 31, 2009. In the second and third quarters 2009,
approximately two-thirds of the $29.4 million charge was offset by lower salary and employee
benefits costs, and the other one-third will be offset during the remainder of the year. This
charge is not expected to have a material impact on Georgia Powers financial statements for the
year ending December 31, 2009.
67
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation and Amortization
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(39.6) |
|
(24.4) |
|
$(7.2) |
|
(1.5) |
|
In the third quarter 2009, depreciation and amortization was $122.7 million compared to $162.3
million for the corresponding period in 2008. For year-to-date 2009, depreciation and amortization
was $464.9 million compared to $472.1 million for the corresponding period in 2008. These
decreases were primarily due to the amortization of $54.0 million of the regulatory liability
related to other cost of removal obligations as authorized by the Georgia PSC, partially offset by
increased depreciation due to additional plant in service related to transmission, distribution,
and environmental projects.
Allowance for Equity Funds Used During Construction
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$2.3 |
|
11.1 |
|
$(6.3) |
|
(8.8) |
|
In the third quarter 2009, the change in allowance for equity funds used during construction
(AFUDC) when compared to the corresponding period in 2008 was not material.
For year-to-date 2009, AFUDC was $66.3 million compared to $72.6 million for the corresponding
period in 2008. The decrease was due to a decrease in the average cost of construction work in
progress balances for year-to-date 2009 compared to the corresponding period in 2008 as a result of
projects completed in 2008.
Interest Expense, Net of Amounts Capitalized
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$9.1 |
|
10.6 |
|
$36.8 |
|
14.4 |
|
In the third quarter 2009, interest expense, net of amounts capitalized was $95.3 million compared
to $86.2 million for the corresponding period in 2008. For year-to-date 2009, interest expense,
net of amounts capitalized was $293.1 million compared to $256.3 million for the corresponding
period in 2008. These increases were primarily due to an increase in long-term debt levels
resulting from the issuance of additional senior notes and pollution control bonds in the last 12
months to fund Georgia Powers ongoing construction program, partially offset by lower average
interest rates on existing variable rate debt.
Income Taxes
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(21.7) |
|
(9.1) |
|
$(75.4) |
|
(16.6) |
|
In the third quarter 2009, income taxes were $215.7 million compared to $237.4 million for the
corresponding period in 2008. For year-to-date 2009, income taxes were $378.0 million compared to
$453.4 million for the corresponding period in 2008. These decreases were primarily due to lower
pre-tax net income.
68
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Georgia Powers future
earnings potential. The level of Georgia Powers future earnings depends on numerous factors that
affect the opportunities, challenges, and risks of Georgia Powers business of selling electricity.
These factors include Georgia Powers ability to maintain a constructive regulatory environment
that continues to allow for the recovery of prudently incurred costs during a time of increasing
costs. Future earnings in the near term will depend, in part, upon maintaining energy sales, which
is subject to a number of factors. These factors include weather, competition, new energy
contracts with neighboring utilities, energy conservation practiced by customers, the price of
electricity, the price elasticity of demand, and the rate of economic growth or decline in Georgia
Powers service area. Recessionary conditions have negatively impacted sales and are expected to
continue to have a negative impact, particularly to industrial and commercial customers. The
timing and extent of the economic recovery will impact future earnings. For additional information
relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENTS DISCUSSION AND ANALYSIS
FUTURE EARNINGS POTENTIAL of Georgia Power in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental statutes and regulations
could affect earnings if such costs cannot continue to be fully recovered in rates on a timely
basis. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental
Matters of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under
Environmental Matters in Item 8 of the Form 10-K for additional information.
Carbon Dioxide Litigation
New York Case
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Carbon Dioxide Litigation New York Case of Georgia Power in Item 7 and Note 3 to the financial
statements of Georgia Power under Environmental Matters Carbon Dioxide Litigation New York
Case in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation.
On September 21, 2009, the U.S. Court of Appeals for the Second Circuit reversed the district
courts ruling, vacating the dismissal of the plaintiffs claim, and remanding the case to the
district court. This ruling is subject to potential reconsideration and appeal. Therefore, the
ultimate outcome of these matters cannot be determined at this time.
Kivalina Case
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Carbon Dioxide Litigation Kivalina Case of Georgia Power in Item 7 and Note 3 to the financial
statements of Georgia Power under Environmental Matters Carbon Dioxide Litigation Kivalina
Case in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation.
On September 30, 2009, the U.S. District Court for the Northern District of California granted the
defendants motions to dismiss the case based on lack of jurisdiction and ruled that the claims
were barred by the political question doctrine and by the plaintiffs failure to establish the
standard for determining that the defendants conduct caused the injury alleged. The ultimate
outcome of this matter may depend on appeals or other legal proceedings and cannot be determined at
this time.
69
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Air Quality
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Environmental Statutes and Regulations Air Quality of Georgia Power in Item 7 of the Form 10-K
for additional information regarding the eight-hour ozone standard. On September 16, 2009, the EPA
announced that it would reconsider its March 2008 decision regarding the eight-hour ozone standard,
potentially resulting in a more stringent standard and designation of additional nonattainment
areas within Georgia Powers service territory. The EPA is expected to propose any revisions to
the standard by December 2009 and issue a final decision by August 2010. The impact of a more
stringent standard will depend on the proposed and final regulations and resolution of any legal
challenges and cannot be determined at this time.
Water Quality
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Environmental Statutes and Regulations Water Quality of Georgia Power in Item 7 of the Form
10-K for additional information regarding the EPAs regulation of cooling water intake structures.
On April 1, 2009, the U.S. Supreme Court reversed the U.S. Court of Appeals for the Second
Circuits decision with respect to the rules use of cost-benefit analysis and held that the EPA
could consider costs in arriving at its standards and in providing variances from those standards
for existing power plant cooling water intake structures. Other aspects of the courts decision
were not appealed and remain unaffected by the U.S. Supreme Courts ruling. While the U.S. Supreme
Courts decision may ultimately result in greater flexibility for demonstrating compliance with the
standards, the full scope of the 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.
Global Climate Issues
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Global Climate Issues of Georgia Power in Item 7 of the Form 10-K for information regarding the
potential for legislation and regulation addressing greenhouse gas emissions. On April 24, 2009,
the EPA published a proposed finding that certain greenhouse gas emissions from new motor vehicles
endanger public health and welfare due to climate change and, on September 28, 2009, the EPA
published a proposed rule regulating greenhouse gas emissions from new motor vehicles under the
Clean Air Act. The EPA has stated that finalization of this rule will cause carbon dioxide and
other greenhouse gases to become regulated pollutants under the Prevention of Significant
Deterioration preconstruction permit program and the Title V operating permit program, which both
apply to power plants. On October 27, 2009, the EPA published a proposed rule governing how these
programs would be applied to stationary sources, including power plants. The EPA has stated that
it expects to finalize its endangerment finding and proposed rules in March 2010. The ultimate
outcome of the endangerment finding and these proposed rules cannot be determined at this time and
will depend on additional regulatory action and potential legal challenges.
In addition, federal legislative proposals that would impose mandatory requirements related to
greenhouse gas emissions, renewable energy standards, and energy efficiency standards continue to
be actively considered in Congress, and the reduction of greenhouse gas emissions has been
identified as a high priority by the current Administration. On June 26, 2009, the American Clean
Energy and Security Act of 2009, which would impose mandatory greenhouse gas restrictions through
implementation of a cap and trade program, a renewable
70
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
energy standard, and other measures, was
passed by the House of Representatives. Similar legislation is being considered by the Senate.
The ultimate outcome of these matters cannot be determined at this time; however,
mandatory restrictions on Georgia Powers greenhouse gas emissions, or requirements relating to
renewable energy or energy efficiency, 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.
FERC and Georgia PSC Matters
Market-Based Rate Authority
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL FERC Matters
Market-Based Rate Authority of Georgia Power in Item 7 and Note 3 to the financial statements of
Georgia Power under FERC Matters Market-Based Rate Authority in Item 8 of the Form 10-K for
information regarding market-based rate authority. In October 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 March 5, 2009,
the FERC accepted Southern Companys CBR tariff for filing. On March 25, 2009, the FERC accepted
Southern Companys compliance filing related to the MBR tariff and directed Southern Company to
commence the energy auction in 30 days. Southern Company commenced the energy auction on April 23,
2009. The FERC has determined that implementation of the energy auction in accordance with the MBR
tariff order adequately mitigates going forward any presumption of market power that Southern
Company may have in the Southern Company retail service territory and adjacent market areas. The
original generation dominance proceeding initiated by the FERC in December 2004 remains pending
before the FERC. The ultimate outcome of this matter cannot be determined at this time.
Retail Fuel Cost Recovery
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Fuel Cost
Recovery of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under
Retail Regulatory Matters Fuel Cost Recovery in Item 8 of the Form 10-K for additional
information. In May 2008, the Georgia PSC approved an additional increase of approximately $222
million effective June 2008. On March 10, 2009, the Georgia PSC granted Georgia Powers request to
delay its fuel case filing until September 4, 2009 and, on August 27, 2009, the Georgia PSC
approved an additional delay in the filing date to no later than December 15, 2009 (with new rates
to be effective April 1, 2010). As of September 30, 2009, Georgia Power had a total under
recovered fuel cost balance of approximately $671 million compared to $764 million at December 31,
2008.
Fuel cost recovery revenues as recorded on the financial statements are adjusted for differences in
actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, any
changes in the billing factor will not have a significant effect on Georgia Powers revenues or net
income, but will affect cash flow.
Retail Rate Matters
Under the 2007 Retail Rate Plan, Georgia Powers earnings are evaluated against a retail return on
equity (ROE) range of 10.25% to 12.25%. In connection with the 2007 Retail Rate Plan, the Georgia
PSC ordered that Georgia Power file its next general base rate case by July 1, 2010; however, the
2007 Retail Rate Plan provided
that Georgia Power may file for a general base rate increase in the event its projected retail ROE
falls below 10.25%.
71
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The economic recession has significantly reduced Georgia Powers revenues upon which retail rates
were set under the 2007 Retail Rate Plan. Despite stringent efforts to reduce expenses, current
projections indicate Georgia Powers retail ROE will be less than 10.25% in both 2009 and 2010.
However, in lieu of filing to increase customer rates as allowed under the 2007 Retail Rate Plan,
on June 29, 2009, Georgia Power filed a request with the Georgia PSC for an accounting order that
would allow Georgia Power to amortize approximately $324 million of its regulatory liability
related to other cost of removal obligations.
On August 27, 2009, the Georgia PSC approved the accounting order. Under the terms of the
accounting order, if Georgia Power does not file for a retail base rate increase in 2009, Georgia
Power will be entitled to amortize up to one-third of the regulatory liability ($108 million) in
2009. Through September 30, 2009, Georgia Power has amortized $54 million of the regulatory
liability. In addition, Georgia Power will be entitled to amortize up to two-thirds of the
regulatory liability ($216 million) in 2010. In the event Georgia Power files for a retail base
rate increase prior to July 1, 2010, then the amortization of the regulatory liability in 2010
would be reduced by one-sixth for each month that such rate case is filed prior to July 1, 2010.
Furthermore, the amortization of the regulatory liability is limited to only the amount that would
allow Georgia Power to earn a retail ROE not more than 9.75% in 2009 and 10.15% in 2010. In
addition, Georgia Power may not file for a base rate increase prior to July 1, 2010 unless economic
conditions beyond its control continue to reduce Georgia Powers projected retail ROE and in no
event unless Georgia Powers projected retail ROE for 2009 or 2010 is less than 9.25% after taking
into consideration amortization of the regulatory liability.
On July 21, 2009, the Georgia PSC accepted Georgia Powers offer to bring a total of 178 MWs of the
Block 5 and 6 capacity (which covers small portions of Plants Gaston, McManus, Mitchell, and
Wilson) into retail rate base for the remaining life of the assets as existing wholesale contracts
expire in 2011-2016. Similar treatment for approximately 78 MWs of Plant Scherer Unit 3 capacity
for 2015-2031 was approved on September 15, 2009.
Construction
Nuclear
See Note (B) to the Condensed Financial Statements under Construction Projects Nuclear herein
for information regarding the potential expansion of Plant Vogtle.
