TEST ONLY
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 March 31, 2011
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 35203 |
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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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001-31737
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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
(Response applicable only to The Southern Company at this time.)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large |
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Smaller |
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Accelerated |
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Accelerated |
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Non-accelerated |
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Reporting |
Registrant |
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Filer |
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Filer |
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Filer |
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Company |
The Southern Company |
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X |
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Alabama Power Company |
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X |
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Georgia Power Company |
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X |
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Gulf Power Company |
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X |
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Mississippi Power Company |
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X |
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Southern Power Company |
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X |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act.) Yes o No þ (Response applicable to all registrants.)
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Description of |
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Shares Outstanding |
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Registrant |
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Common Stock |
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at March 31, 2011 |
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The Southern Company |
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Par Value $5 Per Share |
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849,122,723 |
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Alabama Power Company |
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Par Value $40 Per Share |
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30,537,500 |
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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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4,142,717 |
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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
March 31, 2011
3
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2011
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Page |
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Number |
PART II OTHER INFORMATION
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Item 1. |
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145 |
Item 1A. |
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145 |
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 5. |
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Other Information |
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Inapplicable |
Item 6. |
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146 |
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150 |
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 |
2010 ARP
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Alternate Rate Plan approved by the Georgia PSC for Georgia Power which became effective January 1, 2011 and will continue through December 31, 2013 |
AFUDC
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Allowance for funds used during construction |
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 |
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, 2010 |
GAAP
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Generally Accepted Accounting Principles |
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 |
NCCR
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Georgia Powers Nuclear Construction Cost Recovery |
NDR
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Alabama Powers natural disaster reserve |
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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Mississippi Powers Performance Evaluation Plan |
Plant Vogtle Units 3 and 4
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Two new nuclear generating units under construction at Plant Vogtle |
Power Pool
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The operating arrangement whereby the integrated generating resources of the traditional operating companies and Southern Power are subject to joint commitment and dispatch in order to serve their combined load obligations |
PPA
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Power Purchase Agreement |
PSC
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Public Service Commission |
Rate CNP Environmental
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Alabama Powers rate certificated new plant environmental |
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 |
5
DEFINITIONS
(continued)
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Term |
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Meaning |
SCR
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Selective catalytic reduction |
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 |
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 |
S&P
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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, economic recovery, fuel cost recovery and other rate actions,
environmental regulations and expenditures, future earnings, access to sources of capital,
financing activities, start and completion of construction projects, plans and estimated costs for
new generation resources, impact of the Small Business Jobs and Credit Act of 2010, impact of the
Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, estimated sales
and purchases under new power sale and purchase agreements,
storm damage cost recovery and repairs, 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 changes, 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, coal combustion byproducts, and emissions of sulfur, nitrogen,
carbon, soot, particulate matter, hazardous air pollutants, including mercury, and other
substances, financial reform legislation, 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, and IRS audits; |
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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 and recovery from the recent recession, population and business growth (and declines),
and the effects of energy conservation measures; |
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available sources and costs of fuels; |
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effects of inflation; |
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ability to control costs and avoid cost overruns during the development and construction of
facilities; |
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investment performance of Southern Companys employee benefit plans and nuclear
decommissioning trust funds; |
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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 other cost recovery mechanisms; |
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regulatory approvals and actions related to the Plant Vogtle expansion, including Georgia
PSC and NRC approvals and potential DOE loan guarantees; |
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regulatory approvals and actions related to the Kemper IGCC, including Mississippi PSC
approvals and potential DOE loan guarantees; |
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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 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 influenzas, or other similar occurrences; |
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the direct or indirect effects on Southern Companys business resulting from incidents
affecting the U.S. electric grid or operation of generating resources; |
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the effect of accounting pronouncements issued periodically by standard setting bodies; and |
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other factors discussed elsewhere herein and in other reports filed by the registrants from
time to time with the SEC. |
The registrants expressly disclaim any obligation to update any forward-looking statements.
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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Ended March 31, |
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2011 |
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2010 |
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(in millions) |
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Operating Revenues: |
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Retail revenues |
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$ |
3,396 |
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$ |
3,459 |
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Wholesale revenues |
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449 |
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542 |
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Other electric revenues |
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150 |
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135 |
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Other revenues |
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17 |
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21 |
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Total operating revenues |
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4,012 |
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4,157 |
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Operating Expenses: |
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Fuel |
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1,476 |
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1,645 |
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Purchased power |
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100 |
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127 |
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Other operations and maintenance |
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944 |
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908 |
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Depreciation and amortization |
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418 |
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343 |
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Taxes other than income taxes |
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220 |
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212 |
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Total operating expenses |
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3,158 |
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3,235 |
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Operating Income |
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854 |
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922 |
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Other Income and (Expense): |
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Allowance for equity funds used during construction |
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35 |
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49 |
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Interest expense, net of amounts capitalized |
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(222 |
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(222 |
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Other income (expense), net |
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2 |
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(2 |
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Total other income and (expense) |
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(185 |
) |
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(175 |
) |
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Earnings Before Income Taxes |
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669 |
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747 |
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Income taxes |
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231 |
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236 |
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Consolidated Net Income |
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438 |
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511 |
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Dividends on Preferred and Preference Stock of Subsidiaries |
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16 |
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16 |
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Consolidated Net Income After Dividends on
Preferred and Preference Stock of Subsidiaries |
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$ |
422 |
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$ |
495 |
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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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$ |
0.50 |
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$ |
0.60 |
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Diluted EPS |
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$ |
0.49 |
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$ |
0.60 |
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Average number of shares of common stock outstanding (in millions) |
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Basic |
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848 |
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823 |
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Diluted |
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854 |
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825 |
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Cash dividends paid per share of common stock |
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$ |
0.4550 |
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$ |
0.4375 |
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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 Three Months |
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Ended March 31, |
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2011 |
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2010 |
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(in millions) |
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Operating Activities: |
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Consolidated net income |
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$ |
438 |
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$ |
511 |
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Adjustments to reconcile consolidated net income
to net cash provided from operating activities |
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Depreciation and amortization, total |
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501 |
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422 |
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Deferred income taxes |
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174 |
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107 |
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Deferred revenues |
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(2 |
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(20 |
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Allowance for equity funds used during construction |
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(35 |
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(49 |
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Pension, postretirement, and other employee benefits |
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(11 |
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5 |
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Stock based compensation expense |
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21 |
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19 |
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Generation construction screening costs |
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(19 |
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Other, net |
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(14 |
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(37 |
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Changes in certain current assets and liabilities |
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-Receivables |
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276 |
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43 |
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-Fossil fuel stock |
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(42 |
) |
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133 |
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-Other current assets |
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(77 |
) |
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(94 |
) |
-Accounts payable |
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(108 |
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(100 |
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-Accrued taxes |
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131 |
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(73 |
) |
-Accrued compensation |
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(277 |
) |
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(112 |
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-Other current liabilities |
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23 |
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2 |
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Net cash provided from operating activities |
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|
998 |
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738 |
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Investing Activities: |
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Property additions |
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(1,086 |
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(1,054 |
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Investment in restricted cash |
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(3 |
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Distribution of restricted cash |
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61 |
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8 |
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Nuclear decommissioning trust fund purchases |
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(928 |
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(238 |
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Nuclear decommissioning trust fund sales |
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924 |
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189 |
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Proceeds from property sales |
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14 |
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Cost of removal, net of salvage |
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(15 |
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(28 |
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Change in construction payables |
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136 |
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28 |
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Other investing activities |
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13 |
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7 |
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Net cash used for investing activities |
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(884 |
) |
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(1,088 |
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Financing Activities: |
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Increase (decrease) in notes payable, net |
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(54 |
) |
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132 |
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Proceeds |
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Long-term debt issuances |
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937 |
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350 |
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Common stock issuances |
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193 |
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147 |
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Redemptions |
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Long-term debt |
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(824 |
) |
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(256 |
) |
Payment of common stock dividends |
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(385 |
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(359 |
) |
Payment of dividends on preferred and preference stock of subsidiaries |
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(16 |
) |
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(16 |
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Other financing activities |
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(2 |
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1 |
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|
Net cash used for financing activities |
|
|
(151 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
(37 |
) |
|
|
(351 |
) |
Cash and Cash Equivalents at Beginning of Period |
|
|
447 |
|
|
|
690 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
410 |
|
|
$ |
339 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $17 and $21 capitalized for 2011 and 2010, respectively) |
|
$ |
197 |
|
|
$ |
182 |
|
Income taxes (net of refunds) |
|
|
(357 |
) |
|
|
6 |
|
Noncash transactions accrued property additions at end of period |
|
|
531 |
|
|
|
373 |
|
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 March 31, |
|
|
At December 31, |
|
Assets |
|
2011 |
|
|
2010 |
|
|
|
(in millions) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
410 |
|
|
$ |
447 |
|
Restricted cash and cash equivalents |
|
|
7 |
|
|
|
68 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
1,024 |
|
|
|
1,140 |
|
Unbilled revenues |
|
|
341 |
|
|
|
420 |
|
Under recovered regulatory clause revenues |
|
|
220 |
|
|
|
209 |
|
Other accounts and notes receivable |
|
|
249 |
|
|
|
285 |
|
Accumulated provision for uncollectible accounts |
|
|
(26 |
) |
|
|
(25 |
) |
Fossil fuel stock, at average cost |
|
|
1,350 |
|
|
|
1,308 |
|
Materials and supplies, at average cost |
|
|
828 |
|
|
|
827 |
|
Vacation pay |
|
|
150 |
|
|
|
151 |
|
Prepaid expenses |
|
|
435 |
|
|
|
784 |
|
Other regulatory assets, current |
|
|
199 |
|
|
|
210 |
|
Other current assets |
|
|
53 |
|
|
|
59 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
5,240 |
|
|
|
5,883 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
57,408 |
|
|
|
56,731 |
|
Less accumulated depreciation |
|
|
20,384 |
|
|
|
20,174 |
|
|
|
|
|
|
|
|
Plant in service, net of depreciation |
|
|
37,024 |
|
|
|
36,557 |
|
Other utility plant, net |
|
|
67 |
|
|
|
|
|
Nuclear fuel, at amortized cost |
|
|
738 |
|
|
|
670 |
|
Construction work in progress |
|
|
4,872 |
|
|
|
4,775 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
42,701 |
|
|
|
42,002 |
|
|
|
|
|
|
|
|
Other Property and Investments: |
|
|
|
|
|
|
|
|
Nuclear decommissioning trusts, at fair value |
|
|
1,369 |
|
|
|
1,370 |
|
Leveraged leases |
|
|
630 |
|
|
|
624 |
|
Miscellaneous property and investments |
|
|
267 |
|
|
|
277 |
|
|
|
|
|
|
|
|
Total other property and investments |
|
|
2,266 |
|
|
|
2,271 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
1,263 |
|
|
|
1,280 |
|
Prepaid pension costs |
|
|
104 |
|
|
|
88 |
|
Unamortized debt issuance expense |
|
|
178 |
|
|
|
178 |
|
Unamortized loss on reacquired debt |
|
|
269 |
|
|
|
274 |
|
Deferred under recovered regulatory clause revenues |
|
|
133 |
|
|
|
218 |
|
Other regulatory assets, deferred |
|
|
2,432 |
|
|
|
2,402 |
|
Other deferred charges and assets |
|
|
433 |
|
|
|
436 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
4,812 |
|
|
|
4,876 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
55,019 |
|
|
$ |
55,032 |
|
|
|
|
|
|
|
|
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 March 31, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2011 |
|
|
2010 |
|
|
|
(in millions) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
1,435 |
|
|
$ |
1,301 |
|
Notes payable |
|
|
1,243 |
|
|
|
1,297 |
|
Accounts payable |
|
|
1,315 |
|
|
|
1,275 |
|
Customer deposits |
|
|
333 |
|
|
|
332 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Accrued income taxes |
|
|
13 |
|
|
|
8 |
|
Unrecognized tax benefits |
|
|
183 |
|
|
|
187 |
|
Other accrued taxes |
|
|
192 |
|
|
|
440 |
|
Accrued interest |
|
|
259 |
|
|
|
225 |
|
Accrued vacation pay |
|
|
190 |
|
|
|
194 |
|
Accrued compensation |
|
|
165 |
|
|
|
438 |
|
Liabilities from risk management activities |
|
|
133 |
|
|
|
152 |
|
Other regulatory liabilities, current |
|
|
83 |
|
|
|
88 |
|
Other current liabilities |
|
|
493 |
|
|
|
535 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
6,037 |
|
|
|
6,472 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
18,133 |
|
|
|
18,154 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
7,673 |
|
|
|
7,554 |
|
Deferred credits related to income taxes |
|
|
233 |
|
|
|
235 |
|
Accumulated deferred investment tax credits |
|
|
525 |
|
|
|
509 |
|
Employee benefit obligations |
|
|
1,575 |
|
|
|
1,580 |
|
Asset retirement obligations |
|
|
1,283 |
|
|
|
1,257 |
|
Other cost of removal obligations |
|
|
1,170 |
|
|
|
1,158 |
|
Other regulatory liabilities, deferred |
|
|
335 |
|
|
|
312 |
|
Other deferred credits and liabilities |
|
|
508 |
|
|
|
517 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
13,302 |
|
|
|
13,122 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
37,472 |
|
|
|
37,748 |
|
|
|
|
|
|
|
|
Redeemable Preferred Stock of Subsidiaries |
|
|
375 |
|
|
|
375 |
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, par value $5 per share |
|
|
|
|
|
|
|
|
Authorized 1.5 billion shares |
|
|
|
|
|
|
|
|
Issued March 31, 2011: 850 million shares |
|
|
|
|
|
|
|
|
December 31, 2010: 844 million shares |
|
|
|
|
|
|
|
|
Treasury March 31, 2011: 0.5 million shares |
|
|
|
|
|
|
|
|
December 31, 2010: 0.5 million shares |
|
|
|
|
|
|
|
|
Par value |
|
|
4,248 |
|
|
|
4,219 |
|
Paid-in capital |
|
|
3,894 |
|
|
|
3,702 |
|
Treasury, at cost |
|
|
(15 |
) |
|
|
(15 |
) |
Retained earnings |
|
|
8,404 |
|
|
|
8,366 |
|
Accumulated other comprehensive loss |
|
|
(66 |
) |
|
|
(70 |
) |
|
|
|
|
|
|
|
Total Common Stockholders Equity |
|
|
16,465 |
|
|
|
16,202 |
|
Preferred and Preference Stock of Subsidiaries |
|
|
707 |
|
|
|
707 |
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
17,172 |
|
|
|
16,909 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
55,019 |
|
|
$ |
55,032 |
|
|
|
|
|
|
|
|
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 |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in millions) |
|
Consolidated Net Income |
|
$ |
438 |
|
|
$ |
511 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $2 and $1, respectively |
|
|
3 |
|
|
|
1 |
|
Reclassification adjustment for amounts included in net income, net of tax of $2 and $3, respectively |
|
|
3 |
|
|
|
6 |
|
Marketable securities: |
|
|
|
|
|
|
|
|
Change in fair value, net of tax of $- and $1, respectively |
|
|
(1 |
) |
|
|
2 |
|
Pension and other post retirement benefit plans: |
|
|
|
|
|
|
|
|
Reclassification adjustment for amounts included in net income, net of tax of $1 and $-, respectively |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
4 |
|
|
|
9 |
|
|
|
|
|
|
|
|
Dividends on preferred and preference stock of subsidiaries |
|
|
(16 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
426 |
|
|
$ |
504 |
|
|
|
|
|
|
|
|
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
FIRST QUARTER 2011 vs. FIRST QUARTER 2010
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
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$(73)
|
|
(14.6) |
|
Southern Companys first quarter 2011 net income after dividends on preferred and preference stock
of subsidiaries was $422 million ($0.50 per share) compared to $495 million ($0.60 per share) for
the first quarter 2010. The decrease for the first quarter 2011 when compared to the corresponding
period in 2010 was primarily the result of decreases in revenues in the first quarter 2011 due to
the significantly colder weather in the first quarter 2010, a decrease in wholesale revenues
primarily at Alabama Power, a decrease in the amortization of the regulatory liability related to
other cost of removal obligations at Georgia Power, and increases in operations and maintenance
expenses. The decrease for the first quarter 2011 was partially offset by an increase in retail
base revenues at Georgia Power pursuant to the 2010 ARP and by increases in revenues associated
with new PPAs at Southern Power.
Retail Revenues
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
|
(change in millions)
|
|
(% change) |
$(63)
|
|
(1.8) |
|
In the first quarter 2011, retail revenues were $3.4 billion compared to $3.5 billion for the
corresponding period in 2010.
14
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the change to retail revenues follow:
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
2011 |
|
|
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
3,459 |
|
|
|
|
|
Estimated change in |
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
166 |
|
|
|
4.8 |
|
Sales growth (decline) |
|
|
(5 |
) |
|
|
(0.1 |
) |
Weather |
|
|
(90 |
) |
|
|
(2.6 |
) |
Fuel and other cost recovery |
|
|
(134 |
) |
|
|
(3.9 |
) |
|
Retail current year |
|
$ |
3,396 |
|
|
|
(1.8 |
)% |
|
Revenues associated with changes in rates and pricing increased in the first quarter 2011 when
compared to the corresponding period in 2010 primarily due to Georgia Powers retail base rate
increase and NCCR revenues. Also contributing to the increase were
revenues associated with Alabama Powers Rate CNP Environmental due to the completion of
construction projects related to environmental mandates, although there was no increase in the Rate
CNP Environmental billing factors in 2011.
Revenues attributable to changes in sales decreased in the first quarter 2011 when compared to the
corresponding period in 2010. The decrease was due to a 0.9% decrease in weather-adjusted
residential KWH sales and a 0.8% decrease in weather-adjusted commercial KWH sales. In addition,
weather-adjusted industrial KWH sales increased 6.4% due to increased production activity in the
primary metals and chemical sectors.
Revenues resulting from changes in weather
decreased $90 million in the first quarter 2011 as a
result of significantly colder weather in the corresponding period in 2010.
Fuel and other cost recovery revenues decreased $134 million in the first quarter 2011 when
compared to the corresponding period in 2010. 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
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
|
(change in millions)
|
|
(% change) |
$(93)
|
|
(17.2) |
|
Wholesale revenues consist of PPAs with investor-owned utilities and electric cooperatives, unit
power sales contracts, and short-term opportunity sales. Wholesale revenues from PPAs and unit
power sales contracts have both capacity and energy components. Capacity revenues reflect the
recovery of fixed costs and a return on investment. Energy revenues will vary depending on fuel
prices, the market cost of available energy compared to the Southern Company system-owned
generation, demand for energy within the Southern Company service territory, and the availability
of the Southern Company system generation. Increases and decreases in energy revenues that are
driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a
significant impact on net income. Short-term opportunity sales are made at market-based rates that
generally provide a margin above the variable cost to produce the energy.
In the first quarter 2011, wholesale revenues were $449 million compared to $542 million for the
corresponding period in 2010, reflecting a $71 million decrease in energy revenues and a $22
million decrease in capacity revenues. The decrease in the first quarter 2011 was primarily due to
a 24.2% decrease in KWH sales mainly due to the expiration of long-term unit power sales contracts
in May 2010 at Alabama Power and the capacity subject to those contracts being made
available for retail service starting in June 2010. The decrease was partially offset by higher
energy and capacity revenues under new PPAs at Southern Power that began in June, July, and
December 2010 and January 2011.
15
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Electric Revenues
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$15
|
|
11.1 |
|
In the first quarter 2011, other electric revenues were $150 million compared to $135 million for
the corresponding period in 2010. The increase in the first quarter 2011 when compared to the
corresponding period in 2010 was primarily the result of an increase in transmission revenues.
Other Revenues
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$(4)
|
|
(20.3) |
|
In the first quarter 2011, other revenues were $17 million compared to $21 million for the
corresponding period in 2010. The decrease in the first quarter 2011 when compared to the
corresponding period in 2010 was primarily the result of a $4 million decrease in revenues at
SouthernLINC Wireless related to lower average revenue per subscriber and fewer subscribers due to
increased competition in the industry.
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
|
|
(change in millions) |
|
(% change) |
Fuel* |
|
$ |
(169 |
) |
|
|
(10.3 |
) |
Purchased power |
|
|
(27 |
) |
|
|
(20.8 |
) |
|
|
|
|
|
Total fuel and purchased power expenses |
|
$ |
(196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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. |
Fuel and purchased power expenses for the first quarter 2011 were $1.6 billion compared to
$1.8 billion for the corresponding period in 2010. The decrease for the first quarter 2011 when
compared to the corresponding period in 2010 was primarily the result of a $63 million decrease
related to total KWHs generated and purchased and a $133 million net decrease in the average cost
of fuel and purchased power. The decrease in total KWHs generated and purchased resulted primarily
from a decrease in customer demand, and the net decrease in the cost of fuel and purchased power
resulted primarily from a 20.6% decrease in the average cost of gas per KWH generated and a 4.9%
decrease in the average cost of coal per KWH generated.
Fuel expenses at the traditional operating companies are generally offset by fuel revenues and do
not have a significant effect on net income. See FUTURE EARNINGS POTENTIAL 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.
16
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
First Quarter |
|
Percent |
Average Cost |
|
2011 |
|
2010 |
|
Change |
|
|
(cents per net KWH) |
|
|
|
|
|
Fuel |
|
|
3.25 |
|
|
|
3.60 |
|
|
|
(9.7 |
) |
Purchased power |
|
|
9.25 |
|
|
|
7.37 |
|
|
|
25.5 |
|
|
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
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$36
|
|
3.8 |
|
In the first quarter 2011, other operations and maintenance expenses were $944 million compared to
$908 million for the corresponding period in 2010. The increase in the first quarter 2011 when
compared to the corresponding period in 2010
was primarily the result of a $30 million increase in scheduled outage and maintenance costs, a $10
million increase in commodity and labor costs, a $9 million increase in transmission and
distribution expenses, and a $3 million increase in customer service related costs. The increase
was partially offset by a $16 million decrease in administrative and general costs primarily due to
decreases in property insurance, pension costs, and other employee benefits.
Depreciation and Amortization
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
|
(change in millions)
|
|
(% change) |
$75
|
|
21.9 |
|
In the first quarter 2011, depreciation and amortization was $418 million compared to $343 million
for the corresponding period in 2010. The increase for the first quarter 2011 when compared to the
corresponding period in 2010 was primarily the result of a $50 million decrease in the amortization
of the regulatory liability related to other cost of removal obligations at Georgia Power as
authorized by the Georgia PSC and additional depreciation on plant in service related to
environmental, transmission, and distribution projects. See Note 3 to the financial statements of
Southern Company in Item 8 of the Form 10-K under Retail Regulatory Matters Georgia Power
Retail Rate Plans for additional information on the other cost of removal regulatory liability.
Taxes Other Than Income Taxes
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
|
(change in millions)
|
|
(% change) |
$8
|
|
3.9 |
|
In the first quarter 2011, taxes other than income taxes were $220 million compared to $212 million
for the corresponding period in 2010. The increase for the first quarter 2011 when compared to the
corresponding period in 2010 was primarily the result of increases in property and payroll taxes.
17
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Allowance for Equity Funds Used During Construction
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
|
(change in millions)
|
|
(% change) |
$(14)
|
|
(28.6) |
|
In the first quarter 2011, AFUDC equity was $35 million compared to $49 million for the
corresponding period in 2010. The decrease for the first quarter 2011 when compared to the
corresponding period in 2010 was primarily due to the inclusion of Georgia Powers Plant Vogtle
Units 3 and 4 construction work in progress in rate base effective January 1, 2011 which reduced
the amount of AFUDC capitalized. Also contributing to the decrease was the completion of
environmental construction projects at Alabama Power. See Note 3 to the financial statements of
Southern Company in Item 8 of the Form 10-K under Retail Regulatory Matters Georgia Power
Nuclear Construction and Note (B) to the Condensed Financial Statements under State PSC Matters
Georgia Power Nuclear Construction herein for additional information.
Income Taxes
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
|
(change in millions)
|
|
(% change) |
$(5)
|
|
(1.8) |
|
In the first quarter 2011, income taxes were $231 million compared to $236 million for the
corresponding period in 2010. The decrease for the first quarter 2011 when compared to the
corresponding period in 2010 was primarily the result of lower pre-tax earnings, partially offset
by a decrease in the first quarter 2010 in uncertain tax positions at Georgia Power related to
state income tax credits that remain subject to litigation. See Notes (B) and (G) to the Condensed
Financial Statements under Income Tax Matters Georgia State Income Tax Credits and
Unrecognized Tax Benefits, respectively, herein for additional information.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Southern Companys
future earnings potential. The level of Southern Companys future earnings depends on numerous
factors that affect the opportunities, challenges, and risks of Southern Companys primary business
of selling electricity. These factors include the traditional operating companies ability to
maintain a constructive regulatory environment that continues to allow for the timely recovery of
prudently incurred costs during a time of increasing costs. Other major factors include
profitability of the competitive wholesale supply business and federal regulatory policy. 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.
Changes in economic conditions impact sales for the traditional operating companies and Southern
Power, and the pace of the economic recovery remains uncertain. The timing and extent of the
economic recovery will impact growth and may 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. Further, higher costs that are recovered through regulated rates could contribute to
reduced demand for electricity, which could negatively impact results of
18
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
operations, cash flows, and financial condition. See MANAGEMENTS DISCUSSION AND ANALYSIS
FUTURE EARNINGS POTENTIAL Environmental Matters of Southern Company in Item 7 and Note 3 to
the financial statements of Southern Company under Environmental Matters in Item 8 of the Form
10-K for additional information.
New Source Review Actions
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
New Source Review Actions of Southern Company in Item 7 and Note 3 to the financial statements of
Southern Company under Environmental Matters New Source Review Actions in Item 8 of the Form
10-K for additional information regarding civil actions brought by the EPA against certain Southern
Company subsidiaries. The EPAs action against Alabama Power alleged that Alabama Power violated
the NSR provisions of the Clean Air Act and related state laws with respect to certain of its
coal-fired generating facilities. On March 14, 2011, the U.S. District Court for the Northern
District of Alabama granted Alabama Powers motion for summary judgment on all remaining claims and
dismissed the case with prejudice. The EPA has the right to appeal within 60 days of the order.
The ultimate outcome of this matter cannot be determined at this time.
Carbon Dioxide Litigation
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 February 23, 2011, the U.S. Court of Appeals for the Ninth Circuit issued an order
staying the case until June 15, 2011. The ultimate outcome of this matter 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 regulation of air quality. On May 3, 2011, the EPA published a
proposed rule, called Utility MACT (Maximum Achievable Control Technology), which would impose
stringent emission limits on coal- and oil-fired electric utility steam generating units (EGUs).
The proposed rule establishes numeric emission limits for acid gases, mercury, and total
particulate matter. Meeting the proposed limits would likely require additional emission control
equipment such as scrubbers, SCRs, baghouses, and other control measures at many coal-fired EGUs.
Pursuant to a court-approved consent decree, the EPA must issue a final rule by November 16, 2011.
Compliance for existing sources would be required three years after the effective date of the final
rule. In the proposed rule, the EPA discussed the possibility of a one-year compliance extension
which could be granted by the EPA or the states on a case-by-case basis if necessary. If finalized
as proposed, compliance with this rule would require significant capital expenditures and
compliance costs at many of the facilities of Southern Companys subsidiaries which could impact
unit retirement and replacement decisions. In addition, results of operations, cash flows, and
financial condition could be impacted if the costs are not recovered through regulated rates.
Further, there is uncertainty regarding the ability of the electric utility industry to achieve
compliance with the requirements of the proposed rule within the proposed compliance period, and
the limited compliance period could negatively impact electric system reliability. The outcome of
this rulemaking cannot be determined at this time.
In April 2010, the EPA proposed an Industrial Boiler MACT rule that would establish emissions
limits for various hazardous air pollutants typically emitted from industrial boilers, including
biomass boilers and start-up boilers. The EPA issued the final rules on February 23, 2011 and, at
the same time, issued a notice of intent to reconsider the final rules to allow for additional
public review and comment. Georgia Power has delayed the decision to convert Plant
19
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Mitchell Unit 3 to biomass until there is greater clarity regarding these regulations. The impact
of these regulations will depend on their final form and the outcome of any legal challenges and
cannot be determined at this time.
In October 2008, the EPA approved a revision to Alabamas State Implementation Plan (SIP)
requirements related to opacity which granted some flexibility to affected sources while requiring
compliance with Alabamas very strict opacity limits through use of continuous opacity monitoring
system data. In a decision published on April 6, 2011, the EPA responded to an environmental
groups request for reconsideration by attempting to rescind its previous approval of the Alabama
SIP revision. On April 8, 2011, Alabama Power filed an appeal of that decision with the U.S. Court
of Appeals for the Eleventh Circuit and requested the court to stay the effectiveness of the EPAs
attempted rescission pending judicial review. Absent a stay, the EPAs decision will become
effective May 6, 2011 and the rule under which Alabama Power has been operating since January 2009
may not be available unless Alabama Powers appeal is resolved
in its favor
by the court. If the EPAs decision
is allowed to take effect, it will likely impact unit availability and result in increased
maintenance and compliance costs. The final outcome of this matter 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 regulation of water quality. On April 20, 2011, the EPA
proposed a rule that establishes
standards for reducing impacts to fish and other aquatic life caused by cooling water intake
structures at existing power plants and manufacturing facilities. The rule also addresses cooling
water intake structures for new units at existing facilities. The rule focuses on reducing adverse
impacts to fish and other aquatic life due to impingement (when fish and other aquatic life are
trapped by water flow velocity against a facilitys cooling water intake structure screens) and
entrainment (when aquatic organisms are drawn through a facilitys cooling water system after
entering through the cooling water intake structure). Affected cooling water intake structures
would have to comply with national impingement standards (for intake velocity or alternatively
numeric impingement reduction standards) and entrainment reduction requirements (determined on a
case-by-case basis). The rules proposed impingement standards could require technological
improvements to cooling water intake structures at many of Southern Company affiliates existing
generating facilities, including facilities with closed-cycle re-circulating cooling systems
(cooling towers). To address the rules entrainment standards, facilities with once-through
cooling systems may have to install cooling towers. New units constructed at existing plants would
have to meet the national impingement standards and install closed-cycle cooling or the equivalent
to meet the entrainment mandate. The EPA has agreed in a settlement agreement to issue a final
rule by July 27, 2012. If finalized as proposed, some of the facilities of Southern Companys
subsidiaries may be subject to significant additional capital expenditures and compliance costs
that could affect future unit retirement and replacement decisions. Also, results of operations,
cash flows, and financial condition could be significantly impacted if such costs are not recovered
through regulated rates. The ultimate outcome of this rulemaking cannot be determined at this
time.
