10-Q
Table of Contents

 

 

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, 2012

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

 

Commission

File Number

 

Registrant, State of Incorporation,

Address and Telephone Number

 

I.R.S. Employer

Identification No.

1-3526

 

The Southern Company

(A Delaware Corporation)

30 Ivan Allen Jr. Boulevard, N.W.

Atlanta, Georgia 30308

(404) 506-5000

  58-0690070

1-3164

 

Alabama Power Company

(An Alabama Corporation)

600 North 18th Street

Birmingham, Alabama 35203

(205) 257-1000

  63-0004250

1-6468

 

Georgia Power Company

(A Georgia Corporation)

241 Ralph McGill Boulevard, N.E.

Atlanta, Georgia 30308

(404) 506-6526

  58-0257110

001-31737

 

Gulf Power Company

(A Florida Corporation)

One Energy Place

Pensacola, Florida 32520

(850) 444-6111

  59-0276810

001-11229

 

Mississippi Power Company

(A Mississippi Corporation)

2992 West Beach

Gulfport, Mississippi 39501

(228) 864-1211

  64-0205820

333-98553

 

Southern Power Company

(A Delaware Corporation)

30 Ivan Allen Jr. Boulevard, N.W.

Atlanta, Georgia 30308

(404) 506-5000

  58-2598670

 

 

 


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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 ¨

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 ¨

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):

 

Registrant

   Large
Accelerated
Filer
   Accelerated
Filer
   Non-
accelerated

Filer
   Smaller
Reporting
Company

The Southern Company

   X         

Alabama Power Company

         X   

Georgia Power Company

         X   

Gulf Power Company

         X   

Mississippi Power Company

         X   

Southern Power Company

         X   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No þ (Response applicable to all registrants.)

 

Registrant

 

Description of
Common Stock

      Shares Outstanding    
    at March  31, 2012    

The Southern Company

  Par Value $5 Per Share   868,690,126

Alabama Power Company

  Par Value $40 Per Share     30,537,500

Georgia Power Company

  Without Par Value       9,261,500

Gulf Power Company

  Without Par Value       4,542,717

Mississippi Power Company

  Without Par Value       1,121,000

Southern Power Company

  Par Value $0.01 Per Share              1,000

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.

 

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INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31, 2012

 

         Page
    Number
 

DEFINITIONS

    5       

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

    7       
   PART I — FINANCIAL INFORMATION  

Item 1.

  

Financial Statements (Unaudited)

 

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 
  

The Southern Company and Subsidiary Companies

 
  

Condensed Consolidated Statements of Income

    10       
  

Condensed Consolidated Statements of Comprehensive Income

    11       
  

Condensed Consolidated Statements of Cash Flows

    12       
  

Condensed Consolidated Balance Sheets

    13       
  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    15       
  

Alabama Power Company

 
  

Condensed Statements of Income

    33       
  

Condensed Statements of Comprehensive Income

    33       
  

Condensed Statements of Cash Flows

    34       
  

Condensed Balance Sheets

    35       
  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    37       
  

Georgia Power Company

 
  

Condensed Statements of Income

    51       
  

Condensed Statements of Comprehensive Income

    51       
  

Condensed Statements of Cash Flows

    52       
  

Condensed Balance Sheets

    53       
  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    55       
  

Gulf Power Company

 
  

Condensed Statements of Income

    72       
  

Condensed Statements of Comprehensive Income

    72       
  

Condensed Statements of Cash Flows

    73       
  

Condensed Balance Sheets

    74       
  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    76       
  

Mississippi Power Company

 
  

Condensed Statements of Income

    92       
  

Condensed Statements of Comprehensive Income

    92       
  

Condensed Statements of Cash Flows

    93       
  

Condensed Balance Sheets

    94       
  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    96       
  

Southern Power Company and Subsidiary Companies

 
  

Condensed Consolidated Statements of Income

    115       
  

Condensed Consolidated Statements of Comprehensive Income

    115       
  

Condensed Consolidated Statements of Cash Flows

    116       
  

Condensed Consolidated Balance Sheets

    117       
  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    119       
  

Notes to the Condensed Financial Statements

    130       

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

    31       

Item 4.

  

Controls and Procedures

    31       

 

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INDEX TO QUARTERLY REPORT ON FORM 10-Q

March 31, 2012

 

          Page
                     Number
 
   PART II — OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     160   

Item 1A.

  

Risk Factors

     160   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     Inapplicable   

Item 3.

  

Defaults Upon Senior Securities

     Inapplicable   

Item 4.

  

Mine Safety Disclosures

     Inapplicable   

Item 5.

  

Other Information

     Inapplicable   

Item 6.

  

Exhibits

     161   
  

Signatures

     165   

 

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DEFINITIONS

 

Term    Meaning
2010 ARP    Alternate Rate Plan approved by the Georgia PSC for Georgia Power, which became effective January 1, 2011 and will continue through December 31, 2013
2011 IRP Update    Georgia Power’s 2011 Integrated Resource Plan update filed with the Georgia PSC on August 4, 2011
AFUDC    Allowance for funds used during construction
Alabama Power    Alabama Power Company
Clean Air Act    Clean Air Act Amendments of 1990
CPCN    Certificate of public convenience and necessity
CWIP    Construction work in progress
DOE    U.S. Department of Energy
ECO Plan    Mississippi Power’s Environmental Compliance Overview Plan
EPA    U.S. Environmental Protection Agency
FERC    Federal Energy Regulatory Commission
Form 10-K    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, 2011
GAAP    Generally accepted accounting principles
Georgia Power    Georgia Power Company
Gulf Power    Gulf Power Company
IGCC    Integrated coal gasification combined cycle
IIC    Intercompany Interchange Contract
Internal Revenue Code    Internal Revenue Code of 1986, as amended
IRS    Internal Revenue Service
Kemper IGCC    Integrated coal gasification combined cycle facility under construction in Kemper County, Mississippi
KWH    Kilowatt-hour
LIBOR    London Interbank Offered Rate
Mississippi Power    Mississippi Power Company
mmBtu    Million British thermal unit
MW    Megawatt
MWH    Megawatt-hour
NCCR    Georgia Power’s Nuclear Construction Cost Recovery
NDR    Alabama Power’s natural disaster reserve
NRC    Nuclear Regulatory Commission
NSR    New Source Review
OCI    Other Comprehensive Income
PEP    Mississippi Power’s Performance Evaluation Plan
Plant Vogtle Units 3 and 4    Two new nuclear generating units under construction at Plant Vogtle
Power Pool    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    Power Purchase Agreement
PSC    Public Service Commission
registrants    Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power
ROE    Return on equity
SEC    Securities and Exchange Commission

 

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SMEPA    South Mississippi Electric Power Association
Southern Company    The Southern Company
Southern Company system    Southern Company, the traditional operating companies, Southern Power, and other subsidiaries
Southern Power    Southern Power Company
traditional operating companies    Alabama Power, Georgia Power, Gulf Power, and Mississippi Power
Westinghouse    Westinghouse Electric Company LLC
wholesale revenues    revenues generated from sales for resale

 

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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 retail sales, retail rates, economic recovery, fuel and environmental cost recovery and other rate actions, current and proposed environmental regulations and related estimated expenditures, future earnings, access to sources of capital, projections for the qualified pension plan and other postretirement benefit plan contributions, financing activities, start and completion of construction projects, plans and estimated costs for new generation resources, filings with state and federal regulatory authorities, 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, and estimated construction and other expenditures. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar terminology. There are various factors that could cause actual results to differ materially from those suggested by the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include:

 

 

the impact of recent and future federal and state regulatory 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, 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;

 

 

current and future litigation, regulatory investigations, proceedings, or inquiries, including the pending EPA civil actions against certain Southern Company subsidiaries, FERC matters, and IRS and state tax audits;

 

 

the effects, extent, and timing of the entry of additional competition in the markets in which Southern Company’s subsidiaries operate;

 

 

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;

 

 

available sources and costs of fuels;

 

 

effects of inflation;

 

 

ability to control costs and avoid cost overruns during the development and construction of facilities;

 

 

investment performance of Southern Company’s employee benefit plans and nuclear decommissioning trust funds;

 

 

advances in technology;

 

 

state and federal rate regulations and the impact of pending and future rate cases and negotiations, including rate actions relating to fuel and other cost recovery mechanisms;

 

 

regulatory approvals and actions related to Plant Vogtle Units 3 and 4, including Georgia PSC approvals, NRC actions, and potential DOE loan guarantees;

 