On March 17, 2009, the Georgia PSC voted to certify construction of Plant Vogtle Units 3 and 4 at
an in-service cost of $6.4 billion. In addition, the Georgia PSC voted to approve inclusion of the
related construction work in progress accounts in rate base and to recover financing costs during
the construction period beginning in 2011, which reduces the projected in-service cost to
approximately $4.5 billion.
On April 21, 2009, the Governor of the State of Georgia signed into law the Georgia Nuclear Energy
Financing Act that will allow Georgia Power to recover financing costs for nuclear construction
projects by including the related construction work in progress accounts in rate base during the
construction period. The cost recovery provisions will become effective January 1, 2011.
On June 15, 2009, an environmental group filed a petition in the Superior Court of Fulton County,
Georgia seeking review of the Georgia PSCs certification order and challenging the
constitutionality of the Georgia Nuclear Energy Financing Act. Georgia Power believes there is no
meritorious basis for this petition and intends to vigorously defend against the requested actions.
The ultimate outcome of this matter cannot be determined at this time.
72
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On August 26, 2009, the NRC issued the Early Site Permit and Limited Work Authorization for Plant
Vogtle Units 3 and 4. Excavation for the new units is in progress.
On August 27, 2009, the NRC issued letters to Westinghouse revising the review schedules needed to
certify the AP1000 standard design for new reactors and expressing concerns related to the
availability of adequate information and the shield building design. The shield building protects
the containment and provides structural support to the containment cooling water supply. Georgia
Power is continuing to work with Westinghouse and the NRC to resolve these concerns. Any possible
delays in the AP1000 design certification schedule, including those addressed by the NRC in their
letters, are not currently expected to affect the projected commercial operation dates for Plant
Vogtle Units 3 and 4. The ultimate outcome of this matter cannot be determined at this time.
On August 31, 2009, Georgia Power filed with the Georgia PSC its first semi-annual construction
monitoring report for Plant Vogtle Units 3 and 4 for the period ended June 30, 2009 which did not
include any change to the estimated construction cost as certified by the Georgia PSC in March
2009. The Georgia PSC will conduct hearings between November 2009 and January 2010 in review of
this report and is scheduled to render its decision on February 18, 2010. The ultimate outcome of
this matter cannot be determined at this time.
There are pending technical and procedural challenges to the construction and licensing of Plant
Vogtle Units 3 and 4. Similar additional challenges at the state and federal level are expected as
construction proceeds. The ultimate outcome of these matters cannot now be determined.
Other
On March 17, 2009, the Georgia PSC approved Georgia Powers request to convert Plant Mitchell from
coal-fueled to wood biomass-fueled at an in-service cost of approximately $103 million. The
conversion is expected to be completed in 2012. The Georgia PSC also approved Georgia Powers plan
to install additional environmental controls at Plants Branch and Yates.
On August 10, 2009, Georgia Power filed its quarterly construction monitoring report for Plant
McDonough Units 4, 5, and 6 for the quarter ended June 30, 2009. On September 30, 2009, Georgia
Power amended the report. As amended, the report includes a request for an increase in the
certified costs to construct Plant McDonough. The Georgia PSC will conduct hearings between
December 2009 and February 2010 in review of the amended report and is scheduled to render its
decision on March 16, 2010.
Nuclear Relicensing
The NRC operating licenses for Plant Vogtle Units 1 and 2 were scheduled to 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. On June 3, 2009,
the NRC approved the extension of the licenses as requested.
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, which could have a significant impact on the future cash flow
and net income of Georgia Power. Georgia Power estimates the cash flow reduction to 2009 tax
payments as a result of the bonus depreciation provisions of the ARRA to be between approximately
$120 million and $150 million. On October
27, 2009, Southern Company and its subsidiaries received notice that an award of $165 million had
been
73
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
granted, of which $51 million relates to Georgia Power, under its ARRA grant application for
transmission and distribution automation and modernization projects pending final negotiations.
Georgia Power continues to assess the other financial implications of the ARRA. The ultimate
impact cannot be determined at this time.
Other Matters
Georgia Power is involved in various other matters being litigated, regulatory matters, and certain
tax-related issues that could affect future earnings. In addition, Georgia Power is subject to
certain claims and legal actions arising in the ordinary course of business. Georgia Powers
business activities are subject to extensive governmental regulation related to public health and
the environment, such as regulation of air emissions and water discharges. 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, and common
law nuisance claims for injunctive relief and property damage allegedly caused by greenhouse gas
emissions, have become more frequent. The ultimate outcome of such pending or potential litigation
against Georgia Power cannot be predicted at this time; however, for current proceedings not
specifically reported herein or in Note 3 to the financial statements of Georgia Power in Item 8 of
the Form 10-K, management does not anticipate that the liabilities, if any, arising from such
current proceedings would have a material adverse effect on Georgia Powers financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other
contingencies, regulatory matters, and other matters being litigated which may affect future
earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Georgia Power prepares its financial statements in accordance with accounting principles generally
accepted in the United States. Significant accounting policies are described in Note 1 to the
financial statements of Georgia Power in Item 8 of the Form 10-K. In the application of these
policies, certain estimates are made that may have a material impact on Georgia Powers results of
operations and related disclosures. Different assumptions and measurements could produce estimates
that are significantly different from those recorded in the financial statements. See MANAGEMENTS
DISCUSSION AND ANALYSIS ACCOUNTING POLICIES Application of Critical Accounting Policies and
Estimates of Georgia Power in Item 7 of the Form 10-K for a complete discussion of Georgia Powers
critical accounting policies and estimates related to Electric Utility Regulation, Contingent
Obligations, and Unbilled Revenues.
New Accounting Standards
Variable Interest Entities
In June 2009, the FASB issued new guidance on the consolidation of variable interest entities,
which replaces the quantitative-based risks and rewards calculation for determining whether an
enterprise is the primary beneficiary in a variable interest entity with an approach that is
primarily qualitative, requires ongoing assessments of whether an enterprise is the primary
beneficiary of a variable interest entity, and requires additional disclosures about an
enterprises involvement in variable interest entities. Georgia Power is required to adopt this
new guidance effective January 1, 2010 and is evaluating the impact, if any, it will have on its
financial statements.
74
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Overview
Georgia Powers financial condition remained stable at September 30, 2009. Throughout the turmoil
in the financial markets, Georgia Power has maintained adequate access to capital without drawing
on any of its committed bank credit arrangements used to support its commercial paper borrowings
and variable rate pollution control revenue bonds. Georgia Power 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. Market rates for committed credit have increased, and
Georgia Power has been and expects to continue to be subject to higher costs as its existing
facilities are replaced or renewed. Total committed credit fees at Georgia Power currently average
less than 3/8 of 1% per year. Georgia Powers interest cost for short-term
debt has decreased as market short-term interest rates have declined from 2008 levels. The
ultimate impact on future financing costs as a result of financial turmoil cannot be determined at
this time. Georgia Power 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.
Georgia Powers investments in pension and nuclear decommissioning trust funds remained stable
during the third quarter 2009. Georgia Power expects that the earliest that cash may have to be
contributed to the pension trust fund is 2012 and such contribution could be significant; however,
projections of the amount vary significantly depending on key variables including future trust fund
performance and cannot be determined at this time. Georgia Power does not expect any changes to
funding obligations to the nuclear decommissioning trusts prior to 2011.
Net cash provided from operating activities totaled $1.1 billion for the first nine months of 2009,
compared to $1.3 billion for the corresponding period in 2008. The $180.3 million decrease in cash
provided from operating activities in the first nine months of 2009 was primarily due to the $126
million decrease in net income, a reduction in deferred environmental revenues of approximately
$140 million, and an increase in fuel inventory additions of approximately $251 million, partially
offset by reductions in accounts receivable. Net cash used for investing activities totaled $1.7
billion for the first nine months of 2009, compared to $1.5 billion for the corresponding period in
2008. The increase was primarily due to gross property additions to utility plant. Net cash
provided from financing activities totaled $497.7 million for the first nine months of 2009,
compared to $523.6 million for the corresponding period in 2008. The $25.9 million decrease was
primarily due to higher redemptions of long-term debt, partially offset by higher capital
contributions from Southern Company in 2009.
Significant balance sheet changes for the first nine months of 2009 include an increase of $1.4
billion in total property, plant, and equipment.
Capital Requirements and Contractual Obligations
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Capital
Requirements and Contractual Obligations of Georgia Power in Item 7 of the Form 10-K for a
description of Georgia Powers capital requirements for its construction program, scheduled
maturities of long-term debt, as well as related interest, derivative obligations, preferred and
preference stock dividends, leases, purchase commitments, trust funding requirements, and
unrecognized tax benefits. Approximately $254 million will be required through September 30, 2010
to fund maturities of long-term debt. The construction program is 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; Georgia PSC approvals; changes in
legislation; the cost and efficiency
75
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of construction labor, equipment, and materials; and the cost
of capital. In addition, there can be no assurance that costs related to capital expenditures will
be fully recovered.
Sources of Capital
Georgia Power plans to obtain the funds required for construction and other purposes from sources
similar to those utilized in the past. Recently, Georgia Power has primarily utilized funds from
operating cash flows, short-term debt, security issuances, term loans, and equity contributions
from Southern Company. However, the amount, type, and timing of any future financings, if needed,
will depend upon regulatory approval, prevailing market conditions, and other factors. See
MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Sources of Capital
of Georgia Power in Item 7 of the Form 10-K for additional information.
Georgia Powers current liabilities frequently exceed current assets because of the continued use
of short-term debt as a funding source to meet scheduled maturities of long-term debt as well as
cash needs which can fluctuate significantly due to the seasonality of the business. To meet
short-term cash needs and contingencies, Georgia Power had at September 30, 2009 approximately
$14.5 million of cash and cash equivalents and approximately $1.7 billion of unused credit
arrangements with banks. See Note 6 to the financial statements of Georgia Power under Bank
Credit Arrangements in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements
under Bank Credit Arrangements herein for additional information. Of the unused credit
arrangements in place at September 30, 2009, $595 million expire in 2010 and $1.1 billion expire in
2012. Georgia Power expects to renew its credit facilities, as needed, prior to expiration.
Credit arrangements provide liquidity support to Georgia Powers purchase obligations related to
variable rate pollution control revenue bonds and commercial paper borrowings. At September 30,
2009, Georgia Power had $901 million of variable rate pollution control revenue bonds outstanding.
Georgia Power may meet short-term cash needs through a Southern Company subsidiary organized to
issue and sell commercial paper at the request and for the benefit of Georgia Power and other
Southern Company subsidiaries. At September 30, 2009, Georgia Power had approximately $253 million
of commercial paper outstanding. Management believes that the need for working capital can be
adequately met by utilizing commercial paper programs, lines of credit, and cash.
Credit Rating Risk
Georgia Power does not have any credit arrangements that would require material changes in payment
schedules or terminations as a result of a credit rating downgrade. There are certain contracts
that could require collateral, but not accelerated payment, in the event of a credit rating change
to BBB- and/or Baa3 or below. These contracts are for physical electricity purchases and sales,
fuel purchases, fuel transportation and storage, emissions allowances, energy price risk
management, and construction of new generation. At September 30, 2009, the maximum potential
collateral requirements under these contracts at a BBB- and/or Baa3 rating were approximately $35
million. At September 30, 2009, the maximum potential collateral requirements under these
contracts at a rating below BBB- and/or Baa3 were approximately $1.2 billion. Included in these
amounts are certain agreements that could require collateral in the event that one or more Power
Pool participants has a credit rating change to below investment grade. Generally, collateral may
be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, any credit
rating downgrade could impact Georgia Powers ability to access capital markets, particularly the
short-term debt market.
76
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On September 2, 2009, Moodys affirmed the credit ratings of Georgia Powers senior unsecured notes
and commercial paper of A2/P-1, respectively, and revised the rating outlook to negative. On
October 6, 2009, Standard and Poors affirmed the credit ratings of Georgia Powers senior
unsecured notes and its short-term credit rating of A/A-1, respectively, and maintained its stable
rating outlook. On September 4, 2009, Fitch affirmed Georgia Powers senior unsecured notes and
commercial paper ratings of A+/F1, respectively, but revised Georgia Powers rating outlook to
negative.
Market Price Risk
Georgia Powers market risk exposure relative to interest rate changes has not changed materially
compared with the December 31, 2008 reporting period. Since a significant portion of outstanding
indebtedness is at fixed rates, Georgia Power is not aware of any facts or circumstances that would
significantly affect exposures on existing indebtedness in the near term. However, the impact on
future financing costs cannot now be determined.