State PSC Matters
Retail Fuel Cost Recovery
The traditional operating companies each have established fuel cost recovery rates approved by
their respective state PSCs. In previous years, the traditional operating companies have
experienced volatility in pricing of fuel commodities with higher than expected pricing for coal
and uranium and volatile price swings in natural gas. These higher fuel costs have resulted in
total under recovered fuel costs included in the balance sheets of Alabama Power, Georgia Power,
and Gulf Power of approximately $348 million at March 31, 2011. Mississippi Power collected all
previously under recovered fuel costs and, as of March 31, 2011, had a total over recovered fuel
balance of $58 million. At December 31, 2010, total under recovered fuel costs included in the
balance sheets of Alabama Power, Georgia Power, and Gulf Power were approximately $420 million and
Mississippi Power had a total over recovered fuel balance of $55 million. Fuel cost
recovery revenues are adjusted for differences in actual recoverable fuel costs and amounts billed
in current regulated rates. Accordingly, changing the billing factor has no significant effect on
Southern Companys revenues or net income,
20
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
but does impact annual cash flow. The traditional operating companies continuously monitor the
under or over recovered fuel cost balances.
On March 1, 2011, Georgia Power filed a request with the Georgia PSC to decrease fuel rates by
0.61%. The decrease would reduce Georgia Powers annual billings by approximately $43 million.
The decrease in fuel costs is driven primarily by lower natural gas prices than those included in
current rates. That decrease is a result of increases in natural gas supplies from the production
of shale gas and lower industrial demand. If approved, the new rates will go into effect
June 1, 2011. The ultimate outcome of this matter cannot be determined at this time.
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 Retail Regulatory Matters Alabama Power Fuel Cost Recovery and Retail Regulatory
Matters Georgia Power Fuel Cost Recovery in Item 8 of the Form 10-K for additional
information.
Alabama Power Retail Regulatory Matters
Natural Disaster Reserve
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Alabama
Power Natural Disaster Reserve of Southern Company in Item 7 and Note 3 to the financial
statements of Southern Company under Retail Regulatory Matters Alabama Power Natural
Disaster Reserve in Item 8 of the Form 10-K.
On April 27, 2011, devastating storms swept through the central part of Alabama causing significant
damage in parts of the service territory of Alabama Power. Over 400,000 of Alabama
Powers 1.4 million customers were without electrical service immediately after the storms,
resulting from significant damage to Alabama Powers transmission and distribution facilities.
The preliminary estimated cost associated with repairing the damage to facilities and restoring electrical service
to customers is between $40 million and $55 million for operations and maintenance expenses and between $180 million and $225 million for capital expenditures.
Alabama Power maintains a reserve for operations and maintenance expenses to cover the cost of damages from
major storms to Alabama Powers transmission and distribution facilities.
At March 31, 2011, the NDR had an accumulated balance of $127 million, which is included in the
Condensed Balance Sheets herein under other regulatory liabilities, deferred. The accruals are
reflected as operations and maintenance expenses in the Condensed Statements of Income herein.
Georgia Power Retail Regulatory Matters
Plant Branch Units 1 and 2 De-certification
See Environmental Matters Air Quality and Water Quality herein and MANAGEMENTS
DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters Environmental
Statutes and Regulations Air Quality, Water Quality, and Coal Combustion Byproducts
of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under
Retail Regulatory Matters Rate Plans in Item 8 of the Form 10-K for additional information
regarding potential rules and regulations being developed by the EPA, including the Utility MACT
rule for coal- and oil-fired EGUs, revisions to effluent guidelines for steam electric power
plants, and additional regulation of coal combustion byproducts; the State of Georgias
Multi-Pollutant Rule; Georgia Powers analysis of the potential costs and benefits of installing
the required controls on its coal-fired generating units in light of these regulations; and the
2010 ARP.
21
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On March 22, 2011, the board of the Georgia Department of Natural Resources began consideration of
modifications to the Georgia Multi-Pollutant Rule. The proposed modifications would change the
compliance dates for certain of Georgia Powers coal-fired generating units as follows:
|
|
|
|
|
|
|
Scherer 3
|
|
July 1, 2011 |
|
|
Branch 1
|
|
December 31, 2013 |
|
|
Branch 2
|
|
October 1, 2013 |
|
|
Branch 3
|
|
October 1, 2015 |
|
|
Branch 4
|
|
December 31, 2015 |
The Multi-Pollutant Rule is designed to reduce emissions of mercury, sulfur dioxide, and nitrogen
oxides statewide. The Utility MACT rule will also regulate emissions of mercury, in addition to
other air pollutants. All required controls, including SCR, scrubber, and baghouse, are expected
to be operational at Plant Scherer Unit 3 by the required compliance date. As a result of these
proposed rules, Georgia Powers management expects to request that the Georgia PSC approve
de-certification of its Plant Branch Units 1 and 2, totaling 569 MWs of capacity, as of the
effective dates for controls under the Multi-Pollutant Rule as revised. Georgia Power continues to
analyze the potential costs and benefits of installing the required controls on its remaining
coal-fired units, including Plant Branch Units 3 and 4, in light of the proposed air quality rules,
as well as additional potential federal regulations related to water quality and coal combustion
byproducts. Georgia Power may determine that retiring and replacing certain of its existing units
with new generating resources or purchased power is more economically efficient than installing the
required controls.
Under the terms of the 2010 ARP, any costs associated with changes to Georgia Powers approved
environmental operating or capital budgets resulting from new or revised environmental regulations
through 2013 that are approved by the Georgia PSC in connection with an updated integrated resource
plan will be deferred as a regulatory asset to be recovered over a time period deemed appropriate
by the Georgia PSC. Georgia Power currently expects to file an update to its integrated resource
plan in late summer 2011, which would include the Plant Branch Units 1 and 2 de-certification
request. In connection with this filing, Georgia Power expects to request the Georgia PSC to
approve the deferral and related amortization of the retail portion of the related costs associated
with the de-certification request. Georgia Power moved the retail portion of the net carrying
value of Plant Branch Units 1 and 2 from plant in service, net of depreciation, to other utility
plant, net of depreciation. Consistent with current ratemaking treatment, Georgia Power will
continue to depreciate these units using the composite straight-line rates approved by the Georgia
PSC, and upon actual retirement, expects to include the units remaining net carrying value in rate
base. However, the recovery periods for these units may change in connection with Georgia Powers
updated integrated resource plan. As a result of this regulatory treatment, the de-certification
of Plant Branch Units 1 and 2 is not expected to have a significant impact on Southern Companys
financial statements.
The ultimate outcome of these matters cannot be determined at this time.
Storm Damage Reserve
During April 2011, severe storms in Georgia caused significant damage
to Georgia Powers distribution and transmission facilities.
Georgia Power maintains a reserve for property damage to cover the
operating and maintenance cost of damages from major storms to its transmission and distribution lines as mandated by the
Georgia PSC. As a result of this regulatory treatment, the storms are
not expected to have a material impact on Southern Companys
financial statements. See Note 1 to the financial statements of
Southern Company under Storm Damage Reserves in Item 8 of the Form
10-K for additional information.
Income Tax Matters
Bonus Depreciation
In September 2010, the Small Business Jobs and Credit Act of 2010 (SBJCA) was signed into law. The
SBJCA includes an extension of the 50% bonus depreciation for certain property acquired and placed
in service in 2010 (and for certain long-term construction projects to be placed in service in
2011). Additionally, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and
Job Creation Act (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act
include 100% bonus depreciation for property placed in service after September 8, 2010 and through
2011 (and for certain long-term construction projects to be placed in service in 2012) and 50%
bonus depreciation for property placed in service in 2012 (and for certain long-term construction
projects to be placed in service in 2013), which will have a positive impact on the future cash
flows of Southern Company. On March 29, 2011, the IRS issued additional guidance and safe harbors
relating to the 50% and 100% bonus depreciation rules. Based on this
guidance, Southern Company estimates the potential increased cash flow for 2011 to be between
approximately $350 million and $450 million. The ultimate outcome of this matter cannot be
determined at this time.
22
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Construction Program
The subsidiary companies of Southern Company are engaged in continuous construction programs to
accommodate existing and estimated future loads on their respective systems. Southern Company
intends to continue its strategy of developing and constructing new generating facilities,
including natural gas, biomass, and potentially solar units at Southern Power, natural gas and new
nuclear units at Georgia Power, and the Kemper IGCC facility at Mississippi Power, as well as
adding environmental control equipment and expanding the transmission and distribution systems.
For the traditional operating companies, major generation construction projects are subject to
state PSC approvals in order to be included in retail rates. While Southern Power generally
constructs and acquires generation assets covered by long-term PPAs, any uncontracted capacity
could negatively affect future earnings. See Note 7 to the financial statements of Southern
Company under Construction Program in Item 8 of the Form 10-K for estimated construction
expenditures for the next three years. In addition, see Note 3 to the financial statements of
Southern Company under Retail Regulatory Matters Georgia Power Nuclear Construction,
Retail Regulatory Matters Georgia Power Other Construction, and Retail Regulatory Matters
Mississippi Power Integrated Coal Gasification Combined Cycle in Item 8 of the Form 10-K and
Note (B) to the Condensed Financial Statements under State PSC Matters Georgia Power Nuclear
Construction and State PSC Matters Mississippi Power Integrated Coal Gasification Combined
Cycle herein for additional information.
On March 11, 2011, a major earthquake and tsunami struck Japan and caused substantial damage to the
nuclear generating units at the Fukushima Daiichi generating plant. According to published
reports, the owner of these units is continuing work to stabilize these units following a loss of
operation of the cooling systems for the units. While the Southern Company system will continue to monitor
this developing situation, it has not identified any immediate impact to the licensing and
construction of Plant Vogtle Units 3 and 4 or the operation of the existing nuclear generating
units of Alabama Power and Georgia Power.
The events in Japan have created uncertainties that may affect transportation, price of fuels,
availability of equipment from Japanese manufacturers, and future costs for operating nuclear
plants. Specifically, the NRC plans to perform additional operational and safety reviews of
nuclear facilities in the U.S., which could potentially impact future operations and capital
requirements.
See RISK FACTORS in Item 1A of Southern Company in the Form 10-K for a discussion of certain risks
associated with the licensing, construction, and operation of nuclear generating units, including
potential impacts that could result from a major incident at a nuclear facility anywhere in the
world. The ultimate outcome of these events cannot be determined at this time.
Other Matters
Southern Company and its subsidiaries are involved in various other matters being litigated,
regulatory matters, and certain tax-related issues that could affect future earnings. In addition,
Southern Company and its subsidiaries are subject to certain claims and legal actions arising in
the ordinary course of business. The business activities of Southern Companys subsidiaries 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 U.S. In particular, personal injury and other 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 and other 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.
23
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See the Notes to the Condensed Financial Statements herein for discussion of various other
contingencies, regulatory matters, and other matters being litigated which may affect future
earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Company prepares its consolidated financial statements in accordance with GAAP.
Significant accounting policies are described in Note 1 to the financial statements of Southern
Company in Item 8 of the Form 10-K. In the application of these policies, certain estimates are
made that may have a material impact on Southern Companys results of operations and related
disclosures. Different assumptions and measurements could produce estimates that are
significantly different from those recorded in the financial statements. See MANAGEMENTS
DISCUSSION AND ANALYSIS ACCOUNTING POLICIES Application of Critical Accounting Policies
and Estimates of Southern Company in Item 7 of the Form 10-K for a complete discussion of
Southern Companys critical accounting policies and estimates related to Electric Utility
Regulation, Contingent Obligations, Unbilled Revenues, and Pension and Other Postretirement
Benefits.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Southern Companys financial condition remained stable at March 31, 2011. 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. See Sources of Capital and
Financing Activities herein for additional information.
Net cash provided from operating activities totaled $998 million for the first quarter 2011, an
increase of $260 million from the corresponding period in 2010. Significant changes in operating
cash flow for the first quarter 2011 as compared to the corresponding period in 2010 include a
decrease in accounts receivable balances primarily due to greater recovery of fuel costs. Net cash
used for investing activities totaled $884 million for the first quarter 2011, a decrease of $204
million from the corresponding period in 2010. This decrease was primarily due to an increase in
construction-related accounts payable. Net cash used for financing activities totaled $151 million
for the first quarter 2011, an increase of $150 million from the corresponding period in 2010.
This increase was primarily due to a decrease in notes payable.
Significant balance sheet changes for the first quarter 2011 include a decrease in prepaid expenses
of $349 million due to a reduction in prepaid income taxes and an increase of $699 million 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 equity of $263 million.
The market price of Southern Companys common stock at March 31, 2011 was $38.11 per share (based
on the closing price as reported on the New York Stock Exchange) and the book value was $19.39 per
share, representing a market-to-book ratio of 196.5%, compared to $38.23, $19.21, and 199.0%,
respectively, at the end of 2010. The dividend for the first quarter 2011 was $0.4550 per share
compared to $0.4375 per share in the first quarter 2010. In April 2011, the quarterly dividend
payable in June 2011 was increased to $0.4725 per share.
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 the construction programs of its
subsidiaries 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
24
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and interest, and derivative obligations. Approximately $1.4 billion
will be required through
March 31, 2012 for maturities and announced repurchases of long-term debt.
The construction programs of Southern Companys subsidiaries are currently estimated to include a
base level investment of $4.9 billion, $5.1 billion, and $4.5 billion for 2011, 2012, and 2013,
respectively. Included in these estimated amounts are environmental expenditures to comply with
existing statutes and regulations of $341 million, $427 million, and $452 million for 2011, 2012,
and 2013, respectively. In addition, Southern Company currently estimates that potential
incremental investments to comply with anticipated new environmental regulations could range from
$74 million to $289 million for 2011, $191 million to $670 million for 2012, and $476 million to
$1.9 billion for 2013. If the EPAs proposed Utility MACT rule is finalized as proposed, Southern
Company estimates the potential investments in 2011 through 2013 for new environmental regulations
will be closer to the upper end of the ranges set forth above. 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
generating plants, including unit retirements and replacements, 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; project scope and design
changes; storm impacts; 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 2011, as well as in subsequent years, will be contingent on Southern
Companys investment opportunities.
Except as described below with respect to potential DOE loan guarantees, the traditional operating
companies and Southern Power plan to obtain the funds required for construction and other purposes
from sources similar to those used in the past, which were primarily from operating cash flows,
security issuances, term loans, short-term borrowings, and equity contributions from Southern
Company. However, the amount, type, and timing of any future 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.
In June 2010, Georgia Power reached an agreement with the DOE to accept terms for a conditional
commitment for federal loan guarantees that would apply to future Georgia Power borrowings related
to the construction of Plant Vogtle Units 3 and 4. Any borrowings guaranteed by the DOE would be
full recourse to Georgia Power and secured by a first priority lien on Georgia Powers 45.7%
undivided ownership interest in Plant Vogtle Units 3 and 4. Total guaranteed borrowings would not
exceed the lesser of 70% of eligible project costs or approximately $3.4 billion, and are expected
to be funded by the Federal Financing Bank. Final approval and issuance of loan guarantees by the
DOE are subject to receipt of the combined Construction and Operating License for Plant Vogtle
Units 3 and 4 from the NRC, negotiation of definitive agreements, completion of due diligence by
the DOE, receipt of any necessary regulatory approvals, and satisfaction of other conditions.
There can be no assurance that the DOE will issue loan guarantees for Georgia Power.
In addition, Mississippi Power has applied to the DOE for federal loan guarantees to finance a
portion of the eligible construction costs of the Kemper IGCC. Mississippi Power is in advanced
due diligence with the DOE. There can be no assurance that the DOE will issue federal loan
guarantees for Mississippi Power.
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.
25
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At March 31, 2011, Southern Company and its subsidiaries
had approximately $410 million of cash and
cash equivalents and approximately $4.8 billion of unused committed credit arrangements with banks,
of which $1.6 billion expire in 2011 and $3.3 billion expire in 2012. Of the credit arrangements
expiring in 2011 and 2012, $81 million contain provisions allowing two-year term loans executable
at expiration and $952 million contain provisions allowing one-year term loans executable at
expiration. At March 31, 2011, approximately $1.4 billion of the credit facilities were dedicated
to providing liquidity support to the traditional operating companies variable rate pollution
control revenue bonds. 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 March 31, 2011, the Southern Company system had approximately $1.2 billion
of commercial paper borrowings outstanding with a weighted average interest rate of 0.3% per annum.
During the first quarter 2011, Southern Company had an average of $1.2 billion of commercial paper
outstanding at a weighted average interest rate of 0.3% per annum and the maximum amount
outstanding was $1.6 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. In April 2010,
Mississippi Power was required to notify the lessor, Juniper Capital L.P., if it intended to
terminate the lease at the end of the initial term expiring in October 2011. Mississippi Power
chose not to give notice to terminate the lease. Mississippi Power has the option to purchase the
units or renew the lease. Mississippi Power is required to provide notice of its intent to either
renew the lease or purchase the facility by July 2011. The ultimate outcome of this matter cannot
be determined at this time.
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 March 31, 2011, 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 $495
million. At March 31, 2011, the maximum potential collateral requirements under these contracts at
a rating below BBB- and/or Baa3 were approximately $2.5 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.
Market Price Risk
Southern Company is exposed to market risks, primarily commodity price risk and interest rate risk.
Southern Company may also occasionally have limited exposure to foreign currency exchange rates.
To manage the volatility attributable to these exposures, Southern Company nets the exposures,
where possible, to take advantage of natural offsets and enters into various derivative
transactions for the remaining exposures pursuant to Southern Companys policies in areas such as
counterparty exposure and risk management practices. Southern Companys policy is that derivatives
are to be used primarily for hedging purposes and mandates strict adherence to all applicable risk
management policies. Derivative positions are monitored using techniques including, but not
limited to, market valuation, value at risk, stress testing, and sensitivity analysis.
26
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Due to cost-based rate regulation and other various cost recovery mechanisms, the traditional
operating companies continue to have limited exposure to market volatility in interest rates,
foreign currency, commodity fuel prices, and prices of electricity. In addition, Southern Powers
exposure to market volatility in commodity fuel prices and prices of electricity is limited because
its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser.
However, Southern Power has been and may continue to be exposed to market volatility in
energy-related commodity prices as a result of sales of uncontracted generating capacity. To
mitigate residual risks relative to movements in electricity prices, the traditional operating
companies enter into physical fixed-price contracts for the purchase and sale of electricity
through the wholesale electricity market and, to a lesser extent, into financial hedge contracts
for natural gas purchases. The traditional operating companies continue to manage fuel-hedging
programs implemented per the guidelines of their respective state PSCs. Southern Company had no
material change in market risk exposure for the first quarter 2011 when compared with the December
31, 2010 reporting period.
The changes in fair value of energy-related derivative contracts, the majority of which are
composed of regulatory hedges, for the three months ended March 31, 2011 were as follows:
|
|
|
|
|
|
|
First Quarter |
|
|
2011 |
|
|
Changes |
|
|
Fair Value |
|
|
(in millions) |
|
Contracts outstanding at the beginning of the period, assets (liabilities), net |
|
$ |
(196 |
) |
Contracts realized or settled |
|
|
38 |
|
Current period changes(a) |
|
|
|
|
|
Contracts outstanding at the end of the period, assets (liabilities), net |
|
$ |
(158 |
) |
|
|
|
|
(a) |
|
Current period changes also include the changes in fair value of new contracts entered into
during the period, if any. |
The change in the fair value positions of the energy-related derivative contracts for the
three months ended March 31, 2011 was an increase of $38 million, substantially all of which is due
to natural gas positions. The change is attributable to both the volume of mmBtu and prices of
natural gas. At March 31, 2011, Southern Company had a net hedge volume of 154.2 million mmBtu
with a weighted average contract cost approximately $1.09 per mmBtu above market prices, compared
to 149.3 million mmBtu at December 31, 2010 with a weighted average contract cost approximately
$1.35 per mmBtu above market prices. The majority of the natural gas hedges are recovered through
the traditional operating companies fuel cost recovery clauses.
The fair value of energy-related derivative contracts by hedge designation reflected in the
financial statements as assets (liabilities) consists of the following:
|
|
|
|
|
|
|
|
|
Asset (Liability) Derivatives |
|
March 31, 2011 |
|
December 31, 2010 |
|
|
(in millions) |
Regulatory hedges |
|
$ |
(156 |
) |
|
$ |
(193 |
) |
Cash flow hedges |
|
|
|
|
|
|
(1 |
) |
Not designated |
|
|
(2 |
) |
|
|
(2 |
) |
|
Total fair value |
|
$ |
(158 |
) |
|
$ |
(196 |
) |
|
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 that are designated as cash flow hedges are 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.
27
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total net unrealized pre-tax gains (losses) recognized in income for the three months ended March
31, 2011 and 2010 were not material.
Southern Company uses over-the-counter contracts that are not exchange traded but are fair valued
using prices which are market observable, and thus fall into Level 2. See Note (C) to the
Condensed Financial Statements herein for further discussion on fair value measurements. The
maturities of the energy-related derivative contracts and the level of the fair value hierarchy in
which they fall at March 31, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
Fair Value Measurements |
|
|
Total |
|
Maturity |
|
|
Fair Value |
|
Year 1 |
|
Years 2&3 |
|
Years 4&5 |
|
|
(in millions) |
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Level 2 |
|
|
(158 |
) |
|
|
(125 |
) |
|
|
(33 |
) |
|
|
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of
contracts
outstanding at end
of period |
|
$ |
(158 |
) |
|
$ |
(125 |
) |
|
$ |
(33 |
) |
|
$ |
|
|
|
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) enacted in July 2010
could impact the use of over-the-counter derivatives by Southern Company. Regulations to implement
the Dodd-Frank Act could impose additional requirements on the use of over-the-counter derivatives,
such as margin and reporting requirements, which could affect both the use and cost of
over-the-counter derivatives. The impact, if any, cannot be determined until regulations are
finalized.
For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND
LIQUIDITY Market Price Risk of Southern Company in Item 7 and Note 1 under Financial
Instruments and Note 11 to the financial statements of Southern Company in Item 8 of the Form 10-K
and Note (H) to the Condensed Financial Statements herein.
Financing Activities
During the first quarter 2011, Southern Company issued approximately 5.8 million shares of common
stock for $193 million through the Southern Investment Plan and employee and director stock plans.
The proceeds were primarily used for general corporate purposes, including the investment by
Southern Company in its subsidiaries, and to repay short-term indebtedness.
In January 2011, Georgia Powers $100 million aggregate principal amount of Series S 4.0% Senior
Notes due January 15, 2011 matured.
In January 2011, Georgia Power issued $300 million aggregate principal amount of Series 2011A
Floating Rate Senior Notes due January 15, 2013. The proceeds were used for general corporate
purposes, including Georgia Powers continuous construction program.
In March 2011, Alabama Power issued $250 million aggregate principal amount of Series 2011A 5.50%
Senior Notes due March 15, 2041. The proceeds were used for general corporate purposes, including
Alabama Powers continuous construction program.
In March 2011, Georgia Powers $300 million variable rate bank term loan due on March 4, 2011
matured and was partially replaced by two one-year $125 million aggregate principal amount variable
rate bank loans that bear interest based on one-month LIBOR.
28
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Subsequent to March 31, 2011, Georgia Power issued $250 million aggregate principal amount of
Series 2011B 3.0% Senior Notes due April 15, 2016. The proceeds were used to repay short-term debt
and for general corporate purposes, including Georgia Powers continuous construction program.
Also subsequent to March 31, 2011, Georgia Power purchased and is holding $113.5 million of
pollution control revenue bonds. The bonds are expected to be re-marketed to investors at a future
date.
Subsequent to March 31, 2011, Gulf Power extended the maturity date of a $110 million bank note
until June 30, 2011.
Subsequent to March 31, 2011, Mississippi Power entered into a one-year $75 million aggregate
principal amount long-term floating rate bank loan that bears interest based on one-month LIBOR.
The proceeds were used to repay short-term debt and for general corporate purposes, including
Mississippi Powers continuous construction program.
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.
29
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 Note 1 to the financial statements of each registrant under
Financial Instruments, Note 11 to the financial statements of Southern Company, Alabama Power,
and Georgia Power, Note 10 to the financial statements of Gulf Power
and Mississippi Power, and
Note 9 to the financial statements of Southern Power in Item 8 of the Form 10-K. Also, see Note (H) to the Condensed Financial
Statements herein for information relating to derivative instruments.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this quarterly report, Southern Company, Alabama Power,
Georgia Power, Gulf Power, Mississippi Power, and Southern Power conducted separate evaluations
under the supervision and with the participation of each companys management, including the Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation
of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934). Based upon these evaluations, the Chief Executive Officer and
the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures
are effective.
(b) Changes in internal controls.
There have been no changes in Southern Companys, Alabama Powers, Georgia Powers, Gulf Powers,
Mississippi Powers, or Southern Powers internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the
first quarter 2011 that have materially affected or are reasonably likely to materially affect
Southern Companys, Alabama Powers, Georgia Powers, Gulf Powers, Mississippi Powers, or
Southern Powers internal control over financial reporting.