 

regulatory approvals and actions related to the Kemper IGCC, including Mississippi PSC approvals, potential DOE loan guarantees, the SMEPA purchase decision, utilization of investment tax credits, and the outcome of any further proceedings regarding the Mississippi PSC’s issuance of the CPCN;

 

 

the performance of projects undertaken by the non-utility businesses and the success of efforts to invest in and develop new opportunities;

 

 

internal restructuring or other restructuring options that may be pursued;

 

 

potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to Southern Company or its subsidiaries;

 

 

the ability of counterparties of Southern Company and its subsidiaries to make payments as and when due and to perform as required;

 

 

the ability to obtain new short- and long-term contracts with wholesale customers;

 

 

the direct or indirect effect on Southern Company’s business resulting from terrorist incidents and the threat of terrorist incidents, including cyber intrusion;

 

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interest rate fluctuations and financial market conditions and the results of financing efforts, including Southern Company’s and its subsidiaries’ credit ratings;

 

 

the impacts of any potential U.S. credit rating downgrade or other sovereign financial issues, including impacts on interest rates, access to capital markets, impacts on currency exchange rates, counterparty performance, and the economy in general, as well as potential impacts on the availability or benefits of proposed DOE loan guarantees;

 

 

the ability of Southern Company and its subsidiaries to obtain additional generating capacity at competitive prices;

 

 

catastrophic events such as fires, earthquakes, explosions, floods, hurricanes, droughts, pandemic health events such as influenzas, or other similar occurrences;

 

 

the direct or indirect effects on Southern Company’s business resulting from incidents affecting the U.S. electric grid or operation of generating resources;

 

 

the effect of accounting pronouncements issued periodically by standard setting bodies; and

 

 

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.

 

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THE SOUTHERN COMPANY

AND SUBSIDIARY COMPANIES

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

     For the Three Months
Ended March 31,
 
     2012     2011  
     (in millions)  

Operating Revenues:

    

Retail revenues

   $ 3,092      $ 3,396   

Wholesale revenues

     349        449   

Other electric revenues

     148        150   

Other revenues

     15        17   
  

 

 

   

 

 

 

Total operating revenues

     3,604        4,012   
  

 

 

   

 

 

 

Operating Expenses:

    

Fuel

     1,064        1,476   

Purchased power

     141        100   

Other operations and maintenance

     967        944   

Depreciation and amortization

     441        418   

Taxes other than income taxes

     225        220   
  

 

 

   

 

 

 

Total operating expenses

     2,838        3,158   
  

 

 

   

 

 

 

Operating Income

     766        854   

Other Income and (Expense):

    

Allowance for equity funds used during construction

     31        35   

Interest expense, net of amounts capitalized

     (211     (222

Other income (expense), net

     (2     2   
  

 

 

   

 

 

 

Total other income and (expense)

     (182     (185
  

 

 

   

 

 

 

Earnings Before Income Taxes

     584        669   

Income taxes

     200        231   
  

 

 

   

 

 

 

Consolidated Net Income

     384        438   

Dividends on Preferred and Preference Stock of Subsidiaries

     16        16   
  

 

 

   

 

 

 

Consolidated Net Income After Dividends on Preferred and Preference Stock of Subsidiaries

   $ 368      $ 422   
  

 

 

   

 

 

 

Common Stock Data:

    

Earnings per share (EPS) -

    

Basic EPS

   $ 0.42      $ 0.50   

Diluted EPS

   $ 0.42      $ 0.49   

Average number of shares of common stock outstanding (in millions)

    

Basic

     868        848   

Diluted

     877        854   

Cash dividends paid per share of common stock

   $ 0.4725      $ 0.4550   

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

     For the Three Months
Ended March 31,
 
     2012     2011  
     (in millions)  

Consolidated Net Income

   $ 384      $ 438   

Other comprehensive income (loss):

    

Qualifying hedges:

    

Changes in fair value, net of tax of $2 and $2, respectively

     3        3   

Reclassification adjustment for amounts included in net income, net of tax of $1 and $2, respectively

     2        3   

Marketable securities:

    

Change in fair value, net of tax of $- and $-, respectively

            (1

Pension and other post retirement benefit plans:

    

Reclassification adjustment for amounts included in net income, net of tax of $1 and $1, respectively

     1        (1
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     6        4   
  

 

 

   

 

 

 

Dividends on preferred and preference stock of subsidiaries

     (16     (16
  

 

 

   

 

 

 

Comprehensive Income

   $ 374      $ 426   
  

 

 

   

 

 

 

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     For the Three Months
Ended March 31,
 
     2012     2011  
     (in millions)  

Operating Activities:

    

Consolidated net income

   $ 384      $ 438   

Adjustments to reconcile consolidated net income to net cash provided from operating activities —

    

Depreciation and amortization, total

     529        501   

Deferred income taxes

     104        174   

Allowance for equity funds used during construction

     (31     (35

Pension, postretirement, and other employee benefits

     16        (11

Stock based compensation expense

     25        21   

Other, net

     2        (16

Changes in certain current assets and liabilities —

    

-Receivables

     372        276   

-Fossil fuel stock

     (218     (42

-Other current assets

     (60     (77

-Accounts payable

     (136     (108

-Accrued taxes

     (167     131   

-Accrued compensation

     (305     (277

-Other current liabilities

     53        23   
  

 

 

   

 

 

 

Net cash provided from operating activities

     568        998   
  

 

 

   

 

 

 

Investing Activities:

    

Property additions

     (1,231     (1,086

Distribution of restricted cash

            61   

Nuclear decommissioning trust fund purchases

     (336     (928

Nuclear decommissioning trust fund sales

     334        924   

Proceeds from property sales

     2        14   

Cost of removal, net of salvage

     (32     (15

Change in construction payables

     (156     136   

Other investing activities

     (8     10   
  

 

 

   

 

 

 

Net cash used for investing activities

     (1,427     (884
  

 

 

   

 

 

 

Financing Activities:

    

Increase (decrease) in notes payable, net

     174        (54

Proceeds —

    

Long-term debt issuances

     1,400        937   

Interest-bearing refundable deposit related to asset sale

     150          

Common stock issuances

     116        193   

Redemptions —

    

Long-term debt

     (827     (824

Payment of common stock dividends

     (410     (385

Payment of dividends on preferred and preference stock of subsidiaries

     (16     (16

Other financing activities

     1        (2
  

 

 

   

 

 

 

Net cash provided from (used for) financing activities

     588        (151
  

 

 

   

 

 

 

Net Change in Cash and Cash Equivalents

     (271     (37

Cash and Cash Equivalents at Beginning of Period

     1,315        447   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 1,044      $ 410   
  

 

 

   

 

 

 

Supplemental Cash Flow Information:

    

Cash paid during the period for —

    

Interest (net of $21 and $17 capitalized for 2012 and 2011, respectively)

   $ 178      $ 197   

Income taxes (net of refunds)

     2        (357

Noncash transactions — accrued property additions at end of period

     420        531   

 

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

Assets

  At March 31,
2012
    At December 31,
2011
 
    (in millions)  

Current Assets:

   

Cash and cash equivalents

  $ 1,044      $ 1,315   

Restricted cash and cash equivalents

    7        8   

Receivables —

   

Customer accounts receivable

    936        1,074   

Unbilled revenues

    358        376   

Under recovered regulatory clause revenues

    5        143   

Other accounts and notes receivable

    226        282   

Accumulated provision for uncollectible accounts

    (24     (26

Fossil fuel stock, at average cost

    1,585        1,367   

Materials and supplies, at average cost

    898        903   

Vacation pay

    161        160   

Prepaid expenses

    519        385   

Other regulatory assets, current

    267        239   

Other current assets

    59        46   
 

 

 

   

 

 

 

Total current assets

    6,041        6,272   
 

 

 

   

 

 

 

Property, Plant, and Equipment:

   

In service

    60,073        59,744   

Less accumulated depreciation

    21,327        21,154   
 

 

 

   

 

 

 

Plant in service, net of depreciation

    38,746        38,590   

Other utility plant, net

    54        55   

Nuclear fuel, at amortized cost

    830        774   

Construction work in progress

    6,225        5,591   
 

 

 

   

 

 

 

Total property, plant, and equipment

    45,855        45,010   
 

 

 

   

 

 

 

Other Property and Investments:

   

Nuclear decommissioning trusts, at fair value

    1,280        1,207   

Leveraged leases

    654        649   

Miscellaneous property and investments

    260        262   
 

 

 

   

 

 

 

Total other property and investments

    2,194        2,118   
 

 

 

   

 

 

 