Due to cost-based rate regulation, Georgia Power continues to have limited exposure to market
volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate
residual risks relative to movements in electricity prices, Georgia Power enters into physical
fixed-price contracts for the purchase and sale of electricity through the wholesale electricity
market. Georgia Power continues to manage a fuel-hedging program implemented per the guidelines of
the Georgia PSC. As such, Georgia Power has no material change in market risk exposure when
compared with the December 31, 2008 reporting period.
The changes in fair value of energy-related derivative contracts for the three months and nine
months ended September 30, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Year-to-Date |
|
|
2009 |
|
2009 |
|
|
Changes |
|
Changes |
|
|
Fair Value |
|
|
(in millions) |
Contracts outstanding at the beginning of the period, assets
(liabilities), net |
|
$ |
(125.4 |
) |
|
$ |
(113.2 |
) |
Contracts realized or settled |
|
|
56.5 |
|
|
|
130.6 |
|
Current period changes(a) |
|
|
3.0 |
|
|
|
(83.3 |
) |
|
Contracts outstanding at the end of the period, assets (liabilities), net |
|
$ |
(65.9 |
) |
|
$ |
(65.9 |
) |
|
(a) |
|
Current period changes also include the changes in fair value of new contracts entered into
during the period, if any. |
The changes in the fair value positions of the energy-related derivative contracts for the
three months and nine months ended September 30, 2009 were increases of $60 million and $47
million, respectively, substantially all of which is due to natural gas positions. These changes
are attributable to both the volume and prices of natural gas. At September 30, 2009, Georgia
Power had a net hedge volume of 68 million mmBtu with a weighted average contract cost
approximately $0.96 per mmBtu above market prices, compared to 75 million mmBtu at June 30, 2009
with a weighted average contract cost approximately $1.69 per mmBtu above market prices and
compared to 59 million mmBtu at December 31, 2008 with a weighted average contract cost
approximately $1.96 per mmBtu above market prices. The natural gas hedge settlements are recovered
through the fuel cost recovery mechanism.
77
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At September 30, 2009 and December 31, 2008, the net fair value of energy-related derivative
contracts by hedge designation was reflected in the financial statements as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
Asset (Liability) Derivatives |
|
2009 |
|
2008 |
|
|
(in millions) |
Regulatory hedges |
|
$ |
(65.9 |
) |
|
$ |
(113.2 |
) |
Not designated |
|
|
|
|
|
|
|
|
|
Total fair value |
|
$ |
(65.9 |
) |
|
$ |
(113.2 |
) |
|
Energy-related derivative contracts which are designated as regulatory hedges relate to Georgia
Powers fuel hedging program 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 mechanism. 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 and losses recognized in income for the three months and nine months ended
September 30, 2009 and 2008 for energy-related derivative contracts that are not hedges were not
material.
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy
in which they fall at September 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
Fair Value Measurements |
|
|
Total |
|
Maturity |
|
|
Fair Value |
|
Year 1 |
|
Years 2&3 |
|
Years 4&5 |
|
|
(in millions) |
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Level 2 |
|
|
(65.9 |
) |
|
|
(52.4 |
) |
|
|
(13.3 |
) |
|
|
(0.2 |
) |
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of
contracts
outstanding at end
of period |
|
$ |
(65.9 |
) |
|
$ |
(52.4 |
) |
|
$ |
(13.3 |
) |
|
$ |
(0.2 |
) |
|
Georgia Power uses over-the-counter contracts that are not exchange traded but are fair valued
using prices which are actively quoted, and thus fall into Level 2. See Note (C) to the Condensed
Financial Statements herein for further discussion on fair value measurements.
For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND
LIQUIDITY Market Price Risk of Georgia Power in Item 7 and Notes 1 and 6 to the financial
statements of Georgia Power under Financial Instruments in Item 8 of the Form 10-K and Note (E)
to the Condensed Financial Statements herein.
Financing Activities
In February 2009, Georgia Power issued $500 million of Series 2009A 5.95% Senior Notes due February
1, 2039. The proceeds were used to repay at maturity $150 million aggregate principal amount of
Series U Floating Rate Senior Notes due February 7, 2009, to repay a portion of short-term
indebtedness, and for general corporate purposes, including Georgia Powers continuous construction
program. Georgia Power settled $100 million of hedges related to the Series 2009A issuance at a
loss of approximately $16 million, and this loss will be amortized to interest expense, in
earnings, together with a previously settled loss of approximately $2 million, over 10 years.
78
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In July 2009, Georgia Power incurred obligations in connection with the issuance of $154.3 million
of variable rate pollution control revenue bonds. The proceeds of the bonds were used to retire
$154.3 million of fixed rate pollution control revenue bonds.
In August 2009, Georgia Powers $125 million Series V 4.10% Senior Notes due August 15, 2009
matured.
In August 2009, Georgia Power redeemed its $55 million of Series D 5.50% Senior Insured Quarterly
Notes due November 15, 2017.
In September 2009, Georgia Power incurred obligations in connection with the issuance of variable
rate pollution control revenue bonds totaling $262.2 million. The proceeds of $89.2 million of the
variable rate pollution control revenue bonds were used to fund the acquisition, construction,
installation, and equipping costs of certain solid waste disposal facilities located at Plant
Scherer. The proceeds from the remaining $173 million were used to retire Bartow County (Georgia
Power Plant Bowen Project) First, Second and Third Series 2007 variable rate pollution control
revenue bonds totaling $173 million.
Subsequent to September 30, 2009, Georgia Power entered into forward starting interest rate swaps
to mitigate exposure to interest rate changes related to anticipated debt issuances. The total
notional amount of the swaps is $200 million, and the swaps have been designated as a cash flow
hedge.
In addition to any financings that may be necessary to meet capital requirements and contractual
obligations, Georgia Power plans to continue, when economically feasible, a program to retire
higher-cost securities and replace these obligations with lower-cost capital if market conditions
permit.
79
GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
329,597 |
|
|
$ |
359,652 |
|
|
$ |
858,038 |
|
|
$ |
871,834 |
|
Wholesale revenues, non-affiliates |
|
|
25,752 |
|
|
|
26,194 |
|
|
|
70,418 |
|
|
|
76,902 |
|
Wholesale revenues, affiliates |
|
|
3,661 |
|
|
|
20,036 |
|
|
|
19,748 |
|
|
|
89,500 |
|
Other revenues |
|
|
18,631 |
|
|
|
15,959 |
|
|
|
54,816 |
|
|
|
45,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
377,641 |
|
|
|
421,841 |
|
|
|
1,003,020 |
|
|
|
1,083,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
163,302 |
|
|
|
185,003 |
|
|
|
435,050 |
|
|
|
501,129 |
|
Purchased power, non-affiliates |
|
|
9,991 |
|
|
|
14,057 |
|
|
|
20,480 |
|
|
|
23,269 |
|
Purchased power, affiliates |
|
|
29,399 |
|
|
|
41,136 |
|
|
|
58,020 |
|
|
|
66,564 |
|
Other operations and maintenance |
|
|
57,422 |
|
|
|
65,223 |
|
|
|
194,896 |
|
|
|
197,428 |
|
Depreciation and amortization |
|
|
23,452 |
|
|
|
22,295 |
|
|
|
69,828 |
|
|
|
66,205 |
|
Taxes other than income taxes |
|
|
26,683 |
|
|
|
25,088 |
|
|
|
72,120 |
|
|
|
66,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
310,249 |
|
|
|
352,802 |
|
|
|
850,394 |
|
|
|
921,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
67,392 |
|
|
|
69,039 |
|
|
|
152,626 |
|
|
|
162,061 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction |
|
|
6,810 |
|
|
|
2,673 |
|
|
|
17,335 |
|
|
|
6,196 |
|
Interest income |
|
|
129 |
|
|
|
914 |
|
|
|
423 |
|
|
|
2,332 |
|
Interest expense, net of amounts capitalized |
|
|
(9,264 |
) |
|
|
(10,491 |
) |
|
|
(29,003 |
) |
|
|
(32,165 |
) |
Other income (expense), net |
|
|
(266 |
) |
|
|
(355 |
) |
|
|
(1,369 |
) |
|
|
(1,365 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(2,591 |
) |
|
|
(7,259 |
) |
|
|
(12,614 |
) |
|
|
(25,002 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
64,801 |
|
|
|
61,780 |
|
|
|
140,012 |
|
|
|
137,059 |
|
Income taxes |
|
|
22,042 |
|
|
|
22,886 |
|
|
|
45,341 |
|
|
|
48,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
42,759 |
|
|
|
38,894 |
|
|
|
94,671 |
|
|
|
88,517 |
|
Dividends on Preference Stock |
|
|
1,551 |
|
|
|
1,551 |
|
|
|
4,652 |
|
|
|
4,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income After Dividends on Preference Stock |
|
$ |
41,208 |
|
|
$ |
37,343 |
|
|
$ |
90,019 |
|
|
$ |
83,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net Income After Dividends on Preference Stock |
|
$ |
41,208 |
|
|
$ |
37,343 |
|
|
$ |
90,019 |
|
|
$ |
83,865 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $(414), $-, $(414), and
$(1,077), respectively |
|
|
(659 |
) |
|
|
|
|
|
|
(659 |
) |
|
|
(1,715 |
) |
Reclassification adjustment for amounts included in net
income, net of tax of $105, $104, $314, and $261, respectively |
|
|
166 |
|
|
|
167 |
|
|
|
500 |
|
|
|
416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
(493 |
) |
|
|
167 |
|
|
|
(159 |
) |
|
|
(1,299 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
40,715 |
|
|
$ |
37,510 |
|
|
$ |
89,860 |
|
|
$ |
82,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
81
GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
94,671 |
|
|
$ |
88,517 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization, total |
|
|
74,407 |
|
|
|
69,926 |
|
Deferred income taxes |
|
|
(2,177 |
) |
|
|
24,850 |
|
Allowance for equity funds used during construction |
|
|
(17,335 |
) |
|
|
(6,196 |
) |
Pension, postretirement, and other employee benefits |
|
|
1,123 |
|
|
|
1,413 |
|
Stock option expense |
|
|
793 |
|
|
|
656 |
|
Tax benefit of stock options |
|
|
8 |
|
|
|
200 |
|
Hedge settlements |
|
|
|
|
|
|
(5,220 |
) |
Other, net |
|
|
(4,017 |
) |
|
|
(4,116 |
) |
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
-Receivables |
|
|
40,388 |
|
|
|
(75,430 |
) |
-Fossil fuel stock |
|
|
(54,511 |
) |
|
|
(26,408 |
) |
-Materials and supplies |
|
|
(1,411 |
) |
|
|
7,135 |
|
-Prepaid income taxes |
|
|
416 |
|
|
|
(3,929 |
) |
-Property damage cost recovery |
|
|
10,831 |
|
|
|
20,038 |
|
-Other current assets |
|
|
2,178 |
|
|
|
2,371 |
|
-Accounts payable |
|
|
(13,022 |
) |
|
|
(2,154 |
) |
-Accrued taxes |
|
|
14,593 |
|
|
|
3,825 |
|
-Accrued compensation |
|
|
(7,364 |
) |
|
|
(3,063 |
) |
-Other current liabilities |
|
|
8,627 |
|
|
|
(2,057 |
) |
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
148,198 |
|
|
|
90,358 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(330,776 |
) |
|
|
(232,398 |
) |
Investment in restricted cash from pollution control revenue bonds |
|
|
(49,188 |
) |
|
|
|
|
Distribution of restricted cash from pollution control revenue bonds |
|
|
28,144 |
|
|
|
|
|
Cost of removal, net of salvage |
|
|
(6,758 |
) |
|
|
(5,246 |
) |
Construction payables |
|
|
(11,721 |
) |
|
|
13,830 |
|
Other investing activities |
|
|
(5,445 |
) |
|
|
(3,956 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(375,744 |
) |
|
|
(227,770 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Increase (decrease) in notes payable, net |
|
|
(101,589 |
) |
|
|
57,813 |
|
Proceeds |
|
|
|
|
|
|
|
|
Common stock issued to parent |
|
|
135,000 |
|
|
|
|
|
Capital contributions from parent company |
|
|
3,461 |
|
|
|
75,304 |
|
Gross excess tax benefit of stock options |
|
|
22 |
|
|
|
283 |
|
Pollution control revenue bonds |
|
|
130,400 |
|
|
|
|
|
Senior notes |
|
|
140,000 |
|
|
|
|
|
Other long-term debt issuances |
|
|
|
|
|
|
110,000 |
|
Redemptions |
|
|
|
|
|
|
|
|
Senior notes |
|
|
(1,033 |
) |
|
|
(974 |
) |
Payment of preference stock dividends |
|
|
(4,652 |
) |
|
|
(4,507 |
) |
Payment of common stock dividends |
|
|
(66,975 |
) |
|
|
(61,275 |
) |
Other financing activities |
|
|
(1,635 |
) |
|
|
(2,135 |
) |
|
|