30
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in millions) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
1,126 |
|
|
$ |
1,176 |
|
Wholesale revenues, non-affiliates |
|
|
68 |
|
|
|
172 |
|
Wholesale revenues, affiliates |
|
|
75 |
|
|
|
98 |
|
Other revenues |
|
|
51 |
|
|
|
49 |
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
1,320 |
|
|
|
1,495 |
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
Fuel |
|
|
395 |
|
|
|
489 |
|
Purchased power, non-affiliates |
|
|
11 |
|
|
|
18 |
|
Purchased power, affiliates |
|
|
46 |
|
|
|
52 |
|
Other operations and maintenance |
|
|
297 |
|
|
|
310 |
|
Depreciation and amortization |
|
|
157 |
|
|
|
145 |
|
Taxes other than income taxes |
|
|
85 |
|
|
|
82 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
991 |
|
|
|
1,096 |
|
|
|
|
|
|
|
|
Operating Income |
|
|
329 |
|
|
|
399 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction |
|
|
5 |
|
|
|
13 |
|
Interest income |
|
|
4 |
|
|
|
4 |
|
Interest expense, net of amounts capitalized |
|
|
(74 |
) |
|
|
(75 |
) |
Other income (expense), net |
|
|
(6 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(71 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
258 |
|
|
|
335 |
|
Income taxes |
|
|
96 |
|
|
|
122 |
|
|
|
|
|
|
|
|
Net Income |
|
|
162 |
|
|
|
213 |
|
Dividends on Preferred and Preference Stock |
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
|
|
Net Income After Dividends on Preferred and Preference Stock |
|
$ |
152 |
|
|
$ |
203 |
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in millions) |
|
Net Income After Dividends on Preferred and Preference Stock |
|
$ |
152 |
|
|
$ |
203 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of
$2 and $-, respectively |
|
|
2 |
|
|
|
|
|
Reclassification adjustment for amounts included in net
income, net of tax of $- and $1, respectively |
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
2 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
154 |
|
|
$ |
204 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
32
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in millions) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
162 |
|
|
$ |
213 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization, total |
|
|
185 |
|
|
|
168 |
|
Deferred income taxes |
|
|
59 |
|
|
|
47 |
|
Allowance for equity funds used during construction |
|
|
(5 |
) |
|
|
(13 |
) |
Pension, postretirement, and other employee benefits |
|
|
(11 |
) |
|
|
(8 |
) |
Stock based compensation expense |
|
|
3 |
|
|
|
3 |
|
Hedge settlements |
|
|
4 |
|
|
|
|
|
Storm damage accruals |
|
|
1 |
|
|
|
2 |
|
Other, net |
|
|
(4 |
) |
|
|
4 |
|
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
-Receivables |
|
|
51 |
|
|
|
11 |
|
-Fossil fuel stock |
|
|
3 |
|
|
|
13 |
|
-Materials and supplies |
|
|
10 |
|
|
|
(3 |
) |
-Other current assets |
|
|
(69 |
) |
|
|
(78 |
) |
-Accounts payable |
|
|
(153 |
) |
|
|
(75 |
) |
-Accrued taxes |
|
|
160 |
|
|
|
69 |
|
-Accrued compensation |
|
|
(67 |
) |
|
|
(41 |
) |
-Other current liabilities |
|
|
(2 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
327 |
|
|
|
274 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(213 |
) |
|
|
(255 |
) |
Distribution of restricted cash from pollution control revenue bonds |
|
|
11 |
|
|
|
5 |
|
Nuclear decommissioning trust fund purchases |
|
|
(97 |
) |
|
|
(39 |
) |
Nuclear decommissioning trust fund sales |
|
|
97 |
|
|
|
39 |
|
Cost of removal, net of salvage |
|
|
(8 |
) |
|
|
(5 |
) |
Change in construction payables |
|
|
(2 |
) |
|
|
(26 |
) |
Other investing activities |
|
|
(12 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(224 |
) |
|
|
(298 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Proceeds |
|
|
|
|
|
|
|
|
Capital contributions from parent company |
|
|
5 |
|
|
|
6 |
|
Senior notes issuances |
|
|
250 |
|
|
|
|
|
Redemptions |
|
|
|
|
|
|
|
|
Senior notes |
|
|
(200 |
) |
|
|
|
|
Payment of preferred and preference stock dividends |
|
|
(10 |
) |
|
|
(10 |
) |
Payment of common stock dividends |
|
|
(138 |
) |
|
|
(136 |
) |
Other financing activities |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
Net cash used for financing activities |
|
|
(98 |
) |
|
|
(141 |
) |
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
5 |
|
|
|
(165 |
) |
Cash and Cash Equivalents at Beginning of Period |
|
|
154 |
|
|
|
368 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
159 |
|
|
$ |
203 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $2 and $5 capitalized for 2011 and 2010, respectively) |
|
$ |
72 |
|
|
$ |
59 |
|
Income taxes (net of refunds) |
|
|
(110 |
) |
|
|
19 |
|
Noncash transactions accrued property additions at end of period |
|
|
26 |
|
|
|
48 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
33
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
At December 31, |
|
Assets |
|
2011 |
|
|
2010 |
|
|
|
(in millions) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
159 |
|
|
$ |
154 |
|
Restricted cash and cash equivalents |
|
|
7 |
|
|
|
18 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
321 |
|
|
|
362 |
|
Unbilled revenues |
|
|
110 |
|
|
|
153 |
|
Under recovered regulatory clause revenues |
|
|
10 |
|
|
|
5 |
|
Other accounts and notes receivable |
|
|
33 |
|
|
|
35 |
|
Affiliated companies |
|
|
89 |
|
|
|
57 |
|
Accumulated provision for uncollectible accounts |
|
|
(10 |
) |
|
|
(10 |
) |
Fossil fuel stock, at average cost |
|
|
388 |
|
|
|
391 |
|
Materials and supplies, at average cost |
|
|
336 |
|
|
|
346 |
|
Vacation pay |
|
|
56 |
|
|
|
55 |
|
Prepaid expenses |
|
|
140 |
|
|
|
208 |
|
Other regulatory assets, current |
|
|
32 |
|
|
|
38 |
|
Other current assets |
|
|
7 |
|
|
|
10 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,678 |
|
|
|
1,822 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
20,218 |
|
|
|
19,966 |
|
Less accumulated provision for depreciation |
|
|
7,038 |
|
|
|
6,931 |
|
|
|
|
|
|
|
|
Plant in service, net of depreciation |
|
|
13,180 |
|
|
|
13,035 |
|
Nuclear fuel, at amortized cost |
|
|
317 |
|
|
|
283 |
|
Construction work in progress |
|
|
428 |
|
|
|
547 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
13,925 |
|
|
|
13,865 |
|
|
|
|
|
|
|
|
Other Property and Investments: |
|
|
|
|
|
|
|
|
Equity investments in unconsolidated subsidiaries |
|
|
63 |
|
|
|
64 |
|
Nuclear decommissioning trusts, at fair value |
|
|
578 |
|
|
|
552 |
|
Miscellaneous property and investments |
|
|
71 |
|
|
|
71 |
|
|
|
|
|
|
|
|
Total other property and investments |
|
|
712 |
|
|
|
687 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
456 |
|
|
|
488 |
|
Prepaid pension costs |
|
|
267 |
|
|
|
257 |
|
Deferred under recovered regulatory clause revenues |
|
|
5 |
|
|
|
4 |
|
Other regulatory assets, deferred |
|
|
673 |
|
|
|
675 |
|
Other deferred charges and assets |
|
|
209 |
|
|
|
196 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
1,610 |
|
|
|
1,620 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
17,925 |
|
|
$ |
17,994 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
34
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2011 |
|
|
2010 |
|
|
|
(in millions) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
|
|
|
$ |
200 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
158 |
|
|
|
210 |
|
Other |
|
|
170 |
|
|
|
273 |
|
Customer deposits |
|
|
86 |
|
|
|
86 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Accrued income taxes |
|
|
4 |
|
|
|
2 |
|
Other accrued taxes |
|
|
51 |
|
|
|
32 |
|
Accrued interest |
|
|
62 |
|
|
|
63 |
|
Accrued vacation pay |
|
|
45 |
|
|
|
45 |
|
Accrued compensation |
|
|
34 |
|
|
|
99 |
|
Liabilities from risk management activities |
|
|
24 |
|
|
|
31 |
|
Over recovered regulatory clause revenues |
|
|
23 |
|
|
|
22 |
|
Other current liabilities |
|
|
39 |
|
|
|
41 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
696 |
|
|
|
1,104 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
6,235 |
|
|
|
5,987 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
2,774 |
|
|
|
2,747 |
|
Deferred credits related to income taxes |
|
|
86 |
|
|
|
85 |
|
Accumulated deferred investment tax credits |
|
|
155 |
|
|
|
157 |
|
Employee benefit obligations |
|
|
309 |
|
|
|
311 |
|
Asset retirement obligations |
|
|
528 |
|
|
|
520 |
|
Other cost of removal obligations |
|
|
712 |
|
|
|
701 |
|
Other regulatory liabilities, deferred |
|
|
236 |
|
|
|
217 |
|
Other deferred credits and liabilities |
|
|
90 |
|
|
|
87 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
4,890 |
|
|
|
4,825 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
11,821 |
|
|
|
11,916 |
|
|
|
|
|
|
|
|
Redeemable Preferred Stock |
|
|
342 |
|
|
|
342 |
|
|
|
|
|
|
|
|
Preference Stock |
|
|
343 |
|
|
|
343 |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, par value $40 per share |
|
|
|
|
|
|
|
|
Authorized - 40,000,000 shares |
|
|
|
|
|
|
|
|
Outstanding - 30,537,500 shares |
|
|
1,222 |
|
|
|
1,222 |
|
Paid-in capital |
|
|
2,166 |
|
|
|
2,156 |
|
Retained earnings |
|
|
2,036 |
|
|
|
2,022 |
|
Accumulated other comprehensive loss |
|
|
(5 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
5,419 |
|
|
|
5,393 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
17,925 |
|
|
$ |
17,994 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
35
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2011 vs. FIRST QUARTER 2010
OVERVIEW
Alabama Power operates as a vertically integrated utility providing electricity to retail and
wholesale 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 and grow energy sales given economic
conditions, and to effectively manage and secure timely recovery of costs. These costs include
those related to projected long-term demand growth, increasingly stringent environmental standards,
fuel, capital expenditures, and restoration following major storms. Appropriately balancing
required costs and capital expenditures 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
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$(51)
|
|
(25.1) |
|
Alabama Powers net income after dividends on preferred and preference stock for the first quarter
2011 was $152 million compared to $203 million for the corresponding period in 2010. The decrease
was primarily due to reductions in wholesale revenues from sales to non-affiliates in the first
quarter 2011 and significantly colder weather in the first quarter 2010. The decrease in revenue
was partially offset by decreases in operations and maintenance expenses and an increase in
revenues under Rate CNP Environmental associated with the completion of construction projects
related to environmental mandates.
Retail Revenues
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
|
(change in millions)
|
|
(% change) |
$(50)
|
|
(4.3) |
|
In the first quarter 2011, retail revenues were $1.13 billion compared to $1.18 billion for the
corresponding period in 2010.
36
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the change to retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
2011 |
|
|
(in millions) |
|
(% change) |
|
Retail prior year |
|
$ |
1,176 |
|
|
|
|
|
Estimated change in |
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
26 |
|
|
|
2.2 |
|
Sales growth (decline) |
|
|
(3 |
) |
|
|
(0.2 |
) |
Weather |
|
|
(45 |
) |
|
|
(3.9 |
) |
Fuel and other cost recovery |
|
|
(28 |
) |
|
|
(2.4 |
) |
|
Retail current year |
|
$ |
1,126 |
|
|
|
(4.3 |
)% |
|
Revenues associated with changes in rates and pricing increased in the first quarter 2011 when
compared to the corresponding period in 2010 primarily due to increased revenues associated with
Rate CNP Environmental. The increase was due to the completion of construction projects related to
environmental mandates, although there was no increase in the Rate CNP Environmental billing
factors in 2011.
Revenues attributable to changes in sales decreased slightly in the first quarter 2011 from the
corresponding period in 2010. Weather-adjusted residential KWH energy sales decreased 2.7% due to
a decrease in customer demand. Weather-adjusted commercial KWH energy sales decreased 1.0% due to
decreases in the number of customers and demand. Industrial KWH energy sales increased 9.5% due to
an increase in demand resulting from changes in production levels primarily in the chemical and
primary metals sectors.
Revenues resulting from changes in weather decreased in the first quarter 2011 when compared to the
corresponding period in 2010. Residential and commercial sales revenues decreased 7.1% and 1.5%,
respectively, as a result of significantly colder weather in the corresponding period in 2010.
Fuel and other cost recovery revenues decreased in the first quarter 2011 when compared to the
corresponding period in 2010 primarily due to a decrease in fuel costs associated with decreased
KWH generation and a decrease in costs associated with PPAs certificated by the Alabama PSC.
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 NDR. Under these
provisions, fuel and other cost recovery revenues generally equal fuel and other cost recovery
expenses and do not impact net income.
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.
Wholesale Revenues Non-Affiliates
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$(104)
|
|
(60.5) |
|
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 first quarter 2011, wholesale revenues from non-affiliates were $68 million compared to $172
million for the corresponding period in 2010, reflecting a $55 million decrease in revenue from
energy sales and a $49 million decrease in capacity revenue. This decrease was primarily
due to a 66.3% decrease in KWH sales, partially offset by a
37
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
16.8% increase in the price. In May 2010, the long-term unit power sales contracts expired and the
unit power sales capacity revenues ceased, resulting in a $102 million revenue reduction as
compared to the first quarter 2010. Beginning in June 2010, such capacity subject to the unit
power sales contracts became available for retail service. See MANAGEMENTS DISCUSSION AND
ANALYSIS RESULTS OF OPERATIONS Operating Revenues of Alabama Power in Item 7 of the Form
10-K for additional information.
Wholesale Revenues Affiliates
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$(23)
|
|
(23.5) |
|
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 first quarter 2011, wholesale revenues from affiliates were $75 million compared to $98
million for the corresponding period in 2010. This decrease was due to a 19.0% decrease in price
and a 5.3% decrease in KWH sales.
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
|
|
(change in millions) |
|
(% change) |
Fuel* |
|
$ |
(94 |
) |
|
|
(19.2 |
) |
Purchased power non-affiliates |
|
|
(7 |
) |
|
|
(38.9 |
) |
Purchased power affiliates |
|
|
(6 |
) |
|
|
(11.5 |
) |
|
|
|
|
Total fuel and purchased power expenses |
|
$ |
(107 |
) |
|
|
|
|
|
|
|
|
* |
|
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 first quarter 2011, total fuel and purchased power expenses were $452 million compared
to $559 million for the corresponding period in 2010. This decrease was primarily due to a $49
million decrease in total KWHs generated, a $28 million decrease in the cost of fuel, and a $20
million decrease in the average cost of purchased power.
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
Alabama PSC Matters Retail Fuel Cost Recovery herein for additional information.
Details of Alabama Powers cost of generation and purchased power are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
First Quarter |
|
Percent |
Average Cost |
|
2011 |
|
2010 |
|
Change |
|
|
(cents per net KWH) |
|
|
|
|
Fuel* |
|
|
2.62 |
|
|
|
2.80 |
|
|
|
(6.4 |
) |
Purchased power |
|
|
5.26 |
|
|
|
7.08 |
|
|
|
(25.7 |
) |
|
* |
|
KWHs generated by hydro are excluded from the average cost of fuel. |
In the first quarter 2011, fuel expense was $395 million compared to $489 million for the
corresponding period in 2010. The $94 million decrease was due to a 14.6% decrease in KWHs
generated by coal, an 8.0% decrease in KWHs generated by natural gas,
and a 17.8% decrease in the
average cost of KWHs generated by natural gas, which excludes fuel
associated with tolling agreements.
38
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non-Affiliates
In the first quarter 2011, purchased power expense from non-affiliates was $11 million compared to
$18 million for the corresponding period in 2010. This decrease was related to a 75.6% decrease in
the amount of energy purchased, partially offset by a 140.3% increase in the average cost per KWH.
Energy purchases from non-affiliates will vary depending on the market cost of available energy
compared to the cost of Southern Company system-generated energy, demand for energy within the
Southern Company system service territory, and availability of Southern Company system generation.
Affiliates
In the first quarter 2011, purchased power expense from affiliates was $46 million compared to $52
million for the corresponding period in 2010. This decrease was
related to a 39.9% decrease in the
average cost per KWH, partially offset by a 14.0% increase in the amount of energy 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, or other contractual agreements, as approved by the FERC.
Other Operations and Maintenance Expenses
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$(13)
|
|
(4.2) |
|
In the first quarter 2011, other operations and maintenance expenses were $297 million compared to
$310 million for the corresponding period in 2010. Administration and general expenses decreased
$9 million related to decreases in affiliated service companies expenses, property insurance
expense, employee medical and other benefit-related expenses, and injuries and damages expenses.
Nuclear production expenses decreased $8 million primarily due to a change to the nuclear
maintenance outage accounting process associated with the routine refueling activities, as approved
by the Alabama PSC in August 2010. As a result, no nuclear maintenance outage expenses will be
recognized in 2011, reducing nuclear production expense by approximately $50 million as compared to
2010. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters
Nuclear Outage Accounting Order of Alabama Power in Item 7 of the Form 10-K for additional
information. In addition, the decrease in nuclear production expenses was partially offset by an
increase in maintenance costs related to increases in labor. Transmission and distribution
expenses increased $4 million primarily due to overhead line clearing costs.
Depreciation and Amortization
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$12
|
|
8.3 |
|
In the first quarter 2011, depreciation and amortization was $157 million compared to $145 million
for the corresponding period in 2010. The increase was due to additions of property, plant, and
equipment primarily related to environmental mandates (which are offset by revenues associated with
Rate CNP Environmental), distribution, and transmission projects.
39
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Allowance for Equity Funds Used During Construction
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$(8)
|
|
(61.5) |
|
In the first quarter 2011, AFUDC equity was $5 million compared to $13 million for the
corresponding period in 2010. This decrease was due to the completion of environmental
construction projects at Plants Barry, Gaston, and Miller.
Income Taxes
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$(26)
|
|
(21.3) |
|
For the first quarter 2011, income taxes were $96 million compared to $122 million for the
corresponding period in 2010. This decrease was primarily due to lower pre-tax earnings.
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 timely 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. Changes in economic conditions impact sales for Alabama Power and
the pace of the economic recovery remains uncertain. The timing and extent of the economic
recovery will impact growth and may 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. Further, higher costs that are recovered through regulated rates could contribute to
reduced demand for electricity, which could negatively impact results of operations, cash flows,
and financial condition. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL
Environmental Matters of Alabama Power in Item 7 and Note 3 to the financial statements of
Alabama Power under Environmental Matters in Item 8 of the Form 10-K for additional information.
New Source Review Actions
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
New Source Review Actions of Alabama Power in Item 7 and Note 3 to the financial statements of
Alabama Power under Environmental Matters New Source Review Actions in Item 8 of the Form 10-K
for additional information regarding civil actions brought by the EPA against certain Southern
Company subsidiaries. The EPAs action against Alabama Power alleged that Alabama Power violated
the NSR provisions of the Clean Air Act and related
40
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
state laws with respect to certain of its coal-fired generating facilities. On March 14, 2011, the
U.S. District Court for the Northern District of Alabama granted Alabama Powers motion for summary
judgment on all remaining claims and dismissed the case with prejudice. The EPA has the right to
appeal within 60 days of the order. The ultimate outcome of this matter cannot be determined at
this time.
Carbon Dioxide Litigation
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 February 23, 2011, the U.S. Court of Appeals for the Ninth Circuit issued an order staying the
case until June 15, 2011. The ultimate outcome of this matter 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 regulation of air quality. On May 3, 2011, the EPA published a
proposed rule, called Utility MACT (Maximum Achievable Control Technology), which would impose
stringent emission limits on coal- and oil-fired electric utility steam generating units (EGUs).
The proposed rule establishes numeric emission limits for acid gases, mercury, and total
particulate matter. Meeting the proposed limits would likely require additional emission control
equipment such as scrubbers, SCRs, baghouses, and other control measures at many coal-fired EGUs.
Pursuant to a court-approved consent decree, the EPA must issue a final rule by November 16, 2011.
Compliance for existing sources would be required three years after the effective date of the final
rule. In the proposed rule, the EPA discussed the possibility of a one-year compliance extension
which could be granted by the EPA or the states on a case-by-case basis if necessary. If finalized
as proposed, compliance with this rule would require significant capital expenditures and
compliance costs at many of Alabama Powers facilities which could impact unit retirement and
replacement decisions. In addition, results of operations, cash flows, and financial condition
could be impacted if the costs are not recovered through regulated rates. Further, there is
uncertainty regarding the ability of the electric utility industry to achieve compliance with the
requirements of the proposed rule within the proposed compliance period, and the limited compliance
period could negatively impact electric system reliability. The outcome of this rulemaking cannot
be determined at this time.
In October 2008, the EPA approved a revision to Alabamas State Implementation Plan (SIP)
requirements related to opacity which granted some flexibility to affected sources while requiring
compliance with Alabamas very strict opacity limits through use of continuous opacity monitoring
system data. In a decision published on April 6, 2011, the EPA responded to an environmental
groups request for reconsideration by attempting to rescind its previous approval of the Alabama
SIP revision. On April 8, 2011, Alabama Power filed an appeal of that decision with the U.S. Court
of Appeals for the Eleventh Circuit and requested the court to stay the effectiveness of the EPAs
attempted rescission pending judicial review. Absent a stay, the EPAs decision will become
effective May 6, 2011 and the rule under which Alabama Power has been operating since January 2009
may not be available unless Alabama Powers appeal is resolved in its favor by the court. If the EPAs decision
is allowed to take effect, it will likely impact unit availability and result in increased
maintenance and compliance costs. The final outcome of this matter cannot be determined at this time.
41
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 regulation of water quality. On April 20, 2011, the EPA
proposed a rule that establishes
standards for reducing impacts to fish and other aquatic life caused by cooling water intake
structures at existing power plants and manufacturing facilities. The rule also addresses cooling
water intake structures for new units at existing facilities. The rule focuses on reducing adverse
impacts to fish and other aquatic life due to impingement (when fish and other aquatic life are
trapped by water flow velocity against a facilitys cooling water intake structure screens) and
entrainment (when aquatic organisms are drawn through a facilitys cooling water system after
entering through the cooling water intake structure). Affected cooling water intake structures
would have to comply with national impingement standards (for intake velocity or alternatively
numeric impingement reduction standards) and entrainment reduction requirements (determined on a
case-by-case basis). The rules proposed impingement standards could require technological
improvements to cooling water intake structures at many of Alabama Powers existing generating
facilities, including facilities with closed-cycle re-circulating cooling systems (cooling towers).
To address the rules entrainment standards, facilities with once-through cooling systems may have
to install cooling towers. New units constructed at existing plants would have to meet the
national impingement standards and install closed-cycle cooling or the equivalent to meet the
entrainment mandate. The EPA has agreed in a settlement agreement to issue a final rule by July
27, 2012. If finalized as proposed, some of Alabama Powers facilities may be subject to
significant additional capital expenditures and compliance costs that could affect future unit
retirement and replacement decisions. Also, results of operations, cash flows, and financial
condition could be significantly impacted if such costs are not recovered through regulated rates.
The ultimate outcome of this rulemaking cannot be determined at this time.
Alabama PSC Matters
Retail Fuel Cost Recovery
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Fuel Cost
Recovery of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under
Retail Regulatory Matters Fuel Cost Recovery in Item 8 of the Form 10-K for information
regarding Alabama Powers fuel cost recovery. Alabama Powers under recovered fuel costs as of
March 31, 2011 totaled $15 million as compared to $4 million at December 31, 2010. These under
recovered fuel costs at March 31, 2011 are included in under recovered regulatory clause revenues
and deferred under recovered regulatory clause revenues on Alabama Powers Condensed Balance Sheets
herein. This classification is based on an estimate which includes such factors as weather,
generation availability, energy demand, and the price of energy. A change in any of these factors
could have a material impact on the timing of any recovery of the under recovered fuel costs.
Natural Disaster Reserve
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Natural
Disaster Reserve of Alabama Power in Item 7 and Note 3 to the financial statements under Retail
Regulatory Matters Natural Disaster Reserve in Item 8 of the Form 10-K for additional
information.
On April 27, 2011, devastating storms swept through the central part of Alabama causing significant
damage in parts of the service territory of Alabama Power. Over 400,000 of Alabama Powers 1.4
million customers were without electrical service immediately after the storms, resulting from significant damage to Alabama Powers
transmission and distribution facilities. The preliminary estimated cost associated with repairing the damage to facilities and restoring
electrical service to customers is between $40 million and $55 million for operations and maintenance expenses and between $180 million
and $225 million for capital expenditures. Alabama Power maintains a reserve for operations and maintenance expenses to cover the cost
of damages from major storms to Alabama Powers transmission and distribution facilities.
42
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At March 31, 2011, the NDR had an accumulated balance of $127 million, which is included in the
Condensed Balance Sheets herein under other regulatory liabilities, deferred. The accruals are
reflected as operations and maintenance expenses in the Condensed Statements of Income herein.
Income Tax Matters
Bonus Depreciation
In September 2010, the Small Business Jobs and Credit Act of 2010 (SBJCA) was signed into law. The
SBJCA includes an extension of the 50% bonus depreciation for certain property acquired and placed
in service in 2010 (and for certain long-term construction projects to be placed in service in
2011). Additionally, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and
Job Creation Act (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act
include 100% bonus depreciation for property placed in service after September 8, 2010 and through
2011 (and for certain long-term construction projects to be placed in service in 2012) and 50%
bonus depreciation for property placed in service in 2012 (and for certain long-term construction
projects to be placed in service in 2013), which will have a positive impact on the future cash
flows of Alabama Power. On March 29, 2011, the IRS issued additional guidance and safe harbors
relating to the 50% and 100% bonus depreciation rules. Based on this guidance, Alabama Power
estimates the potential increased cash flow for 2011 to be between approximately $100 million and
$150 million. The ultimate outcome of this matter cannot be determined at this time.
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 U.S. In particular, personal injury and other 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 and other 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.
The events in Japan have created uncertainties that may affect transportation of materials, price
of fuels, availability of equipment from Japanese manufacturers, and future costs for operating
nuclear plants. Specifically, the NRC plans to perform additional operational and safety reviews of
existing nuclear facilities in the U.S., which could potentially impact future operations and
capital requirements. The ultimate outcome of these events cannot be determined at this time. See
RISK FACTORS of Alabama Power in Item 1A of the Form 10-K for a discussion of certain risks
associated with the operation of nuclear generating units, including potential impacts that could
result from a major incident at a nuclear facility anywhere in the world.
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.
43
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Alabama Power prepares its financial statements in accordance with GAAP. 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, Unbilled Revenues, and Pension and
Other Postretirement Benefits.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Alabama Powers financial condition remained stable at March 31, 2011. 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. See Sources of Capital and
Financing Activities herein for additional information.
Net cash provided from operating activities totaled $327 million for the first three months of
2011, an increase of $53 million as compared to the first three months of 2010. The increase in
cash provided from operating activities was primarily due to accrued taxes related to refunds
received from bonus depreciation and receivables. This is partially offset by a decrease in
accounts payable associated with payables to affiliates, a decrease in net income, and the under
collection of regulatory clause revenues. Net cash used for investing activities totaled $224
million for the first three months of 2011 primarily due to gross property additions related to
steam generation equipment, nuclear fuel, and transmission and distribution expenditures. Net cash
used for financing activities totaled $98 million for the first three months of 2011 primarily due
to payment of common stock dividends and the issuance and maturity of senior notes. Fluctuations
in cash flow from financing activities vary year to year based on capital needs and the maturity or
redemption of securities.
Significant balance sheet changes for the first three months of 2011 include decreases of $103
million in other accounts payable related to the timing of outstanding checks associated with
property tax payments, $68 million in prepaid expenses related to income taxes, $43 million in
unbilled revenues, and $41 million in customer accounts receivable; and increases of $60 million in
property, plant, and equipment associated with nuclear fuel and routine property additions and $48
million in debt resulting from greater issuances than maturities.
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 requirements through March 31, 2012 for maturities of long-term debt.
The approved construction program of Alabama Power includes a base level investment of $0.9 billion
for 2011, $0.9 billion for 2012, and $1.1 billion for 2013. Included in Alabama Powers approved
construction program are estimated environmental expenditures to comply with existing statutes and
regulations of $47 million, $26 million, and $53 million for 2011, 2012, and 2013, respectively.
Alabama Power currently anticipates that additional expenditures may be required to
comply with anticipated statutes and regulations. Such additional expenditures are estimated to be
in amounts up to $48 million, $108 million, and $354 million for 2011, 2012, and 2013,
44
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
respectively. If the EPAs proposed Utility MACT rule is finalized as proposed, Alabama Power
estimates that the potential incremental investments in 2011 through 2013 for new environmental
regulations will be close to the upper end of the estimates set forth above. 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 generating plants, including unit retirements and replacements, 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; project scope and design
changes; storm impacts; 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. 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 March 31, 2011 cash and cash equivalents of approximately $159 million and unused
committed credit arrangements with banks of approximately $1.3 billion. Of the unused credit
arrangements, $506 million expire in 2011 and $765 million expire in 2012. Of the credit
arrangements that expire in 2011, $372 million contain provisions allowing for one-year term loans
executable at expiration. Alabama Power expects to renew its credit arrangements, as needed, prior
to expiration. The credit arrangements provide liquidity support to Alabama Powers commercial
paper borrowings and $798 million are dedicated to funding purchase obligations related to variable
rate pollution control revenue bonds. 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 March 31, 2011, Alabama Power had no commercial paper borrowings outstanding.
During the first quarter 2011, Alabama Power had an average of $88 million of commercial paper
outstanding at a weighted average interest rate of 0.2% per annum and the maximum amount
outstanding was $255 million. 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 below BBB- and/or Baa3. These contracts are primarily for physical electricity purchases, fuel
purchases, fuel transportation and storage, and energy price risk management. At March 31, 2011,
the maximum potential collateral requirements under these contracts at a rating below BBB- and/or
Baa3 were approximately $303 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 Alabama Powers
ability to access capital markets, particularly the short-term debt market.
45
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Market Price Risk
During the first quarter 2011, Alabama Power had interest rate swaps totaling $200 million expire,
which did not materially increase market risk exposure relative to interest rate changes. Since a
significant portion of outstanding indebtedness remains 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 and other various cost recovery mechanisms, 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 had no material
change in market risk exposure for the first quarter 2011 when compared with the December 31, 2010
reporting period.
The changes in fair value of energy-related derivative contracts, the majority of which are
composed of regulatory hedges, for the three months ended March 31, 2011 were as follows:
|
|
|
|
|
|
|
First Quarter |
|
|
2011 |
|
|
Changes |
|
|
Fair Value |
|
|
(in millions) |
Contracts outstanding at the beginning of the period, assets (liabilities), net |
|
$ |
(38 |
) |
Contracts realized or settled |
|
|
11 |
|
Current period changes(a) |
|
|
|
|
|
Contracts outstanding at the end of the period, assets (liabilities), net |
|
$ |
(27 |
) |
|
(a) |
|
Current period changes also include the changes in fair value of new contracts entered into
during the period, if any. |
The change in the fair value positions of the energy-related derivative contracts for the
three months ended March 31, 2011 was an increase of $11 million, substantially all of which is due
to natural gas positions. The change is attributable to both the volume of mmBtu and prices of
natural gas. At March 31, 2011, Alabama Power had a net hedge volume of 31.1 million mmBtu with a
weighted average contract cost approximately $0.90 per mmBtu above market prices, compared to 33.9
million mmBtu at December 31, 2010 with a weighted average contract cost approximately $1.14 per
mmBtu above market prices. The majority of the natural gas hedges are recovered through the fuel
cost recovery clause.
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 clause.
Unrealized pre-tax gains and losses recognized in income for the three months ended March 31, 2011
and 2010 for energy-related derivative contracts that are not hedges were not material.
46
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Alabama Power uses over-the-counter contracts that are not exchange traded but are fair valued
using prices which are market observable, and thus fall into Level 2. See Note (C) to the
Condensed Financial Statements herein for further discussion on fair value measurements. The
maturities of the energy-related derivative contracts and the level of the fair value hierarchy in
which they fall at March 31, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
Fair Value Measurements |
|
|
Total |
|
Maturity |
|
|
Fair Value |
|
Year 1 |
|
Years 2&3 |
|
Years 4&5 |
|
|
(in millions) |
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Level 2 |
|
|
(27 |
) |
|
|
(23 |
) |
|
|
(4 |
) |
|
|
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of
contracts
outstanding at end
of period |
|
$ |
(27 |
) |
|
$ |
(23 |
) |
|
$ |
(4 |
) |
|
$ |
|
|
|
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) enacted in July 2010
could impact the use of over-the-counter derivatives by Alabama Power. Regulations to implement
the Dodd-Frank Act could impose additional requirements on the use of over-the-counter derivatives,
such as margin and reporting requirements, which could affect both the use and cost of
over-the-counter derivatives. The impact, if any, cannot be determined until regulations are
finalized.
For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND
LIQUIDITY Market Price Risk of Alabama Power in Item 7 and Note 1 under Financial
Instruments and Note 11 to the financial statements of Alabama Power in Item 8 of the Form 10-K
and Note (H) to the Condensed Financial Statements herein.
Financing Activities
In February 2011, Alabama Powers $200 million Series HH 5.10% Senior Notes due February 1, 2011
matured.
In March 2011, Alabama Power issued $250 million aggregate principal amount of Series 2011A 5.50%
Senior Notes due March 15, 2041. The proceeds were used for general corporate purposes, including
Alabama Powers continuous construction program. Alabama Power settled $200 million of interest
rate hedges related to the Series 2011A 5.50% Senior Note issuance at a gain of approximately $4
million. The gain will be amortized to interest expense, in earnings, over 10 years.
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.