Deferred Charges and Other Assets:

   

Deferred charges related to income taxes

    1,381        1,365   

Unamortized debt issuance expense

    163        156   

Unamortized loss on reacquired debt

    279        285   

Deferred under recovered regulatory clause revenues

    24        48   

Other regulatory assets, deferred

    3,486        3,532   

Other deferred charges and assets

    451        481   
 

 

 

   

 

 

 

Total deferred charges and other assets

    5,784        5,867   
 

 

 

   

 

 

 

Total Assets

  $ 59,874      $ 59,267   
 

 

 

   

 

 

 

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

Liabilities and Stockholders’ Equity

  At March 31,
2012
    At December 31,
2011
 
    (in millions)  

Current Liabilities:

   

Securities due within one year

  $ 1,881      $ 1,717   

Interest-bearing refundable deposit related to asset sale

    150          

Notes payable

    1,029        859   

Accounts payable

    1,262        1,553   

Customer deposits

    358        347   

Accrued taxes —

   

Accrued income taxes

    51        13   

Unrecognized tax benefits

    12        22   

Other accrued taxes

    198        425   

Accrued interest

    249        226   

Accrued vacation pay

    204        205   

Accrued compensation

    158        450   

Liabilities from risk management activities

    219        209   

Other regulatory liabilities, current

    153        125   

Other current liabilities

    393        426   
 

 

 

   

 

 

 

Total current liabilities

    6,317        6,577   
 

 

 

   

 

 

 

Long-term Debt

    19,051        18,647   
 

 

 

   

 

 

 

Deferred Credits and Other Liabilities:

   

Accumulated deferred income taxes

    9,001        8,809   

Deferred credits related to income taxes

    220        224   

Accumulated deferred investment tax credits

    651        611   

Employee benefit obligations

    2,432        2,442   

Asset retirement obligations

    1,341        1,321   

Other cost of removal obligations

    1,178        1,165   

Other regulatory liabilities, deferred

    324        297   

Other deferred credits and liabilities

    578        514   
 

 

 

   

 

 

 

Total deferred credits and other liabilities

    15,725        15,383   
 

 

 

   

 

 

 

Total Liabilities

    41,093        40,607   
 

 

 

   

 

 

 

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, 2012: 869 million shares

   

— December 31, 2011: 866 million shares

   

Treasury — March 31, 2012: 0.5 million shares

   

— December 31, 2011: 0.5 million shares

   

Par value

    4,346        4,328   

Paid-in capital

    4,550        4,410   

Treasury, at cost

    (18     (17

Retained earnings

    8,926        8,968   

Accumulated other comprehensive loss

    (105     (111
 

 

 

   

 

 

 

Total Common Stockholders’ Equity

    17,699        17,578   

Preferred and Preference Stock of Subsidiaries

    707        707   
 

 

 

   

 

 

 

Total Stockholders’ Equity

    18,406        18,285   
 

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

  $ 59,874      $ 59,267   
 

 

 

   

 

 

 

The accompanying notes as they relate to Southern Company are an integral part of these condensed financial statements.

 

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FIRST QUARTER 2012 vs. FIRST QUARTER 2011

OVERVIEW

Southern Company is a holding company that owns all of the common stock of the traditional operating companies — Alabama Power, Georgia Power, Gulf Power, and Mississippi Power — and Southern Power and other direct and indirect subsidiaries. Discussion of the results of operations is focused on the Southern Company system’s primary business of electricity sales by the traditional operating companies and Southern Power. The four traditional operating companies are vertically integrated utilities providing electric service in four Southeastern states. Southern Power constructs, acquires, owns, and manages generation assets, including renewable energy projects, and sells electricity at market-based rates in the wholesale market. Southern Company’s 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 MANAGEMENT’S 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 2012 vs. First Quarter 2011

 

(change in millions)    (% change)

$(54)

   (12.8)

 

Southern Company’s first quarter 2012 net income after dividends on preferred and preference stock of subsidiaries was $368 million ($0.42 per share) compared to $422 million ($0.50 per share) for the first quarter 2011. The decrease for the first quarter 2012 when compared to the corresponding period in 2011 was primarily the result of a decrease in revenues due to milder weather, an increase in depreciation on additional plant in service related to new generation, transmission, distribution, and environmental projects, an increase in operations and maintenance expenses, and lower energy revenues at Southern Power. The net income decrease for the first quarter 2012 was partially offset by increases in revenues associated with the elimination of a tax-related adjustment under Alabama Power’s rate structure, an increase related to retail revenue rate effects at Georgia Power, an increase related to interim retail rate revenues at Gulf Power, and an increase in industrial KWH sales.

Retail Revenues

 

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)

$(304)

   (9.0)

 

In the first quarter 2012, retail revenues were $3.1 billion compared to $3.4 billion for the corresponding period in 2011.

 

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Details of the change to retail revenues were as follows:

 

    

First Quarter

2012

 

     (in millions)    (% change)

Retail — prior year

   $3,396   

Estimated change in —

     

Rates and pricing

          59      1.7

Sales growth (decline)

          17      0.5

Weather

        (113)      (3.3)

Fuel and other cost recovery

        (267)      (7.9)

 

Retail – current year

   $3,092         (9.0)%

 

Revenues associated with changes in rates and pricing increased in the first quarter 2012 when compared to the corresponding period in 2011 primarily due to the elimination of a tax-related adjustment under Alabama Power’s rate structure and an increase related to interim retail rate revenues at Gulf Power. Also contributing to the increase were increases in retail revenues at Georgia Power associated with rate pricing effects due to decreased customer usage and the NCCR and demand-side management tariff increases, partially offset by lower contributions from market-driven rates from commercial and industrial customers.

Revenues attributable to changes in sales increased in the first quarter 2012 when compared to the corresponding period in 2011. The increase was due to a 1.9% increase in industrial KWH sales and a 0.6% increase in weather-adjusted residential KWH sales, partially offset by a 1.3% decrease in weather-adjusted commercial KWH sales. Increased demand in the pipelines, transportation, and primary metals sectors was the main contributor to the increase in industrial KWH sales.

Revenues resulting from changes in weather decreased $113 million in the first quarter 2012 as a result of milder weather when compared to the corresponding period in 2011.

Fuel and other cost recovery revenues decreased $267 million in the first quarter 2012 when compared to the corresponding period in 2011. 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 2012 vs. First Quarter 2011

 

(change in millions)    (% change)

$(100)

   (22.3)

 

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 prices of wholesale energy compared to the Southern Company system’s generation, demand for energy within the Southern Company system’s service territory, and the availability of the Southern Company system’s 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 Southern Company system’s variable cost to produce the energy.

 

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In the first quarter 2012, wholesale revenues were $349 million compared to $449 million for the corresponding period in 2011, reflecting a $107 million decrease in energy revenues and a $7 million increase in capacity revenues. The decrease in the first quarter 2012 was primarily related to lower energy sales mainly due to lower customer demand and a reduction in the average price of energy.

Fuel and Purchased Power Expenses

 

 

First Quarter 2012 vs. First Quarter 2011

 

    (change in millions)           (% change)

Fuel

  $                (412)                 (27.9)

Purchased power

                      41                 41.0

 

  

Total fuel and purchased power expenses

  $                (371)        

 

  

In the first quarter 2012, total fuel and purchased power expenses were $1.2 billion compared to $1.6 billion for the corresponding period in 2011. The decrease in the first quarter 2012 when compared to the corresponding period in 2011 was primarily the result of a $395 million decrease in the average cost of fuel and purchased power, partially offset by a $24 million net increase related to total KWHs generated and purchased.

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 — “PSC Matters — Retail Fuel Cost Recovery” herein for additional information. Fuel expenses incurred under Southern Power’s PPAs are generally the responsibility of the counterparties and do not significantly affect net income.

Details of the Southern Company system’s generation and purchased power were as follows:

 

    

First Quarter

2012

  

First Quarter

2011

 

Total generation (billions of KWHs)

      39       46

Total purchased power (billions of KWHs)

       4        1

 

Sources of generation (percent)

     

Coal

      35       53

Nuclear

      19       16

Gas

      42       28

Hydro

       4        3

 

Cost of fuel, generated (cents per net KWH)

     

Coal

   4.09    3.96

Nuclear

   0.80    0.67

Gas

   2.77    3.93

 

Average cost of fuel, generated (cents per net KWH)

   2.85    3.39

Average cost of purchased power (cents per net KWH)*

   3.88    9.25

 

 

* Average cost of purchased power includes fuel purchased by the electric utilities for tolling agreements where power is generated by the provider.