|
|
|
|
|
Net cash provided from financing activities |
|
|
232,999 |
|
|
|
174,509 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
5,453 |
|
|
|
37,097 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
3,443 |
|
|
|
5,348 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
8,896 |
|
|
$ |
42,445 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $6,909 and $2,470 capitalized for 2009 and 2008, respectively) |
|
$ |
29,123 |
|
|
$ |
27,940 |
|
Income taxes (net of refunds) |
|
$ |
43,423 |
|
|
$ |
37,353 |
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
82
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Assets |
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
8,896 |
|
|
$ |
3,443 |
|
Restricted cash and cash equivalents |
|
|
21,043 |
|
|
|
|
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
91,613 |
|
|
|
69,531 |
|
Unbilled revenues |
|
|
57,723 |
|
|
|
48,742 |
|
Under recovered regulatory clause revenues |
|
|
31,878 |
|
|
|
98,644 |
|
Other accounts and notes receivable |
|
|
3,897 |
|
|
|
7,201 |
|
Affiliated companies |
|
|
1,724 |
|
|
|
8,516 |
|
Accumulated provision for uncollectible accounts |
|
|
(1,896 |
) |
|
|
(2,188 |
) |
Fossil fuel stock, at average cost |
|
|
160,704 |
|
|
|
108,129 |
|
Materials and supplies, at average cost |
|
|
38,247 |
|
|
|
36,836 |
|
Other regulatory assets, current |
|
|
22,841 |
|
|
|
38,908 |
|
Prepaid expenses |
|
|
28,670 |
|
|
|
20,363 |
|
Other current assets |
|
|
2,043 |
|
|
|
5,292 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
467,383 |
|
|
|
443,417 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
2,890,230 |
|
|
|
2,785,561 |
|
Less accumulated provision for depreciation |
|
|
1,005,256 |
|
|
|
971,464 |
|
|
|
|
|
|
|
|
Plant in service, net of depreciation |
|
|
1,884,974 |
|
|
|
1,814,097 |
|
Construction work in progress |
|
|
614,808 |
|
|
|
391,987 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
2,499,782 |
|
|
|
2,206,084 |
|
|
|
|
|
|
|
|
Other Property and Investments |
|
|
15,902 |
|
|
|
15,918 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
35,225 |
|
|
|
24,220 |
|
Other regulatory assets, deferred |
|
|
169,900 |
|
|
|
170,836 |
|
Other deferred charges and assets |
|
|
24,698 |
|
|
|
18,550 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
229,823 |
|
|
|
213,606 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
3,212,890 |
|
|
$ |
2,879,025 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
83
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
140,000 |
|
|
$ |
|
|
Notes payable |
|
|
38,341 |
|
|
|
148,239 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
46,633 |
|
|
|
50,304 |
|
Other |
|
|
72,379 |
|
|
|
90,381 |
|
Customer deposits |
|
|
31,463 |
|
|
|
28,017 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Accrued income taxes |
|
|
11,038 |
|
|
|
39,983 |
|
Other accrued taxes |
|
|
22,869 |
|
|
|
11,855 |
|
Accrued interest |
|
|
10,634 |
|
|
|
8,959 |
|
Accrued compensation |
|
|
8,303 |
|
|
|
15,667 |
|
Other regulatory liabilities, current |
|
|
19,076 |
|
|
|
4,602 |
|
Liabilities from risk management activities |
|
|
13,531 |
|
|
|
26,928 |
|
Other current liabilities |
|
|
20,781 |
|
|
|
29,047 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
435,048 |
|
|
|
453,982 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
978,982 |
|
|
|
849,265 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
296,385 |
|
|
|
254,354 |
|
Accumulated deferred investment tax credits |
|
|
10,053 |
|
|
|
11,255 |
|
Employee benefit obligations |
|
|
96,827 |
|
|
|
97,389 |
|
Other cost of removal obligations |
|
|
189,077 |
|
|
|
180,325 |
|
Other regulatory liabilities, deferred |
|
|
40,737 |
|
|
|
28,597 |
|
Other deferred credits and liabilities |
|
|
83,523 |
|
|
|
83,768 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
716,602 |
|
|
|
655,688 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
2,130,632 |
|
|
|
1,958,935 |
|
|
|
|
|
|
|
|
Preference Stock |
|
|
97,998 |
|
|
|
97,998 |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, without par value |
|
|
|
|
|
|
|
|
Authorized - 20,000,000 shares |
|
|
|
|
|
|
|
|
Outstanding - September 30, 2009: 3,142,717 shares |
|
|
|
|
|
|
|
|
- December 31, 2008: 1,792,717 shares |
|
|
253,060 |
|
|
|
118,060 |
|
Paid-in capital |
|
|
515,830 |
|
|
|
511,547 |
|
Retained earnings |
|
|
220,461 |
|
|
|
197,417 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
|
(5,091 |
) |
|
|
(4,932 |
) |
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
984,260 |
|
|
|
822,092 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
3,212,890 |
|
|
$ |
2,879,025 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
84
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2009 vs. THIRD QUARTER 2008
AND
YEAR-TO-DATE 2009 vs. YEAR-TO-DATE 2008
OVERVIEW
Gulf Power operates as a vertically integrated utility providing electricity to retail customers
within its traditional service area located in northwest Florida and to wholesale customers in the
Southeast. Many factors affect the opportunities, challenges, and risks of Gulf Powers business
of selling electricity. These factors include the ability to maintain a 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. These costs include those related
to projected long-term demand growth, increasingly stringent environmental standards, fuel prices,
and storm restoration costs. Appropriately balancing the need to recover these increasing costs
with customer prices will continue to challenge Gulf Power for the foreseeable future.
Gulf Power continues to focus on several key performance indicators. These indicators include
customer satisfaction, plant availability, system reliability, and net income after dividends on
preference stock. For additional information on these indicators, see MANAGEMENTS DISCUSSION AND
ANALYSIS OVERVIEW Key Performance Indicators of Gulf Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$3.9 |
|
10.3 |
|
$6.1 |
|
7.3 |
|
Gulf Powers net income after dividends on preference stock for the third quarter 2009 was $41.2
million compared to $37.3 million for the corresponding period in 2008. The increase was primarily
due to increased allowance for equity funds used during construction (AFUDC), which is non-taxable,
decreased other operations and maintenance expenses, and decreased interest expense, net of amounts
capitalized, partially offset by unfavorable weather and a decline in sales.
Gulf Powers net income after dividends on preference stock for year-to-date 2009 was $90.0 million
compared to $83.9 million for the corresponding period in 2008. The increase was primarily due to
increased AFUDC, which is non-taxable, and decreased interest expense, net of amounts capitalized,
partially offset by unfavorable weather and a decline in sales.
Retail Revenues
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(30.1) |
|
(8.4) |
|
$(13.8) |
|
(1.6) |
|
In the third quarter 2009, retail revenues were $329.6 million compared to $359.7 million for the
corresponding period in 2008. For year-to-date 2009, retail revenues were $858.0 million compared
to $871.8 million for the corresponding period in 2008.
85
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the change to retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Year-to-Date |
|
|
2009 |
|
2009 |
|
|
(in millions) |
|
(% change) |
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
359.7 |
|
|
|
|
|
|
$ |
871.8 |
|
|
|
|
|
Estimated change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
10.2 |
|
|
|
2.9 |
|
|
|
25.5 |
|
|
|
2.9 |
|
Sales growth (decline) |
|
|
(0.6 |
) |
|
|
(0.2 |
) |
|
|
(4.1 |
) |
|
|
(0.5 |
) |
Weather |
|
|
(6.0 |
) |
|
|
(1.7 |
) |
|
|
(8.9 |
) |
|
|
(1.0 |
) |
Fuel and other cost recovery |
|
|
(33.7 |
) |
|
|
(9.4 |
) |
|
|
(26.3 |
) |
|
|
(3.0 |
) |
|
Retail current year |
|
$ |
329.6 |
|
|
|
(8.4 |
)% |
|
$ |
858.0 |
|
|
|
(1.6 |
)% |
|
Revenues associated with changes in rates and pricing increased in the third quarter and
year-to-date 2009 when compared to the corresponding periods in 2008 primarily due to increased
revenue associated with higher projected environmental compliance costs in 2009. Annually, Gulf
Power petitions the Florida PSC for recovery of projected costs including any true-up amount from
prior periods, and approved rates are implemented each January. These recovery provisions include
related expenses and a return on average net investment. See Note 1 to the financial statements of
Gulf Power under Revenues and Note 3 to the financial statements of Gulf Power under
Environmental Matters Environmental Remediation and Retail Regulatory Matters
Environmental Cost Recovery in Item 8 of the Form 10-K for additional information.
Revenues attributable to changes in sales declined in the third quarter 2009 when compared to the
corresponding period in 2008. Weather-adjusted KWH energy sales to residential customers increased
3.3% despite a reduction in the number of customers, primarily due to an increase in per customer
usage. Weather-adjusted KWH energy sales to commercial customers decreased 1.4% primarily due to
decreased per customer usage and a decrease in the number of customers driven by the recession.
KWH energy sales to industrial customers decreased 29.3% as a result of recessionary economic
conditions and increased customer co-generation due to the lower cost of natural gas.
Revenues attributable to changes in sales declined year-to-date 2009 when compared to the
corresponding period in 2008. Weather-adjusted KWH energy sales to residential customers increased
1.5% despite a decrease in the number of customers, primarily due to an increase in per customer
usage. Weather-adjusted KWH energy sales to commercial customers decreased 1.1% primarily due to a
decrease in per customer usage and a decrease in the number of customers driven by the recession.
KWH energy sales to industrial customers decreased 24.2% as a result of recessionary economic
conditions and increased customer co-generation due to the lower cost of natural gas.
Revenues attributable to changes in weather decreased in the third quarter and year-to-date 2009 as
a result of unfavorable weather when compared to the corresponding periods in 2008.
Fuel and other cost recovery revenues decreased in the third quarter and year-to-date 2009 when
compared to the corresponding periods in 2008 due to overall decreased customer usage primarily
resulting from decreased industrial usage. Fuel and other cost recovery revenues include fuel
expenses, the energy component of purchased power costs, purchased power capacity costs, and
revenues related to the recovery of storm damage restoration costs. Annually, Gulf Power petitions
the Florida PSC for recovery of projected fuel and purchased power costs including any true-up
amount from prior periods, and approved rates are implemented each January. The recovery
provisions generally equal the related expenses and have no material impact on net income. See
FUTURE EARNINGS POTENTIAL FERC
and Florida PSC Matters Retail Regulatory
Matters herein and MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC
86
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Matters Fuel Cost Recovery of Gulf Power in Item 7 and Note 1 to the financial statements of
Gulf Power under Revenues and Property Damage Reserve and Note 3 to the financial statements of
Gulf Power under Retail Regulatory Matters Storm Damage Cost Recovery and Fuel Cost Recovery
in Item 8 of the Form 10-K for additional information.
Wholesale Revenues Non-Affiliates
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
(change in millions) |
(% change) |
$(0.4) |
|
(1.7) |
|
$(6.5) |
|
(8.4) |
|
Wholesale revenues from non-affiliates will vary depending on the market cost of available energy
compared to the cost of Gulf Power and Southern Company system-owned generation, demand for energy
within the Southern Company service territory, and availability of Southern Company system
generation. Wholesale revenues from non-affiliates are predominantly unit power sales under
long-term contracts to other Florida utilities. Revenues from these contracts have both capacity
and energy components. Capacity revenues reflect the recovery of fixed costs and a return on
investment under the contracts. Energy is generally sold at variable cost.