47
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in millions) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
1,815 |
|
|
$ |
1,792 |
|
Wholesale revenues, non-affiliates |
|
|
83 |
|
|
|
110 |
|
Wholesale revenues, affiliates |
|
|
11 |
|
|
|
14 |
|
Other revenues |
|
|
80 |
|
|
|
68 |
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
1,989 |
|
|
|
1,984 |
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
Fuel |
|
|
677 |
|
|
|
758 |
|
Purchased power, non-affiliates |
|
|
74 |
|
|
|
82 |
|
Purchased power, affiliates |
|
|
163 |
|
|
|
162 |
|
Other operations and maintenance |
|
|
422 |
|
|
|
389 |
|
Depreciation and amortization |
|
|
173 |
|
|
|
114 |
|
Taxes other than income taxes |
|
|
87 |
|
|
|
80 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
1,596 |
|
|
|
1,585 |
|
|
|
|
|
|
|
|
Operating Income |
|
|
393 |
|
|
|
399 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction |
|
|
25 |
|
|
|
35 |
|
Interest expense, net of amounts capitalized |
|
|
(96 |
) |
|
|
(93 |
) |
Other income (expense), net |
|
|
(1 |
) |
|
|
(6 |
) |
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(72 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
321 |
|
|
|
335 |
|
Income taxes |
|
|
111 |
|
|
|
93 |
|
|
|
|
|
|
|
|
Net Income |
|
|
210 |
|
|
|
242 |
|
Dividends on Preferred and Preference Stock |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
Net Income After Dividends on Preferred and
Preference Stock |
|
$ |
206 |
|
|
$ |
238 |
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in millions) |
|
Net Income After Dividends on Preferred and Preference Stock |
|
$ |
206 |
|
|
$ |
238 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
Reclassification adjustment for amounts included in net
income, net of tax of $ and $2, respectively |
|
|
1 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
207 |
|
|
$ |
241 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
49
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in millions) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
210 |
|
|
$ |
242 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization, total |
|
|
210 |
|
|
|
154 |
|
Deferred income taxes |
|
|
56 |
|
|
|
59 |
|
Deferred revenues |
|
|
2 |
|
|
|
(18 |
) |
Deferred expenses |
|
|
33 |
|
|
|
25 |
|
Allowance for equity funds used during construction |
|
|
(25 |
) |
|
|
(35 |
) |
Pension, postretirement, and other employee benefits |
|
|
(7 |
) |
|
|
(4 |
) |
Stock based compensation expense |
|
|
4 |
|
|
|
3 |
|
Storm damage accruals |
|
|
5 |
|
|
|
5 |
|
Other, net |
|
|
(52 |
) |
|
|
(26 |
) |
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
-Receivables |
|
|
122 |
|
|
|
(9 |
) |
-Fossil fuel stock |
|
|
(30 |
) |
|
|
81 |
|
-Materials and supplies |
|
|
(9 |
) |
|
|
1 |
|
-Prepaid income taxes |
|
|
80 |
|
|
|
23 |
|
-Other current assets |
|
|
(4 |
) |
|
|
(8 |
) |
-Accounts payable |
|
|
(50 |
) |
|
|
(17 |
) |
-Accrued taxes |
|
|
(194 |
) |
|
|
(185 |
) |
-Accrued compensation |
|
|
(65 |
) |
|
|
(7 |
) |
-Other current liabilities |
|
|
64 |
|
|
|
43 |
|
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
350 |
|
|
|
327 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(513 |
) |
|
|
(625 |
) |
Nuclear decommissioning trust fund purchases |
|
|
(830 |
) |
|
|
(199 |
) |
Nuclear decommissioning trust fund sales |
|
|
827 |
|
|
|
150 |
|
Cost of removal, net of salvage |
|
|
1 |
|
|
|
(14 |
) |
Change in construction payables, net of joint owner portion |
|
|
93 |
|
|
|
41 |
|
Other investing activities |
|
|
(6 |
) |
|
|
51 |
|
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(428 |
) |
|
|
(596 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Decrease in notes payable, net |
|
|
(62 |
) |
|
|
(81 |
) |
Proceeds |
|
|
|
|
|
|
|
|
Capital contributions from parent company |
|
|
171 |
|
|
|
460 |
|
Pollution control revenue bonds issuances |
|
|
137 |
|
|
|
|
|
Senior notes issuances |
|
|
300 |
|
|
|
350 |
|
Other long-term debt issuances |
|
|
250 |
|
|
|
|
|
Redemptions |
|
|
|
|
|
|
|
|
Pollution control revenue bonds |
|
|
(84 |
) |
|
|
|
|
Senior notes |
|
|
(101 |
) |
|
|
(250 |
) |
Other long-term debt |
|
|
(300 |
) |
|
|
|
|
Payment of preferred and preference stock dividends |
|
|
(4 |
) |
|
|
(4 |
) |
Payment of common stock dividends |
|
|
(224 |
) |
|
|
(205 |
) |
Other financing activities |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
Net cash provided from financing activities |
|
|
81 |
|
|
|
268 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
3 |
|
|
|
(1 |
) |
Cash and Cash Equivalents at Beginning of Period |
|
|
8 |
|
|
|
14 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
11 |
|
|
$ |
13 |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $9 and $13 capitalized for 2011 and 2010, respectively) |
|
|
$65 |
|
|
$ |
62 |
|
Income taxes (net of refunds) |
|
|
(77 |
) |
|
|
(6 |
) |
Noncash transactions accrued property additions at end of period |
|
|
350 |
|
|
|
275 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
50
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
At December 31, |
|
Assets |
|
2011 |
|
|
2010 |
|
|
|
(in millions) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
11 |
|
|
$ |
8 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
540 |
|
|
|
580 |
|
Unbilled revenues |
|
|
160 |
|
|
|
172 |
|
Under recovered regulatory clause revenues |
|
|
188 |
|
|
|
184 |
|
Joint owner accounts receivable |
|
|
54 |
|
|
|
60 |
|
Other accounts and notes receivable |
|
|
52 |
|
|
|
67 |
|
Affiliated companies |
|
|
21 |
|
|
|
21 |
|
Accumulated provision for uncollectible accounts |
|
|
(13 |
) |
|
|
(11 |
) |
Fossil fuel stock, at average cost |
|
|
654 |
|
|
|
624 |
|
Materials and supplies, at average cost |
|
|
380 |
|
|
|
371 |
|
Vacation pay |
|
|
77 |
|
|
|
78 |
|
Prepaid income taxes |
|
|
6 |
|
|
|
99 |
|
Other regulatory assets, current |
|
|
107 |
|
|
|
105 |
|
Other current assets |
|
|
66 |
|
|
|
80 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,303 |
|
|
|
2,438 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
26,681 |
|
|
|
26,397 |
|
Less accumulated provision for depreciation |
|
|
10,008 |
|
|
|
9,966 |
|
|
|
|
|
|
|
|
Plant in service, net of depreciation |
|
|
16,673 |
|
|
|
16,431 |
|
Other utility plant, net |
|
|
67 |
|
|
|
|
|
Nuclear fuel, at amortized cost |
|
|
421 |
|
|
|
386 |
|
Construction work in progress |
|
|
3,304 |
|
|
|
3,287 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
20,465 |
|
|
|
20,104 |
|
|
|
|
|
|
|
|
Other Property and Investments: |
|
|
|
|
|
|
|
|
Equity investments in unconsolidated subsidiaries |
|
|
69 |
|
|
|
70 |
|
Nuclear decommissioning trusts, at fair value |
|
|
791 |
|
|
|
818 |
|
Miscellaneous property and investments |
|
|
40 |
|
|
|
42 |
|
|
|
|
|
|
|
|
Total other property and investments |
|
|
900 |
|
|
|
930 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
731 |
|
|
|
723 |
|
Prepaid pension costs |
|
|
101 |
|
|
|
91 |
|
Deferred under recovered regulatory clause revenues |
|
|
128 |
|
|
|
214 |
|
Other regulatory assets, deferred |
|
|
1,224 |
|
|
|
1,207 |
|
Other deferred charges and assets |
|
|
191 |
|
|
|
207 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
2,375 |
|
|
|
2,442 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
26,043 |
|
|
$ |
25,914 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
51
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2011 |
|
|
2010 |
|
|
|
(in millions) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
379 |
|
|
$ |
415 |
|
Notes payable |
|
|
514 |
|
|
|
576 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
200 |
|
|
|
243 |
|
Other |
|
|
644 |
|
|
|
574 |
|
Customer deposits |
|
|
198 |
|
|
|
198 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Accrued income taxes |
|
|
34 |
|
|
|
1 |
|
Unrecognized tax benefits |
|
|
180 |
|
|
|
187 |
|
Other accrued taxes |
|
|
95 |
|
|
|
328 |
|
Accrued interest |
|
|
142 |
|
|
|
94 |
|
Accrued vacation pay |
|
|
56 |
|
|
|
58 |
|
Accrued compensation |
|
|
46 |
|
|
|
109 |
|
Liabilities from risk management activities |
|
|
70 |
|
|
|
77 |
|
Other cost of removal obligations, current |
|
|
31 |
|
|
|
31 |
|
Nuclear decommissioning trust securities lending collateral |
|
|
100 |
|
|
|
144 |
|
Other current liabilities |
|
|
162 |
|
|
|
134 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,851 |
|
|
|
3,169 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
8,169 |
|
|
|
7,931 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
3,773 |
|
|
|
3,718 |
|
Deferred credits related to income taxes |
|
|
127 |
|
|
|
129 |
|
Accumulated deferred investment tax credits |
|
|
227 |
|
|
|
229 |
|
Employee benefit obligations |
|
|
685 |
|
|
|
684 |
|
Asset retirement obligations |
|
|
721 |
|
|
|
705 |
|
Other cost of removal obligations |
|
|
128 |
|
|
|
131 |
|
Other deferred credits and liabilities |
|
|
196 |
|
|
|
211 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
5,857 |
|
|
|
5,807 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
16,877 |
|
|
|
16,907 |
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
45 |
|
|
|
45 |
|
|
|
|
|
|
|
|
Preference Stock |
|
|
221 |
|
|
|
221 |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, without par value |
|
|
|
|
|
|
|
|
Authorized - 20,000,000 shares |
|
|
|
|
|
|
|
|
Outstanding - 9,261,500 shares |
|
|
398 |
|
|
|
398 |
|
Paid-in capital |
|
|
5,467 |
|
|
|
5,291 |
|
Retained earnings |
|
|
3,045 |
|
|
|
3,063 |
|
Accumulated other comprehensive loss |
|
|
(10 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
8,900 |
|
|
|
8,741 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
26,043 |
|
|
$ |
25,914 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Georgia Power are an integral part of these
condensed financial statements.
52
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2011 vs. FIRST QUARTER 2010
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 and grow energy sales given economic conditions, 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, and fuel
prices. Georgia Power is currently constructing two new nuclear and three new combined cycle
generating units. Appropriately balancing required costs and capital expenditures with customer
prices will continue to challenge Georgia Power for the foreseeable future.
In December 2010, the Georgia PSC approved the 2010 ARP including a base rate increase of
approximately $562 million effective January 1, 2011. On March 1, 2011, Georgia Power filed a
request with the Georgia PSC to adjust its fuel cost recovery rates. The Georgia PSC will conduct
public hearings on the fuel cost recovery filing in early May 2011, with a final decision expected
on May 24, 2011. If approved, the new fuel cost recovery rates will go into effect June 1, 2011.
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
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$(32)
|
|
(13.4) |
|
Georgia Powers net income after dividends on preferred and preference stock for the first quarter
2011 was $206 million compared to $238 million for the corresponding period in 2010. The decrease
was primarily due to a decrease in the amortization of the regulatory liability related to other
cost of removal obligations, an increase in operating and maintenance expenses, a decrease in
revenue due to significantly colder weather in the first quarter 2010, and higher income taxes.
This decrease was partially offset by an increase in retail base revenues effective January 1, 2011
as authorized by the Georgia PSC in the 2010 ARP.
Retail Revenues
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$23
|
|
1.3 |
|
Retail revenues for the first quarters 2011 and 2010 were $1.8 billion.
53
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the change to retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
2011 |
|
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
1,792 |
|
|
|
|
|
Estimated change in |
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
141 |
|
|
|
7.9 |
|
Sales growth (decline) |
|
|
(7 |
) |
|
|
(0.4 |
) |
Weather |
|
|
(31 |
) |
|
|
(1.8 |
) |
Fuel cost recovery |
|
|
(80 |
) |
|
|
(4.4 |
) |
|
Retail current year |
|
$ |
1,815 |
|
|
|
1.3 |
% |
|
Revenues associated with changes in rates and pricing increased in the first quarter 2011 when
compared to the corresponding period in 2010 due to the retail base rate increase and NCCR
revenues.
Revenues attributable to changes in sales decreased in the first quarter 2011 when compared to the
corresponding period in 2010. Weather-adjusted residential KWH sales decreased 0.2%,
weather-adjusted commercial KWH sales decreased 1.8%, and weather-adjusted industrial KWH sales
increased 3.5% in the first quarter 2011 when compared to the corresponding period in 2010.
Revenues resulting from changes in weather decreased in the first quarter 2011 when compared to the
corresponding period in 2010 as a result of significantly colder weather in the first quarter 2010.
Fuel revenues and costs are allocated between retail and wholesale jurisdictions. Retail fuel cost
recovery revenues decreased by $80 million in the first quarter of 2011 when compared to the
corresponding period in 2010 due to decreased KWH sales and lower fuel costs.
Electric rates include provisions to adjust billings for fluctuations in fuel costs, including the
energy component of purchased power costs. Under these provisions, fuel revenues generally equal
fuel expenses, including the fuel component of purchased power costs, and do not affect net income.
Wholesale Revenues Non-Affiliates
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$(27)
|
|
(24.5) |
|
Wholesale revenues from non-affiliates will vary depending on fuel prices, 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 first quarter 2011, wholesale revenues from non-affiliates were $83 million compared to $110
million in the corresponding period in 2010, reflecting a $21 million decrease in energy revenues
and a $6 million decrease in capacity revenues. The decrease in the first quarter 2011 was
primarily due to a 27.4% decrease in KWH sales from lower demand resulting from
significantly colder weather in the first quarter 2010 and the expiration of the long-term unit
power sales contract in May 2010.
54
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Revenues
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$12
|
|
17.6 |
|
In the first quarter 2011, other revenues were $80 million compared to $68 million in the
corresponding period in 2010. This increase was primarily due to an $11 million increase in
transmission revenues due to the increased usage of Georgia Powers transmission system by
non-affiliated companies.
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
|
|
(change in millions) |
|
(% change) |
Fuel* |
|
$ |
(81 |
) |
|
|
(10.7 |
) |
Purchased power non-affiliates |
|
|
(8 |
) |
|
|
(9.8 |
) |
Purchased power affiliates |
|
|
1 |
|
|
|
0.6 |
|
|
|
|
|
|
Total fuel and purchased power expenses |
|
$ |
(88 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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 first quarter 2011, total fuel and purchased power expenses were $914 million compared
to $1.0 billion in the corresponding period in 2010. The decrease was primarily due to a $34
million net decrease related to lower KWHs generated and purchased primarily due to lower customer demand as a result
of significantly colder weather in 2010 and a $54 million decrease in the average cost of fuel and
average price of purchased power.
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 Georgia PSC Matters Fuel Cost Recovery herein for additional
information.
Details of Georgia Powers cost of generation and purchased power are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
First Quarter |
|
Percent |
Average Cost |
|
2011 |
|
2010 |
|
Change |
|
|
(cents per net KWH) |
|
|
|
|
Fuel |
|
|
3.73 |
|
|
|
3.78 |
|
|
|
(1.3 |
) |
Purchased power |
|
|
5.57 |
|
|
|
6.36 |
|
|
|
(12.4 |
) |
|
In the first quarter 2011, fuel expense was $677 million compared to $758 million in the
corresponding period in 2010. This decrease was due to an 11.1% decrease of KWHs generated as a
result of lower KWH demand and a 1.3% decrease in the average cost of fuel per KWH generated.
Non-Affiliates
In the first quarter 2011, purchased power expense from non-affiliates was $74 million compared to
$82 million in the corresponding period in 2010. This decrease was due to a 29.9% decrease in the
volume of KWHs purchased due to lower demand as a result of the significantly colder
weather in first quarter 2010, partially offset by a 29.6% increase in the average cost per KWH
purchased.
55
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Energy purchases from non-affiliates will vary depending on the market cost of available energy
compared to the cost of Southern Company system-generated energy, demand for energy within the
Southern Company system service territory, and availability of Southern Company system generation.
Other Operations and Maintenance Expenses
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$33
|
|
8.5 |
|
In the first quarter 2011, other operations and maintenance expenses were $422 million compared to
$389 million in the corresponding period in 2010. This increase was primarily due to increases of
$18 million in scheduled outages and maintenance at fossil generating plants, $7 million in
transmission and distribution primarily due to maintenance of overhead lines, and $4 million in
uncollectible account expense.
Depreciation and Amortization
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$59
|
|
51.8 |
|
In the first quarter 2011, depreciation and amortization was $173 million compared to $114 million
in the corresponding period in 2010. This increase was primarily due to amortization of $10
million compared to $60 million in the first quarter 2011 and 2010, respectively, of the regulatory
liability related to other cost of removal obligations as authorized by the Georgia PSC and
depreciation on additional plant in service related to transmission, distribution, and
environmental projects. See Note 3 to the financial statements of Georgia Power under Retail
Regulatory Matters Rate Plans in Item 8 of the Form 10-K for additional information on the
other cost of removal regulatory liability.
Taxes Other Than Income Taxes
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$7
|
|
8.8 |
|
In the first quarter 2011, taxes other than income taxes were $87 million compared to $80 million
in the corresponding period in 2010. This increase was primarily due to a $5 million increase in
property tax in the first quarter 2011 compared to the corresponding period in 2010.
Allowance for Equity Funds Used During Construction
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$(10)
|
|
(28.6) |
|
In the first quarter 2011, AFUDC equity was $25 million compared to $35 million in the
corresponding period in 2010. This decrease was due to the inclusion of Plant Vogtle Units 3 and 4
construction work in progress in rate base effective January 1, 2011, which reduced the amount of
AFUDC capitalized. See Note 3 to the financial statements of Georgia Power under Construction
Nuclear in Item 8 of the Form 10-K, Note (B) to the Condensed Financial
Statements herein under State PSC Matters Georgia Power Nuclear Construction, and FUTURE
EARNINGS POTENTIAL Construction Nuclear herein for additional information.
56
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Taxes
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$18
|
|
19.4 |
|
In the first quarter 2011, income taxes were $111 million compared to $93 million in the
corresponding period in 2010. The increase in income taxes was primarily due to the recognition in the first quarter 2010 of
certain state income tax credits that remain subject to litigation and
a decrease in non-taxable AFUDC equity in the first quarter 2011, partially offset by lower pre-tax
earnings. See Notes 3 and 5 to the financial statements of Georgia Power under Income Tax
Matters and Unrecognized Tax Benefits, respectively, in Item 8 of the Form 10-K and Notes (B)
and (G) to the Condensed Financial Statements herein under Income Tax Matters Georgia State
Income Tax Credits and Unrecognized Tax Benefits, respectively, for additional information.
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 timely 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. Changes in economic conditions impact sales for Georgia Power and
the pace of the economic recovery remains uncertain. The timing and extent of the economic
recovery will impact growth and may 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. Further, higher costs that are recovered through regulated rates could contribute to
reduced demand for electricity, which could negatively impact results of operations, cash flows,
and financial condition. 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
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 February 23, 2011, the U.S.
Court of Appeals for the Ninth Circuit issued an order staying the case until June 15, 2011. The
ultimate outcome of this matter cannot be determined at this time.
57
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 regulation of air quality. On May 3, 2011, the EPA published a
proposed rule, called Utility MACT (Maximum Achievable Control Technology), which would impose
stringent emission limits on coal- and oil-fired electric utility steam generating units (EGUs).
The proposed rule establishes numeric emission limits for acid gases, mercury, and total
particulate matter. Meeting the proposed limits would likely require additional emission control
equipment such as scrubbers, SCRs, baghouses, and other control measures at many coal-fired EGUs.
Pursuant to a court-approved consent decree, the EPA must issue a final rule by November 16, 2011.
Compliance for existing sources would be required three years after the effective date of the final
rule. In the proposed rule, the EPA discussed the possibility of a one-year compliance extension
which could be granted by the EPA or the states on a case-by-case basis if necessary. If finalized
as proposed, compliance with this rule would require significant capital expenditures and
compliance costs at many of Georgia Powers facilities which could impact unit retirement and
replacement decisions. In addition, results of operations, cash flows, and financial condition
could be impacted if the costs are not recovered through regulated rates. Further, there is
uncertainty regarding the ability of the electric utility industry to achieve compliance with the
requirements of the proposed rule within the proposed compliance period, and the limited compliance
period could negatively impact electric system reliability. The outcome of this rulemaking cannot
be determined at this time.
In April 2010, the EPA proposed an Industrial Boiler MACT rule that would establish emissions
limits for various hazardous air pollutants typically emitted from industrial boilers, including
biomass boilers and start-up boilers. The EPA issued the final rules on February 23, 2011 and, at
the same time, issued a notice of intent to reconsider the final rules to allow for additional
public review and comment. Georgia Power has delayed the decision to convert Plant Mitchell Unit 3
to biomass until there is greater clarity regarding these regulations. The impact of these
regulations will depend on their final form and the outcome 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 regulation of water quality. On April 20, 2011, the EPA
proposed a rule that establishes standards for reducing impacts to fish and other aquatic life
caused by cooling water intake structures at existing power plants and manufacturing facilities.
The rule also addresses cooling water intake structures for new units at existing facilities. The
rule focuses on reducing adverse impacts to fish and other aquatic life due to impingement (when
fish and other aquatic life are trapped by water flow velocity against a facilitys cooling water
intake structure screens) and entrainment (when aquatic organisms are drawn through a facilitys
cooling water system after entering through the cooling water intake structure). Affected cooling
water intake structures would have to comply with national impingement standards (for intake
velocity or alternatively numeric impingement reduction standards) and entrainment reduction
requirements (determined on a case-by-case basis). The rules proposed impingement standards could
require technological improvements to cooling water intake structures at many of Georgia Powers
existing generating facilities, including facilities with closed-cycle re-circulating cooling
systems (cooling towers).
To address the rules entrainment standards, facilities with once-through cooling systems may have
to install cooling towers. New units constructed at existing plants would have to meet the
national impingement standards and install closed-cycle cooling or the equivalent to meet the
entrainment mandate. The EPA has agreed in a settlement agreement to issue a final rule by July
27, 2012. If finalized as proposed, some of Georgia Powers facilities may be subject to
significant additional capital expenditures and compliance costs that could affect future unit
retirement and replacement decisions. Also, results of operations, cash flows, and financial
condition could be significantly impacted if such costs are not recovered through regulated rates.
The ultimate outcome of this rulemaking cannot be determined at this time.
58
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Georgia PSC Matters
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. As of March 31, 2011, Georgia Power had a total under recovered fuel cost balance of
approximately $313 million compared to $398 million at December 31, 2010. 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.
On March 1, 2011, Georgia Power filed a request with the Georgia PSC to decrease fuel rates by
0.61%. The decrease would reduce Georgia Powers annual billings by approximately $43 million.
The decrease in fuel costs is driven primarily by lower natural gas prices than those included in
current rates as a result of increases in natural gas supplies from the production of shale gas and
lower industrial demand. If approved, the new rates will go into effect June 1, 2011. The
ultimate outcome of this matter cannot be determined at this time.
Plant Branch Units 1 and 2 De-certification
See Environmental Matters Air Quality and Water Quality herein and MANAGEMENTS
DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters Environmental
Statutes and Regulations Air Quality, Water Quality, and Coal Combustion Byproducts
of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under Retail
Regulatory Matters Rate Plans in Item 8 of the Form 10-K for additional information regarding
potential rules and regulations being developed by the EPA, including the Utility MACT rule for
coal- and oil-fired EGUs, revisions to effluent guidelines for steam electric power plants, and
additional regulation of coal combustion byproducts; the State of Georgias Multi-Pollutant Rule;
Georgia Powers analysis of the potential costs and benefits of installing the required controls on
its coal-fired generating units in light of these regulations; and the 2010 ARP.
On March 22, 2011, the board of the Georgia Department of Natural Resources began consideration of
modifications to the Georgia Multi-Pollutant Rule. The proposed modifications would change the
compliance dates for certain of Georgia Powers coal-fired generating units as follows:
|
|
|
Scherer 3
|
|
July 1, 2011 |
Branch 1
|
|
December 31, 2013 |
Branch 2
|
|
October 1, 2013 |
Branch 3
|
|
October 1, 2015 |
Branch 4
|
|
December 31, 2015 |
The Multi-Pollutant Rule is designed to reduce emissions of mercury, sulfur dioxide, and nitrogen
oxides statewide. The Utility MACT rule will also regulate emissions of mercury, in addition to
other air pollutants. All required controls, including SCR, scrubber, and baghouse, are expected
to be operational at Plant Scherer Unit 3 by the required compliance date. As a result of these
proposed rules, Georgia Powers management expects to request that the Georgia PSC approve
de-certification of its Plant Branch Units 1 and 2, totaling 569 MWs of capacity, as of the
effective dates for controls under the Multi-Pollutant Rule as revised. Georgia Power continues to
analyze the potential costs and benefits of installing the required controls on its remaining
coal-fired units, including Plant Branch Units 3 and 4, in light of the proposed air quality rules,
as well as additional potential federal regulations related to water quality and coal combustion
byproducts. Georgia Power may determine that retiring and replacing certain of its existing units
with new generating resources or purchased power is more economically efficient than installing the
required controls.
59
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Under the terms of the 2010 ARP, any costs associated with changes to Georgia Powers approved
environmental operating or capital budgets resulting from new or revised environmental regulations
through 2013 that are approved by the Georgia PSC in connection with an updated integrated resource
plan will be deferred as a regulatory asset to be recovered over a time period deemed appropriate
by the Georgia PSC. Georgia Power currently expects to file an update to its integrated resource
plan in late summer 2011, which would include the Plant Branch Units 1 and 2 de-certification
request. In connection with this filing, Georgia Power expects to request the Georgia PSC to
approve the deferral and related amortization of the retail portion of the related costs associated
with the de-certification request. Georgia Power moved the retail portion of the net carrying
value of Plant Branch Units 1 and 2 from plant in service, net of depreciation, to other utility
plant, net of depreciation. Consistent with current ratemaking treatment, Georgia Power will
continue to depreciate these units using the composite straight-line rates approved by the Georgia
PSC, and upon actual retirement, expects to include the units remaining net carrying value in rate
base. However, the recovery periods for these units may change in connection with Georgia Powers
updated integrated resource plan. As a result of this regulatory treatment, the de-certification
of Plant Branch Units 1 and 2 is not expected to have a significant impact on Georgia Powers
financial statements.
The ultimate outcome of these matters cannot be determined at this time.
Storm Damage Reserve
During April 2011, severe storms in Georgia caused significant damage
to Georgia Powers distribution and transmission facilities.
Georgia Power maintains a reserve for property damage to cover the
operating and maintenance cost of damages from major storms to its transmission and distribution lines as mandated by the Georgia
PSC. As a result of this regulatory treatment, the storms are not expected to have a material impact on Georgia Powers financial
statements. See Note 1 to the financial statements of Georgia Power under Storm Damage Reserve in Item 8 of the Form 10-K for
additional information.
Income Tax Matters
Bonus Depreciation
In September 2010, the Small Business Jobs and Credit Act of 2010 (SBJCA) was signed into law. The
SBJCA includes an extension of the 50% bonus depreciation for certain property acquired and placed
in service in 2010 (and for certain long-term construction projects to be placed in service in
2011). Additionally, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and
Job Creation Act (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act
include 100% bonus depreciation for property placed in service after September 8, 2010 and through
2011 (and for certain long-term construction projects to be placed in service in 2012) and 50%
bonus depreciation for property placed in service in 2012 (and for certain long-term construction
projects to be placed in service in 2013), which will have a positive impact on the future cash
flows of Georgia Power. On March 29, 2011, the IRS issued additional guidance and safe harbors
relating to the 50% and 100% bonus depreciation rules. Based on this guidance, Georgia Power
estimates the potential increased cash flow for 2011 to be between approximately $200 million and
$275 million. The ultimate outcome of this matter cannot be determined at this time.
Construction
Nuclear
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Construction Nuclear
of Georgia Power in Item 7 of the Form 10-K for information regarding the construction of Plant
Vogtle Units 3 and 4.
In December 2010, Westinghouse submitted an AP1000 Design Certification Amendment (DCA) to the NRC.
On February 10, 2011, the NRC announced that it was seeking public comment on a proposed rule to
approve the DCA and amend the certified AP1000 reactor design for use in the U.S. The Advisory
Committee on Reactor Safeguards also issued a letter on January 24, 2011 endorsing the issuance of
the Construction and Operating License (COL) for Plant Vogtle Units 3 and 4. In addition, on March
25, 2011, the NRC submitted to the EPA the final environmental
impact statement for Plant Vogtle Units 3 and 4. Georgia Power currently expects to receive the
COL for Plant Vogtle Units 3 and 4 from the NRC in late 2011 based on the NRCs February 16, 2011
release of its COL schedule framework.
On February 21, 2011, the Georgia PSC voted to approve Georgia Powers third semi-annual
construction monitoring report including total costs of $1.048 billion for Plant Vogtle Units 3 and
4 incurred through June 30, 2010. In connection with its certification of Plant Vogtle Units 3 and
4, the Georgia PSC ordered Georgia Power and the PSC
60
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Staff to work together to develop a risk sharing or incentive mechanism that would provide some
level of protection to ratepayers in the event of significant cost overruns, but also not penalize
Georgia Powers earnings if and when overruns are due to mandates from governing agencies. Such
discussions have continued through the third semi-annual construction monitoring proceedings;
however, the Georgia PSC has deferred a decision with respect to any related risk-sharing or
incentive mechanism. A Georgia PSC hearing on this matter is scheduled on July 6, 2011 and a
decision is expected on August 2, 2011. Georgia Power will continue to file construction
monitoring reports by February 28 and August 31 of each year during the construction period.
In December 2010, the Georgia PSC approved the NCCR tariff, which became effective January 1, 2011.
The NCCR tariff was established to recover financing costs for nuclear construction projects by
including the related construction work in progress accounts in rate base during the construction
period in accordance with the Georgia Nuclear Energy Financing Act. With respect to Plant Vogtle
Units 3 and 4, this legislation allows Georgia Power to recover projected financing costs of
approximately $1.7 billion during the construction period beginning in 2011, which reduces the
projected in-service cost to approximately $4.4 billion. Georgia Power is collecting and
amortizing to earnings approximately $91 million of financing costs capitalized in 2009 and 2010
over the five-year period ending December 31, 2015 in addition to the ongoing financing costs. At
March 31, 2011, approximately $87 million of these 2009 and 2010 costs are included in construction
work in progress.
Georgia Power, Oglethorpe Power Corporation, the Municipal Electric Authority of Georgia, and the
City of Dalton, Georgia, an incorporated municipality in the State of Georgia acting by and through
its Board of Water, Light, and Sinking Fund Commissioners (collectively, Owners), and a consortium
consisting of Westinghouse and Stone & Webster, Inc. have established both informal and formal
dispute resolution procedures in order to resolve issues that commonly arise during the course of
constructing a project of this magnitude. Southern Nuclear, on behalf of the Owners, has initiated
both formal and informal claims through these procedures, including ongoing claims, and anticipates
that further issues are likely to arise in the future. The Owners have successfully used both the
informal and formal procedures to resolve disputes and expect to resolve any existing and future
disputes through these procedures as well.
On March 11, 2011, a major earthquake and tsunami struck Japan and caused substantial damage to the
nuclear generating units at the Fukushima Daiichi generating plant. According to published
reports, the owner of these units is continuing work to stabilize these units following a loss of
operation of the cooling systems for the units. While Georgia Power will continue to monitor this
developing situation, it has not identified any immediate impact to the licensing and construction
of Plant Vogtle Units 3 and 4 or the operation of its existing nuclear generating units.
The events in Japan have created uncertainties that may affect transportation, price of fuels,
availability of equipment from Japanese manufacturers, and future costs for operating nuclear
plants. Specifically, the NRC plans to perform additional operational and safety reviews of
nuclear facilities in the U.S., which could potentially impact future operations and capital
requirements.