In the first quarter 2012, fuel expense was $1.1 billion compared to $1.5 billion for the corresponding period in 2011. The decrease in the first quarter 2012 when compared to the corresponding period in 2011 was primarily due to a 29.5% decrease in the average cost of gas per KWH generated, a higher percentage of generation from lower cost natural gas-fired resources, and lower customer demand mainly due to milder weather.

In the first quarter 2012, purchased power expense was $141 million compared to $100 million for the corresponding period in 2011. The increase in the first quarter 2012 when compared to the corresponding period in 2011 was primarily due to a 298.2% increase in the volume of KWHs purchased as the market cost of available energy was lower than the marginal cost of generation available, partially offset by a 58.1% decrease in the average cost per KWH purchased.

 

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Energy purchases will vary depending on demand for energy within the Southern Company system’s service territory, the market prices of wholesale energy as compared to the cost of the Southern Company system’s generation, and the availability of the Southern Company system’s generation.

Other Operations and Maintenance Expenses

 

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)

$23

   2.4

 

In the first quarter 2012, other operations and maintenance expenses were $967 million compared to $944 million for the corresponding period in 2011. The increase in the first quarter 2012 when compared to the corresponding period in 2011 was primarily the result of a $43 million increase in administrative and general costs primarily due to increases in pension costs, property insurance, and other employee benefits. Also contributing to the increase was a $6 million increase in customer service and sales related costs. The increase in the first quarter 2012 was partially offset by a $13 million decrease primarily related to scheduled outage and maintenance costs and commodity and labor costs, as well as an $11 million decrease at Mississippi Power related to the expiration of an operating lease for Plant Daniel Units 3 and 4. See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Purchase of the Plant Daniel Combined Cycle Generating Units” of Southern Company in Item 7 of the Form 10-K for additional information.

Depreciation and Amortization

 

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)

$23

   5.5

 

In the first quarter 2012, depreciation and amortization was $441 million compared to $418 million for the corresponding period in 2011. The increase for the first quarter 2012 when compared to the corresponding period in 2011 was primarily the result of an increase in depreciation due to additional plant in service related to new generation at Georgia Power’s Plant McDonough Unit 4 that went into service in December 2011, as well as transmission, distribution, and environmental projects.

Allowance for Equity Funds Used During Construction

 

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)

$(4)

   (11.4)

 

In the first quarter 2012, AFUDC equity was $31 million compared to $35 million for the corresponding period in 2011. The decrease for the first quarter 2012 when compared to the corresponding period in 2011 was primarily due to the completion of Georgia Power’s Plant McDonough Unit 4 in December 2011, partially offset by CWIP related to Mississippi Power’s Kemper IGCC.

Interest Expense, Net of Amounts Capitalized

 

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)

$(11)

   (5.0)

 

In the first quarter 2012, interest expense, net of amounts capitalized was $211 million compared to $222 million for the corresponding period in 2011. The decrease for the first quarter 2012 when compared to the corresponding period in 2011 was primarily due to lower interest rates on outstanding debt and a refinancing of long-term debt during 2011 at

 

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Southern Power. Also contributing to the decrease was an increase in capitalized interest associated with construction projects at Southern Power.

Income Taxes

 

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)

$(31)

   (13.4)

 

In the first quarter 2012, income taxes were $200 million compared to $231 million for the corresponding period in 2011. The decrease for the first quarter 2012 when compared to the corresponding period in 2011 was primarily the result of lower pre-tax earnings.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Southern Company’s future earnings potential. The level of Southern Company’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Company’s 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. Another major factor is the profitability of the competitive wholesale supply business. Future earnings for the electricity business in the near term will depend, in part, upon maintaining energy sales which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities and other wholesale customers, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in the service territory. 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 and related costs, 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 MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form 10-K.

Environmental Matters

Compliance costs related to federal and state environmental statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. Environmental compliance spending over the next several years may differ materially from the amounts estimated. The timing, specific requirements, and estimated costs could change as environmental statutes and regulations are adopted or modified. Further, higher costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. See MANAGEMENT’S 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 MANAGEMENT’S 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. On February 23, 2012, the EPA filed a motion in the U.S. District Court for the Northern District of Alabama seeking vacatur of the judgment and recusal of the judge in the case involving Alabama Power (including claims related to a unit co-owned by Mississippi Power). At the same time, the EPA asked the U.S. Court of Appeals for

 

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the Eleventh Circuit to stay its appeal of the judgment in favor of Alabama Power. Alabama Power filed oppositions to the EPA’s motion and its request for a stay. On March 29, 2012, the U.S. Court of Appeals for the Eleventh Circuit denied the EPA’s request to stay its appeal. The U.S. District Court for the Northern District of Alabama has not ruled on the EPA’s motion seeking vacatur of the judgment. The ultimate outcome of this matter cannot be determined at this time.

Climate Change Litigation

Hurricane Katrina Case

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Climate Change Litigation — Hurricane Katrina Case” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters — Climate Change Litigation — Hurricane Katrina Case” in Item 8 of the Form 10-K for additional information. On March 20, 2012, the U.S. District Court for the Southern District of Mississippi dismissed the amended class action complaint filed on May 27, 2011 by the plaintiffs. On April 16, 2012, the plaintiffs appealed the case to the U.S. Court of Appeals for the Fifth Circuit. The ultimate outcome of this matter cannot be determined at this time.

Environmental Statutes and Regulations

General

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Environmental Statutes and Regulations — General” of Southern Company in Item 7 of the Form 10-K for information regarding the Southern Company system’s estimated base level capital expenditures to comply with existing statutes and regulations for 2012 through 2014, as well as the Southern Company system’s preliminary estimates for potential incremental environmental compliance investments associated with complying with the EPA’s final Mercury and Air Toxics Standards (MATS) rule (formerly referred to as the Utility Maximum Achievable Control Technology rule) and the EPA’s proposed water and coal combustion byproducts rules. The Southern Company system is continuing to develop its compliance strategy and to assess the potential costs of complying with the MATS rule and the EPA’s proposed water and coal combustion byproducts rules.

The Southern Company system’s compliance strategy, including potential unit retirement and replacement decisions, and future environmental capital expenditures are dependent on a final assessment of the MATS rule and will be affected by the final requirements of new or revised environmental regulations that are promulgated, including any proposed environmental regulations; the outcome of any legal challenges to the environmental rules; the cost, availability, and existing inventory of emissions allowances; and the fuel mix of the electric utilities. These costs may arise from existing unit retirements, installation of additional environmental controls, upgrades to the transmission system, the addition of new generating resources, and changing fuel sources for certain existing units. The Southern Company system’s preliminary analysis further indicates that the short timeframe for compliance with the MATS rule could significantly affect electric system reliability and cause an increase in costs of materials and services. The ultimate outcome of these matters cannot be determined at this time.

As part of Southern Electric Generating Company’s (SEGCO) environmental compliance strategy, the Board of Directors of SEGCO approved adding natural gas as the primary fuel source in 2015 for its 1,000 MWs of generating capacity and the construction of the necessary natural gas pipeline. SEGCO is jointly owned by Alabama Power and Georgia Power. The capacity of SEGCO’s units is sold to Alabama Power and Georgia Power through a PPA. The impact of SEGCO’s ultimate compliance strategy on such PPA costs cannot be determined at this time; however, if such costs cannot continue to be recovered through retail rates, they could have a material impact on Southern Company’s financial statements.

 

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Air Quality

See MANAGEMENT’S 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 on the eight-hour ozone air quality standards and the MATS rule.

On May 1, 2012, the EPA released its final determination of nonattainment areas based on the 2008 eight-hour ozone air quality standards. The only area within the traditional operating companies’ service territory designated as a nonattainment area was a 15-county area within metropolitan Atlanta.

Numerous petitions for administrative reconsideration of the MATS rule, including a petition by Southern Company and its subsidiaries, have been filed with the EPA. Challenges to the final rule have also been filed in the U.S. District Court of Appeals for the District of Columbia by numerous states, environmental organizations, industry groups, and others. The impact of the MATS rule will depend on the outcome of these and any other legal challenges and, therefore, cannot be determined at this time.

Coal Combustion Byproducts

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Environmental Statutes and Regulations — Coal Combustion Byproducts” of Southern Company in Item 7 of the Form 10-K for additional information. On April 5, 2012, 10 environmental groups filed a lawsuit in the U.S. District Court for the District of Columbia seeking to require the EPA to complete its rulemaking process and issue final regulations pertaining to the regulation of coal combustion byproducts as soon as possible. Other parties are expected to file similar challenges. The ultimate outcome of this matter cannot be determined at this time.