In the third quarter 2009, wholesale revenues from non-affiliates were $25.8 million compared to
$26.2 million for the corresponding period in 2008. The decrease was primarily due to lower energy
revenues related to a 7.7% decrease in KWH sales resulting from reduced customer demand primarily
caused by the recessionary economy.
For year-to-date 2009, wholesale revenues from non-affiliates were $70.4 million compared to $76.9
million for the corresponding period in 2008. The decrease was primarily due to lower energy
revenues related to a 17.1% decrease in KWH sales resulting from reduced customer demand primarily
caused by the recessionary economy.
Wholesale Revenues Affiliates
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(16.4) |
|
(81.7) |
|
$(69.8) |
|
(77.9) |
|
Wholesale revenues from affiliates will vary depending on demand and the availability and cost of
generating resources at each company within the Southern Company system. These affiliate sales are
made in accordance with the IIC, as approved by the FERC. These transactions do not have a
significant impact on earnings since the energy is generally sold at marginal cost.
In the third quarter 2009, wholesale revenues from affiliates were $3.6 million compared to $20.0
million for the corresponding period in 2008. The decrease was due to reduced customer demand
resulting in a 63.0% decrease in KWH sales and a 50.6% decrease in price related to lower Power
Pool interchange energy rates.
For year-to-date 2009, wholesale revenues from affiliates were $19.7 million compared to $89.5
million for the corresponding period in 2008. The decrease was due to reduced customer demand
resulting in a 66.3% decrease in KWH sales and a 34.6% decrease in price related to lower Power
Pool interchange energy rates.
87
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Revenues
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$2.7 |
|
16.7 |
|
$9.8 |
|
21.8 |
|
In the third quarter 2009, other revenues were $18.6 million compared to $15.9 million for the
corresponding period in 2008. For year-to-date 2009, other revenues were $54.8 million compared to
$45.0 million for the corresponding period in 2008. These increases were primarily due to other
energy services and higher franchise fees. The increased revenues from other energy services did
not have a material impact on net income since they were generally offset by associated expenses.
Franchise fees have no impact on net income.
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2009 |
|
Year-to-Date 2009 |
|
|
vs. |
|
vs. |
|
|
Third Quarter 2008 |
|
Year-to-Date 2008 |
|
|
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
Fuel* |
|
$(21.7) |
|
(11.7) |
|
$(66.1) |
|
(13.2) |
Purchased power non-affiliates |
|
(4.1) |
|
(28.9) |
|
(2.8) |
|
(12.0) |
Purchased power affiliates |
|
(11.7) |
|
(28.5) |
|
(8.5) |
|
(12.8) |
|
|
|
|
|
|
|
Total fuel and purchased power expenses |
|
$(37.5) |
|
|
|
$(77.4) |
|
|
|
|
|
|
|
|
|
* Fuel includes fuel purchased by Gulf Power for tolling agreements where power is generated by
the provider and is included in purchased power when determining the average cost of purchased
power.
In the third quarter 2009, total fuel and purchased power expenses were $202.6 million
compared to $240.1 million for the corresponding period in 2008. The net decrease in fuel and
purchased power expenses was primarily due to a $24.9 million decrease in the cost of energy
primarily resulting from a decrease in the average cost of natural gas and a $12.6 million decrease
related to total KWHs generated and purchased.
For year-to-date 2009, total fuel and purchased power expenses were $513.5 million compared to
$590.9 million for the corresponding period in 2008. The net decrease in fuel and purchased power
expenses was primarily due to a $50.4 million decrease related to total KWHs generated and
purchased and a $27.0 million decrease in the cost of energy primarily resulting from a decrease in
the average cost of natural gas.
Fuel and purchased power transactions do not have a significant impact on earnings since energy
expenses are generally offset by energy revenues through Gulf Powers fuel cost recovery clause.
See FUTURE EARNINGS POTENTIAL FERC and Florida PSC Matters Retail Regulatory Matters herein
for additional information.
Details of Gulf Powers cost of generation and purchased power are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Third Quarter |
|
Percent |
|
Year-to-Date |
|
Year-to-Date |
|
Percent |
Average Cost |
|
2009 |
|
2008 |
|
Change |
|
2009 |
|
2008 |
|
Change |
|
|
(cents per net KWH) |
|
|
|
|
|
(cents per net KWH) |
|
|
|
|
Fuel |
|
|
4.59 |
|
|
|
4.54 |
|
|
|
1.1 |
|
|
|
4.46 |
|
|
|
4.20 |
|
|
|
6.2 |
|
Purchased power |
|
|
7.98 |
|
|
|
13.09 |
|
|
|
(39.0 |
) |
|
|
6.78 |
|
|
|
11.07 |
|
|
|
(38.8 |
) |
|
88
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the third quarter 2009, fuel expense was $163.3 million compared to $185.0 million for the
corresponding period in 2008. The decrease was due to a decrease of 42.3% in the average cost of
natural gas prices and a decrease of 13.9% in KWHs generated as a result of lower demand, partially
offset by an increase of 17.5% in the average cost of coal per KWH generated.
For year-to-date 2009, fuel expense was $435.0 million compared to $501.1 million for the
corresponding period in 2008. The decrease was due to a decrease of 39.7% in the average cost of
natural gas prices and a decrease of 19.0% in KWHs generated as a result of lower demand, partially
offset by an increase of 22.5% in the average cost of coal per KWH generated.
Non-Affiliates
In the third quarter 2009, purchased power from non-affiliates was $9.9 million compared to $14.0
million for the corresponding period in 2008. The decrease was primarily related to a 51.8%
decrease in the volume of KWHs purchased, partially offset by a 77.7% increase in average cost per
KWH purchased.
For year-to-date 2009, purchased power from non-affiliates was $20.5 million compared to $23.3
million for the corresponding period in 2008. The decrease was primarily related to an 11.2%
decrease in the volume of KWHs purchased, partially offset by a 15.3% increase in average cost per
KWH purchased.
Energy purchases from non-affiliates will vary depending on the market cost of available energy
being lower than the cost of Southern Company system-generated energy, demand for energy within the
Southern Company system service territory, and the availability of Southern Company system
generation.
Affiliates
In the third quarter 2009, purchased power from affiliates was $29.4 million compared to $41.1
million for the corresponding period in 2008. The decrease was primarily related to a 56.8%
decrease in average cost per KWH purchased, partially offset by a 66.5% increase in the volume of
KWHs purchased from lower-priced Power Pool resources.
For year-to-date 2009, purchased power from affiliates was $58.0 million compared to $66.5 million
for the corresponding period in 2008. The decrease was primarily related to a 52.8% decrease in
average cost per KWH purchased, partially offset by an 85.5% increase in the volume of KWHs
purchased from lower-priced Power Pool resources.
Energy purchases from affiliates will vary depending on demand and the availability and cost of
generating resources at each company within the Southern Company system. These purchases are made
in accordance with the IIC, as approved by the FERC.
Other Operations and Maintenance Expenses
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(7.8) |
|
(12.0) |
|
$(2.5) |
|
(1.3) |
|
In the third quarter 2009, other operations and maintenance expenses were $57.4 million compared to
$65.2 million for the corresponding period in 2008. The decrease was primarily due to an $8.0
million decrease in storm recovery costs and a $1.9 million decrease in maintenance at generation
facilities, partially offset by $1.9
million in increased expense from other energy services. The decreased storm recovery costs and
the increased
89
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
expense from other energy services did not have a material impact on earnings since
they were offset by associated revenues.
For year-to-date 2009, other operations and maintenance expenses were $194.9 million compared to
$197.4 million for the corresponding period in 2008. The decrease was primarily due to a $9.7
million decrease in storm recovery costs, partially offset by a $7.4 million increase in other
energy services. The decreased storm recovery costs and the increased expense from other energy
services did not have a material impact on earnings since they were offset by associated revenues.
Depreciation and Amortization
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$1.2 |
|
5.2 |
|
$3.6 |
|
5.5 |
|
In the third quarter 2009, depreciation and amortization was $23.5 million compared to $22.3
million for the corresponding period in 2008. For year-to-date 2009, depreciation and amortization
was $69.8 million compared to $66.2 million for the corresponding period in 2008. These increases
were primarily due to net additions to generation and distribution facilities.
Taxes Other Than Income Taxes
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$1.6 |
|
6.4 |
|
$5.5 |
|
8.3 |
|
In the third quarter 2009, taxes other than income taxes were $26.7 million compared to $25.1
million for the corresponding period in 2008. For year-to-date 2009, taxes other than income taxes
were $72.1 million compared to $66.6 million for the corresponding period in 2008. These increases
were primarily due to increases in franchise fees and gross receipt taxes, which have no impact on
net income.
Allowance for Equity Funds Used During Construction
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$4.1 |
|
154.8 |
|
$11.1 |
|
179.8 |
|
In the third quarter 2009, AFUDC was $6.8 million compared to $2.7 million for the
corresponding period in 2008. For year-to-date 2009, AFUDC was $17.3 million compared to $6.2
million for the corresponding period in 2008. These increases were primarily due to the
construction of environmental control projects.
Interest Income
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(0.8) |
|
(85.9) |
|
$(1.9) |
|
(81.9) |
|
In the third quarter 2009, interest income was $0.1 million compared to $0.9 million for the
corresponding period in 2008. For year-to-date 2009, interest income was $0.4 million compared to
$2.3 million for the
corresponding period in 2008. These decreases were primarily due to decreases in interest received
related to the recovery of financing costs associated with the fuel clause.
90
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest Expense, Net of Amounts Capitalized
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(1.2) |
|
(11.7) |
|
$(3.2) |
|
(9.8) |
|
In the third quarter 2009, interest expense, net of amounts capitalized was $9.3 million compared
to $10.5 million for the corresponding period in 2008. For year-to-date 2009, interest expense,
net of amounts capitalized was $29.0 million compared to $32.2 million for the corresponding period
in 2008. These decreases were primarily the result of an increase in capitalization of AFUDC
related to the construction of environmental control projects.
Income Taxes
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
(change in millions) |
|
(% change) |
|
(change in millions) |
|
(% change) |
$(0.8) |
|
(3.7) |
|
$(3.2) |
|
(6.6) |
|
In the third quarter 2009, income taxes were $22.1 million compared to $22.9 million for the
corresponding period in 2008. The decrease was primarily due to an increase in the tax benefit
associated with an increase in AFUDC, which is non-taxable.
For year-to-date 2009, income taxes were $45.3 million compared to $48.5 million for the
corresponding period in 2008. The decrease was primarily due to an increase in the tax benefit
associated with an increase in AFUDC, which is non-taxable, and state tax credits, partially offset
by higher pre-tax income.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Gulf Powers future
earnings potential. The level of Gulf Powers future earnings depends on numerous factors that
affect the opportunities, challenges, and risks of Gulf Powers business of selling electricity.
These factors include Gulf Powers ability to maintain a constructive regulatory environment that
continues to allow for the recovery of prudently incurred costs during a time of increasing costs.
Future earnings in the near term will depend, in part, upon maintaining energy sales, which is
subject to a number of factors. These factors include weather, competition, new energy contracts
with neighboring utilities, energy conservation practiced by customers, the price of electricity,
the price elasticity of demand, and the rate of economic growth or decline in Gulf Powers service
area. Recessionary conditions have negatively impacted sales and are expected to continue to have
a negative impact, particularly to industrial and commercial customers. The timing and extent of
the economic recovery will impact future earnings. For additional information relating to these
issues, see RISK FACTORS in Item 1A and MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS
POTENTIAL of Gulf Power in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to the Clean Air Act and other environmental statutes and regulations
could affect earnings if such costs cannot continue to be fully recovered in rates on a timely
basis. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental
Matters of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under Environmental Matters
in Item 8 of the Form 10-K for additional information.
91
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Carbon Dioxide Litigation
New York Case
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Carbon Dioxide Litigation New York Case of Gulf Power in Item 7 and Note 3 to the financial
statements of Gulf Power under Environmental Matters Carbon Dioxide Litigation New York
Case in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation.
On September 21, 2009, the U.S. Court of Appeals for the Second Circuit reversed the district
courts ruling, vacating the dismissal of the plaintiffs claim, and remanding the case to the
district court. This ruling is subject to potential reconsideration and appeal. Therefore, the
ultimate outcome of these matters cannot be determined at this time.