See RISK FACTORS of Georgia Power in Item 1A of the Form 10-K for a discussion of certain risks
associated with the licensing, construction, and operation of nuclear generating units,
including potential impacts that could result from a major incident at a nuclear facility anywhere
in the world.
There are other pending technical and procedural challenges to the construction and licensing of
Plant Vogtle Units 3 and 4, including petitions filed at the NRC in response to the events in Japan. Similar additional challenges at the state and federal level are
expected as construction proceeds.
The ultimate outcome of these matters cannot be determined at this time.
61
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Construction
In May 2010, the Georgia PSC approved Georgia Powers request to extend the construction schedule
for Plant McDonough Units 4, 5, and 6 as a result of the short-term reduction in forecasted demand,
as well as the requested increase in the certified amount. As a result, the units are expected to
be placed into service in January 2012, May 2012, and January 2013, respectively. The Georgia PSC
has approved Georgia Powers quarterly construction monitoring reports, including actual project
expenditures incurred, through June 30, 2010. Georgia Power will continue to file quarterly
construction monitoring reports throughout the construction period.
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 U.S. In particular, personal
injury and other 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
and other 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 GAAP. 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, Unbilled Revenues, and Pension and
Other Postretirement Benefits.
62
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 March 31, 2011. 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. See Sources of Capital and
Financing Activities herein for additional information.
Net cash provided from operating activities totaled $350 million for the first three months of
2011, compared to $327 million for the corresponding period in 2010. The $23 million increase is
primarily due to higher recovery of fuel costs. Net cash used for investing activities totaled
$428 million primarily due to gross property additions to utility plant in the first three months
of 2011. Net cash provided from financing activities totaled $81 million for the first three
months of 2011, compared to $268 million for the corresponding period in 2010. The $187 million
decrease is primarily due to higher capital contributions from Southern Company in the first
quarter 2010, partially offset by long-term debt issuances in the first quarter 2011.
Significant balance sheet changes for the first three months of 2011 include an increase of $361
million in total property, plant, and equipment, an increase of $238 million in long-term debt to
replace short-term debt and provide funds for Georgia Powers continuous construction program, and
an increase in paid in capital of $176 million reflecting equity contributions from Southern
Company.
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 $379 million will be required through March 31, 2012 to
fund maturities and announced repurchases of long-term debt.
The construction program of Georgia Power is currently estimated to include a base level investment
of $2.1 billion, $2.2 billion, and $2.0 billion for 2011, 2012, and 2013, respectively. Included
in these estimated amounts are environmental expenditures to comply with existing statutes and
regulations of $73 million, $79 million, and $58 million for 2011, 2012, and 2013, respectively.
In addition, Georgia Power currently estimates that potential incremental investments to comply
with anticipated new environmental regulations could range from $69 million to $289 million for
2011, $191 million to $651 million for 2012, and $476 million to $1.4 billion for 2013. If the
EPAs proposed Utility MACT rule is finalized as proposed, Georgia Power estimates that the
potential incremental investments in 2011 through 2013 for new environmental regulations will be
closer to the upper end of the ranges set forth above. 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 generating plants,
including unit retirements and replacements, to meet new regulatory requirements; changes in FERC
rules and regulations; Georgia PSC approvals; changes in legislation; the cost and efficiency of
construction labor, equipment, and materials;
project scope and design changes; storm impacts; 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
Except as described below with respect to potential DOE loan guarantees, Georgia Power plans to
obtain the funds required for construction and other purposes from sources similar to those used in
the past, which were primarily from operating cash flows, short-term debt, security issuances, term
loans, and equity contributions from Southern Company.
63
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
In June 2010, Georgia Power reached an agreement with the DOE to accept terms for a conditional
commitment for federal loan guarantees that would apply to future borrowings by Georgia Power
related to the construction of Plant Vogtle Units 3 and 4. Any borrowings guaranteed by the DOE
would be full recourse to Georgia Power and secured by a first priority lien on Georgia Powers
45.7% undivided ownership interest in Plant Vogtle Units 3 and 4. Total guaranteed borrowings
would not exceed the lesser of 70% of eligible project costs or approximately $3.4 billion and are
expected to be funded by the Federal Financing Bank. Final approval and issuance of loan
guarantees by the DOE are subject to receipt of the COL for Plant Vogtle Units 3 and 4 from the
NRC, negotiation of definitive agreements, completion of due diligence by the DOE, receipt of any
necessary regulatory approvals, and satisfaction of other conditions. There can be no assurance
that the DOE will issue loan guarantees for Georgia Power. See FUTURE EARNINGS POTENTIAL
Construction Nuclear herein for more information on Plant Vogtle Units 3 and 4.
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 March 31, 2011 approximately $11
million of cash and cash equivalents and approximately $1.7 billion of unused committed credit
arrangements with banks. As of March 31, 2011, of the unused credit arrangements, $595 million
expire in 2011 and $1.1 billion expire in 2012. Of the credit arrangements that expire in 2011 and
2012, $40 million contain provisions allowing for two-year term loans executable at expiration and
$220 million contain provisions allowing for one-year term loans executable at expiration. Georgia
Power expects to renew its credit arrangements, as needed, prior to expiration. At March 31, 2011,
the credit arrangements were dedicated to providing liquidity support to Georgia Powers commercial
paper program and approximately $522 million of purchase obligations related to variable rate
pollution control revenue bonds. 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. Georgia 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 Georgia Power and other Southern Company
subsidiaries. At March 31, 2011, Georgia Power had approximately $513 million of commercial paper
borrowings outstanding with a weighted average interest rate of 0.3% per annum. During the first
quarter 2011, the maximum amount of commercial paper outstanding was $681 million and the average
amount outstanding was $330 million. The weighted average annual interest rate on commercial paper
in the first quarter 2011 was 0.3%. 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, energy price risk management, and construction of
new generation. At March 31, 2011, the maximum potential collateral
requirements under these contracts at a BBB- and/or Baa3 rating were approximately $27 million. At
March 31, 2011, the maximum potential collateral requirements under these contracts at a rating
below BBB- and/or Baa3 were approximately $1.4 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.
64
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Market Price Risk
Georgia Powers market risk exposure relative to interest rate changes for the first quarter 2011
has not changed materially compared with the December 31, 2010 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 and other various cost recovery mechanisms, 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 had no material change
in market risk exposure for the first quarter 2011 relative to fuel and electricity prices when
compared with the December 31, 2010 reporting period.
The changes in fair value of energy-related derivative contracts, the majority of which are
composed of regulatory hedges, for the three months ended March 31, 2011 were as follows:
|
|
|
|
|
|
|
First Quarter |
|
|
2011 |
|
|
Changes |
|
|
Fair Value |
|
|
(in millions) |
Contracts outstanding at the beginning of the period, assets (liabilities), net |
|
$ |
(100 |
) |
Contracts realized or settled |
|
|
17 |
|
Current period changes(a) |
|
|
(1 |
) |
|
Contracts outstanding at the end of the period, assets (liabilities), net |
|
$ |
(84 |
) |
|
|
|
|
(a) |
|
Current period changes also include the changes in fair value of new contracts entered into
during the period, if any. |
The change in the fair value positions of the energy-related derivative contracts for the
three months ended March 31, 2011 was an increase of $16 million, substantially all of which is due
to natural gas positions. The change is attributable to both the volume of mmBtu and prices of
natural gas. At March 31, 2011, Georgia Power had a net hedge volume of 65.0 million mmBtu with a
weighted average contract cost approximately $1.38 per mmBtu above market prices, compared to 58.7
million mmBtu at December 31, 2010 with a weighted average contract cost approximately $1.74 per
mmBtu above market prices. The natural gas hedges are recovered through the fuel cost recovery
mechanism.
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.
Unrealized pre-tax gains and losses recognized in income for the three months ended March 31, 2011
and 2010 for energy-related derivative contracts that are not hedges were not material.
65
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Georgia Power uses over-the-counter contracts that are not exchange traded but are fair valued
using prices which are market observable, and thus fall into Level 2. See Note (C) to the
Condensed Financial Statements herein for further discussion on fair value measurements. The
maturities of the energy-related derivative contracts and the level of the fair value hierarchy in
which they fall at March 31, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
Fair Value Measurements |
|
|
Total |
|
Maturity |
|
|
Fair Value |
|
Year 1 |
|
Years 2&3 |
|
Years 4&5 |
|
|
(in millions) |
|
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Level 2 |
|
|
(84 |
) |
|
|
(70 |
) |
|
|
(14 |
) |
|
|
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of
contracts outstanding
at end of period |
|
$ |
(84 |
) |
|
$ |
(70 |
) |
|
$ |
(14 |
) |
|
$ |
|
|
|
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) enacted in July 2010
could impact the use of over-the-counter derivatives by Georgia Power. Regulations to implement
the Dodd-Frank Act could impose additional requirements on the use of over-the-counter derivatives,
such as margin and reporting requirements, which could affect both the use and cost of
over-the-counter derivatives. The impact, if any, cannot be determined until regulations are
finalized.
For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND
LIQUIDITY Market Price Risk of Georgia Power in Item 7 and Note 1 under Financial
Instruments and Note 11 to the financial statements of Georgia Power in Item 8 of the Form 10-K
and Note (H) to the Condensed Financial Statements herein.
Financing Activities
In January 2011, Georgia Powers $100 million aggregate principal amount of Series S 4.0% Senior
Notes due January 15, 2011 matured.
In January 2011, Georgia Power issued $300 million aggregate principal amount of Series 2011A
Floating Rate Senior Notes due January 15, 2013. The proceeds were used to repay short-term debt
and for general corporate purposes, including Georgia Powers continuous construction program.
In March 2011, Georgia Powers $300 million variable rate bank term loan due on March 4, 2011
matured and was partially replaced by two one-year $125 million aggregate principal amount variable
rate bank loans that bear interest based on one-month LIBOR.
Subsequent to March 31, 2011, Georgia Power issued $250 million aggregate principal amount of
Series 2011B 3.0% Senior Notes due April 15, 2016. The proceeds were used to repay short-term debt
and for general corporate purposes, including Georgia Powers continuous construction program.
Also subsequent to March 31, 2011, Georgia Power purchased and is holding $113.5 million of
pollution control revenue bonds. The bonds are expected to be remarketed to investors at a future
date.
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.
66
GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
274,826 |
|
|
$ |
304,750 |
|
Wholesale revenues, non-affiliates |
|
|
31,019 |
|
|
|
27,914 |
|
Wholesale revenues, affiliates |
|
|
4,135 |
|
|
|
9,518 |
|
Other revenues |
|
|
14,628 |
|
|
|
14,530 |
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
324,608 |
|
|
|
356,712 |
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
Fuel |
|
|
131,782 |
|
|
|
152,712 |
|
Purchased power, non-affiliates |
|
|
7,003 |
|
|
|
7,435 |
|
Purchased power, affiliates |
|
|
16,618 |
|
|
|
20,413 |
|
Other operations and maintenance |
|
|
80,509 |
|
|
|
70,418 |
|
Depreciation and amortization |
|
|
31,756 |
|
|
|
28,071 |
|
Taxes other than income taxes |
|
|
24,896 |
|
|
|
25,233 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
292,564 |
|
|
|
304,282 |
|
|
|
|
|
|
|
|
Operating Income |
|
|
32,044 |
|
|
|
52,430 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction |
|
|
2,135 |
|
|
|
1,385 |
|
Interest income |
|
|
14 |
|
|
|
17 |
|
Interest expense, net of amounts capitalized |
|
|
(13,629 |
) |
|
|
(11,385 |
) |
Other income (expense), net |
|
|
(563 |
) |
|
|
(533 |
) |
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(12,043 |
) |
|
|
(10,516 |
) |
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
20,001 |
|
|
|
41,914 |
|
Income taxes |
|
|
6,759 |
|
|
|
15,063 |
|
|
|
|
|
|
|
|
Net Income |
|
|
13,242 |
|
|
|
26,851 |
|
Dividends on Preference Stock |
|
|
1,551 |
|
|
|
1,551 |
|
|
|
|
|
|
|
|
Net Income After Dividends on Preference Stock |
|
$ |
11,691 |
|
|
$ |
25,300 |
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Net Income After Dividends on Preference Stock |
|
$ |
11,691 |
|
|
$ |
25,300 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $- and $(953), respectively |
|
|
|
|
|
|
(1,518 |
) |
Reclassification adjustment for amounts included in net
income, net of tax of $90 and $105, respectively |
|
|
143 |
|
|
|
166 |
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
143 |
|
|
|
(1,352 |
) |
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
11,834 |
|
|
$ |
23,948 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
68
GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,242 |
|
|
$ |
26,851 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization, total |
|
|
33,294 |
|
|
|
29,659 |
|
Deferred income taxes |
|
|
6,249 |
|
|
|
2,917 |
|
Allowance for equity funds used during construction |
|
|
(2,135 |
) |
|
|
(1,385 |
) |
Pension, postretirement, and other employee benefits |
|
|
(1,256 |
) |
|
|
550 |
|
Stock based compensation expense |
|
|
518 |
|
|
|
623 |
|
Other, net |
|
|
(3,793 |
) |
|
|
(520 |
) |
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
-Receivables |
|
|
35,336 |
|
|
|
6,150 |
|
-Prepayments |
|
|
1,156 |
|
|
|
983 |
|
-Fossil fuel stock |
|
|
(14,941 |
) |
|
|
17,419 |
|
-Materials and supplies |
|
|
(726 |
) |
|
|
(1,170 |
) |
-Prepaid income taxes |
|
|
28,889 |
|
|
|
4,530 |
|
-Property damage cost recovery |
|
|
|
|
|
|
11 |
|
-Other current assets |
|
|
7 |
|
|
|
12 |
|
-Accounts payable |
|
|
(8,863 |
) |
|
|
(4,443 |
) |
-Accrued taxes |
|
|
4,053 |
|
|
|
15,539 |
|
-Accrued compensation |
|
|
(10,000 |
) |
|
|
(3,462 |
) |
-Other current liabilities |
|
|
6,127 |
|
|
|
6,304 |
|
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
87,157 |
|
|
|
100,568 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(94,239 |
) |
|
|
(81,225 |
) |
Distribution of restricted cash from pollution control revenue bonds |
|
|
|
|
|
|
2,340 |
|
Cost of removal, net of salvage |
|
|
(5,314 |
) |
|
|
(5,759 |
) |
Change in construction payables |
|
|
3,171 |
|
|
|
(11,846 |
) |
Payments pursuant to long-term service agreements |
|
|
(2,198 |
) |
|
|
(699 |
) |
Other investing activities |
|
|
68 |
|
|
|
(190 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(98,512 |
) |
|
|
(97,379 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Decrease in notes payable, net |
|
|
(6,620 |
) |
|
|
(6,599 |
) |
Proceeds |
|
|
|
|
|
|
|
|
Common stock issued to parent |
|
|
50,000 |
|
|
|
50,000 |
|
Capital contributions from parent company |
|
|
809 |
|
|
|
1,128 |
|
Redemptions |
|
|
|
|
|
|
|
|
Senior notes |
|
|
(125 |
) |
|
|
(85 |
) |
Payment of preference stock dividends |
|
|
(1,551 |
) |
|
|
(1,551 |
) |
Payment of common stock dividends |
|
|
(27,500 |
) |
|
|
(26,075 |
) |
Other financing activities |
|
|
110 |
|
|
|
605 |
|
|
|
|
|
|
|
|
Net cash provided from financing activities |
|
|
15,123 |
|
|
|
17,423 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
3,768 |
|
|
|
20,612 |
|
Cash and Cash Equivalents at Beginning of Period |
|
|
16,434 |
|
|
|
8,677 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
20,202 |
|
|
$ |
29,289 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $851 and $552 capitalized for 2011 and 2010, respectively) |
|
$ |
8,284 |
|
|
$ |
9,461 |
|
Income taxes (net of refunds) |
|
|
(29,557 |
) |
|
|
(4,383 |
) |
Noncash transactions accrued property additions at end of period |
|
|
17,882 |
|
|
|
32,308 |
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
69
GULF POWER COMPANY
CONDENSED BALANCE SHEETS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
At December 31, |
|
Assets |
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
20,202 |
|
|
$ |
16,434 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
58,954 |
|
|
|
74,377 |
|
Unbilled revenues |
|
|
44,970 |
|
|
|
64,697 |
|
Under recovered regulatory clause revenues |
|
|
22,077 |
|
|
|
19,690 |
|
Other accounts and notes receivable |
|
|
10,253 |
|
|
|
9,867 |
|
Affiliated companies |
|
|
4,923 |
|
|
|
7,859 |
|
Accumulated provision for uncollectible accounts |
|
|
(1,518 |
) |
|
|
(2,014 |
) |
Fossil fuel stock, at average cost |
|
|
182,096 |
|
|
|
167,155 |
|
Materials and supplies, at average cost |
|
|
45,455 |
|
|
|
44,729 |
|
Other regulatory assets, current |
|
|
16,849 |
|
|
|
20,278 |
|
Prepaid expenses |
|
|
25,937 |
|
|
|
58,412 |
|
Other current assets |
|
|
3,259 |
|
|
|
3,585 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
433,457 |
|
|
|
485,069 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
3,738,908 |
|
|
|
3,634,255 |
|
Less accumulated provision for depreciation |
|
|
1,087,442 |
|
|
|
1,069,006 |
|
|
|
|
|
|
|
|
Plant in service, net of depreciation |
|
|
2,651,466 |
|
|
|
2,565,249 |
|
Construction work in progress |
|
|
200,079 |
|
|
|
209,808 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
2,851,545 |
|
|
|
2,775,057 |
|
|
|
|
|
|
|
|
Other Property and Investments |
|
|
16,284 |
|
|
|
16,352 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
49,920 |
|
|
|
46,357 |
|
Prepaid pension costs |
|
|
7,998 |
|
|
|
7,291 |
|
Other regulatory assets, deferred |
|
|
237,448 |
|
|
|
219,877 |
|
Other deferred charges and assets |
|
|
29,288 |
|
|
|
34,936 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
324,654 |
|
|
|
308,461 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
3,625,940 |
|
|
$ |
3,584,939 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
70
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
At December 31, |
|
Liabilities and Stockholder's Equity |
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
110,000 |
|
|
$ |
110,000 |
|
Notes payable |
|
|
86,563 |
|
|
|
93,183 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
39,567 |
|
|
|
46,342 |
|
Other |
|
|
67,856 |
|
|
|
68,840 |
|
Customer deposits |
|
|
35,914 |
|
|
|
35,600 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Accrued income taxes |
|
|
4,613 |
|
|
|
3,835 |
|
Other accrued taxes |
|
|
11,754 |
|
|
|
7,944 |
|
Accrued interest |
|
|
18,530 |
|
|
|
13,393 |
|
Accrued compensation |
|
|
6,234 |
|
|
|
14,459 |
|
Other regulatory liabilities, current |
|
|
22,860 |
|
|
|
27,060 |
|
Liabilities from risk management activities |
|
|
7,167 |
|
|
|
9,415 |
|
Other current liabilities |
|
|
18,863 |
|
|
|
19,766 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
429,921 |
|
|
|
449,837 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
1,114,406 |
|
|
|
1,114,398 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
396,377 |
|
|
|
382,876 |
|
Accumulated deferred investment tax credits |
|
|
7,771 |
|
|
|
8,109 |
|
Employee benefit obligations |
|
|
75,472 |
|
|
|
76,654 |
|
Other cost of removal obligations |
|
|
205,373 |
|
|
|
204,408 |
|
Other regulatory liabilities, deferred |
|
|
42,378 |
|
|
|
42,915 |
|
Other deferred credits and liabilities |
|
|
145,382 |
|
|
|
132,708 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
872,753 |
|
|
|
847,670 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
2,417,080 |
|
|
|
2,411,905 |
|
|
|
|
|
|
|
|
Preference Stock |
|
|
97,998 |
|
|
|
97,998 |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, without par value |
|
|
|
|
|
|
|
|
Authorized - 20,000,000 shares |
|
|
|
|
|
|
|
|
Outstanding - March 31, 2011: 4,142,717 shares |
|
|
|
|
|
|
|
|
- December 31, 2010: 3,642,717 shares |
|
|
353,060 |
|
|
|
303,060 |
|
Paid-in capital |
|
|
539,867 |
|
|
|
538,375 |
|
Retained earnings |
|
|
220,519 |
|
|
|
236,328 |
|
Accumulated other comprehensive loss |
|
|
(2,584 |
) |
|
|
(2,727 |
) |
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
1,110,862 |
|
|
|
1,075,036 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
3,625,940 |
|
|
$ |
3,584,939 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
71
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2011 vs. FIRST QUARTER 2010
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 and grow energy sales given economic conditions, 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 required costs and capital expenditures with customer
prices will continue to challenge Gulf Power for the foreseeable future.
Gulf Power continues to focus on several key performance indicators. These indicators include
customer satisfaction, plant availability, system reliability, and net income 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
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$(13.6)
|
|
(53.8) |
|
Gulf Powers net income after dividends on preference stock for the first quarter 2011 was $11.7
million compared to $25.3 million for the corresponding period in 2010. The decrease was primarily
due to increases in other operations and maintenance expenses in the first quarter 2011 and
significantly colder weather in the first quarter 2010.
Retail Revenues
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$(29.9)
|
|
(9.8) |
|
In the first quarter 2011, retail revenues were $274.8 million compared to $304.7 million for the
corresponding period in 2010.
72
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the change to retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
2011 |
|
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
304.7 |
|
|
|
|
|
Estimated change in |
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
(2.0 |
) |
|
|
(0.7 |
) |
Sales growth (decline) |
|
|
1.2 |
|
|
|
0.4 |
|
Weather |
|
|
(9.5 |
) |
|
|
(3.1 |
) |
Fuel and other cost recovery. |
|
|
(19.6 |
) |
|
|
(6.4 |
) |
|
Retail current year |
|
$ |
274.8 |
|
|
|
(9.8 |
)% |
|
Revenues associated with changes in rates and pricing decreased in the first quarter 2011 when
compared to the corresponding period in 2010 primarily due to lower recoverable costs under Gulf
Powers environmental cost recovery clause due to lower KWH energy sales.
Annually, Gulf Power petitions the Florida PSC for recovery of projected environmental compliance
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 increased in the first quarter 2011 when compared to the
corresponding period in 2010. Weather-adjusted KWH energy sales to residential and commercial
customers increased 2.0% and 2.2%, respectively, due to higher use per customer. KWH energy sales
to industrial customers increased 7.9% primarily due to the addition of a new large customer and
several customers buying more energy during maintenance outages of the customers onsite generation
facilities.
Revenues attributable to changes in weather decreased in the first quarter 2011 when compared to
the corresponding period for 2010 due to significantly colder weather in the first quarter 2010.
Fuel and other cost recovery revenues decreased in the first quarter 2011 when compared to the
corresponding period for 2010 primarily due to lower fuel cost for generation and lower purchased
power energy cost required to meet a lower level of KWH energy sales. Fuel and other cost recovery
revenues include fuel expenses, the energy component of purchased power costs, and purchased power
capacity costs. Annually, Gulf Power petitions the Florida PSC for recovery of projected fuel and
purchased power costs including any true-up amount from prior periods, and approved rates are
implemented each January. The recovery provisions generally equal the related expenses and have no
material effect on net income. See FUTURE EARNINGS POTENTIAL Florida PSC Matters Fuel Cost
Recovery herein and MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC
Matters Fuel Cost Recovery of Gulf Power in Item 7 and Note 1 to the financial statements of
Gulf Power under Revenues and Note 3 to the financial statements of Gulf Power under Retail
Regulatory Matters Fuel Cost Recovery in Item 8 of the Form 10-K for additional information.
73
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale Revenues Non-Affiliates
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$3.1
|
|
11.1 |
|
Wholesale revenues from non-affiliates will vary depending on fuel prices, 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 and Georgia 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 first quarter 2011, wholesale revenues from non-affiliates were $31.0 million compared to
$27.9 million for the corresponding period in 2010. The increase was primarily due to increased
capacity revenues as a result of contracts effective in the second quarter 2010.
Wholesale Revenues Affiliates
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$(5.4)
|
|
(56.6) |
|
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 first quarter 2011, wholesale revenues from affiliates were $4.1 million compared to $9.5
million for the corresponding period in 2010. The decrease was primarily due to a 43.7% decrease
in price related to lower energy rates in the first quarter 2011 and decreased energy revenues
related to a 22.9% decrease in KWH energy sales due to decreases in customer demand.
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
|
|
(change in millions) |
|
(% change) |
Fuel* |
|
$ |
(21.0 |
) |
|
|
(13.7 |
) |
Purchased power non-affiliates |
|
|
(0.4 |
) |
|
|
(5.8 |
) |
Purchased power affiliates |
|
|
(3.8 |
) |
|
|
(18.6 |
) |
|
|
|
|
|
Total fuel and purchased power expenses |
|
$ |
(25.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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 first quarter 2011, total fuel and purchased power expenses were $155.4 million
compared to $180.6 million for the corresponding period in 2010. The decrease in fuel and
purchased power expenses was due to a $12.7 million decrease in the average cost of fuel and
purchased power and a $12.5 million decrease related to total KWHs generated and purchased.
74
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Florida PSC Matters Fuel Cost Recovery herein for additional
information.
Details of Gulf Powers cost of generation and purchased power are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
First Quarter |
|
Percent |
Average Cost |
|
2011 |
|
2010 |
|
Change |
|
|
(cents per net KWH) |
|
|
|
|
Fuel |
|
|
4.69 |
|
|
|
5.11 |
|
|
|
(8.22 |
) |
Purchased power |
|
|
5.37 |
|
|
|
5.56 |
|
|
|
(3.42 |
) |
|
In the first quarter 2011, fuel expense was $131.8 million compared to $152.7 million for the
corresponding period in 2010. The decrease was primarily due to a 45.3% decrease in the average
cost of natural gas and a 1.7% decrease in KWHs generated as a result of decreased demand,
partially offset by a 2.4% increase in the average cost of coal.
Non-Affiliates
In the first quarter 2011, purchased power expense from non-affiliates was $7.0 million compared to
$7.4 million for the corresponding period in 2010. The decrease was primarily due to a 56.3%
decrease in the volume of KWHs purchased, partially offset by an 18.3% increase in average cost per
KWH purchased.
Energy purchases from non-affiliates will vary depending on the market cost of available energy
compared to the cost of Southern Company system-generated energy, demand for energy within the
Southern Company system service territory, and the availability of Southern Company system
generation.
Affiliates
In the first quarter 2011, purchased power expense from affiliates was $16.6 million compared to
$20.4 million for the corresponding period in 2010. The decrease was primarily due to a 3.4%
decrease in average cost per KWH purchased and a 16.5% decrease in the volume of KWHs purchased
related to decreases in customer demand.
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 or other contractual agreements, as approved by the FERC.
Other Operations and Maintenance Expenses
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$10.1
|
|
14.3 |
|
In the first quarter 2011, other operations and maintenance expenses were $80.5 million compared to
$70.4 million for the corresponding period in 2010. The increase was primarily due to planned
outage maintenance expenses at Plant Crist.
75
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation and Amortization
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$3.7
|
|
13.1 |
|
In the first quarter 2011, depreciation and amortization was $31.8 million compared to $28.1
million for the corresponding period in 2010. The increase was primarily due to the addition of
environmental control projects and other net additions to transmission and distribution facilities.
Allowance for Equity Funds Used During Construction
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$0.7
|
|
54.2 |
|
In the first quarter 2011, AFUDC equity was $2.1 million compared to $1.4 million for the
corresponding period in 2010. The increase was primarily due to construction of environmental
control projects.
Interest Expense, Net of Amounts Capitalized
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$2.2
|
|
19.7 |
|
In the first quarter 2011, interest expense, net of amounts capitalized was $13.6 million compared
to $11.4 million for the corresponding period in 2010. The increase was primarily due to an
increase in long-term debt resulting from the issuance of additional senior notes.
Income Taxes
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$(8.3)
|
|
(55.1) |
|
In the first quarter 2011, income taxes were $6.8 million compared to $15.1 million for the
corresponding period in 2010. The decrease was primarily due to lower pre-tax earnings.
76
GULF 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 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 timely 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. Changes in economic conditions impact sales for Gulf Power, and the pace of
the economic recovery remains uncertain. The timing and extent of the economic recovery will
impact growth and may 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. Further, higher costs that are recovered through regulated rates could contribute to
reduced demand for electricity, which could negatively impact results of operations, cash flows,
and financial condition. 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.
Carbon Dioxide Litigation
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 February 23, 2011, the U.S. Court of Appeals for the Ninth Circuit issued an order staying the
case until June 15, 2011. The ultimate outcome of this matter 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 regulation of air quality. On May 3, 2011, the EPA published a proposed
rule, called Utility MACT (Maximum Achievable Control Technology), which would impose stringent
emission limits on coal- and oil-fired electric utility steam generating units (EGUs). The
proposed rule establishes numeric emission limits for acid gases, mercury, and total particulate
matter. Meeting the proposed limits would likely require additional emission control equipment
such as scrubbers, SCRs, baghouses, and other control measures at many coal-fired EGUs. Pursuant
to a court-approved consent decree, the EPA must issue a final rule by November 16, 2011.
Compliance for existing sources would be required three years after the effective date of the final
rule. In the proposed rule, the EPA discussed the possibility of a one-year compliance extension
which could be granted by the EPA or the states on a case-by-case basis if necessary. If finalized
as proposed, compliance with this rule would require significant capital expenditures and
compliance costs at many of Gulf Powers facilities which could impact unit retirement and
replacement decisions. In addition, results of operations, cash flows, and financial condition
could be impacted if the costs are not recovered
77
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
through regulated rates. Further, there is uncertainty regarding the ability of the electric
utility industry to achieve compliance with the requirements of the proposed rule within the
proposed compliance period, and the limited compliance period could negatively impact electric
system reliability. The outcome of this rulemaking 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 regulation of water quality. On April 20, 2011, the EPA
proposed a rule that establishes
standards for reducing impacts to fish and other aquatic life caused by cooling water intake
structures at existing power plants and manufacturing facilities. The rule also addresses cooling
water intake structures for new units at existing facilities. The rule focuses on reducing adverse
impacts to fish and other aquatic life due to impingement (when fish and other aquatic life are
trapped by water flow velocity against a facilitys cooling water intake structure screens) and
entrainment (when aquatic organisms are drawn through a facilitys cooling water system after
entering through the cooling water intake structure). Affected cooling water intake structures
would have to comply with national impingement standards (for intake velocity or alternatively
numeric impingement reduction standards) and entrainment reduction requirements (determined on a
case-by-case basis). The rules proposed impingement standards could require technological
improvements to cooling water intake structures at many of Gulf Powers existing generating
facilities, including facilities with closed-cycle re-circulating cooling systems (cooling towers).