Global Climate Issues

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Global Climate Issues” of Southern Company in Item 7 of the Form 10-K for additional information. On April 13, 2012, the EPA published proposed regulations to establish standards of performance for greenhouse gas emissions from new fossil fuel steam electric generating units. As proposed, the standards would not apply to existing units. The EPA has delayed its plans to propose greenhouse gas emissions performance standards for modified sources and emissions guidelines for existing sources. The impact of this rulemaking will depend on the scope and specific requirements of the final rule and the outcome of any legal challenges and, therefore, cannot be determined at this time.

PSC Matters

Retail Fuel Cost Recovery

The traditional operating companies each have established fuel cost recovery rates approved by their respective state PSCs. The traditional operating companies have experienced lower pricing for natural gas resulting in an increase in natural gas generation and a decrease in coal generation, which is currently more costly. The lower cost of natural gas has resulted in total over recovered fuel costs at Georgia Power, Gulf Power, and Mississippi Power included in Southern Company’s Condensed Balance Sheets herein of approximately $102 million at March 31, 2012. At March 31, 2012, Alabama Power had under recovered fuel costs included in Southern Company’s Condensed Balance Sheet herein of approximately $6 million. At December 31, 2011, total under recovered fuel costs at Alabama Power and Georgia Power included in Southern Company’s Condensed Balance Sheet herein were approximately $169 million, and Gulf Power and Mississippi Power had a total over recovered fuel balance included in Southern Company’s Condensed Balance Sheet herein of approximately $52 million. Fuel cost recovery revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Southern Company’s revenues or net income, but will affect annual cash flow. The traditional operating companies continuously monitor their under or over recovered fuel cost balances.

On March 30, 2012, Georgia Power filed a request with the Georgia PSC to decrease fuel rates by 19%, which is expected to reduce annual billings by $567 million. The decrease in fuel costs is driven primarily by lower natural gas prices as a result of increased natural gas supplies. The Georgia PSC is scheduled to vote on this matter on June 21, 2012. As proposed, the rate decrease would become effective July 1, 2012; however, Georgia Power is currently working

 

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with the Georgia PSC to potentially implement the proposed decrease effective June 1, 2012. The ultimate outcome of this matter cannot be determined at this time.

See MANAGEMENT’S 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.

Georgia Power

2011 Integrated Resource Plan Update

See MANAGEMENT’S 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 — Georgia Power — Rate Plans” and “— 2011 Integrated Resource Plan Update” in Item 8 of the Form 10-K for additional information regarding proposed and final EPA rules and regulations, including the MATS rule for coal- and oil-fired electric utility steam generating units, revisions to effluent guidelines for steam electric power plants, and additional regulation of coal combustion byproducts; the State of Georgia’s Multi-Pollutant Rule; Georgia Power’s analysis of the potential costs and benefits of installing the required controls on its fossil generating units in light of these regulations; the 2010 ARP; and the 2011 IRP Update.

On March 20, 2012, the Georgia PSC approved Georgia Power’s request to decertify and retire two coal-fired generation units at Plant Branch as of October 31, 2013 and December 31, 2013 and an oil-fired unit at Plant Mitchell as of March 26, 2012, which was included in Georgia Power’s 2011 IRP Update. The Georgia PSC also approved three PPAs totaling 998 MWs with Southern Power for capacity and energy that will commence in 2015 and end in 2030. The PPAs remain subject to FERC approval. The ultimate outcome of this matter cannot be determined at this time.

Income Tax Matters

Bonus Depreciation

In December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (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 through 2013. Due to the significant amount of estimated bonus depreciation for 2012, a portion of Southern Company’s tax credit utilization will be deferred. Consequently, Southern Company’s positive cash flow benefit is estimated to be between $530 million and $720 million in 2012.

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. The Southern Company system intends to continue its strategy of developing and constructing new generating facilities, including natural gas, biomass, and solar units at Southern Power, natural gas units and Plant Vogtle Units 3 and 4 at Georgia Power, and the Kemper IGCC at Mississippi Power, as well as adding or changing fuel sources for certain existing units, 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

 

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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 “Integrated Coal Gasification Combined Cycle” in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under “Retail Regulatory Matters — Georgia Power — Nuclear Construction” and “Integrated Coal Gasification Combined Cycle” herein for additional information.

Investments in Leveraged Leases

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Investments in Leveraged Leases” of Southern Company in Item 7 and Note 1 to the financial statements of Southern Company under “Leveraged Leases” in Item 8 of the Form 10-K for additional information.

The recent financial and operational performance of one of Southern Company’s lessees and the associated generation assets has raised potential concerns on the part of Southern Company as to the credit quality of the lessee and the residual value of the assets. Southern Company is currently engaged in discussions with the lessee and the holders of the project’s nonrecourse debt to restructure the debt payments and the related rental payments to allow additional capital investment in the project to be made to improve the operation of the generation assets and the financial viability of the lease transaction. Southern Company continues to monitor the performance of the underlying assets and to evaluate the ability of the lessee to continue to make the required lease payments. If the attempts at restructuring the project are unsuccessful and the project is ultimately abandoned, the potential impairment loss that would be incurred is approximately $90 million on an after-tax basis. The ultimate outcome of this matter cannot be determined at this time.

Other Matters

Southern Company and its subsidiaries are involved in various other matters being litigated and regulatory matters 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 Company’s 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 air quality and water 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 ultimate liabilities, if any, arising from such current proceedings would have a material effect on Southern Company’s financial statements.

See the Notes to the Condensed Financial Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Other Matters” of Southern Company in Item 7 of the Form 10-K for additional information regarding the earthquake and tsunami that struck Japan in March 2011. On March 12, 2012, the NRC issued three orders and a request for information based on the NRC task force report recommendations that included, among other items, additional mitigation strategies for beyond-design-basis events, enhanced spent fuel pool instrumentation capabilities, hardened vents for certain classes of containment structures, including the one in use at Plant Hatch, site specific evaluations for seismic and flooding hazards, and various plant evaluations to ensure adequate coping capabilities during station blackout and other conditions. The staff of the NRC expects to issue additional implementation guidance by August 2012. The final form and the resulting impact of any changes to safety requirements for nuclear reactors will be dependent on further review and action by the

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

NRC and cannot be determined at this time. See RISK FACTORS of Southern Company 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. The ultimate outcome of these events cannot be determined at this time.

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 Company’s 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 MANAGEMENT’S 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 Company’s 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

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FINANCIAL CONDITION AND LIQUIDITY — “Overview” of Southern Company in Item 7 of the Form 10-K for additional information. Southern Company’s financial condition remained stable at March 31, 2012. 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,” “Financing Activities,” and “Capital Requirements and Contractual Obligations” herein for additional information.

Net cash provided from operating activities totaled $568 million for the first quarter 2012, a decrease of $430 million from the corresponding period in 2011. Significant changes in operating cash flow for the first quarter 2012 compared to the corresponding period in 2011 include an increase in fossil fuel stock levels due to reduced consumption as a result of milder weather in the first quarter 2012 and a decrease in accrued taxes primarily due to the timing of tax payments. Net cash used for investing activities totaled $1.4 billion for the first quarter 2012, an increase of $543 million from the corresponding period in 2011. This increase was primarily due to property additions to utility plant. Net cash provided from financing activities totaled $588 million for the first quarter 2012 compared to $151 million net cash used for financing activities in the corresponding period in 2011. This change was primarily due to an increase in short-term debt outstanding, an increase in long-term debt issuances, and the receipt of an interest-bearing refundable deposit related to a pending asset sale at Mississippi Power.

Significant balance sheet changes for the first quarter 2012 include an increase of $845 million in total property, plant, and equipment for the construction of generation, transmission, and distribution facilities. Other significant changes include an increase in long-term debt of $404 million due to senior note issuances.

The market price of Southern Company’s common stock at the end of the first quarter 2012 was $44.93 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $20.37 per share, representing a market-to-book ratio of 221%, compared to $46.29, $20.32, and 228%, respectively, at the end of 2011. The dividend for the first quarter 2012 was $0.4725 per share compared to $0.4550 per share in the first quarter 2011. In April 2012, the quarterly dividend payable in June 2012 was increased to $0.49 per share.

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Capital Requirements and Contractual Obligations

See MANAGEMENT’S 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 Company’s capital requirements for the construction programs of the Southern Company system and other funding requirements associated with scheduled maturities of long-term debt, as well as the related interest, preferred and preference stock dividends, leases, trust funding requirements, other purchase commitments, unrecognized tax benefits and interest, and derivative obligations. Approximately $1.9 billion will be required through March 31, 2013 to fund maturities and announced redemptions of long-term debt.