Kivalina Case
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Carbon Dioxide Litigation Kivalina Case of Gulf Power in Item 7 and Note 3 to the financial
statements of Gulf Power under Environmental Matters Carbon Dioxide Litigation Kivalina
Case in Item 8 of the Form 10-K for additional information regarding carbon dioxide litigation.
On September 30, 2009, the U.S. District Court for the Northern District of California granted the
defendants motions to dismiss the case based on lack of jurisdiction and ruled that the claims
were barred by the political question doctrine and by the plaintiffs failure to establish the
standard for determining that the defendants conduct caused the injury alleged. The ultimate
outcome of this matter may depend on appeals or other legal proceedings and cannot be determined at
this time.
Air Quality
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Environmental Statutes and Regulations Air Quality of Gulf Power in Item 7 of the Form 10-K for
additional information regarding the eight-hour ozone standard. On September 16, 2009, the EPA
announced that it would reconsider its March 2008 decision regarding the eight-hour ozone standard,
potentially resulting in a more stringent standard and designation of additional nonattainment
areas within Gulf Powers service territory. The EPA is expected to propose any revisions to the
standard by December 2009 and issue a final decision by August 2010. The impact of a more
stringent standard will depend on the proposed and final regulations and resolution of any legal
challenges and cannot be determined at this time.
Water Quality
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Environmental Statutes and Regulations Water Quality of Gulf Power in Item 7 of the Form 10-K
for additional information regarding the EPAs regulation of cooling water intake structures. On
April 1, 2009, the U.S. Supreme Court reversed the U.S. Court of Appeals for the Second Circuits
decision with respect to the rules use of cost-benefit analysis and held that the EPA could
consider costs in arriving at its standards and in providing variances from those standards for
existing power plant cooling water intake structures. Other aspects of the courts decision were
not appealed and remain unaffected by the U.S. Supreme Courts ruling. While the U.S. Supreme
Courts decision may ultimately result in greater flexibility for demonstrating compliance with the
standards, the full scope of the 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.
92
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Global Climate Issues
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Global Climate Issues of Gulf Power in Item 7 of the Form 10-K for information regarding the
potential for legislation and regulation addressing greenhouse gas emissions. On April 24, 2009,
the EPA published a proposed finding that certain greenhouse gas emissions from new motor vehicles
endanger public health and welfare due to climate change and, on September 28, 2009, the EPA
published a proposed rule regulating greenhouse gas emissions from new motor vehicles under the
Clean Air Act. The EPA has stated that finalization of this rule will cause carbon dioxide and
other greenhouse gases to become regulated pollutants under the Prevention of Significant
Deterioration preconstruction permit program and the Title V operating permit program, which both
apply to power plants. On October 27, 2009, the EPA published a proposed rule governing how these
programs would be applied to stationary sources, including power plants. The EPA has stated that
it expects to finalize its endangerment finding and proposed rules in March 2010. The ultimate
outcome of the endangerment finding and these proposed rules cannot be determined at this time and
will depend on additional regulatory action and potential legal challenges.
In addition, federal legislative proposals that would impose mandatory requirements related to
greenhouse gas emissions, renewable energy standards, and energy efficiency standards continue to
be actively considered in Congress, and the reduction of greenhouse gas emissions has been
identified as a high priority by the current Administration. On June 26, 2009, the American Clean
Energy and Security Act of 2009, which would impose mandatory greenhouse gas restrictions through
implementation of a cap and trade program, a renewable energy standard, and other measures, was
passed by the House of Representatives. Similar legislation is being considered by the Senate.
The ultimate outcome of these matters cannot be determined at this time; however, mandatory
restrictions on Gulf Powers greenhouse gas emissions, or requirements relating to renewable energy
or energy efficiency, 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.
FERC and Florida PSC Matters
Market-Based Rate Authority
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL FERC Matters
Market-Based Rate Authority of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf
Power under FERC Matters Market-Based Rate Authority in Item 8 of the Form 10-K for
information regarding market-based rate authority. In October 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 March 5, 2009,
the FERC accepted Southern Companys CBR tariff for filing. On March 25, 2009, the FERC accepted
Southern Companys compliance filing related to the MBR tariff and directed Southern Company to
commence the energy auction in 30 days. Southern Company commenced the energy auction on April 23,
2009. The FERC has determined that implementation of the energy auction in accordance with the MBR
tariff order adequately mitigates going forward any presumption of market power that Southern
Company may have in the Southern Company retail service territory and adjacent market areas. The
original generation dominance proceeding
93
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
initiated by the FERC in December 2004 remains pending before the FERC. The ultimate
outcome of this matter cannot be determined at this time.
Retail Regulatory Matters
Gulf Power has established fuel cost recovery rates approved by the Florida PSC. In recent years,
Gulf Power has experienced higher than expected fuel costs for coal and natural gas. If the
projected fuel cost over or under recovery balance at year-end exceeds 10% of the projected fuel
revenue applicable for the period, Gulf Power is required to notify the Florida PSC and indicate if
an adjustment to the fuel cost recovery factor is being requested.
Under recovered fuel costs at September 30, 2009 totaled $26.1 million, compared to $96.7 million
at December 31, 2008. This amount is included in under recovered regulatory clause revenues on
Gulf Powers Condensed Balance Sheets herein. Fuel cost recovery revenues, as recorded on the
financial statements, are adjusted for differences in actual recoverable costs and amounts billed
in current regulated rates. Accordingly, any change in the billing factor would have no
significant effect on Gulf Powers revenues or net income, but would affect cash flow.
On
November 4, 2009, the Florida PSC approved Gulf Powers
annual rate clause requests for its
purchased power capacity, conservation, and environmental compliance cost recovery factors for 2010. A
decision from the Florida PSC on Gulf Powers annual rate clause
request for its 2010 fuel cost recovery
factor is expected in December 2009. The net effect of the approved and proposed changes to Gulf Powers cost recovery factors for
2010 is a 3.9%
rate increase for residential customers using 1,000 KWHs per month. The ultimate outcome of this
matter cannot now be determined.
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters of Gulf
Power in Item 7 and Notes 1 and 3 to the financial statements of Gulf Power under Revenues and
Retail Regulatory Matters, respectively, in Item 8 of the Form 10-K for additional information.
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, which could have a significant impact on the future cash flow
and net income of Gulf Power. Gulf Power estimates the cash flow reduction to 2009 tax payments as
a result of the bonus depreciation provisions of the ARRA to be between approximately $13 million
and $16 million. On October 27, 2009, Southern Company and its subsidiaries received notice that
an award of $165 million had been granted, of which $15.5 million relates to Gulf Power, under its
ARRA grant application for transmission and distribution automation and modernization projects
pending final negotiations. Gulf Power continues to assess the other financial implications of the
ARRA. The ultimate impact cannot be determined at this time.
Other Matters
On March 16, 2009, Gulf Power entered into a PPA (the Agreement) with Shell Energy North America
(US), L.P. (Shell). Under the terms of the Agreement, Gulf Power will be entitled to all of the
capacity and energy from an approximately 885 MW combined cycle power plant (the Plant) located
in Autauga County, Alabama that is owned and operated by Tenaska Alabama II Partners, L.P.
(Tenaska). Shell is entitled to all of the capacity and energy from the Plant under a 20-year
Energy Conversion Agreement between Shell and Tenaska that expires on May 24, 2023. On July 14,
2009, the Florida PSC approved the Agreement. On
October 17, 2009, the Florida PSCs approval became a final, non-appealable order. The
Agreement became effective on November 1, 2009. Unless earlier terminated in accordance with
its terms, the Agreement will
94
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
terminate on May 24, 2023. Payments under the Agreement will be
material. However, these costs have been approved by the Florida PSC for recovery through Gulf
Powers fuel clause and purchased power capacity clause; therefore, no material impact is
expected on Gulf Powers net income.
Gulf Power is involved in various other matters being litigated and regulatory matters that
could affect future earnings. In addition, Gulf Power is subject to certain claims and legal
actions arising in the ordinary course of business. Gulf Powers business activities are
subject to extensive governmental regulation related to public health and the environment, such
as regulation of air emissions and water discharges. 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, and common law nuisance
claims for injunctive relief and property damage allegedly caused by greenhouse gas emissions,
have become more frequent. The ultimate outcome of such pending or potential litigation against
Gulf Power cannot be predicted at this time; however, for current proceedings not specifically
reported herein or in Note 3 to the financial statements of Gulf Power in Item 8 of the Form
10-K, management does not anticipate that the liabilities, if any, arising from such current
proceedings would have a material adverse effect on Gulf Powers financial statements.
See the Notes to the Condensed Financial Statements herein for discussion of various other
contingencies, regulatory matters, and other matters being litigated which may affect future
earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Gulf Power prepares its financial statements in accordance with accounting principles generally
accepted in the United States. Significant accounting policies are described in Note 1 to the
financial statements of Gulf Power in Item 8 of the Form 10-K. In the application of these
policies, certain estimates are made that may have a material impact on Gulf Powers results of
operations and related disclosures. Different assumptions and measurements could produce estimates
that are significantly different from those recorded in the financial statements. See MANAGEMENTS
DISCUSSION AND ANALYSIS ACCOUNTING POLICIES Application of Critical Accounting Policies and
Estimates of Gulf Power in Item 7 of the Form 10-K for a complete discussion of Gulf Powers
critical accounting policies and estimates related to Electric Utility Regulation, Contingent
Obligations, and Unbilled Revenues.
New Accounting Standards
Variable Interest Entities
In June 2009, the FASB issued new guidance on the consolidation of variable interest entities,
which replaces the quantitative-based risks and rewards calculation for determining whether an
enterprise is the primary beneficiary in a variable interest entity with an approach that is
primarily qualitative, requires ongoing assessments of whether an enterprise is the primary
beneficiary of a variable interest entity, and requires additional disclosures about an
enterprises involvement in variable interest entities. Gulf Power is required to adopt this new
guidance effective January 1, 2010 and is evaluating the impact, if any, it will have on its
financial statements.
95
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Overview
Gulf Powers financial condition remained stable at September 30, 2009. Throughout the turmoil in
the financial markets, Gulf Power has maintained adequate access to capital without drawing on any
of its committed bank credit arrangements used to support its commercial paper borrowings and
variable rate pollution control revenue bonds. Gulf Power 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. Market rates for committed credit have increased, and Gulf
Power has been and expects to continue to be subject to higher costs as its existing facilities are
replaced or renewed. Total committed credit fees at Gulf Power currently average less than 3/4 of 1%
per year. Gulf Powers interest cost for short-term debt has decreased as market short-term
interest rates have declined from 2008 levels. The ultimate impact on future financing costs as a
result of financial turmoil cannot be determined at this time. Gulf Power 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.
Gulf Powers investments in pension trust funds remained stable during the third quarter 2009.
Gulf Power expects that the earliest that cash may have to be contributed to the pension trust fund
is 2012 and such contribution could be significant; however, projections of the amount vary
significantly depending on key variables including future trust fund performance and cannot be
determined at this time.
Net cash provided from operating activities totaled $148.2 million for the first nine months of
2009, compared to $90.4 million for the corresponding period in 2008. The $57.8 million increase
in cash provided from operating activities was primarily due to a $118.8 million increase in cash
from under recovered regulatory clause revenues related to fuel, partially offset by a $28.1
million increase in cash payments for fossil fuel inventory and a $27.0 million decrease in
deferred income taxes. Net cash used for investing activities totaled $375.7 million for the first
nine months of 2009, compared to $227.8 million for the corresponding period in 2008. The $147.9
million increase was primarily due to gross property additions to utility plant. These additions
were primarily related to installation of equipment to comply with environmental requirements. Net
cash provided from financing activities totaled $233.0 million for the first nine months of 2009,
compared to $174.5 million for the corresponding period in 2008. The $58.5 million increase in
cash provided from financing activities was primarily due to the issuances of $140.0 million of
senior notes, $135.0 million of common stock to Southern Company, and $130.4 million of pollution
control revenue bonds in 2009, partially offset by an issuance of $110.0 million of long-term debt
in 2008, a $71.8 million decrease of capital contributions from Southern Company, and a $159.4
million increase in cash payments related to notes payable.