To address the rules entrainment standards, facilities with once-through cooling systems may have
to install cooling towers. New units constructed at existing plants would have to meet the
national impingement standards and install closed-cycle cooling or the equivalent to meet the
entrainment mandate. The EPA has agreed in a settlement agreement to issue a final rule by July
27, 2012. If finalized as proposed, some of Gulf Powers facilities may be subject to significant
additional capital expenditures and compliance costs that could affect future unit retirement and
replacement decisions. Also, results of operations, cash flows, and financial condition could be
significantly impacted if such costs are not recovered through regulated rates. The ultimate
outcome of this rulemaking cannot be determined at this time.
Florida PSC Matters
Fuel Cost Recovery
Gulf Power has established fuel cost recovery rates approved by the Florida PSC. In previous
years, Gulf Power has experienced volatility in pricing of fuel commodities with higher than
expected pricing for coal and volatile price swings in 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 March 31, 2011 totaled $19.8 million, compared to $17.4 million at
December 31, 2010. 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. See MANAGEMENTS DISCUSSION AND
ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Fuel Cost Recovery of Gulf Power in Item
7 and Notes 1 and 3 to the financial statements of Gulf Power under Revenues and Retail
Regulatory Matters Fuel Cost Recovery, respectively, in Item 8 of the Form 10-K for additional
information.
78
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Environmental Cost Recovery
In July 2010, Mississippi Power filed a request for a certificate of public convenience and
necessity to construct a flue gas desulfurization system (scrubber) on Plant Daniel Units 1 and 2.
These units are jointly owned by Mississippi Power and Gulf Power, with 50% ownership each. The
estimated total cost of the project is approximately $625 million and is scheduled for completion
in early 2015. Hearings on the certificate request were held by the
Mississippi PSC on January 25, 2011, but a final order has not
yet been issued. On May 5, 2011, the Mississippi PSC approved up
to $19.5 million (with respect to Mississippi Powers
ownership portion) in spending for
2011 for the scrubber project. A decision on a final order is not
anticipated prior to issuance of the final Utility MACT rule in November
2011. The ultimate
outcome of this matter cannot be determined at this time. See MANAGEMENTS DISCUSSION AND ANALYSIS
FUTURE EARNINGS POTENTIAL PSC Matters Environmental Cost Recovery of Gulf Power in Item
7 and Note 3 to the financial statements of Gulf Power under Retail Regulatory Matters
Environmental Cost Recovery in Item 8 of the Form 10-K for additional information.
Energy
Conservation Cost Recovery
Every five years, the Florida PSC establishes new numeric conservation
goals covering a 10-year period for utilities to reduce annual energy and seasonal peak demand using demand-side management (DSM)
programs. After the goals are established, utilities develop plans and programs to meet the approved goals. The costs for these
programs are recovered through rates established annually in the Energy Conservation Cost Recovery clause.
The most recent goal setting process established new DSM goals for the
period 2010-2019. The new goals are significantly larger than the goals established in the previous five-year cycle due to a
change in the cost-effectiveness test on which the Florida PSC relies to set the goals. Throughout 2010, Gulf Power engaged in
a process at the Florida PSC to develop plans and programs to meet the new DSM goals. The DSM program standards were approved
in April 2011, which allow Gulf Power to implement its DSM programs designed to meet the new goals. Higher cost recovery
rates and achievement of the new DSM goals may result in reduced sales of electricity which could negatively impact results
of operations, cash flows, and financial condition if base rates cannot be adjusted on a timely basis.
See BUSINESS under Rate Matters Integrated Resource Planning
Gulf Power in Item 1 of the Form 10-K for a discussion of Gulf Powers 10-year site plan filed on an annual basis with
the Florida PSC.
Income Tax Matters
Bonus Depreciation
In September 2010, the Small Business Jobs and Credit Act of 2010 (SBJCA) was signed into law. The
SBJCA includes an extension of the 50% bonus depreciation for certain property acquired and placed
in service in 2010 (and for certain long-term construction projects to be placed in service in
2011). Additionally, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and
Job Creation Act (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act
include 100% bonus depreciation for property placed in service after September 8, 2010 and through
2011 (and for certain long-term construction projects to be placed in service in 2012) and 50%
bonus depreciation for property placed in service in 2012 (and for certain long-term construction
projects to be placed in service in 2013), which will have a positive impact on the future cash
flows of Gulf Power. On March 29, 2011, the IRS issued additional guidance and safe harbors
relating to the 50% and 100% bonus depreciation rules. Based on this guidance, Gulf Power
estimates the potential increased cash flow for 2011 to be between approximately $30 million and
$40 million. The ultimate outcome of this matter cannot be determined at this time.
Other Matters
Gulf Power is involved in various other matters being litigated and regulatory matters that
could affect future earnings. In addition, Gulf Power is subject to certain claims and legal
actions arising in the ordinary course of business. Gulf Powers business activities are
subject to extensive governmental regulation related to public health and the environment, 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 U.S. In particular, personal injury and other
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 and other
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.
79
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Gulf Power prepares its financial statements in accordance with GAAP. 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, Unbilled Revenues, and Pension and Other
Postretirement Benefits.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Gulf Powers financial condition remained stable at March 31, 2011. 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. See Sources of Capital and Financing
Activities herein for additional information.
Net cash provided from operating activities totaled $87.2 million for the first three months of
2011 compared to $100.6 million for the corresponding period in 2010. The $13.4 million decrease
was primarily due to a $32.4 million use of cash related to fuel inventory increases in 2011
compared to reductions in 2010, a $13.6 million decrease in net income, and an $8.4 million
decrease due to payments to non-affiliates, partially offset by a $27.9 million increase related to
the declining balance of customer receivables in 2011 compared to its increasing balance in 2010,
which was driven by weather-related demands, and a $13.7 million increase from taxes primarily
related to refunds received. Net cash used for investing activities totaled $98.5 million in the
first three months of 2011 compared to $97.4 million for the corresponding period in 2010. The
$1.1 million increase in cash used was primarily due to gross property additions. Net cash
provided from financing activities totaled $15.1 million for the first three months of 2011,
compared to $17.4 million for the corresponding period in 2010. The $2.3 million decrease was
primarily due to higher common stock dividends in 2011.
Significant balance sheet changes for the first quarter 2011 include a net increase of $76.5
million in property, plant, and equipment, primarily related to environmental control projects; the
issuance of common stock to Southern Company for $50 million; a decrease of $32.5 million in
prepaid expenses, primarily related to prepaid income taxes; and a $14.9 million increase in fossil
fuel stock.
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, as well as the related interest, leases, derivative obligations, preference stock
dividends, purchase commitments, and trust funding requirements. Approximately $110 million will
be required through March 31, 2012 for maturities of long-term debt.
The construction program of Gulf Power is currently estimated to include a base level investment of
$381.5 million, $395.5 million, and $384.1 million for 2011, 2012, and 2013, respectively.
Included in these estimated amounts are environmental expenditures to comply with existing statutes
and regulations of $175.9 million, $227.8 million, and $214.0 million for 2011, 2012, and 2013,
respectively. In addition, Gulf Power currently estimates that potential incremental investments
to comply with anticipated new environmental regulations are up to $17.1 million for 2011, up to
$55.6 million for 2012, and up to $107.3 million for 2013. If the EPAs proposed Utility MACT rule
is finalized as
80
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
proposed, Gulf Power estimates the potential investments in 2011 through 2013 for new
environmental regulations will be closer to the upper end of the ranges set forth above. 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 generating plants, including unit retirements and replacements, to meet new
regulatory requirements; changes in FERC rules and regulations; Florida PSC approvals; changes in
legislation; the cost and efficiency of construction labor, equipment, and materials; project scope
and design changes; 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 used in the past, which were primarily from operating cash flows, short-term debt,
security issuances, 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 scheduled maturities of long-term debt, as well as cash
needs, which can fluctuate significantly due to the seasonality of the business. To meet
short-term cash needs and contingencies, Gulf Power had at March 31, 2011 approximately $20.2
million of cash and cash equivalents and $240 million of unused committed credit arrangements with
banks that will expire in 2011. During the first quarter of 2011, one line of credit for $30
million was extended until July 2011. Subsequent to March 31, 2011, Gulf Power extended the
maturity on two other lines of credit totaling $75 million until July 2011. Gulf Power expects to
renew these lines of credit in July for at least a 364-day period. Of the credit arrangements,
$210 million contain provisions allowing one-year term loans executable at expiration. Gulf Power
expects to renew its credit arrangements, as needed, prior to expiration. 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. 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. Gulf 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 Gulf Power and other Southern Company subsidiaries. At March 31, 2011, Gulf
Power had $83.0 million of commercial paper borrowings outstanding with a weighted average interest
rate of 0.3% per annum. During the first quarter 2011, Gulf Power had an average of $55 million of
commercial paper outstanding at a weighted average interest rate of 0.3% per annum and the maximum
amount outstanding was $103 million. 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, and energy price risk management. At March 31, 2011, the maximum
potential collateral requirements under these contracts at a BBB- and/or Baa3 rating were
approximately $125 million. At March 31, 2011, the maximum potential collateral requirements under
these contracts at a rating below BBB- and/or Baa3 were approximately $530 million. Included in
these amounts are certain agreements
81
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Market Price Risk
Gulf Powers market risk exposure relative to interest rate changes for the first quarter 2011 has
not changed materially compared with the December 31, 2010 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 and other various cost recovery mechanisms, 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 and, to a lesser extent, into financial hedge contracts for natural
gas purchases. Gulf Power continues to manage a financial hedging program for fuel purchased to
operate its electric generating fleet implemented per the guidelines of the Florida PSC. As such,
Gulf Power had no material change in market risk exposure for the first quarter 2011 when compared
with the December 31, 2010 reporting period.
The changes in fair value of energy-related derivative contracts, the majority of which are
composed of regulatory hedges, for the three months ended March 31, 2011 were as follows:
|
|
|
|
|
|
|
First Quarter |
|
|
2011 |
|
|
Changes |
|
|
Fair Value |
|
|
(in millions) |
Contracts outstanding at the beginning of the period, assets (liabilities), net |
|
$ |
(11 |
) |
Contracts realized or settled |
|
|
2 |
|
Current period changes(a) |
|
|
1 |
|
|
Contracts outstanding at the end of the period, assets (liabilities), net |
|
$ |
(8 |
) |
|
|
|
|
(a) |
|
Current period changes also include the changes in fair value of new contracts entered into
during the period, if any. |
The change in the fair value positions of the energy-related derivative contracts for the
three months ended March 31, 2011 was an increase of $3 million, substantially all of which is due
to natural gas positions. The change is attributable to both the volume of mmBtu and prices of
natural gas. At March 31, 2011, Gulf Power had a net hedge volume of 20.3 million mmBtu with a
weighted average contract cost approximately $0.46 per mmBtu above market prices, compared to 19.6
million mmBtu at December 31, 2010 with a weighted average contract cost approximately $0.67 per
mmBtu above market prices. Natural gas settlements are recovered through the fuel cost recovery
clause.
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.
Unrealized pre-tax gains and losses recognized in income for the three months ended March 31, 2011
and 2010 for energy-related derivative contracts that are not hedges were not material.
82
GULF POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gulf Power uses over-the-counter contracts that are not exchange traded but are fair valued using
prices which are market observable, and thus fall into Level 2. See Note (C) to the Condensed
Financial Statements herein for further discussion on fair value measurements. The maturities of
the energy-related derivative contracts and the level of the fair value hierarchy in which they
fall at March 31, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
Fair Value Measurements |
|
|
Total |
|
Maturity |
|
|
Fair Value |
|
Year 1 |
|
Years 2&3 |
|
Years 4&5 |
|
|
(in millions) |
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Level 2 |
|
|
(8 |
) |
|
|
(5 |
) |
|
|
(3 |
) |
|
|
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of contracts
outstanding at end
of period |
|
$ |
(8 |
) |
|
$ |
(5 |
) |
|
$ |
(3 |
) |
|
$ |
|
|
|
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) enacted in July 2010
could impact the use of over-the-counter derivatives by Gulf Power. Regulations to implement the
Dodd-Frank Act could impose additional requirements on the use of over-the-counter derivatives,
such as margin and reporting requirements, which could affect both the use and cost of
over-the-counter derivatives. The impact, if any, cannot be determined until regulations are
finalized.
For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND
LIQUIDITY Market Price Risk of Gulf Power in Item 7 and Note 1 under Financial Instruments
and Note 10 to the financial statements of Gulf Power in Item 8 of the Form 10-K and Note (H) to
the Condensed Financial Statements herein.
Financing Activities
On January 20, 2011, Gulf Power issued to Southern Company 500,000 shares of common stock, without
par value, and realized proceeds of $50 million. The proceeds were used to repay a portion of Gulf
Powers short-term indebtedness and for other general corporate purposes, including Gulf Powers
continuous construction program.
Subsequent to March 31, 2011, Gulf Power extended the maturity date of a $110 million variable rate
bank note until June 30, 2011.
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.
83
MISSISSIPPI POWER COMPANY
84
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
Retail revenues |
|
$ |
180,474 |
|
|
$ |
186,587 |
|
Wholesale revenues, non-affiliates |
|
|
69,851 |
|
|
|
78,889 |
|
Wholesale revenues, affiliates |
|
|
9,300 |
|
|
|
14,675 |
|
Other revenues |
|
|
3,651 |
|
|
|
3,487 |
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
263,276 |
|
|
|
283,638 |
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
Fuel |
|
|
121,054 |
|
|
|
130,797 |
|
Purchased power, non-affiliates |
|
|
1,010 |
|
|
|
3,621 |
|
Purchased power, affiliates |
|
|
8,350 |
|
|
|
14,721 |
|
Other operations and maintenance |
|
|
70,367 |
|
|
|
67,338 |
|
Depreciation and amortization |
|
|
19,863 |
|
|
|
18,675 |
|
Taxes other than income taxes |
|
|
17,481 |
|
|
|
18,460 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
238,125 |
|
|
|
253,612 |
|
|
|
|
|
|
|
|
Operating Income |
|
|
25,151 |
|
|
|
30,026 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
Allowance for equity funds used during construction |
|
|
3,131 |
|
|
|
18 |
|
Interest income |
|
|
342 |
|
|
|
33 |
|
Interest expense, net of amounts capitalized |
|
|
(6,013 |
) |
|
|
(6,179 |
) |
Other income (expense), net |
|
|
(403 |
) |
|
|
1,531 |
|
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(2,943 |
) |
|
|
(4,597 |
) |
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
22,208 |
|
|
|
25,429 |
|
Income taxes |
|
|
7,158 |
|
|
|
9,743 |
|
|
|
|
|
|
|
|
Net Income |
|
|
15,050 |
|
|
|
15,686 |
|
Dividends on Preferred Stock |
|
|
433 |
|
|
|
433 |
|
|
|
|
|
|
|
|
Net Income After Dividends on Preferred Stock |
|
$ |
14,617 |
|
|
$ |
15,253 |
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Net Income After Dividends on Preferred Stock |
|
$ |
14,617 |
|
|
$ |
15,253 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $(1) and
$12, respectively |
|
|
(2 |
) |
|
|
20 |
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
14,615 |
|
|
$ |
15,273 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
85
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
15,050 |
|
|
$ |
15,686 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization, total |
|
|
21,442 |
|
|
|
20,118 |
|
Deferred income taxes |
|
|
10,015 |
|
|
|
(8,080 |
) |
Investment tax credits received |
|
|
9,750 |
|
|
|
|
|
Allowance for equity funds used during construction |
|
|
(3,131 |
) |
|
|
(18 |
) |
Pension, postretirement, and other employee benefits |
|
|
1,037 |
|
|
|
1,822 |
|
Stock based compensation expense |
|
|
813 |
|
|
|
757 |
|
Tax benefit of stock options |
|
|
73 |
|
|
|
24 |
|
Generation construction screening costs |
|
|
|
|
|
|
(18,832 |
) |
Other, net |
|
|
(1,436 |
) |
|
|
1,138 |
|
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
-Receivables |
|
|
11,592 |
|
|
|
7,715 |
|
-Fossil fuel stock |
|
|
(538 |
) |
|
|
17,761 |
|
-Materials and supplies |
|
|
(317 |
) |
|
|
(885 |
) |
-Prepaid income taxes |
|
|
15,976 |
|
|
|
|
|
-Other current assets |
|
|
1,649 |
|
|
|
(8,262 |
) |
-Accounts payable |
|
|
17,538 |
|
|
|
970 |
|
-Accrued taxes |
|
|
(31,213 |
) |
|
|
(12,109 |
) |
-Accrued compensation |
|
|
(9,556 |
) |
|
|
(7,719 |
) |
-Over recovered regulatory clause revenues |
|
|
7,756 |
|
|
|
7,596 |
|
-Other current liabilities |
|
|
(149 |
) |
|
|
(708 |
) |
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
66,351 |
|
|
|
16,974 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(148,917 |
) |
|
|
(19,054 |
) |
Cost of removal, net of salvage |
|
|
(2,830 |
) |
|
|
(3,375 |
) |
Construction payables |
|
|
33,291 |
|
|
|
2,812 |
|
Capital grant proceeds |
|
|
16,912 |
|
|
|
|
|
Distribution of restricted cash |
|
|
50,000 |
|
|
|
|
|
Other investing activities |
|
|
(834 |
) |
|
|
(5,316 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(52,378 |
) |
|
|
(24,933 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Proceeds |
|
|
|
|
|
|
|
|
Capital contributions from parent company |
|
|
50,610 |
|
|
|
752 |
|
Gross excess tax benefit of stock options |
|
|
106 |
|
|
|
75 |
|
Redemptions |
|
|
|
|
|
|
|
|
Capital leases |
|
|
(349 |
) |
|
|
(323 |
) |
Other long-term debt |
|
|
(130,000 |
) |
|
|
|
|
Payment of preferred stock dividends |
|
|
(433 |
) |
|
|
(433 |
) |
Payment of common stock dividends |
|
|
(18,875 |
) |
|
|
(17,150 |
) |
Other financing activities |
|
|
(418 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
Net cash used for financing activities |
|
|
(99,359 |
) |
|
|
(17,080 |
) |
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
(85,386 |
) |
|
|
(25,039 |
) |
Cash and Cash Equivalents at Beginning of Period |
|
|
160,779 |
|
|
|
65,025 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
75,393 |
|
|
$ |
39,986 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $994 and $9 capitalized for 2011 and 2010, respectively) |
|
$ |
6,135 |
|
|
$ |
7,028 |
|
Income taxes (net of refunds) |
|
|
(32,294 |
) |
|
|
(3,821 |
) |
Noncash transactions accrued property additions at end of period |
|
|
72,114 |
|
|
|
6,501 |
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
86
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
At December 31, |
|
Assets |
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
75,393 |
|
|
$ |
160,779 |
|
Restricted cash and cash equivalents |
|
|
|
|
|
|
50,000 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
31,355 |
|
|
|
37,532 |
|
Unbilled revenues |
|
|
25,992 |
|
|
|
31,010 |
|
Other accounts and notes receivable |
|
|
9,345 |
|
|
|
11,220 |
|
Affiliated companies |
|
|
30,905 |
|
|
|
17,837 |
|
Accumulated provision for uncollectible accounts |
|
|
(467 |
) |
|
|
(638 |
) |
Fossil fuel stock, at average cost |
|
|
112,777 |
|
|
|
112,240 |
|
Materials and supplies, at average cost |
|
|
28,988 |
|
|
|
28,671 |
|
Other regulatory assets, current |
|
|
60,440 |
|
|
|
63,896 |
|
Prepaid income taxes |
|
|
46,458 |
|
|
|
59,596 |
|
Other current assets |
|
|
21,482 |
|
|
|
19,057 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
442,668 |
|
|
|
591,200 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
2,416,242 |
|
|
|
2,392,477 |
|
Less accumulated provision for depreciation |
|
|
980,896 |
|
|
|
971,559 |
|
|
|
|
|
|
|
|
Plant in service, net of depreciation |
|
|
1,435,346 |
|
|
|
1,420,918 |
|
Construction work in progress |
|
|
383,619 |
|
|
|
274,585 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
1,818,965 |
|
|
|
1,695,503 |
|
|
|
|
|
|
|
|
Other Property and Investments |
|
|
6,111 |
|
|
|
5,900 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Deferred charges related to income taxes |
|
|
21,521 |
|
|
|
18,065 |
|
Other regulatory assets, deferred |
|
|
128,379 |
|
|
|
132,420 |
|
Other deferred charges and assets |
|
|
20,357 |
|
|
|
33,233 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
170,257 |
|
|
|
183,718 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
2,438,001 |
|
|
$ |
2,476,321 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
87
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
126,465 |
|
|
$ |
256,437 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
48,146 |
|
|
|
51,887 |
|
Other |
|
|
116,911 |
|
|
|
59,295 |
|
Customer deposits |
|
|
13,181 |
|
|
|
12,543 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Accrued income taxes |
|
|
8,753 |
|
|
|
4,356 |
|
Other accrued taxes |
|
|
16,147 |
|
|
|
51,709 |
|
Accrued interest |
|
|
5,132 |
|
|
|
5,933 |
|
Accrued compensation |
|
|
6,521 |
|
|
|
16,076 |
|
Other regulatory liabilities, current |
|
|
5,730 |
|
|
|
6,177 |
|
Over recovered regulatory clause liabilities |
|
|
84,802 |
|
|
|
77,046 |
|
Liabilities from risk management activities |
|
|
24,825 |
|
|
|
27,525 |
|
Other current liabilities |
|
|
20,454 |
|
|
|
20,115 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
477,067 |
|
|
|
589,099 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
461,696 |
|
|
|
462,032 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
298,724 |
|
|
|
281,967 |
|
Deferred credits related to income taxes |
|
|
12,096 |
|
|
|
11,792 |
|
Accumulated deferred investment tax credits |
|
|
43,098 |
|
|
|
33,678 |
|
Employee benefit obligations |
|
|
114,369 |
|
|
|
113,964 |
|
Other cost of removal obligations |
|
|
115,192 |
|
|
|
111,614 |
|
Other regulatory liabilities, deferred |
|
|
60,452 |
|
|
|
58,814 |
|
Other deferred credits and liabilities |
|
|
37,865 |
|
|
|
43,213 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
681,796 |
|
|
|
655,042 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
1,620,559 |
|
|
|
1,706,173 |
|
|
|
|
|
|
|
|
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 |
|
|
444,344 |
|
|
|
392,790 |
|
Retained earnings |
|
|
302,627 |
|
|
|
306,885 |
|
Accumulated other comprehensive income (loss) |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
784,662 |
|
|
|
737,368 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
2,438,001 |
|
|
$ |
2,476,321 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
88
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2011 vs. FIRST QUARTER 2010
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 and grow energy sales given economic
conditions, 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 customer prices will continue to challenge
Mississippi Power for the foreseeable future.
Mississippi Power continues to focus on several key performance indicators. In recognition that
Mississippi Powers long-term financial success is dependent upon how well it satisfies its
customers needs, Mississippi Powers retail base rate mechanism, PEP, includes performance
indicators that directly tie customer service indicators to Mississippi Powers allowed return. In
addition to the PEP performance indicators, Mississippi Power focuses on other performance
measures, including broader measures of customer satisfaction, plant availability, system
reliability, and net income after dividends on preferred stock. For additional information on
these indicators, see MANAGEMENTS DISCUSSION AND ANALYSIS OVERVIEW Key Performance
Indicators of Mississippi Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$(0.7)
|
|
(4.2) |
|
Mississippi Powers net income after dividends on preferred stock for the first quarter 2011 was
$14.6 million compared to $15.3 million for the corresponding period in 2010. The decrease in net
income after dividends on preferred stock for the first quarter 2011 was primarily due to an
increase in other operations and maintenance expenses, a decrease in other income (expense), net
primarily resulting from a decrease in amounts collected from customers for contributions in aid of
construction, a decrease in capacity revenues from customers served outside Mississippi Powers
service territory, and a decrease in territorial base revenues due to significantly colder weather
in the first quarter 2010. The decrease in net income after dividends on preferred stock for the
first quarter 2011 was partially offset by an increase in AFUDC equity resulting from construction
of the Kemper IGCC.
Retail Revenues
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$(6.1)
|
|
(3.3) |
|
In the first quarter 2011, retail revenues were $180.5 million compared to $186.6 million for the
corresponding period in 2010.
89
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the change to retail revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
|
2011 |
|
|
(in millions) |
|
(% change) |
Retail prior year |
|
$ |
186.6 |
|
|
|
|
|
Estimated change in |
|
|
|
|
|
|
|
|
Rates and pricing |
|
|
1.0 |
|
|
|
0.5 |
|
Sales growth (decline) |
|
|
3.5 |
|
|
|
1.9 |
|
Weather |
|
|
(4.0 |
) |
|
|
(2.2 |
) |
Fuel and other cost recovery |
|
|
(6.6 |
) |
|
|
(3.5 |
) |
|
Retail current year |
|
$ |
180.5 |
|
|
|
(3.3 |
)% |
|
Revenues associated with changes in rates and pricing increased in the first quarter 2011 when
compared to the corresponding period in 2010 due to an increase of $1.0 million related to the ECO
Plan rate. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters
Environmental Compliance Overview Plan of Mississippi Power in Item 7 of the Form 10-K and
FUTURE EARNINGS POTENTIAL Mississippi PSC Matters Retail Regulatory Matters Environmental
Compliance Overview Plan herein for additional information.
Revenues attributable to changes in sales increased in the first quarter 2011 when compared to the
corresponding period in 2010, primarily resulting from the continued recovery of some larger
industrial customers. KWH energy sales to industrial customers increased 6.5% due to increased
production for several large industrial customers resulting from improving economic conditions.
Weather-adjusted KWH energy sales to the residential and commercial customers remained relatively
flat when compared to the corresponding period in 2010.
Revenues attributable to changes in weather decreased in the first quarter 2011 when compared to
the corresponding period for 2010 primarily due to significantly colder weather in the first
quarter 2010.
Fuel and other cost recovery revenues decreased in the first quarter 2011 when compared to the
corresponding period in 2010 primarily as a result of lower recoverable fuel costs. Recoverable
fuel costs include fuel and purchased power expenses reduced by the fuel portion of wholesale
revenues from energy sold to customers outside Mississippi Powers service territory. Electric
rates include provisions to adjust billings for fluctuations in fuel costs, including the energy
component of purchased power costs. Under these provisions, fuel revenues generally equal fuel
expenses, including the fuel component of purchased power costs, and do not affect net income.
Wholesale Revenues Non-Affiliates
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$(9.0)
|
|
(11.5) |
|
Wholesale revenues from non-affiliates will vary depending on fuel prices, the market cost of
available energy compared to the cost of Mississippi Power and Southern Company system-owned
generation, demand for energy within the Southern Company service territory, and the availability
of Southern Company system generation. Increases and decreases in revenues that are driven by fuel
prices are accompanied by an increase or decrease in fuel costs and do not have a significant
impact on net income.
In the first quarter 2011, wholesale revenues from non-affiliates were $69.9 million compared to
$78.9 million for the corresponding period in 2010. The decrease was due to $6.6 million in
decreased revenues from customers inside Mississippi Powers service territory and $2.4 million in
decreased revenues from customers outside Mississippi Powers
90
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
service territory. The $6.6 million decrease in revenues from customers inside Mississippi Powers
service territory was primarily due to a $6.1 million decrease in fuel revenues and a $0.5 million
decrease in wholesale base revenues due to significantly colder weather in the first quarter 2010,
partially offset by a wholesale base rate increase effective January 2011. The $2.4 million
decrease in revenues from customers outside Mississippi Powers service territory was primarily due
to a $1.1 million decrease in sales, a $0.5 million decrease associated with lower prices resulting
from lower marginal cost of fuel, and a $0.8 million decrease in capacity revenues.
Wholesale Revenues Affiliates
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$(5.4)
|
|
(36.6) |
|
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 first quarter 2011, wholesale revenues from affiliates were $9.3 million compared to $14.7
million for the corresponding period in 2010. The decrease was primarily due to a $4.4 million
decrease in energy revenues, of which $2.9 million was associated with decreased sales and $1.5
million was associated with lower prices. Capacity revenues decreased by $1.0 million.
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
|
|
(change in millions) |
|
(% change) |
Fuel |
|
$ |
(9.7 |
) |
|
|
(7.4 |
) |
Purchased power non-affiliates |
|
|
(2.6 |
) |
|
|
(72.1 |
) |
Purchased power affiliates |
|
|
(6.4 |
) |
|
|
(43.3 |
) |
|
|
|
|
|
Total fuel and purchased power expenses |
|
$ |
(18.7 |
) |
|
|
|
|
|
|
|
|
|
In the first quarter 2011, total fuel and purchased power expenses were $130.4 million compared to
$149.1 million for the corresponding period in 2010. The decrease was primarily due to an $11.7
million decrease in cost of fuel and purchased power and a $7.0 million decrease in total KWHs
generated and purchased.
Fuel and purchased power transactions do not have a significant impact on earnings since energy
expenses are generally offset by energy revenues through Mississippi Powers fuel cost recovery
clause. See FUTURE EARNINGS POTENTIAL Mississippi PSC Matters Retail Regulatory Matters
herein for additional information.
Details of Mississippi Powers cost of generation and purchased power are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
First Quarter |
|
Percent |
Average Cost |
|
2011 |
|
2010 |
|
Change |
|
|
(cents per net KWH) |
|
|
|
|
Fuel |
|
|
3.92 |
|
|
|
4.23 |
|
|
|
(7.3 |
) |
Purchased power |
|
|
3.08 |
|
|
|
3.76 |
|
|
|
(18.1 |
) |
|
91
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the first quarter 2011, fuel expense was $121.1 million compared to $130.8 million for the
corresponding period in 2010. The decrease was primarily due to a 7.3% decrease in the price of
fuel primarily resulting from lower gas prices and a 0.1% decrease in generation from Mississippi
Power facilities resulting from lower energy demand in the first quarter 2011 compared to the
corresponding period in 2010.
Non-Affiliates
In the first quarter 2011, purchased power expense from non-affiliates was $1.0 million compared to
$3.6 million for the corresponding period in 2010. The decrease was primarily the result of a
54.2% decrease in the average cost of purchased power per KWH and a 39.1% decrease in KWH volume
purchased. The decrease in prices was due to a lower marginal cost of fuel while the decrease in
volume was a result of higher cost opportunity purchases.