The construction programs are subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; changes in environmental statutes and regulations; the outcome of any legal challenges to the environmental rules; changes in generating plants, including unit retirements and replacements and adding or changing fuel sources at existing units, 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 Company’s stock plans, private placements, or public offerings. The amount and timing of additional equity capital to be raised in 2012, as well as in subsequent years, will be contingent on Southern Company’s 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 MANAGEMENT’S 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 Power’s 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 $3.46 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 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. Mississippi Power also received DOE grant funds of $245 million that were used for the construction of the Kemper IGCC. An additional $25 million is expected to be received for the initial operation of the Kemper IGCC.

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Southern Company’s 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 of the Southern Company system. To meet short-term cash needs and contingencies, Southern Company has substantial cash flow from operating activities and access to capital markets, including commercial paper programs which are backed by bank credit facilities.

At March 31, 2012, Southern Company and its subsidiaries had approximately $1.0 billion of cash and cash equivalents. Committed credit arrangements with banks at March 31, 2012 were as follows:

 

     Expires         Executable Term
Loans
   Due Within One
Year(a)
Company    2012    2013    2014
and
Beyond
   Total    Unused    One
Year
   Two
Year
   Term
Out
   No Term
Out
     (in millions)    (in millions)    (in millions)    (in millions)

Southern Company

     $        $        $ 1,000        $ 1,000        $ 1,000        $        $        $        $  

Alabama Power

       121          35          1,150          1,306          1,306          51                   51          71  

Georgia Power

                         1,750          1,750          1,745                                      

Gulf Power

       75          35          165          275          275          75                   75          35  

Mississippi Power

       106          25          165          296          296          25          41          66          65  

Southern Power

                         500          500          500                                      

Other

       25          25                   50          50          25                   25           

Total

     $ 327        $ 120        $ 4,730        $ 5,177        $ 5,172        $ 176        $ 41        $ 217        $ 171  

 

 

 

(a) Reflects facilities expiring on or before March 31, 2013.

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.

Most of these arrangements contain covenants that limit debt levels and typically contain cross default provisions that are restricted only to the indebtedness of the individual company. Southern Company and its subsidiaries are currently in compliance with all such covenants.

A portion of the unused credit with banks is allocated to provide liquidity support to the traditional operating companies’ variable rate pollution control revenue bonds and commercial paper programs. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of March 31, 2012 was approximately $1.8 billion.

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.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Details of short-term borrowings, excluding $2 million in notes payable related to other energy service contracts, were as follows:

 

     Short-term Debt at  the
End of the Period
        Short-term Debt During the Period (a)
     Amount
  Outstanding  
  

    Weighted    

Average

Interest

Rate

       

Average

    Outstanding    

  

  Weighted  

Average

Interest

Rate

  

Maximum

Amount

    Outstanding    

 

     

 

     (in millions)              (in millions)         (in millions)

March 31, 2012:

                 

Commercial paper

      $   728        0.3%       $583    0.3%    $938

Short-term bank debt

       300    1.1%         290    1.2%      300

 

     

 

  

Total

   $1,028    0.6%       $873    0.6%   

 

     

 

  

 

(a) Average and maximum amounts are based upon daily balances during the period.

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

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. The maximum potential collateral requirements under these contracts at March 31, 2012 were as follows:

 

Credit Ratings   

  Maximum Potential  
Collateral

Requirements

 

     (in millions)

At BBB and Baa2

   $       9      

At BBB- and/or Baa3

   624 

Below BBB- and/or Baa3

   2,833    

 

Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, any credit rating downgrade could impact Southern Company’s 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 Company’s policies in areas such as counterparty exposure and risk management practices. Southern Company’s 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.

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S 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 Power’s 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 or heat-rate 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 2012 when compared with the December 31, 2011 reporting period.

The changes in fair value of energy-related derivative contracts, substantially all of which are composed of regulatory hedges, for the three months ended March 31, 2012 were as follows:

 

    

  First Quarter  

2012

Changes

 

     Fair Value

 

     (in millions)

Contracts outstanding at the beginning of the period, assets (liabilities), net

   $(231)

Contracts realized or settled

       50

Current period changes(a)

       (84)

 

Contracts outstanding at the end of the period, assets (liabilities), net

   $(265)

 

 

(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, 2012 was a decrease of $34 million, of which $18 million related to natural gas swaps, $15 million related to natural gas options, and $1 million related to other energy-related derivatives. The change is attributable to both the volume of mmBtu and the price of natural gas. At March 31, 2012, Southern Company had a net hedge volume of 221 million mmBtu, which consisted of 123 million mmBtu of swaps and 98 million mmBtu of options. The weighted average swap contract cost was approximately $1.71 per mmBtu above market prices. At December 31, 2011, Southern Company had a net hedge volume of 189 million mmBtu, which consisted of 123 million mmBtu of swaps and 66 million mmBtu of options. The weighted average swap contract cost was approximately $1.51 per mmBtu above market prices. The change in option premiums is primarily attributable to the volatility of the market and the underlying change in the natural gas price. The majority of the natural gas hedge gains and losses are recovered through the traditional operating companies’ fuel cost recovery clauses.

The net fair value of energy-related derivative contracts by hedge designation was reflected in the financial statements as follows:

 

Asset (Liability) Derivatives    March 31, 2012     December 31, 2011  

 

     (in millions)

Regulatory hedges

   $(249)   $(221)

Cash flow hedges

         (1)         (1)

Not designated

       (15)         (9)

 

Total fair value

   $(265)   $(231)

 

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 mainly used by Southern Power to

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

hedge anticipated purchases and sales and are initially deferred in OCI before being recognized in income in the same period as the hedged transaction. Gains and losses on energy-related derivative contracts that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.

Total net unrealized pre-tax gains (losses) recognized in income for the three months ended March 31, 2012 and 2011 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, 2012 were as follows:

 

    

March 31, 2012

Fair Value Measurements

 

     Total    Maturity
         Fair Value              Year 1              Years 2&3          Years 4&5  

 

     (in millions)

Level 1

   $   —      $   —      $ —     $— 

Level 2

     (265)      (197)       (66)        (2)

Level 3

      —       —      —     —

 

Fair value of contracts outstanding at end of period

   $(265)    $(197)    $(66)    $ (2)

 

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 all relevant regulations are finalized.

For additional information, see MANAGEMENT’S 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 2012, Southern Company issued approximately 3.6 million shares of common stock for $115 million through 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. While Southern Company continues to issue additional equity through its employee and director equity compensation plans, Southern Company is not currently issuing additional shares of common stock through the Southern Investment Plan or its employee savings plan. All sales under the Southern Investment Plan and the employee savings plan are currently being funded with shares acquired on the open market by the independent plan administrators.

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following table outlines the debt financing activities for the quarter ended March 31, 2012:

 

Company*    Senior Note
Issuances
   Senior Note
Redemptions
and Maturities
   Other Long-
Term Debt
Redemptions
  and Maturities  

 

     (in millions)

Southern Company

    $    —     $500    $  — 

Alabama Power

        250       —          1

Georgia Power

        750       —      250

Mississippi Power

        400       —        75

 

Total

   $1,400    $500    $326

 

 

* Gulf Power and Southern Power did not issue or redeem any long-term debt during the first quarter 2012.

Southern Company’s subsidiaries used the proceeds of the debt issuances shown in the table above for the redemptions and maturities shown in the table above to repay short-term indebtedness and for general corporate purposes, including their respective continuous construction programs.

On January 17, 2012, Southern Company’s $500 million aggregate principal amount of Series 2007A 5.30% Senior Notes matured.

On March 6, 2012, Mississippi Power received a $150 million interest-bearing refundable deposit from SMEPA to be applied to the sale price for the pending sale of a 17.5% undivided interest in the Kemper IGCC. Until the acquisition is closed, the deposit bears interest at Mississippi Power’s AFUDC rate and is refundable to SMEPA upon termination of the asset purchase agreement related to such purchase, within 60 days of a request by SMEPA for a full or partial refund, or within 15 days at SMEPA’s discretion in the event that Mississippi Power’s senior unsecured credit rating falls below a BBB+ and/or Baa1.

Subsequent to March 31, 2012, Alabama Power redeemed $250 million aggregate principal amount of its Series 2007B 5.875% Senior Notes due April 1, 2047.