Significant balance sheet changes for the first nine months of 2009 include a net increase of
$293.7 million in property, plant, and equipment, primarily related to environmental control
projects; the issuance of $140.0 million in senior notes; the issuance of common stock to Southern
Company for $135.0 million; the issuance of $130.4 million of pollution control revenue bonds, with
a related restricted cash balance of $21.0 million; an increase in fossil fuel stock of $52.6
million; an increase in customer accounts receivable and unbilled revenues of $31.1 million; and a
$66.8 million decrease in under recovered regulatory clause revenues primarily related to fuel.
96
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Requirements and Contractual Obligations
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Capital
Requirements and Contractual Obligations of Gulf Power in Item 7 of the Form 10-K for a
description of Gulf Powers capital requirements for its construction program, maturities of
long-term debt, leases, derivative obligations, preference stock dividends, purchase commitments,
and trust funding requirements. Approximately $140 million will be required through September 30,
2010 to fund maturities of debt. The construction program is 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; storm impacts;
changes in environmental statutes and regulations; changes in FERC rules and regulations; Florida
PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment,
and materials; and the cost of capital. In addition, there can be no assurance that costs related
to capital expenditures will be fully recovered.
Sources of Capital
Gulf Power plans to obtain the funds required for construction and other purposes from sources
similar to those utilized in the past. Recently, Gulf Power has utilized funds from operating cash
flows, short-term debt, security offerings, a long-term bank note, and equity contributions from
Southern Company. However, the amount, type, and timing of any future financings, if needed, will
depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENTS
DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Sources of Capital of Gulf Power
in Item 7 of the Form 10-K for additional information.
Gulf Powers current liabilities frequently exceed current assets because of the continued use of
short-term debt as a funding source to meet cash needs which can fluctuate significantly due to the
seasonality of the business. To meet short-term cash needs and contingencies, Gulf Power had at
September 30, 2009 approximately $8.9 million of cash and cash equivalents and $220 million of
unused committed lines of credit with banks. Of these credit agreements, $60 million expire in
2009, $160 million expire in 2010, and $70 million of these facilities contain provisions allowing
one-year term loans executable at expiration. Subsequent to September 30, 2009, Gulf Power renewed
$40 million of its credit facilities that were set to expire in 2009 and extended the maturity
dates to 2010. Gulf Power expects to renew its credit facilities, as needed, prior to expiration.
See Note 6 to the financial statements of Gulf Power under Bank Credit Arrangements in Item 8 of
the Form 10-K and Note (E) to the Condensed Financial Statements under Bank Credit Arrangements
herein for additional information. These credit arrangements provide liquidity support to Gulf
Powers commercial paper borrowings and $69 million are dedicated to funding purchase obligations
related to variable rate pollution control revenue bonds. Gulf Power may meet short-term cash
needs through a Southern Company subsidiary organized to issue and sell commercial paper at the
request and for the benefit of Gulf Power and other Southern Company subsidiaries. At September
30, 2009, Gulf Power had $36.9 million of commercial paper outstanding. Management believes that
the need for working capital can be adequately met by utilizing the commercial paper program, lines
of credit, and cash.
Credit Rating Risk
Gulf Power does not have any credit arrangements that would require material changes in payment
schedules or terminations as a result of a credit rating downgrade. There are certain contracts
that could require collateral, but not accelerated payment, in the event of a credit rating change
to BBB- and/or Baa3 or below. These contracts are for physical electricity purchases and sales,
fuel transportation and storage, emissions allowances, and energy price risk management. At
September 30, 2009, the maximum potential collateral requirements
under these contracts at a BBB- and/or Baa3 rating were approximately $58 million. At September
30, 2009,
97
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the maximum potential collateral requirements under these contracts at a rating below
BBB- and/or Baa3 were approximately $384 million. Included in these amounts are certain agreements
that could require collateral in the event that one or more Power Pool participants has a credit
rating change to below investment grade. Generally, collateral may be provided by a Southern
Company guaranty, letter of credit, or cash. Additionally, any credit rating downgrade could
impact Gulf Powers ability to access capital markets, particularly the short-term debt market.
On September 2, 2009, Moodys affirmed the credit ratings of Gulf Powers senior unsecured notes
and commercial paper of A2/P-1, respectively, and revised the rating outlook to negative. On
October 6, 2009, Standard and Poors affirmed the credit ratings of Gulf Powers senior unsecured
notes and its short-term credit rating of A/A-1, respectively, and maintained its stable rating
outlook. On September 4, 2009, Fitch affirmed Gulf Powers senior unsecured notes and commercial
paper ratings of A+/F1, respectively, and maintained a stable rating outlook for Gulf Power.
Market Price Risk
Gulf Powers market risk exposure relative to interest rate changes has not changed materially
compared with the December 31, 2008 reporting period. Since a significant portion of outstanding
indebtedness is at fixed rates, Gulf Power is not aware of any facts or circumstances that would
significantly affect exposures on existing indebtedness in the near term. However, the impact on
future financing costs cannot now be determined.
Due to cost-based rate regulation, Gulf Power continues to have limited exposure to market
volatility in interest rates, commodity fuel prices, and prices of electricity. To mitigate
residual risks relative to movements in electricity prices, Gulf Power enters into physical
fixed-price contracts for the purchase and sale of electricity through the wholesale electricity
market. Gulf Power continues to manage a fuel-hedging program implemented per the guidelines of
the Florida PSC. As such, Gulf Power has no material change in market risk exposure when compared
with the December 31, 2008 reporting period.
The changes in fair value of energy-related derivative contracts for the three months and nine
months ended September 30, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Year-to-Date |
|
|
2009 |
|
2009 |
|
|
Changes |
|
Changes |
|
|
Fair Value |
|
|
(in millions) |
Contracts outstanding at the beginning of the period, assets
(liabilities), net |
|
$ |
(28.2 |
) |
|
$ |
(31.2 |
) |
Contracts realized or settled |
|
|
12.5 |
|
|
|
35.6 |
|
Current period changes(a) |
|
|
0.6 |
|
|
|
(19.5 |
) |
|
Contracts outstanding at the end of the period, assets (liabilities), net |
|
$ |
(15.1 |
) |
|
$ |
(15.1 |
) |
|
(a) Current period changes also include the changes in fair value of new contracts entered into
during the period, if any.
The increases in the fair value positions of the energy-related derivative contracts for the
three months and nine months ended September 30, 2009 were $13 million and $16 million,
respectively, substantially all of which is due to natural gas positions. These changes are
attributable to both the volume and prices of natural gas. At September 30, 2009, Gulf Power had a
net hedge volume of 12 million mmBtu with a weighted average contract cost approximately $1.23 per
mmBtu above market prices, compared to 15 million mmBtu at June 30, 2009 with a weighted average
contract cost approximately $1.95 per mmBtu above market prices and compared
to 14 million mmBtu at December 31, 2008 with a weighted average contract cost approximately $2.24
per mmBtu above market prices. Natural gas hedge settlements are recovered through the fuel cost
recovery clause.
98
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At September 30, 2009 and December 31, 2008, the net fair value of energy-related derivative
contracts by hedge designation was reflected in the financial statements as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
Asset (Liability) Derivatives |
|
2009 |
|
2008 |
|
|
(in millions) |
Regulatory hedges |
|
$ |
(15.1 |
) |
|
$ |
(31.2 |
) |
Not designated |
|
|
|
|
|
|
|
|
|
Total fair value |
|
$ |
(15.1 |
) |
|
$ |
(31.2 |
) |
|
Energy-related derivative contracts which are designated as regulatory hedges relate to Gulf
Powers fuel hedging program 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 clause. 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 and losses recognized in income for the three months and nine months ended
September 30, 2009 and 2008 for energy-related derivative contracts that are not hedges were not
material.
The maturities of the energy-related derivative contracts and the level of the fair value hierarchy
in which they fall at September 30, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
Total |
|
Maturity |
|
|
Fair Value |
|
Year 1 |
|
Years 2&3 |
|
Years 4&5 |
|
|
|
|
|
|
(in millions) |
|
|
|
|
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Level 2 |
|
|
(15.1 |
) |
|
|
(12.0 |
) |
|
|
(3.2 |
) |
|
|
0.1 |
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of
contracts
outstanding at end
of period |
|
$ |
(15.1 |
) |
|
$ |
(12.0 |
) |
|
$ |
(3.2 |
) |
|
$ |
0.1 |
|
|
Gulf Power uses over-the-counter contracts that are not exchange traded but are fair valued using
prices which are actively quoted, and thus fall into Level 2. See Note (C) to the Condensed
Financial Statements herein for further discussion on fair value measurements.
For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND
LIQUIDITY Market Price Risk of Gulf Power in Item 7 and Notes 1 and 6 to the financial
statements of Gulf Power under Financial Instruments in Item 8 of the Form 10-K and Note (E) to
the Condensed Financial Statements herein.
Financing Activities
On January 22, 2009, Gulf Power issued to Southern Company 1,350,000 shares of Gulf Power common
stock, without par value, and realized proceeds of $135 million. The proceeds were used to repay a
portion of Gulf Powers short-term debt and for other general corporate purposes, including Gulf
Powers continuous construction program.
99
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In March 2009, Gulf Power incurred obligations related to the issuance of $130.4 million of
pollution control revenue bonds. The proceeds are being used for the acquisition, construction,
installation, and equipping of certain solid waste disposal facilities located at Plant Crist.
In June 2009, Gulf Power issued $140 million of Series 2009A Floating Rate Senior Notes due June
28, 2010. The proceeds were used to repay a portion of short-term indebtedness and for other
general corporate purposes, including Gulf Powers continuous construction program.
In July 2009, Gulf Power entered into a forward starting interest rate swap to mitigate exposure to
interest rate changes related to anticipated debt issuances. The notional amount of the swap is
$50 million, and the swap has been designated as a cash flow hedge.
Subsequent to September 30, 2009, Gulf Power entered into another forward starting interest rate
swap to mitigate exposure to interest rate changes related to anticipated debt issuances. The
notional amount of the swap is $50 million, and the swap has been designated as a cash flow hedge.
In addition to any financings that may be necessary to meet capital requirements, contractual
obligations, and storm-recovery, Gulf Power plans to continue, when economically feasible, a
program to retire higher-cost securities and replace these obligations with lower-cost capital if
market conditions permit.