Energy purchases from non-affiliates will vary depending on the market cost of available energy
compared to the cost of Southern Company system-generated energy, demand for energy within the
Southern Company system service territory, and availability of Southern Company system generation.
Affiliates
In the first quarter 2011, purchased power expense from affiliates was $8.3 million compared to
$14.7 million for the corresponding period in 2010. The decrease was primarily due to a 37.3%
decrease in KWH volume purchased and a 9.5% decrease in the average cost of purchased power per
KWH.
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
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$3.1
|
|
4.5 |
|
In the first quarter 2011, other operations and maintenance expenses were $70.4 million compared to
$67.3 million for the corresponding period in 2010. The increase was primarily due to a $2.9
million increase in generation maintenance expenses for several major scheduled outages and a $1.0
million increase in expense for a combined cycle long-term service agreement due to a 29% increase
in operating hours as a result of lower gas prices. These expenses were partially offset by a $0.7
million decrease in administrative and general expenses primarily due to pension costs and other
employee benefits.
Depreciation and Amortization
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$1.2
|
|
6.4 |
|
In the first quarter 2011, depreciation and amortization was $19.9 million compared to $18.7
million for the corresponding period in 2010. The increase was primarily due to a $1.0 million
increase in depreciation resulting from an increase in plant in service.
92
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Taxes Other Than Income Taxes
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$(1.0)
|
|
(5.3) |
|
In the first quarter 2011, taxes other than income taxes were $17.5 million compared to $18.5
million for the corresponding period in 2010. The decrease was primarily due to a $1.3 million
decrease in ad valorem taxes and a $0.2 million decrease in franchise taxes, partially offset by a
$0.4 million increase in corporate franchise taxes and a $0.1 million increase in payroll taxes.
The retail portion of ad valorem taxes is recoverable under Mississippi Powers ad
valorem tax cost recovery clause and, therefore, does not affect net income.
Allowance for Equity Funds Used During Construction
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$3.1
|
|
N/M |
|
N/M Not meaningful
In the first quarter 2011, AFUDC equity increased $3.1 million as compared to the
corresponding period in 2010 primarily due to increases in construction of the Kemper IGCC which
began in June 2010 with the approval of the certificate order by the Mississippi PSC. See Note 3
to the financial statements of Mississippi Power under Integrated Coal Gasification Combined
Cycle in Item 8 of the Form 10-K and FUTURE EARNINGS POTENTIAL Integrated Coal Gasification
Combined Cycle herein for additional information regarding the Kemper IGCC.
Interest Expense, Net of Amounts Capitalized
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$(0.2)
|
|
(2.7) |
|
In the first quarter 2011, interest expense, net of amounts capitalized was $6.0 million compared
to $6.2 million for the corresponding period in 2010. The decrease was primarily due to a $1.0
million increase in AFUDC debt expense primarily associated with the Kemper IGCC, partially offset
by a $0.7 million increase in interest expense associated with the issuance of new long-term debt
in September and December 2010.
Other Income (Expense), Net
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
($1.9)
|
|
N/M |
|
N/M Not meaningful
In the first quarter 2011, other income (expense), net was ($0.4) million compared to $1.5
million for the corresponding period in 2010. The decrease was primarily due to a $1.5 million
decrease in amounts collected from customers for contributions in aid of construction and a $0.5
million decrease in customer projects.
93
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Taxes
|
|
|
First Quarter 2011 vs. First Quarter 2010
|
|
(change in millions)
|
|
(% change) |
$(2.5)
|
|
(26.5) |
|
In the first quarter 2011, income taxes were $7.2 million compared to $9.7 million for the
corresponding period in 2010. The decrease was primarily due to a $1.3 million decrease resulting
from the decrease in pre-tax earnings and a $1.2 million decrease due to an increase in AFUDC
equity which is non-taxable.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Mississippi Powers
future earnings potential. The level of Mississippi Powers future earnings depends on numerous
factors that affect the opportunities, challenges, and risks of Mississippi Powers business of
selling electricity. These factors include Mississippi Powers ability to maintain a constructive
regulatory environment that continues to allow for the timely 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 Mississippi Powers service area. Changes in economic conditions impact sales
for Mississippi Power and the pace of the economic recovery remains uncertain. The timing and
extent of the economic recovery will impact growth and may 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 Mississippi 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. Further, higher costs that are recovered through regulated rates could contribute to
reduced demand for electricity, which could negatively impact results of operations, cash flows,
and financial condition. See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL
Environmental Matters of Mississippi Power in Item 7 and Note 3 to the financial statements of
Mississippi Power under Environmental Matters in Item 8 of the Form 10-K for additional
information.
New Source Review Actions
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
New Source Review Actions of Mississippi Power in Item 7 and Note 3 to the financial statements of
Mississippi Power under Environmental Matters New Source Review Actions in Item 8 of the Form
10-K for additional information regarding civil actions brought by the EPA against certain Southern
Company subsidiaries. The EPAs action against Alabama Power alleged that Alabama Power violated
the NSR provisions of the Clean Air Act and related state laws with respect to certain of its
coal-fired generating facilities. On March 14, 2011, the U.S. District Court for the Northern
District of Alabama granted Alabama Powers motion for summary judgment on all remaining claims and
dismissed the case with prejudice. The EPA has the right to appeal within 60 days of the order.
The ultimate outcome of this matter cannot be determined at this time.
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Carbon Dioxide Litigation
Kivalina Case
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Carbon Dioxide Litigation Kivalina Case of Mississippi Power in Item 7 and Note 3 to the
financial statements of Mississippi 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 February 23, 2011, the U.S. Court of Appeals for the Ninth Circuit issued an order
staying the case until June 15, 2011. The ultimate outcome of this matter 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 Mississippi Power in Item 7 of the Form
10-K for additional information regarding regulation of air quality. On May 3, 2011, the EPA published a
proposed rule, called Utility MACT (Maximum Achievable Control Technology), which would impose
stringent emission limits on coal- and oil-fired electric utility steam generating units (EGUs).
The proposed rule establishes numeric emission limits for acid gases, mercury, and total
particulate matter. Meeting the proposed limits would likely require additional emission control
equipment such as scrubbers, SCRs, baghouses, and other control measures at many coal-fired EGUs.
Pursuant to a court-approved consent decree, the EPA must issue a final rule by November 16, 2011.
Compliance for existing sources would be required three years after the effective date of the final
rule. In the proposed rule, the EPA discussed the possibility of a one-year compliance extension
which could be granted by the EPA or the states on a case-by-case basis if necessary. If finalized
as proposed, compliance with this rule would require significant capital expenditures and
compliance costs at many of Mississippi Powers facilities which could impact unit retirement and
replacement decisions. In addition, results of operations, cash flows, and financial condition
could be impacted if the costs are not recovered through regulated rates. Further, there is
uncertainty regarding the ability of the electric utility industry to achieve compliance with the
requirements of the proposed rule within the proposed compliance period, and the limited compliance
period could negatively impact electric system reliability. The outcome of this rulemaking cannot
be determined at this time.
In October 2008, the EPA approved a revision to Alabamas State Implementation Plan (SIP)
requirements related to opacity which granted some flexibility to affected sources while requiring
compliance with Alabamas very strict opacity limits through use of continuous opacity monitoring
system data. In a decision published on April 6, 2011, the EPA responded to an environmental
groups request for reconsideration by attempting to rescind its previous approval of the Alabama
SIP revision. Mississippi Powers jointly-owned facility with Alabama Power in Greene County,
Alabama is impacted by this decision. On April 8, 2011, Alabama Power filed an appeal of that
decision with the U.S. Court of Appeals for the Eleventh Circuit and requested the court to stay
the effectiveness of the EPAs attempted rescission pending judicial review. Absent a stay, the
EPAs decision will become effective May 6, 2011 and the rule under which Alabama Power has been
operating since January 2009 may not be available
unless Alabama Powers appeal is resolved in its favor by the
court. If the EPAs decision is allowed to take effect, it will likely impact unit availability
and result in increased maintenance and compliance costs. The final outcome of this matter 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 Mississippi Power in Item 7 of the Form
10-K for additional information regarding regulation of water quality. On April 20, 2011, the EPA
proposed a rule that establishes
standards for reducing impacts to fish and other aquatic life caused by cooling water intake
structures at existing power plants and manufacturing facilities. The rule also addresses cooling
water intake structures for new units at existing
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facilities. The rule focuses on reducing adverse impacts to fish and other aquatic life due to
impingement (when fish and other aquatic life are trapped by water flow velocity against a
facilitys cooling water intake structure screens) and entrainment (when aquatic organisms are
drawn through a facilitys cooling water system after entering through the cooling water intake
structure). Affected cooling water intake structures would have to comply with national
impingement standards (for intake velocity or alternatively numeric impingement reduction
standards) and entrainment reduction requirements (determined on a case-by-case basis). The rules
proposed impingement standards could require technological improvements to cooling water intake
structures at many of Mississippi Powers existing generating facilities, including facilities with
closed-cycle re-circulating cooling systems (cooling towers). To address the rules entrainment
standards, facilities with once-through cooling systems may have to install cooling towers. New
units constructed at existing plants would have to meet the national impingement standards and
install closed-cycle cooling or the equivalent to meet the entrainment mandate. The EPA has agreed
in a settlement agreement to issue a final rule by July 27, 2012. If finalized as proposed, some
of Mississippi Powers facilities may be subject to significant additional capital expenditures and
compliance costs that could affect future unit retirement and replacement decisions. Also, results
of operations, cash flows, and financial condition could be significantly impacted if such costs
are not recovered through regulated rates. The ultimate outcome of this rulemaking cannot be
determined at this time.
Mississippi PSC Matters
Retail Regulatory Matters
Performance Evaluation Plan
See Note 3 to the financial statements of Mississippi Power under Retail Regulatory Matters
Performance Evaluation Plan in Item 8 of the Form 10-K for additional information regarding
Mississippi Powers base rates.
In November 2010, Mississippi Power filed its annual PEP filing for 2011, which indicated a rate
increase of 1.936%, or $16.1 million, annually. On January 10, 2011, the Mississippi Public
Utilities Staff (MPUS) contested the filing. The ultimate outcome of this matter cannot be determined at
this time.
On March 15, 2011, Mississippi Power submitted its annual PEP lookback filing for 2010, which
recommended no surcharge or refund.
On May 2, 2011, Mississippi Power received a letter from the MPUS
disputing certain items in the 2010 PEP lookback filing. The ultimate outcome of this matter cannot be determined at
this time.
System Restoration Rider
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL
PSC Matters System Restoration Rider of Mississippi Power in Item 7 of the Form 10-K for additional information.
On January 31, 2011, Mississippi Power submitted its 2011 SRR rate filing with the Mississippi PSC, which
proposed that Mississippi Power be allowed to accrue approximately $3.6 million to the property damage reserve in 2011.
On May 5, 2011, the filing was approved by the Mississippi PSC.
Environmental Compliance Overview Plan
See Note 3 to the financial statements of Mississippi Power under Retail Regulatory Matters
Environmental Compliance Overview Plan in Item 8 of the Form 10-K for information on Mississippi
Powers annual environmental filing with the Mississippi PSC.
On February 14, 2011, Mississippi Power submitted its ECO Plan notice which proposed an immaterial
decrease in annual revenues. In addition, Mississippi Power proposed to change the ECO Plan
collection period to more appropriately match ECO revenues with ECO expenditures. On April 7,
2011, due to changes in ECO Plan cost projections, Mississippi Power submitted a revised 2011 ECO
Plan which changed the requested annual revenues to a $0.9 million decrease. On May 5, 2011, hearings on the revised ECO Plan
were held and the filing was approved by the Mississippi PSC with the
new rates effective in May 2011.
In July 2010, Mississippi Power filed a request for a certificate of public convenience and
necessity to construct a flue gas desulfurization system (scrubber) on Plant Daniel Units 1 and 2.
These units are jointly owned by Mississippi Power and Gulf Power, with 50% ownership each. The
estimated total cost of the project is approximately $625 million with Mississippi Powers portion being $312.5 million. As of March 31, 2011, total
project expenditures were $19.5 million with Mississippi Powers portion being $9.7 million. The project is scheduled for completion in early 2015.
Mississippi Powers portion of the cost, if approved by the Mississippi PSC, is expected to be
recovered through the ECO
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Plan. Hearings on the certificate request were held by the Mississippi PSC on January 25, 2011,
but a final order has not yet been issued. On May 5, 2011, in
conjunction with the ECO Plan hearings, the Mississippi PSC approved
up to $19.5 million (with respect to Mississippi Powers
ownership portion) in spending for 2011 for the scrubber project. A
decision on a final order is not anticipated prior to issuance of the
final Utility MACT rule in November 2011. The ultimate outcome of this matter cannot be
determined at this time.
Certificated New Plant
On April 27, 2011, Mississippi Power submitted to the Mississippi PSC a proposed rate schedule
detailing Certificated New Plant-A (CNP-A), a new proposed cost recovery mechanism designed
specifically to recover financing costs during the construction phase of the Kemper IGCC. Annual
CNP-A rate filings would be made with the first filing occurring in November 2011. If approved by
the Mississippi PSC, recovery through CNP-A will remain in place thereafter until the end of the
calendar year that the Kemper IGCC is placed into commercial service, which is projected to be
2014. Certificated New Plant-B, which will be filed at a later date, would propose to govern rates
effective from the first calendar year after the Kemper IGCC is placed into commercial service
through the first seven full calendar years of its operation. The ultimate outcome of this matter
cannot be determined at this time.
Fuel Cost Recovery
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Fuel Cost
Recovery of Mississippi Power in Item 7 of the Form 10-K for information regarding Mississippi
Powers fuel cost recovery. Mississippi Power establishes, annually, a retail fuel cost recovery
factor that is approved by the Mississippi PSC. Mississippi Power is required to file for an
adjustment to the retail fuel cost recovery factor annually; such filing occurred in November 2010.
The Mississippi PSC approved the retail fuel cost recovery factor in December 2010, with the new
rates effective in January 2011. The retail fuel cost recovery factor will result in an annual
decrease in an amount equal to 5.0% of total 2010 retail revenue. At March 31, 2011, the amount of
over recovered retail fuel costs included in the balance sheets was $57.7 million compared to $55.2
million at December 31, 2010. Mississippi Power also has a wholesale Municipal and Rural
Associations (MRA) and a Market Based (MB) fuel cost recovery factor. Effective January 1, 2011,
the wholesale MRA fuel rate decreased, resulting in an annual decrease in an amount equal to 3.5%
of total 2010 MRA revenue. Effective February 1, 2011, the wholesale MB fuel rate decreased,
resulting in an annual decrease in an amount equal to 7.0% of total 2010 MB revenue. At March 31, 2011, the amount
of over recovered wholesale MRA and MB fuel costs included in the balance sheets was $21.6 million
and $5.2 million compared to $17.5 million and $4.4 million, respectively, at December 31, 2010.
In addition, at March 31, 2011, the amount of over recovered MRA emissions allowance cost included
in the balance sheet was $0.4 million. See Note 3 to the financial statements of Mississippi Power
under FERC Matters in Item 8 of the Form 10-K for additional information. Mississippi Powers
operating revenues are adjusted for differences in actual recoverable fuel cost and amounts billed
in accordance with the currently approved cost recovery rate. Accordingly, this decrease to the
billing factors will have no significant effect on Mississippi Powers revenues or net income, but
will decrease annual cash flow.
In October 2010, the Mississippi PSC engaged an independent professional audit firm to conduct an
audit of Mississippi Powers fuel-related expenditures included in the retail fuel adjustment
clause and energy cost management clause (ECM) for 2010. The audit was completed in the first
quarter 2011 with no audit findings.
Integrated Coal Gasification Combined Cycle
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Integrated Coal
Gasification Combined Cycle and PSC Matters Mississippi Baseload Construction Legislation
of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under
Integrated Coal Gasification Combined Cycle in Item 8 of the Form 10-K for information
regarding the Kemper IGCC.
In June 2010, the Mississippi Chapter of the Sierra Club (Sierra Club) filed an appeal of the
Mississippi PSCs June 3, 2010 decision to grant the Certificate of Public Convenience and
Necessity for the Kemper IGCC with the Chancery Court of Harrison County, Mississippi (Chancery
Court). Subsequently, in July 2010, the Sierra Club also filed an
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appeal directly with the Mississippi Supreme Court. In October 2010, the Mississippi Supreme
Court dismissed the Sierra Clubs direct appeal. On February 28, 2011, the Chancery Court
issued a judgment affirming the Mississippi PSCs order authorizing the construction of the
Kemper IGCC. On March 1, 2011, the Sierra Club appealed the Chancery Courts decision to the
Mississippi Supreme Court.
In May 2009, Mississippi Power received notification from the IRS formally certifying the IRS
allocated Internal Revenue Code Section 48A tax credits (Phase I) of $133 million to Mississippi
Power. On April 19, 2011, Mississippi Power received notification from the IRS formally certifying
that the IRS allocated $279 million of Internal Revenue Code Section 48A tax credits (Phase II) to
Mississippi Power. The utilization of Phase I and Phase II credits is dependent upon meeting the
IRS certification requirements, including an in-service date no later than May 11, 2014 for the
Phase I credits and April 19, 2016 for the Phase II credits. In order to remain eligible for the
Phase II tax credits, Mississippi Power plans to capture and sequester (via enhanced oil recovery)
at least 65% of the carbon dioxide (CO2) produced by the plant during operations in
accordance with the recapture rules for Section 48A investment tax credits. Through March 31,
2011, Mississippi Power received and accrued tax benefits totaling $31.9 million for these tax
credits, which will be amortized as a reduction to depreciation and amortization over the life of
the Kemper IGCC.
In February 2008, Mississippi Power requested that the DOE transfer the remaining funds
previously granted under the Clean Coal Power Initiative Round 2 (CCPI2) from a cancelled IGCC
project of one of Southern Companys subsidiaries that would have been located in Orlando,
Florida. In December 2008, an agreement was reached to assign the remaining funds ($270
million) to the Kemper IGCC. Mississippi Power will receive grant funds of $245 million during
the construction of the plant and $25 million during the initial operation of the plant.
Through March 31, 2011, Mississippi Power has received $40 million and requested an additional
$20.1 million associated with this grant.
On March 10, 2011, the Sierra Club filed a lawsuit in the U.S. District Court for the District
of Columbia against the DOE regarding the National Environmental Policy Act review process
asking for a stay on the issuance of CCPI2 funds and a stay to any related construction
activities. On May 5, 2011, Mississippi Power filed a motion to intervene in this lawsuit.
In March 2010, the Mississippi Department of Environmental Quality (MDEQ) issued the Prevention
of Significant Deterioration (PSD) air permit modification for the plant, which modifies the
original PSD air permit issued in October 2008. The Sierra Club requested a formal evidentiary
hearing regarding the issuance of the modified permit. On April 4, 2011, the MDEQ Permit Board
held an evidentiary hearing wherein the permit board unanimously affirmed the PSD air permit.
On March 4, 2011, Mississippi Power and Denbury Onshore (Denbury), a subsidiary of Denbury
Resources Inc., entered into a contract in which Denbury will purchase 70% of the CO2
captured from the Kemper IGCC.
On April 27, 2011, Mississippi Power submitted to the Mississippi PSC a proposed rate schedule
detailing CNP-A, a new proposed cost recovery mechanism designed specifically to recover
financing costs during the construction phase of the Kemper IGCC. See Mississippi PSC Matters
Retail Regulatory Matters Certificated New Plant herein for additional information.
Events in Japan resulting from the earthquake and tsunami created uncertainties that may affect
transportation and availability of equipment or supplies from Japanese manufacturers in
connection with the construction of the Kemper IGCC.
As of March 31, 2011, Mississippi Power had spent a total of $352.8 million on the Kemper IGCC,
including regulatory filing costs. Of this total, $277 million was included in CWIP (net of
$60.1 million of CCPI2 grant funds), $13.2 million was recorded in other regulatory assets, $1.5
million was recorded in other deferred charges and assets, and $1.0 million was previously
expensed.
The ultimate outcome of these matters cannot be determined at this time.
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Income Tax Matters
Bonus Depreciation
In September 2010, the Small Business Jobs and Credit Act of 2010 (SBJCA) was signed into law. The
SBJCA includes an extension of the 50% bonus depreciation for certain property acquired and placed
in service in 2010 (and for certain long-term construction projects to be placed in service in
2011). Additionally, in December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and
Job Creation Act (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act
include 100% bonus depreciation for property placed in service after September 8, 2010 and through
2011 (and for certain long-term construction projects to be placed in service in 2012) and 50%
bonus depreciation for property placed in service in 2012 (and for certain long-term construction
projects to be placed in service in 2013), which will have a positive impact on the future cash
flows of Mississippi Power. On March 29, 2011, the IRS issued additional guidance and safe harbors
relating to the 50% and 100% bonus depreciation rules. Based on this guidance, Mississippi Power
estimates the potential increased cash flow for 2011 to be between approximately $15 million and
$20 million. The ultimate outcome of this matter cannot be determined at this time.
Other Matters
Mississippi Power is involved in various other matters being litigated and regulatory matters that
could affect future earnings. In addition, Mississippi Power is subject to certain claims and
legal actions arising in the ordinary course of business. Mississippi 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 U.S. In particular, personal injury and other
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 and other
emissions, have become more frequent. The ultimate outcome of such pending or potential litigation
against Mississippi Power cannot be predicted at this time; however, for current proceedings not
specifically reported herein or in Note 3 to the financial statements of Mississippi 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 Mississippi 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
Mississippi Power prepares its financial statements in accordance with GAAP. Significant
accounting policies are described in Note 1 to the financial statements of Mississippi 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 Mississippi 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 Mississippi
Power in Item 7 of the Form 10-K for a complete discussion of Mississippi Powers critical
accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations,
Unbilled Revenues, Plant Daniel Operating Lease, and Pension and Other Postretirement Benefits.
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FINANCIAL CONDITION AND LIQUIDITY
Overview
Mississippi Powers financial condition remained stable at March 31, 2011. Mississippi 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. See Sources of Capital
and Financing Activities herein for additional information.
Net cash provided from operating activities totaled $66.4 million for the first three months of
2011 compared to $17.0 million for the corresponding period in 2010. The $49.4 million increase in
cash provided from operating activities is primarily due to an $18.1 million increase in deferred
income taxes primarily related to bonus depreciation, an increase in accounts payable of $16.6
million primarily due to timing of cash payments, an increase in investment tax credits of $9.7
million related to the Kemper IGCC, and an increase in cash of $18.8 million related to the Kemper
IGCC generation construction screening costs incurred during the first quarter 2010. The
Mississippi PSC issued an order in June 2010 approving the Kemper IGCC. These increases in cash
are partially offset by a decrease of $18.3 million in fossil fuel stock resulting from an increase
in Mississippi Power generation and a decrease in cash payments related to fuel inventory in the
first quarter 2010.
Net cash used for investing activities totaled $52.4 million for the first three months of 2011
compared to $24.9 million for the corresponding period in 2010. The $27.4 million increase in net
cash used for investing activities is primarily due to an increase in property additions of $129.9
million primarily related to the Kemper IGCC, partially offset by a $50.0 million decrease in
restricted cash, a construction payables increase of $30.5 million, and the receipt of $16.9
million capital grant proceeds related to CCPI2.
Net cash used for financing activities totaled $99.4 million for the first three months of 2011,
compared to net cash provided from financing activities of $17.1 million for the corresponding
period in 2010. The $82.3 million increase in net cash used for financing activities was primarily
due to the redemption of $50.0 million in revenue bonds and an $80.0 million maturity of long-term
debt, partially offset by a $49.9 million increase in capital contributions from Southern Company.
Significant balance sheet changes for the first three months of 2011 include a decrease in cash and
cash equivalents of $85.4 million primarily due to an $80.0 million long-term debt maturity and
increased capital spending. Restricted cash and cash equivalents decreased $50.0 million due to
the redemption of revenue bonds in February 2011. Total property, plant, and equipment increased
$123.5 million primarily due to the increase in construction work in progress (CWIP) related to the
Kemper IGCC. Other deferred charges and assets decreased $12.9 million primarily due to the
reclassification of the Plant Daniel scrubber project and materials and supplies to
CWIP. Securities due within one year decreased $130.0 million primarily due to a long-term bank
loan of $80.0 million that matured in March 2011 and the redemption of revenue bonds of $50.0
million in February 2011. Other accounts payable increased $57.6 million primarily due to
increases in construction projects. Other accrued taxes decreased $35.6 million primarily due to
property tax payments of $44.1 million in the first quarter 2011. Paid-in capital increased $51.6
million primarily due to the $50.0 million capital contribution from Southern Company.
Capital Requirements and Contractual Obligations
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Capital
Requirements and Contractual Obligations of Mississippi Power in Item 7 of the Form 10-K for a
description of Mississippi Powers capital requirements for its construction program, lease
obligations, purchase commitments, derivative obligations, preferred stock dividends, and trust
funding requirements. Approximately $126.5 million will be required through March 31, 2012 for
maturities of long-term debt.
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The construction program of Mississippi Power is currently estimated to include a base level
investment of $818 million, $1.0 billion, and $878 million for 2011, 2012, and 2013, respectively.
Included in these estimated amounts are expenditures related to the Kemper IGCC of $685 million,
$813 million, and $616 million in 2011, 2012, and 2013, respectively. Also included in these
estimated amounts are environmental expenditures to comply with existing statutes and regulations
of $20 million, $93 million, and $127 million for 2011, 2012, and 2013, respectively. In addition,
Mississippi Power currently estimates that potential incremental investments to comply with
anticipated new environmental regulations are $0 for 2011, up to $18 million for 2012, and up to
$55 million for 2013. If the EPAs proposed Utility MACT rule is finalized as proposed,
Mississippi Power estimates that the potential incremental investments in 2012 and 2013 for new
environmental regulations will be closer to the upper end of the estimates set forth above. 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 generating plants, including unit retirement and replacement decisions, to
meet new regulatory requirements; changes in FERC rules and regulations; Mississippi PSC approvals;
changes in legislation; the cost and efficiency of construction labor, equipment, and materials;
project scope and design changes; 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
Except as described below with respect to potential DOE loan guarantees, Mississippi Power plans to
obtain the funds required for construction and other purposes from sources similar to those
utilized in the past. Mississippi Power has primarily utilized funds from operating cash flows,
short-term borrowings, external security offerings, and capital 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. In March 2011,
Mississippi Power received a $50 million capital contribution from Southern Company. See
MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Sources of Capital
of Mississippi Power in Item 7 of the Form 10-K for additional information.
Mississippi Power has applied to the DOE for federal loan guarantees to finance a portion of the
eligible construction costs of the Kemper IGCC. Mississippi Power is in advanced due diligence
with the DOE. There can be no assurance that the DOE will issue federal loan guarantees to
Mississippi Power. In addition, Mississippi Power has been awarded DOE CCPI2 grant funds of $245
million to be used for the construction of the Kemper IGCC and $25 million to be used for the
initial operation of the Kemper IGCC. As of March 31, 2011, Mississippi Power had received $40.0
million and requested an additional $20.1 million associated with this grant.
Mississippi Powers current liabilities sometimes 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, Mississippi Power had at March 31, 2011 approximately
$75.4 million of cash and cash equivalents and $186 million of unused committed credit arrangements
with banks. Of the unused credit arrangements, $161 million expire in 2011 and $25 million expire
in 2012. Of these credit arrangements, $41 million contain provisions allowing for two-year term
loans executable at expiration and $90 million contain provisions allowing for one-year term loans
executable at expiration. Mississippi Power expects to renew its credit arrangements, as needed,
prior to expiration. The credit arrangements provide liquidity support to Mississippi Powers
commercial paper program and $40 million are dedicated to funding purchase obligations related to
variable rate pollution control revenue bonds. See Note 6 to the financial statements of
Mississippi 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.
Mississippi 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 Mississippi
Power and other Southern Company subsidiaries. During the three months ended March 31, 2011,
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Mississippi Power had no commercial paper borrowings outstanding. Management believes that the
need for working capital can be adequately met by utilizing commercial paper, 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 Mississippi Power in Item 7 and Note 7 to the financial statements of
Mississippi Power 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. In April 2010,
Mississippi Power was required to notify the lessor, Juniper Capital L.P., if it intended to
terminate the lease at the end of the initial term expiring in October 2011. Mississippi Power
chose not to give notice to terminate the lease. Mississippi Power has the option to purchase the
units or renew the lease. Mississippi Power is required to provide notice of its intent to either
renew the lease or purchase the facility by July 2011. The ultimate outcome of this matter cannot
be determined at this time.
Credit Rating Risk
Mississippi 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 below BBB- and/or Baa3. These contracts are for physical electricity sales, fuel
purchases, fuel transportation and storage, emissions allowances, and energy price risk management.
At March 31, 2011, the maximum potential collateral requirements under these contracts at a rating
below BBB- and/or Baa3 were approximately $335 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 Mississippi Powers ability to access capital markets, particularly the short-term
debt market.
Market Price Risk
Mississippi Powers market risk exposure relative to interest rate changes for the first quarter
2011 has not changed materially compared with the December 31, 2010 reporting period. Since a
significant portion of outstanding indebtedness is at fixed rates, Mississippi 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 and other various cost recovery mechanisms, Mississippi Power
continues to have limited exposure to market volatility in interest rates, foreign currency,
commodity fuel prices, and prices of electricity. To mitigate residual risks relative to movements
in electricity prices, Mississippi Power enters into physical fixed-price contracts for the
purchase and sale of electricity through the wholesale electricity market. Mississippi Power
continues to manage retail fuel-hedging programs implemented per the guidelines of the Mississippi
PSC and wholesale fuel-hedging programs under agreements with wholesale customers. As such,
Mississippi Power had no material change in market risk exposure for the first quarter 2011 when
compared with the December 31, 2010 reporting period.