Subsequent to March 31, 2012, Mississippi Power announced the redemption of $90 million aggregate principal amount of its Series E 5-5/8% Senior Notes due May 1, 2033 that will occur on May 15, 2012.

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.

 

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PART I

Item 3. Quantitative And Qualitative Disclosures About Market Risk.

See MANAGEMENT’S 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 company’s 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 Company’s and Alabama Power’s 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 2012 that have materially affected or are reasonably likely to materially affect Southern Company’s or Alabama Power’s internal control over financial reporting, other than as described in the next sentence. During the first quarter 2012, Alabama Power implemented new accounts payable, supply chain, and work management systems. The implementation of these systems provides additional operational and internal control benefits including system security and automation of previously manual controls. These process improvement initiatives were not in response to an identified internal control deficiency.

There have been no changes in Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s 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 2012 that have materially affected or are reasonably likely to materially affect Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting.

 

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ALABAMA POWER COMPANY

 

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ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

 

     For the Three Months
Ended March 31,
 
     2012     2011  
     (in millions)  

Operating Revenues:

    

Retail revenues

   $ 1,092      $ 1,126   

Wholesale revenues, non-affiliates

     61        68   

Wholesale revenues, affiliates

     14        75   

Other revenues

     49        51   
  

 

 

   

 

 

 

Total operating revenues

     1,216        1,320   
  

 

 

   

 

 

 

Operating Expenses:

    

Fuel

     306        395   

Purchased power, non-affiliates

     15        11   

Purchased power, affiliates

     40        46   

Other operations and maintenance

     321        297   

Depreciation and amortization

     157        157   

Taxes other than income taxes

     86        85   
  

 

 

   

 

 

 

Total operating expenses

     925        991   
  

 

 

   

 

 

 

Operating Income

     291        329   

Other Income and (Expense):

    

Allowance for equity funds used during construction

     5        5   

Interest income

     4        4   

Interest expense, net of amounts capitalized

     (73     (74

Other income (expense), net

     (7     (6
  

 

 

   

 

 

 

Total other income and (expense)

     (71     (71
  

 

 

   

 

 

 

Earnings Before Income Taxes

     220        258   

Income taxes

     84        96   
  

 

 

   

 

 

 

Net Income

     136        162   

Dividends on Preferred and Preference Stock

     10        10   
  

 

 

   

 

 

 

Net Income After Dividends on Preferred and Preference Stock

   $ 126      $ 152   
  

 

 

   

 

 

 

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

     For the Three Months
Ended March 31,
 
     2012      2011  
     (in millions)  

Net Income After Dividends on Preferred and Preference Stock

   $ 126       $ 152   

Other comprehensive income (loss):

     

Qualifying hedges:

     

Changes in fair value, net of tax of $3 and $2, respectively

     4         2   
  

 

 

    

 

 

 

Total other comprehensive income (loss)

     4         2   
  

 

 

    

 

 

 

Comprehensive Income

   $ 130       $ 154   
  

 

 

    

 

 

 

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

 

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ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     For the Three Months
Ended March 31,
 
     2012     2011  
     (in millions)  

Operating Activities:

    

Net income

   $ 136      $ 162   

Adjustments to reconcile net income to net cash provided from operating activities —

    

Depreciation and amortization, total

     189        185   

Deferred income taxes

     31        59   

Allowance for equity funds used during construction

     (5     (5

Pension, postretirement, and other employee benefits

     (1     (11

Stock based compensation expense

     4        3   

Other, net

     (10     1   

Changes in certain current assets and liabilities —

    

-Receivables

     89        51   

-Fossil fuel stock

     (81     3   

-Materials and supplies

     2        10   

-Other current assets

     (51     (69

-Accounts payable

     (149     (153

-Accrued taxes

     43        160   

-Accrued compensation

     (63     (67

-Other current liabilities

     6        (2
  

 

 

   

 

 

 

Net cash provided from operating activities

     140        327   
  

 

 

   

 

 

 

Investing Activities:

    

Property additions

     (244     (213

Distribution of restricted cash from pollution control revenue bonds

            11   

Nuclear decommissioning trust fund purchases

     (49     (97

Nuclear decommissioning trust fund sales

     49        97   

Cost of removal, net of salvage

     (6     (8

Change in construction payables

     14        (2

Other investing activities

     1        (12
  

 

 

   

 

 

 

Net cash used for investing activities

     (235     (224
  

 

 

   

 

 

 

Financing Activities:

    

Proceeds —

    

Capital contributions from parent company

     5        5   

Senior notes issuances

     250        250   

Redemptions —

    

Pollution control revenue bonds

     (1       

Senior notes

            (200

Payment of preferred and preference stock dividends

     (10     (10

Payment of common stock dividends

     (135     (138

Other financing activities

     (3     (5
  

 

 

   

 

 

 

Net cash provided from (used for) financing activities

     106        (98
  

 

 

   

 

 

 

Net Change in Cash and Cash Equivalents

     11        5   

Cash and Cash Equivalents at Beginning of Period

     344        154   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 355      $ 159   
  

 

 

   

 

 

 

Supplemental Cash Flow Information:

    

Cash paid during the period for —

    

Interest (net of $2 and $2 capitalized for 2012 and 2011, respectively)

   $ 66      $ 72   

Income taxes (net of refunds)

     22        (110

Noncash transactions — accrued property additions at end of period

     32        26   

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

 

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ALABAMA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

 

Assets

   At March 31,
2012
    At December 31,
2011
 
     (in millions)  

Current Assets:

    

Cash and cash equivalents

   $ 355      $ 344   

Restricted cash and cash equivalents

            1   

Receivables —

    

Customer accounts receivable

     300        332   

Unbilled revenues

     116        126   

Other accounts and notes receivable

     35        35   

Affiliated companies

     50        79   

Accumulated provision for uncollectible accounts

     (10     (10

Fossil fuel stock, at average cost

     425        344   

Materials and supplies, at average cost

     372        375   

Vacation pay

     59        59   

Prepaid expenses

     146        74   

Other regulatory assets, current

     48        44   

Other current assets

     12        11   
  

 

 

   

 

 

 

Total current assets

     1,908        1,814   
  

 

 

   

 

 

 

Property, Plant, and Equipment:

    

In service

     20,999        20,809   

Less accumulated provision for depreciation

     7,446        7,344   
  

 

 

   

 

 

 

Plant in service, net of depreciation

     13,553        13,465   

Nuclear fuel, at amortized cost

     363        330   

Construction work in progress

     339        374   
  

 

 

   

 

 

 

Total property, plant, and equipment

     14,255        14,169   
  

 

 

   

 

 

 

Other Property and Investments:

    

Equity investments in unconsolidated subsidiaries

     62        62   

Nuclear decommissioning trusts, at fair value

     588        540   

Miscellaneous property and investments

     74        73   
  

 

 

   

 

 

 

Total other property and investments

     724        675   
  

 

 

   

 

 

 

Deferred Charges and Other Assets:

    

Deferred charges related to income taxes

     530        532   

Prepaid pension costs

     67        59   

Deferred under recovered regulatory clause revenues

     24        48   

Other regulatory assets, deferred

     995        994   

Other deferred charges and assets

     161        186   
  

 

 

   

 

 

 

Total deferred charges and other assets

     1,777        1,819   
  

 

 

   

 

 

 

Total Assets

   $ 18,664      $ 18,477   
  

 

 

   

 

 

 

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

 

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ALABAMA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

 

Liabilities and Stockholder’s Equity

   At March 31,
2012
    At December 31,
2011
 
     (in millions)  

Current Liabilities:

    

Securities due within one year

   $ 750      $ 500   

Accounts payable —

    

Affiliated

     163        203   

Other

     225        322   

Customer deposits

     86        85   

Accrued taxes —

    

Accrued income taxes

     44        32   

Other accrued taxes

     54        34   

Accrued interest

     67        63   

Accrued vacation pay

     48        48   

Accrued compensation

     33        95   

Liabilities from risk management activities

     51        54   

Other regulatory liabilities, current

     19        18   

Other current liabilities

     40        38   
  

 

 

   

 

 

 

Total current liabilities

     1,580        1,492   
  

 

 

   

 

 

 

Long-term Debt

     5,630        5,632   
  

 

 

   

 

 

 

Deferred Credits and Other Liabilities:

    

Accumulated deferred income taxes

     3,287        3,257   

Deferred credits related to income taxes

     82        83   

Accumulated deferred investment tax credits

     147        149   

Employee benefit obligations

     343        343   

Asset retirement obligations

     561        553   

Other cost of removal obligations

     719        703   

Other regulatory liabilities, deferred

     193        156   

Other deferred credits and liabilities

     87        82   
  

 