100
MISSISSIPPI POWER COMPANY
101
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
231,894 |
|
|
$ |
241,788 |
|
|
$ |
608,761 |
|
|
$ |
597,298 |
|
Wholesale revenues, non-affiliates |
|
|
81,242 |
|
|
|
106,595 |
|
|
|
235,089 |
|
|
|
274,996 |
|
Wholesale revenues, affiliates |
|
|
13,404 |
|
|
|
28,908 |
|
|
|
30,785 |
|
|
|
79,833 |
|
Other revenues |
|
|
4,140 |
|
|
|
4,124 |
|
|
|
11,449 |
|
|
|
12,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
330,680 |
|
|
|
381,415 |
|
|
|
886,084 |
|
|
|
964,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel |
|
|
148,115 |
|
|
|
174,300 |
|
|
|
393,912 |
|
|
|
443,273 |
|
Purchased power, non-affiliates |
|
|
1,666 |
|
|
|
13,777 |
|
|
|
7,374 |
|
|
|
21,458 |
|
Purchased power, affiliates |
|
|
21,946 |
|
|
|
35,421 |
|
|
|
65,346 |
|
|
|
78,903 |
|
Other operations and maintenance |
|
|
61,138 |
|
|
|
64,828 |
|
|
|
182,500 |
|
|
|
192,969 |
|
Depreciation and amortization |
|
|
17,707 |
|
|
|
17,229 |
|
|
|
53,382 |
|
|
|
52,327 |
|
Taxes other than income taxes |
|
|
17,033 |
|
|
|
17,142 |
|
|
|
48,178 |
|
|
|
48,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
267,605 |
|
|
|
322,697 |
|
|
|
750,692 |
|
|
|
837,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income |
|
|
63,075 |
|
|
|
58,718 |
|
|
|
135,392 |
|
|
|
126,840 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
34 |
|
|
|
403 |
|
|
|
829 |
|
|
|
996 |
|
Interest expense, net of amounts capitalized |
|
|
(6,075 |
) |
|
|
(4,504 |
) |
|
|
(17,091 |
) |
|
|
(13,336 |
) |
Other income (expense), net |
|
|
474 |
|
|
|
1,507 |
|
|
|
3,239 |
|
|
|
6,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(5,567 |
) |
|
|
(2,594 |
) |
|
|
(13,023 |
) |
|
|
(6,315 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
57,508 |
|
|
|
56,124 |
|
|
|
122,369 |
|
|
|
120,525 |
|
Income taxes |
|
|
22,177 |
|
|
|
19,474 |
|
|
|
46,268 |
|
|
|
42,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
35,331 |
|
|
|
36,650 |
|
|
|
76,101 |
|
|
|
77,693 |
|
Dividends on Preferred Stock |
|
|
433 |
|
|
|
433 |
|
|
|
1,299 |
|
|
|
1,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income After Dividends on Preferred Stock |
|
$ |
34,898 |
|
|
$ |
36,217 |
|
|
$ |
74,802 |
|
|
$ |
76,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
|
(in thousands) |
|
Net Income After Dividends on Preferred Stock |
|
$ |
34,898 |
|
|
$ |
36,217 |
|
|
$ |
74,802 |
|
|
$ |
76,394 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $(27), $1,285, $-, and
$(169), respectively |
|
|
(44 |
) |
|
|
2,075 |
|
|
|
|
|
|
|
(272 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
34,854 |
|
|
$ |
38,292 |
|
|
$ |
74,802 |
|
|
$ |
76,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
102
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months |
|
|
|
Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
76,101 |
|
|
$ |
77,693 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization, total |
|
|
58,929 |
|
|
|
56,026 |
|
Deferred income taxes and investment tax credits, net |
|
|
(27,430 |
) |
|
|
5,112 |
|
Pension, postretirement, and other employee benefits |
|
|
5,817 |
|
|
|
6,088 |
|
Stock option expense |
|
|
822 |
|
|
|
639 |
|
Tax benefit of stock options |
|
|
17 |
|
|
|
473 |
|
Generation construction screening expense |
|
|
(21,955 |
) |
|
|
(12,278 |
) |
Other, net |
|
|
214 |
|
|
|
(15,111 |
) |
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
-Receivables |
|
|
48,512 |
|
|
|
(36,440 |
) |
-Fossil fuel stock |
|
|
(42,838 |
) |
|
|
(26,810 |
) |
-Materials and supplies |
|
|
(1,782 |
) |
|
|
(2,961 |
) |
-Prepaid income taxes |
|
|
1,061 |
|
|
|
1,187 |
|
-Other current assets |
|
|
(9,783 |
) |
|
|
4,098 |
|
-Other accounts payable |
|
|
(26,354 |
) |
|
|
10,195 |
|
-Accrued taxes |
|
|
13,430 |
|
|
|
(6,998 |
) |
-Accrued compensation |
|
|
(10,238 |
) |
|
|
(8,066 |
) |
-Other current liabilities |
|
|
20,694 |
|
|
|
17,355 |
|
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
85,217 |
|
|
|
70,202 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(72,661 |
) |
|
|
(100,490 |
) |
Cost of removal, net of salvage |
|
|
(9,911 |
) |
|
|
(3,497 |
) |
Construction payables |
|
|
(3,949 |
) |
|
|
(5,201 |
) |
Hurricane Katrina capital grant proceeds |
|
|
|
|
|
|
7,314 |
|
Other investing activities |
|
|
(2,150 |
) |
|
|
2,422 |
|
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(88,671 |
) |
|
|
(99,452 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Increase (decrease) in notes payable, net |
|
|
(24,891 |
) |
|
|
44,608 |
|
Proceeds |
|
|
|
|
|
|
|
|
Capital contributions from parent company |
|
|
3,330 |
|
|
|
4,222 |
|
Gross excess tax benefit of stock options |
|
|
67 |
|
|
|
892 |
|
Senior notes issuances |
|
|
125,000 |
|
|
|
|
|
Other long-term debt issuances |
|
|
|
|
|
|
80,000 |
|
Redemptions |
|
|
|
|
|
|
|
|
Pollution control revenue bonds |
|
|
|
|
|
|
(7,900 |
) |
Senior notes |
|
|
(40,000 |
) |
|
|
|
|
Payment of preferred stock dividends |
|
|
(1,299 |
) |
|
|
(1,299 |
) |
Payment of common stock dividends |
|
|
(51,375 |
) |
|
|
(51,300 |
) |
Other financing activities |
|
|
(1,781 |
) |
|
|
(1,475 |
) |
|
|
|
|
|
|
|
Net cash provided from financing activities |
|
|
9,051 |
|
|
|
67,748 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
5,597 |
|
|
|
38,498 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
22,413 |
|
|
|
4,827 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
28,010 |
|
|
$ |
43,325 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $117 and $113 capitalized for 2009 and
2008, respectively) |
|
$ |
15,824 |
|
|
$ |
12,054 |
|
Income taxes (net of refunds) |
|
$ |
48,008 |
|
|
$ |
38,710 |
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
103
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Assets |
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
28,010 |
|
|
$ |
22,413 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
51,841 |
|
|
|
40,262 |
|
Unbilled revenues |
|
|
28,294 |
|
|
|
24,798 |
|
Under recovered regulatory clause revenues |
|
|
|
|
|
|
54,994 |
|
Other accounts and notes receivable |
|
|
7,097 |
|
|
|
8,995 |
|
Affiliated companies |
|
|
17,414 |
|
|
|
24,108 |
|
Accumulated provision for uncollectible accounts |
|
|
(1,338 |
) |
|
|
(1,039 |
) |
Fossil fuel stock, at average cost |
|
|
128,375 |
|
|
|
85,538 |
|
Materials and supplies, at average cost |
|
|
28,925 |
|
|
|
27,143 |
|
Other regulatory assets, current |
|
|
55,366 |
|
|
|
59,220 |
|
Prepaid income taxes |
|
|
18,773 |
|
|
|
1,061 |
|
Other current assets |
|
|
17,241 |
|
|
|
9,837 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
379,998 |
|
|
|
357,330 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
2,302,812 |
|
|
|
2,234,573 |
|
Less accumulated provision for depreciation |
|
|
936,324 |
|
|
|
923,269 |
|
|
|
|
|
|
|
|
Plant in service, net of depreciation |
|
|
1,366,488 |
|
|
|
1,311,304 |
|
Construction work in progress |
|
|
43,162 |
|
|
|
70,665 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
1,409,650 |
|
|
|
1,381,969 |
|
|
|
|
|
|
|
|
Other Property and Investments |
|
|
7,321 |
|
|
|
8,280 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
8,860 |
|
|
|
9,566 |
|
Other regulatory assets, deferred |
|
|
184,897 |
|
|
|
171,680 |
|
Other deferred charges and assets |
|
|
25,842 |
|
|
|
23,870 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
219,599 |
|
|
|
205,116 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,016,568 |
|
|
$ |
1,952,695 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
104
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
1,304 |
|
|
$ |
41,230 |
|
Notes payable |
|
|
1,403 |
|
|
|
26,293 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
28,581 |
|
|
|
36,847 |
|
Other |
|
|
41,667 |
|
|
|
63,704 |
|
Customer deposits |
|
|
10,790 |
|
|
|
10,354 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Accrued income taxes |
|
|
24,120 |
|
|
|
8,842 |
|
Other accrued taxes |
|
|
40,647 |
|
|
|
50,700 |
|
Accrued interest |
|
|
4,264 |
|
|
|
3,930 |
|
Accrued compensation |
|
|
10,365 |
|
|
|
20,604 |
|
Other regulatory liabilities, current |
|
|
9,783 |
|
|
|
9,718 |
|
Over recovered regulatory clause liabilities |
|
|
20,466 |
|
|
|
|
|
Liabilities from risk management activities |
|
|
22,179 |
|
|
|
29,291 |
|
Other current liabilities |
|
|
17,715 |
|
|
|
19,144 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
233,284 |
|
|
|
320,657 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
493,779 |
|
|
|
370,460 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
222,702 |
|
|
|
222,324 |
|
Deferred credits related to income taxes |
|
|
11,862 |
|
|
|
14,074 |
|
Accumulated deferred investment tax credits |
|
|
13,121 |
|
|
|
14,014 |
|
Employee benefit obligations |
|
|
145,598 |
|
|
|
142,188 |
|
Other cost of removal obligations |
|
|
97,208 |
|
|
|
96,191 |
|
Other regulatory liabilities, deferred |
|
|
55,688 |
|
|
|
51,340 |
|
Other deferred credits and liabilities |
|
|
46,434 |
|
|
|
52,216 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
592,613 |
|
|
|
592,347 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
1,319,676 |
|
|
|
1,283,464 |
|
|
|
|
|
|
|
|
Redeemable Preferred Stock |
|
|
32,780 |
|
|
|
32,780 |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, without par value |
|
|
|
|
|
|
|
|
Authorized - 1,130,000 shares |
|
|
|
|
|
|
|
|
Outstanding - 1,121,000 shares |
|
|
37,691 |
|
|
|
37,691 |
|
Paid-in capital |
|
|
324,193 |
|
|
|
319,958 |
|
Retained earnings |
|
|
302,228 |
|
|
|
278,802 |
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
664,112 |
|
|
|
636,451 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
2,016,568 |
|
|
$ |
1,952,695 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
105
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRD QUARTER 2009 vs. THIRD QUARTER 2008
AND
YEAR-TO-DATE 2009 vs. YEAR-TO-DATE 2008
OVERVIEW
Mississippi Power operates as a vertically integrated utility providing electricity to retail
customers within its traditional service area located within the State of Mississippi and to
wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks
of Mississippi Powers business of selling electricity. These factors include the ability to
maintain a 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.
These costs include those related to projected long-term demand growth, increasingly stringent
environmental standards, fuel prices, capital expenditures, and restoration following major storms.
Mississippi Power has various regulatory mechanisms that operate to address cost recovery.
Appropriately balancing required costs and capital expenditures with reasonable retail rates will
continue to challenge Mississippi Power for the foreseeable future.
Mississippi Power continues to focus on several key performance indicators. In recognition that
Mississippi Powers long-term financial success is dependent upon how well it satisfies its
customers needs, Mississippi Powers retail base rate mechanism, PEP, includes performance
indicators that directly tie customer service indicators to Mississippi Powers allowed return. In
addition to the PEP performance indicators, Mississippi Power focuses on other performance
measures, including broader measures of customer satisfaction, plant availability, system
reliability, and net income after dividends on preferred stock. For additional information on
these indicators, see MANAGEMENTS DISCUSSION AND ANALYSIS OVERVIEW Key Performance
Indicators of Mississippi Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$(1.3)
|
|
(3.6)
|
|
$(1.6)
|
|
(2.1) |
|
Mississippi Powers net income after dividends on preferred stock for the third quarter 2009 was
$34.9 million compared to $36.2 million for the corresponding period in 2008. The decrease in net
income after dividends on preferred stock for the third quarter 2009 was primarily due to decreases
in wholesale energy revenues and total other income and (expense) and an increase in income tax
expense. The decrease was partially offset by an increase in retail base revenues primarily
resulting from increased sales in the industrial class, an increase in territorial wholesale base
revenues due to a wholesale base rate increase and increased demand, as well as a decrease in other
operations and maintenance expenses.
Mississippi Powers net income after dividends on preferred stock for year-to-date 2009 was $74.8
million compared to $76.4 million for the corresponding period in 2008. The decrease in net income
after dividends on preferred stock for year-to-date 2009 was primarily due to decreases in
wholesale energy revenues and total other income and (expense) and an increase in income tax
expense. The decrease was partially offset by an
increase in territorial wholesale base revenues primarily resulting from an increase in territorial
wholesale base rates and increased demand, as well as a decrease in other operations and
maintenance expenses.
106
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
|
|
|
|
|
|
|
Third Quarter 2009 vs. Third Quarter 2008 |
|
Year-to-Date 2009 vs. Year-to-Date 2008 |
|
(change in millions)
|
|
(% change)
|
|
(change in millions)
|
|
(% change) |
$(9.9)
|
|
(4.1)
|
|
$11.5
|
|
1.9 |
|
In the third quarter 2009, retail revenues were $231.9 million compared to $241.8 million for the
corresponding period in 2008. For year-to-date 2009, retail revenues were $608.8 million compared
to $597.3 million for the corresponding period in 2008.
Details of the change to retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
Year-to-Date |
|
|
2009 |
|
2009 |
|
|
(in millions) |
|
(% change) |
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
241.8 |
|
|
|
|
|
|
$ |
597.3 |
|
|
|
|
|
Estimated
change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|