102
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The changes in fair value of energy-related derivative contracts, the majority of which are
composed of regulatory hedges, for the three months ended March 31, 2011 were as follows:
|
|
|
|
|
|
|
First Quarter |
|
|
2011 |
|
|
Changes |
|
|
Fair Value |
|
|
(in millions) |
Contracts outstanding at the beginning of the period, assets (liabilities), net |
|
$ |
(44 |
) |
Contracts realized or settled |
|
|
7 |
|
Current period changes(a) |
|
|
|
|
|
Contracts outstanding at the end of the period, assets (liabilities), net |
|
$ |
(37 |
) |
|
|
|
|
(a) |
|
Current period changes also include the changes in fair value of new contracts
entered into during the period, if any.
|
The change in the fair value positions of the energy-related derivative contracts for the
three months ended March 31, 2011 was an increase of $7 million, substantially all of which is due
to natural gas positions. The change is attributable to both the volume of mmBtu and the price of
natural gas. At March 31, 2011, Mississippi Power had a net hedge volume of 24.3 million mmBtu
with a weighted average contract cost approximately $1.79 per mmBtu above market prices, compared
to 24.0 million mmBtu at December 31, 2010 with a weighted average contract cost approximately
$1.92 per mmBtu above market prices. The majority of the natural gas hedges are recovered through
the ECM.
Regulatory hedges relate to Mississippi 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 ECM.
Unrealized pre-tax gains and losses recognized in income for the three months ended March 31, 2011
and 2010 for energy-related derivative contracts that are not hedges were not material.
Mississippi Power uses over-the-counter contracts that are not exchange traded but are fair valued
using prices which are market observable, and thus fall into Level 2. See Note (C) to the
Condensed Financial Statements herein for further discussion on fair value measurements. The
maturities of the energy-related derivative contracts and the level of the fair value hierarchy in
which they fall at March 31, 2011 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2011 |
|
|
|
Fair Value Measurements |
|
|
|
Total |
|
Maturity |
|
|
|
Fair Value |
|
Year 1 |
|
Years 2&3 |
|
Years 4&5 |
|
|
(in millions) |
|
Level 1 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Level 2 |
|
|
(37 |
) |
|
|
(24 |
) |
|
|
(13 |
) |
|
|
|
|
Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of
contracts
outstanding at end
of period |
|
$ |
(37 |
) |
|
$ |
(24 |
) |
|
$ |
(13 |
) |
|
$ |
|
|
|
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) enacted in July 2010
could impact the use of over-the-counter derivatives by Mississippi Power. Regulations to
implement the Dodd-Frank Act could impose additional requirements on the use of over-the-counter
derivatives, such as margin and reporting requirements, which could affect both the use and cost of
over-the-counter derivatives. The impact, if any, cannot be determined until regulations are
finalized.
103
MISSISSIPPI POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND
LIQUIDITY Market Price Risk of Mississippi Power in Item 7 and Note 1 under Financial
Instruments and Note 10 to the financial statements of Mississippi Power in Item 8 of the Form
10-K and Note (H) to the Condensed Financial Statements herein.
Financing Activities
On February 8, 2011, Mississippi Power redeemed a $50 million series of revenue bonds issued in
December 2010.
On March 4, 2011, an $80 million long term bank note with a variable interest rate based on
one-month LIBOR matured.
In addition, subsequent to March 31, 2011, Mississippi Power entered into a one-year $75 million
aggregate principal amount long-term floating rate bank loan with a variable interest rate based on
one-month LIBOR. The proceeds of this loan were used to repay maturing long-term and short-term
indebtedness and for other general corporate purposes, including Mississippi Powers continuous
construction program.
In addition to any financings that may be necessary to meet capital requirements, contractual
obligations, and storm restoration costs, Mississippi 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.
104
SOUTHERN POWER COMPANY
AND SUBSIDIARY COMPANIES
105
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Operating Revenues: |
|
|
|
|
|
|
|
|
Wholesale revenues, non-affiliates |
|
$ |
197,166 |
|
|
$ |
153,337 |
|
Wholesale revenues, affiliates |
|
|
83,274 |
|
|
|
101,757 |
|
Other revenues |
|
|
1,347 |
|
|
|
1,394 |
|
|
|
|
|
|
|
|
Total operating revenues |
|
|
281,787 |
|
|
|
256,488 |
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
Fuel |
|
|
102,715 |
|
|
|
97,514 |
|
Purchased power, non-affiliates |
|
|
8,942 |
|
|
|
18,542 |
|
Purchased power, affiliates |
|
|
15,099 |
|
|
|
23,411 |
|
Other operations and maintenance |
|
|
42,754 |
|
|
|
39,010 |
|
Depreciation and amortization |
|
|
30,167 |
|
|
|
29,109 |
|
Taxes other than income taxes |
|
|
4,763 |
|
|
|
5,106 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
204,440 |
|
|
|
212,692 |
|
|
|
|
|
|
|
|
Operating Income |
|
|
77,347 |
|
|
|
43,796 |
|
Other Income and (Expense): |
|
|
|
|
|
|
|
|
Interest expense, net of amounts capitalized |
|
|
(18,829 |
) |
|
|
(20,054 |
) |
Other income (expense), net |
|
|
59 |
|
|
|
418 |
|
|
|
|
|
|
|
|
Total other income and (expense) |
|
|
(18,770 |
) |
|
|
(19,636 |
) |
|
|
|
|
|
|
|
Earnings Before Income Taxes |
|
|
58,577 |
|
|
|
24,160 |
|
Income taxes |
|
|
20,834 |
|
|
|
9,436 |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
37,743 |
|
|
$ |
14,724 |
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Net Income |
|
$ |
37,743 |
|
|
$ |
14,724 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Qualifying hedges: |
|
|
|
|
|
|
|
|
Changes in fair value, net of tax of $423 and
$1,714, respectively |
|
|
643 |
|
|
|
2,677 |
|
Reclassification adjustment for amounts included in
net
income, net of tax of $1,071 and $1,003,
respectively |
|
|
1,630 |
|
|
|
1,567 |
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
|
2,273 |
|
|
|
4,244 |
|
|
|
|
|
|
|
|
Comprehensive Income |
|
$ |
40,016 |
|
|
$ |
18,968 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
106
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
37,743 |
|
|
$ |
14,724 |
|
Adjustments to reconcile net income
to net cash provided from operating activities |
|
|
|
|
|
|
|
|
Depreciation and amortization, total |
|
|
33,580 |
|
|
|
32,355 |
|
Deferred income taxes |
|
|
8,601 |
|
|
|
13,388 |
|
Convertible investment tax credits received |
|
|
38,068 |
|
|
|
|
|
Deferred revenues |
|
|
(21,476 |
) |
|
|
(20,993 |
) |
Mark-to-market adjustments |
|
|
(63 |
) |
|
|
762 |
|
Other, net |
|
|
1,752 |
|
|
|
930 |
|
Changes in certain current assets and liabilities |
|
|
|
|
|
|
|
|
-Receivables |
|
|
20,759 |
|
|
|
16,566 |
|
-Fossil fuel stock |
|
|
625 |
|
|
|
3,815 |
|
-Materials and supplies |
|
|
253 |
|
|
|
4,721 |
|
-Prepaid income taxes |
|
|
15,744 |
|
|
|
(9,248 |
) |
-Other current assets |
|
|
(137 |
) |
|
|
1,020 |
|
-Accounts payable |
|
|
(21,645 |
) |
|
|
(15,111 |
) |
-Accrued taxes |
|
|
4,888 |
|
|
|
3,433 |
|
-Accrued interest |
|
|
(12,281 |
) |
|
|
(12,028 |
) |
-Other current liabilities |
|
|
(519 |
) |
|
|
297 |
|
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
105,892 |
|
|
|
34,631 |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Property additions |
|
|
(113,518 |
) |
|
|
(68,179 |
) |
Change in construction payables |
|
|
43,259 |
|
|
|
15,489 |
|
Payments pursuant to long-term service agreements |
|
|
(11,320 |
) |
|
|
(8,145 |
) |
Other investing activities |
|
|
(3,165 |
) |
|
|
(245 |
) |
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(84,744 |
) |
|
|
(61,080 |
) |
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Increase (decrease) in notes payable, net |
|
|
(20,360 |
) |
|
|
48,006 |
|
Proceeds Capital contributions |
|
|
17,179 |
|
|
|
1,632 |
|
Repayments Other long-term debt |
|
|
(3,066 |
) |
|
|
|
|
Payment of common stock dividends |
|
|
(22,800 |
) |
|
|
(26,775 |
) |
Other financing activities |
|
|
38 |
|
|
|
95 |
|
|
|
|
|
|
|
|
Net cash provided from (used for) financing activities |
|
|
(29,009 |
) |
|
|
22,958 |
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
(7,861 |
) |
|
|
(3,491 |
) |
Cash and Cash Equivalents at Beginning of Period |
|
|
14,204 |
|
|
|
7,152 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Period |
|
$ |
6,343 |
|
|
$ |
3,661 |
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Cash paid during the period for |
|
|
|
|
|
|
|
|
Interest (net of $4,240 and $1,926 capitalized for 2011
and 2010, respectively) |
|
$ |
26,993 |
|
|
$ |
28,900 |
|
Income taxes (net of refunds) |
|
|
(44,721 |
) |
|
|
1,532 |
|
Noncash transactions accrued property additions at end of period |
|
|
78,567 |
|
|
|
30,963 |
|
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
107
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
At December 31, |
|
Assets |
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
6,343 |
|
|
$ |
14,204 |
|
Receivables |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
65,359 |
|
|
|
77,033 |
|
Other accounts receivable |
|
|
2,388 |
|
|
|
1,979 |
|
Affiliated companies |
|
|
10,473 |
|
|
|
19,673 |
|
Fossil fuel stock, at average cost |
|
|
13,209 |
|
|
|
13,663 |
|
Materials and supplies, at average cost |
|
|
34,356 |
|
|
|
33,934 |
|
Prepaid service agreements current |
|
|
33,272 |
|
|
|
41,627 |
|
Prepaid income taxes |
|
|
10,343 |
|
|
|
53,860 |
|
Other prepaid expenses |
|
|
4,297 |
|
|
|
4,161 |
|
Assets from risk management activities |
|
|
2,811 |
|
|
|
2,160 |
|
Other current assets |
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
182,851 |
|
|
|
262,313 |
|
|
|
|
|
|
|
|
Property, Plant, and Equipment: |
|
|
|
|
|
|
|
|
In service |
|
|
3,149,499 |
|
|
|
3,143,919 |
|
Less accumulated provision for depreciation |
|
|
562,973 |
|
|
|
536,107 |
|
|
|
|
|
|
|
|
Plant in service, net of depreciation |
|
|
2,586,526 |
|
|
|
2,607,812 |
|
Construction work in progress |
|
|
538,067 |
|
|
|
427,788 |
|
|
|
|
|
|
|
|
Total property, plant, and equipment |
|
|
3,124,593 |
|
|
|
3,035,600 |
|
|
|
|
|
|
|
|
Other Property and Investments: |
|
|
|
|
|
|
|
|
Goodwill |
|
|
1,839 |
|
|
|
1,839 |
|
Other intangible assets, net of amortization of
$889 and $693
at March 31, 2011 and December 31, 2010,
respectively |
|
|
48,231 |
|
|
|
48,426 |
|
|
|
|
|
|
|
|
Total other property and investments |
|
|
50,070 |
|
|
|
50,265 |
|
|
|
|
|
|
|
|
Deferred Charges and Other Assets: |
|
|
|
|
|
|
|
|
Prepaid long-term service agreements |
|
|
80,134 |
|
|
|
69,740 |
|
Other deferred charges and assets affiliated |
|
|
3,213 |
|
|
|
3,275 |
|
Other deferred charges and assets non-affiliated |
|
|
20,214 |
|
|
|
16,541 |
|
|
|
|
|
|
|
|
Total deferred charges and other assets |
|
|
103,561 |
|
|
|
89,556 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
3,461,075 |
|
|
$ |
3,437,734 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
108
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
At December 31, |
|
Liabilities and Stockholders Equity |
|
2011 |
|
|
2010 |
|
|
|
(in thousands) |
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Securities due within one year |
|
$ |
253 |
|
|
$ |
|
|
Notes payable affiliated |
|
|
|
|
|
|
65,883 |
|
Notes payable non-affiliated |
|
|
249,427 |
|
|
|
203,904 |
|
Accounts payable |
|
|
|
|
|
|
|
|
Affiliated |
|
|
46,536 |
|
|
|
69,783 |
|
Other |
|
|
89,075 |
|
|
|
45,985 |
|
Accrued taxes |
|
|
|
|
|
|
|
|
Accrued income taxes |
|
|
2,390 |
|
|
|
812 |
|
Other accrued taxes |
|
|
6,005 |
|
|
|
2,775 |
|
Accrued interest |
|
|
17,696 |
|
|
|
29,977 |
|
Liabilities from risk management activities |
|
|
5,553 |
|
|
|
5,773 |
|
Other current liabilities |
|
|
3,512 |
|
|
|
3,923 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
420,447 |
|
|
|
428,815 |
|
|
|
|
|
|
|
|
Long-term Debt |
|
|
1,299,364 |
|
|
|
1,302,619 |
|
|
|
|
|
|
|
|
Deferred Credits and Other Liabilities: |
|
|
|
|
|
|
|
|
Accumulated deferred income taxes |
|
|
317,738 |
|
|
|
307,989 |
|
Deferred convertible investment tax credits |
|
|
90,965 |
|
|
|
80,401 |
|
Deferred capacity revenues affiliated |
|
|
9,763 |
|
|
|
30,533 |
|
Other deferred credits and liabilities affiliated |
|
|
4,376 |
|
|
|
4,635 |
|
Other deferred credits and liabilities non-affiliated |
|
|
17,450 |
|
|
|
16,203 |
|
|
|
|
|
|
|
|
Total deferred credits and other liabilities |
|
|
440,292 |
|
|
|
439,761 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
2,160,103 |
|
|
|
2,171,195 |
|
|
|
|
|
|
|
|
Redeemable Noncontrolling Interest |
|
|
3,357 |
|
|
|
3,319 |
|
|
|
|
|
|
|
|
Common Stockholders Equity: |
|
|
|
|
|
|
|
|
Common stock, par value $.01 per share |
|
|
|
|
|
|
|
|
Authorized - 1,000,000 shares |
|
|
|
|
|
|
|
|
Outstanding - 1,000 shares |
|
|
|
|
|
|
|
|
Paid-in capital |
|
|
918,148 |
|
|
|
900,969 |
|
Retained earnings |
|
|
391,213 |
|
|
|
376,270 |
|
Accumulated other comprehensive loss |
|
|
(11,746 |
) |
|
|
(14,019 |
) |
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
1,297,615 |
|
|
|
1,263,220 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
3,461,075 |
|
|
$ |
3,437,734 |
|
|
|
|
|
|
|
|
The accompanying notes as they relate to Southern Power are an integral part of these condensed financial statements.
109
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FIRST QUARTER 2011 vs. FIRST QUARTER 2010
OVERVIEW
Southern Power and its wholly-owned subsidiaries construct, acquire, own, and manage generation
assets and sell electricity at market-based prices in the wholesale market. Southern Power
continues to execute its strategy through a combination of acquiring and constructing new power
plants and by entering into PPAs with investor owned utilities, independent power producers,
municipalities, and electric cooperatives.
Effective March 15, 2011, Southern Company transferred its ownership in its wholly-owned
subsidiary, Southern Renewable Energy, Inc. (SRE) to Southern Power. SRE was formed to construct,
acquire, own, and manage renewable generation assets and sell electricity at market-based prices in
the wholesale market. As a transfer of net assets among entities under common control, the assets
and liabilities of SRE were transferred at historical cost. The consolidated financial statements
of Southern Power have been revised to include the financial condition and the results of
operations of SRE since its inception in January 2010.
To evaluate operating results and to ensure Southern Powers ability to meet its contractual
commitments to customers, Southern Power focuses on several key performance indicators. These
indicators include peak season equivalent forced outage rate (EFOR) and net income. EFOR defines
the hours during peak demand times when Southern Powers generating units are not available due to
forced outages (the lower the better). Net income is the primary
measure of Southern Powers
financial performance. For additional information on these indicators, see MANAGEMENTS DISCUSSION
AND ANALYSIS OVERVIEW Key Performance Indicators of Southern Power in Item 7 of the Form
10-K.
RESULTS OF OPERATIONS
Net Income
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$23.0
|
|
156.3 |
|
Southern Powers net income for the first quarter 2011 was $37.7 million compared to $14.7 million
for the corresponding period in 2010. The increase was primarily due to higher energy and capacity
revenues under new PPAs that began in June, July, and December 2010 and January 2011. The increase
was partially offset by lower energy and capacity revenues under existing PPAs and the expiration
of PPAs in May and December 2010, lower revenues from energy sales that were not covered by PPAs,
higher other operations and maintenance expenses, and higher income taxes.
Wholesale Revenues Non-Affiliates
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$43.9
|
|
28.6 |
|
Wholesale energy sales to non-affiliates will vary depending on the energy demand of those
customers and their generation capacity, as well as the market cost of available energy compared to
the cost of Southern Powers energy. Increases and decreases in revenues that are driven by fuel
prices are accompanied by an increase or decrease in fuel costs and do not have a significant
impact on net income.
110
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale revenues from non-affiliates for the first quarter 2011 were $197.2 million compared to
$153.3 million for the corresponding period in 2010. The increase was mainly due to $88.1 million
of energy and capacity revenues under new non-affiliate PPAs that began in June, July, and December
2010 and January 2011. These increases were partially offset by $31.0 million of lower revenues
from energy sales that were not covered by PPAs as a result of significantly more favorable weather
in the first quarter 2010 compared to 2011, and $13.3 million of lower energy and capacity revenues
under existing non-affiliate PPAs and the expiration of a non-affiliate PPA in December 2010.
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Power Sales Agreements
of Southern Power in Item 7 of the Form 10-K for additional information.
Wholesale Revenues Affiliates
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$(18.5)
|
|
(18.2) |
|
Wholesale energy sales to affiliated companies within the Southern Company system will vary
depending on demand and the availability and cost of generating resources at each company. Sales
to affiliate companies that are not covered by PPAs are made in accordance with the IIC, as
approved by the FERC. Increases and decreases in revenues that are driven by fuel prices are
accompanied by an increase or decrease in fuel costs and do not have a significant impact on net
income.
Wholesale revenues from affiliates for the first quarter 2011 were $83.3 million compared to $101.8
million for the corresponding period in 2010. The decrease was primarily the result of $27.4
million of lower energy and capacity revenues associated with the expiration of affiliate PPAs in
May 2010 and $9.2 million related to lower revenues from power sales to affiliates under the IIC.
These decreases were partially offset by $18.5 million of increased energy and capacity revenues
associated with new affiliate PPAs that began in June 2010.
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Power Sales Agreements
of Southern Power in Item 7 of the Form 10-K for additional information.
Fuel and Purchased Power Expenses
|
|
|
|
|
|
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
|
|
(change in millions) |
|
(% change) |
Fuel |
|
$ |
5.2 |
|
|
|
5.3 |
|
Purchased power non-affiliates |
|
|
(9.6 |
) |
|
|
(51.8 |
) |
Purchased power affiliates |
|
|
(8.3 |
) |
|
|
(35.5 |
) |
|
|
|
|
|
Total fuel and purchased power expenses |
|
$ |
(12.7 |
) |
|
|
|
|
|
|
|
|
|
Southern Power PPAs generally provide that the purchasers are responsible for substantially all of
the cost of fuel. Consequently, any increase or decrease in fuel costs is generally accompanied by
an increase or decrease in related fuel revenues and does not have a significant impact on net
income. Southern Power is responsible for the cost of fuel for generating units that are not
covered under PPAs. Power from these generating units is sold into the market or sold to
affiliates under the IIC.
In the first quarter 2011, total fuel and purchased power expenses were $126.8 million compared to
$139.5 million for the corresponding period in 2010. Fuel and purchased power expenses decreased
$42.9 million due to a 19.3% decrease in the average cost of natural gas and a 43.3% decrease in
the average cost of purchased power. This decrease was partially offset by a $30.2 million
increase in volume of KWHs generated and purchased.
111
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the first quarter 2011, fuel expense was $102.7 million compared to $97.5 million for the
corresponding period in 2010. Fuel expense increased $29.7 million due to an increase in the
volume of KWHs generated. This increase was partially offset by $24.5 million associated with a
19.3% decrease in the average cost of natural gas.
In the first quarter 2011, purchased power expense was $24.0 million compared to $41.9 million for
the corresponding period in 2010. Purchased power expenses decreased $18.4 million due to a 43.3%
decrease in the average cost of purchased power partially offset by $0.5 million associated with an
increase in the volume of KWHs purchased.
Other Operations and Maintenance Expenses
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$3.7
|
|
9.6 |
|
In the first quarter 2011, other operations and maintenance expenses were $42.7 million compared to
$39.0 million for the corresponding period in 2010. This increase was primarily due to a $4.8
million increase related to more generating plant scheduled outages in the first quarter 2011
compared to the corresponding period in 2010 and an unplanned outage at a combined cycle generating
plant. These increases were partially offset by a $1.1 million decrease in salaries and wages
relating mainly to higher payroll taxes in the first quarter of 2010.
Interest Expense, Net of Amounts Capitalized
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$(1.2)
|
|
(6.1) |
|
In the first quarter 2011, interest expense, net of amounts capitalized was $18.8 million compared
to $20.0 million for the corresponding period in 2010. The decrease was primarily due to an
increase in capitalized interest associated with the construction of the Cleveland County
combustion turbine units and the Nacogdoches biomass plant. See FUTURE EARNINGS POTENTIAL
Construction Projects herein for additional information.
Income Taxes
|
|
|
First Quarter 2011 vs. First Quarter 2010 |
(change in millions) |
|
(% change) |
$11.4
|
|
120.8 |
|
In the first quarter 2011, income taxes were $20.8 million compared to $9.4 million for the
corresponding period in 2010 primarily due to higher pre-tax earnings.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Southern Powers future
earnings potential. The level of Southern Powers future earnings depends on numerous factors that
affect the opportunities, challenges, and risks of Southern Powers competitive wholesale business.
These factors include Southern Powers ability to achieve sales growth while containing costs,
regulatory matters, creditworthiness of customers, total generating capacity available in the
Southeast, the successful remarketing of capacity as current contracts expire, and Southern Powers
ability to execute its acquisition strategy and to construct generating facilities. Other factors
that could influence future earnings include weather, demand, generation patterns, and operational
limitations. Recessionary conditions have lowered demand and have negatively impacted capacity
revenues under Southern Powers PPAs where the amounts purchased are based on demand. Southern
Power is unable to predict whether demand under these PPAs will return to pre-recession
112
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
levels. The timing and extent of the economic recovery is uncertain and 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 Power in Item 7 of
the Form 10-K.
Environmental Matters
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
of Southern Power in Item 7 of the Form 10-K for information on the development by federal and
state environmental regulatory agencies of additional control strategies for emissions of air
pollution from industrial sources, including electric generating facilities. Compliance with
possible additional federal or state legislation or regulations related to global climate change,
air quality, or other environmental and health concerns could also affect earnings. While Southern
Powers PPAs generally contain provisions that permit charging the counterparty with some of the
new costs incurred as a result of changes in environmental laws and regulations, the full impact of
any such regulatory or legislative changes cannot be determined at this time.
Carbon Dioxide Litigation
Kivalina Case
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters
Carbon Dioxide Litigation Kivalina Case of Southern Power in Item 7 and Note 3 to the financial
statements of Southern 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 February 23, 2011, the U.S. Court of Appeals for the Ninth Circuit issued an order staying the
case until June 15, 2011. The ultimate outcome of this matter cannot be determined at this time.
Water Quality
On April 20, 2011, the EPA proposed a rule that establishes standards for reducing impacts to fish
and other aquatic life caused by cooling water intake structures at existing power plants and
manufacturing facilities. The rule also addresses cooling water intake structures for new units at
existing facilities. The rule focuses on reducing adverse impacts to fish and other aquatic life
due to impingement (when fish and other aquatic life are trapped by water flow velocity against a
facilitys cooling water intake structure screens) and entrainment (when aquatic organisms are
drawn through a facilitys cooling water system after entering through the cooling water intake
structure). Affected cooling water intake structures would have to comply with national
impingement standards (for intake velocity or alternatively numeric impingement reduction
standards) and entrainment reduction requirements (determined on a case-by-case basis). The rules
proposed impingement standards could require technological improvements to cooling water intake
structures at some of Southern Powers existing generating facilities, including facilities with
closed-cycle re-circulating cooling systems (cooling towers). To address the rules entrainment
standards, facilities with once-through cooling systems may have to install cooling towers. New
units constructed at existing plants would have to meet the national impingement standards and
install closed-cycle cooling or the equivalent to meet the entrainment mandate. The EPA has agreed
in a settlement agreement to issue a final rule by July 27, 2012. If finalized as proposed, some
of Southern Powers facilities may be subject to varying degrees of additional capital expenditures
and compliance costs. While Southern Powers PPAs generally contain provisions that permit
charging the counterparty with some of the new costs incurred as a result of changes in
environmental laws and regulations, the full impact of any such regulatory or legislative changes
cannot be determined at this time.
113
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Construction Projects
Cleveland County Units 1-4
In December 2008, Southern Power announced that it will build an electric generating plant in
Cleveland County, North Carolina. The plant will consist of four combustion turbine natural gas
generating units with a total generating capacity of 720 MWs. The units are expected to begin
commercial operation in 2012. Costs incurred through March 31, 2011 were $239.2 million. The
total estimated construction cost is expected to be between $350 million and $400 million.
Nacogdoches Biomass Plant
In October 2009, Southern Power acquired all of the outstanding membership interests of Nacogdoches
Power LLC (Nacogdoches) from American Renewables LLC, the original developer of the project.
Nacogdoches is constructing a biomass generating plant in Sacul, Texas with an estimated capacity
of 100 MWs. The generating plant will be fueled from wood waste. Construction commenced in 2009
and the plant is expected to begin commercial operation in 2012. Costs incurred through March 31,
2011 were $296.1 million. The total estimated cost of the project is expected to be between $475
million and $500 million.
Other Matters
Southern Power is involved in various other matters being litigated and regulatory matters that
could affect future earnings. In addition, Southern Power is subject to certain claims and legal
actions arising in the ordinary course of business. Southern Powers business activities are
subject to extensive governmental regulation related to public health and the environment.
Litigation over environmental issues and claims of various types, including property damage,
personal injury, common law nuisance, and citizen enforcement of environmental requirements such as
opacity and air and water quality standards, has increased generally throughout the U.S. In
particular, personal injury and other 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 and other emissions, have become more frequent. The ultimate outcome of
such pending or potential litigation against Southern Power 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 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 Southern Powers financial statements.
See Note (B) to the Condensed Financial Statements herein for discussion of various other
contingencies, regulatory matters, and other matters being litigated which may affect future
earnings potential.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Power prepares its consolidated financial statements in accordance with GAAP. Significant
accounting policies are described in Note 1 to the financial statements of Southern 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 Southern 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 Southern
Power in Item 7 of the Form 10-K for a complete discussion of Southern Powers critical accounting
policies and estimates related to Revenue Recognition, Impairment of Long Lived Assets and
Intangibles, Acquisition Accounting, Contingent Obligations, Depreciation, and Convertible
Investment Tax Credits (ITCs).
114
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Overview
Southern Powers financial condition remained stable at March 31, 2011. Southern Power intends to
continue to monitor its access to short-term and long-term capital markets as well as its bank
credit arrangements as needed to meet future capital and liquidity needs. See Sources of Capital
herein for additional information on lines of credit.
Net cash provided from operating activities totaled $105.9 million for the first three months of
2011, compared to $34.6 million for the corresponding period in 2010. This increase was mainly due
to an increase in cash received for convertible ITCs and bonus depreciation. Net cash used for
investing activities totaled $84.7 million for the first three months of 2011, compared to $61.1
million for the corresponding period in 2010. This increase was primarily due to an increase in
construction work in progress related to construction activities at Cleveland County and
Nacogdoches. Net cash used for financing activities totaled $29.0 million for the first three
months of 2011, compared to $23.0 million cash provided from financing activities for the
corresponding period in 2010 primarily due to repayment of an affiliate loan related to SRE.
Significant asset changes in the balance sheet for the first quarter 2011 include an increase in
construction work in progress due to Cleveland County and Nacogdoches construction activities and a
decrease in prepaid income taxes mainly due to the receipt of an income tax refund from the IRS
related to convertible ITCs and bonus depreciation.
Significant liability and stockholders equity changes in the balance sheet for the first quarter
2011 include an increase in accounts payable other primarily related to Cleveland County and
Nacogdoches construction activities, a decrease in accounts payable affiliated primarily due to
the expiration of affiliate PPAs in May 2010, a decrease in notes payable primarily due to
repayment of an affiliate loan related to SRE, and a decrease in deferred capacity revenues
affiliated primarily due to seasonality.
Capital Requirements and Contractual Obligations
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Capital
Requirements and Contractual Obligations of Southern Power in Item 7 of the Form 10-K for a
description of Southern Powers capital requirements for its construction program, scheduled
maturities of long-term debt, interest, leases, derivative obligations, purchase commitments, and
long-term service agreements. The construction program is subject to periodic review and revision;
these amounts include estimates for potential plant acquisitions and new construction as well as
ongoing capital improvements. Planned expenditures for plant acquisitions may vary due to market
opportunities and Southern Powers ability to execute its growth strategy. Actual construction
costs may vary from these estimates because of changes in factors such as: business conditions;
environmental statutes and regulations; FERC rules and regulations; load projections; legislation;
the cost and efficiency of construction labor, equipment, and materials; project scope and design
changes; and the cost of capital.
Sources of Capital
Southern Power may use operating cash flows, external funds, equity capital, or loans from Southern
Company to finance any new projects, acquisitions, and ongoing capital requirements. Southern
Power expects to generate external funds from the issuance of unsecured senior debt and commercial
paper or utilization of credit arrangements from banks. However, the amount, type, and timing of
any future 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 Power in Item 7 of the Form 10-K for additional
information.
115
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southern Powers current liabilities frequently exceed current assets due to the use of short-term
indebtedness as a funding source to meet cash needs which can fluctuate significantly due to the
seasonality of the business. To meet liquidity and capital resource requirements, Southern Power
had at March 31, 2011 cash and cash equivalents of approximately $6 million and committed credit
arrangements with banks of $400 million, all of which expire in 2012. Proceeds from these credit
arrangements may be used for working capital and general corporate purposes as well as liquidity
support for Southern Powers commercial paper program. See Note 6 to the financial statements of
Southern 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.
Southern Powers commercial paper program is used to finance acquisition and construction costs
related to electric generating facilities and for general corporate purposes. At March 31, 2011,
Southern Power had $249 million of commercial paper borrowings outstanding with a weighted average
interest rate of 0.4% per annum. During the first quarter 2011, Southern Power had an average of
$231 million of commercial paper outstanding at a weighted average interest rate of 0.4% per annum
and the maximum amount outstanding was $272 million. Management believes that the need for working
capital can be adequately met by utilizing commer