 

   

 

 

 

Total deferred credits and other liabilities

     5,419        5,326   
  

 

 

   

 

 

 

Total Liabilities

     12,629        12,450   
  

 

 

   

 

 

 

Redeemable Preferred Stock

     342        342   
  

 

 

   

 

 

 

Preference Stock

     343        343   
  

 

 

   

 

 

 

Common Stockholder’s 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

     2,194        2,182   

Retained earnings

     1,948        1,956   

Accumulated other comprehensive loss

     (14     (18
  

 

 

   

 

 

 

Total common stockholder’s equity

     5,350        5,342   
  

 

 

   

 

 

 

Total Liabilities and Stockholder’s Equity

   $ 18,664      $ 18,477   
  

 

 

   

 

 

 

The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER 2012 vs. FIRST QUARTER 2011

OVERVIEW

Alabama Power operates as a vertically integrated utility providing electricity to retail and wholesale customers within its traditional service territory located within the State of Alabama in addition to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Alabama Power’s 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 MANAGEMENT’S 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 2012 vs. First Quarter 2011

 

(change in millions)    (% change)

$(26)

   (17.1)

 

Alabama Power’s net income after dividends on preferred and preference stock for the first quarter 2012 was $126 million compared to $152 million for the corresponding period in 2011. The decrease in net income was related to a decrease in weather-related revenues due to milder weather in the first quarter 2012 and an increase in operations and maintenance expenses. The reductions in net income were partially offset by increases in revenues associated with the elimination of a tax-related adjustment under Alabama Power’s rate structure and an increase in energy sales due to an increase in customer demand. See BUSINESS – “Rate Matters – Rate Structure and Cost Recovery Plans” of Alabama Power in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Rate Adjustments” of Alabama Power in Item 7 of the Form 10-K for information regarding the rate structure of Alabama Power.

Retail Revenues

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)

$(34)

   (3.0)

 

In the first quarter 2012, retail revenues were $1.09 billion compared to $1.13 billion for the corresponding period in 2011.

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Details of the change to retail revenues were as follows:

 

    

First Quarter

2012

 

     (in millions)   (% change)

Retail – prior year

   $1,126  

Estimated change in –

    

Rates and pricing

         25    2.2

Sales growth (decline)

         19    1.8

Weather

         (50)   (4.5)

Fuel and other cost recovery

         (28)   (2.5)

 

Retail – current year

   $1,092       (3.0)%

 

Revenues associated with changes in rates and pricing increased in the first quarter 2012 when compared to the corresponding period in 2011 primarily due to the elimination of a tax-related adjustment under Alabama Power’s rate structure that was effective with October 2011 billings, slightly offset by decreased revenues associated with Rate Certificated New Plant Environmental.

Revenues attributable to changes in sales increased in the first quarter 2012 when compared to the corresponding period in 2011. Industrial KWH energy sales increased 3.2% due to an increase in demand resulting from changes in production levels primarily in the primary metals, chemicals, and forest products sectors, partially offset by a decrease in the stone, clay, and glass sector. Weather-adjusted residential KWH energy sales increased 1.5% due to an increase in customer demand. The decrease in weather-adjusted commercial KWH energy sales was not material.

Revenues resulting from changes in weather decreased in the first quarter 2012 when compared to the corresponding period in 2011. Alabama Power’s service territory experienced milder weather conditions in first quarter 2012 resulting in decreases of 9.0% and 1.6% for residential and commercial sales revenue, respectively.

Fuel and other cost recovery revenues decreased in the first quarter 2012 when compared to the corresponding period in 2011 primarily due to lower fuel costs associated with decreased KWH generation and lower average cost per KWH generated due to lower natural gas prices. 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 affect net income.

See BUSINESS – “Rate Matters – Rate Structure and Cost Recovery Plans” of Alabama Power in Item 1, MANAGEMENT’S 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.

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Wholesale Revenues – Non-Affiliates

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)

$(7)

   (10.3)

 

Wholesale revenues from sales to non-affiliates will vary depending on the market prices of available wholesale energy compared to the cost of Alabama Power’s and the Southern Company system’s generation, demand for energy within the Southern Company system’s service territory, and availability of the Southern Company system’s 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.

In the first quarter 2012, wholesale revenues from non-affiliates were $61 million compared to $68 million for the corresponding period in 2011, reflecting an $8 million decrease in revenue from energy sales and a $1 million increase in capacity revenue. The decrease was primarily due to an 8.1% decrease in KWH sales and a 1.3% decrease in the price of energy.

Wholesale Revenues – Affiliates

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)

$(61)

   (81.3)

 

Wholesale revenues from sales to affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since this energy is generally sold at marginal cost and energy purchases are generally offset by energy revenues through Alabama Power’s energy cost recovery clauses.

In the first quarter 2012, wholesale revenues from affiliates were $14 million compared to $75 million for the corresponding period in 2011. The decrease was due to a 24.3% decrease in the price of energy and a 75.1% decrease in KWH sales.

Fuel and Purchased Power Expenses

 

First Quarter 2012 vs. First Quarter 2011

 

     (change in millions)   (% change)

Fuel

   $(89)   (22.5)

Purchased power – non-affiliates

       4    36.4

Purchased power – affiliates

      (6)   (13.0)

 

 

Total fuel and purchased power expenses

   $(91)  

 

 

In the first quarter 2012, total fuel and purchased power expenses were $361 million compared to $452 million for the corresponding period in 2011. The decrease was primarily due to an $84 million decrease related to a reduction in total KWHs generated as a result of milder weather in the first quarter 2012, a $4 million decrease in the cost of fuel, and an $8 million decrease in the average cost of purchased power.

Fuel and purchased power energy transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Alabama Power’s Energy Cost Recovery Rate mechanism. See FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Fuel Cost Recovery” herein for additional information.

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Details of Alabama Power’s generation and purchased power were as follows:

 

    

First Quarter

2012

  

First Quarter

2011

 

Total generation (billions of KWHs)

   14    16

Total purchased power (billions of KWHs)

     1      1

 

Sources of generation (percent) –

     

Coal

   42    55

Nuclear

   27    23

Gas

   20    15

Hydro

   11     7

 

Cost of fuel, generated (cents per net KWH) 

     

Coal

   3.43    2.99

Nuclear

   0.74    0.67

Gas

   3.00    4.16

 

Average cost of fuel, generated (cents per net KWH)*

   2.51    2.62

Average cost of purchased power (cents per net KWH)**

   4.60    5.26

 

 

* KWHs generated by hydro are excluded from the average cost of fuel, generated.
** Average cost of purchased power includes fuel purchased by Alabama Power for tolling agreements where power is generated by the provider.

Fuel

In the first quarter 2012, fuel expense was $306 million compared to $395 million for the corresponding period in 2011. The $89 million decrease was due to a 35.7% decrease in KWHs generated by coal and a 27.9% decrease in the average cost of KWHs generated by natural gas, which excludes fuel associated with tolling agreements, slightly offset by a 10% increase in KWHs generated by natural gas.

Purchased Power – Non-Affiliates

In the first quarter 2012, purchased power expense from non-affiliates was $15 million compared to $11 million for the corresponding period in 2011. The increase was related to a 296.5% increase in the amount of energy purchased, partially offset by a 68.0% decrease in the average cost per KWH.

Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system’s generation, demand for energy within the Southern Company system’s service territory, and the availability of the Southern Company system’s generation.

Purchased Power – Affiliates

In the first quarter 2012, purchased power expense from affiliates was $40 million compared to $46 million for the corresponding period in 2011. The decrease was related to a 13.9% decrease in the amount of energy purchased, slightly offset by a 2.1% increase in the average cost per KWH.

Energy purchases from affiliates will vary depending on demand for energy 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.

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Other Operations and Maintenance Expenses

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)

$24

   8.1

 

In the first quarter 2012, other operations and maintenance expenses were $321 million compared to $297 million for the corresponding period in 2011. Administrative and general expenses increased $18 million due to benefit-related expenses, affiliated service company expenses, labor expenses, and property insurance expenses. Nuclear production expenses increased $6 million primarily due to the amortization of nuclear outage expenses. See MANAGEMENT’S 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.

Income Taxes

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)

$(12)

   (12.5)

 

For the first quarter 2012, income taxes were $84 million compared to $96 million for the corresponding period in 2011. The decrease was primarily due to lower pre-tax earnings as a result of lower revenues due to milder weather.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Alabama Power’s future earnings potential. The level of Alabama Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Alabama Power’s primary business of selling electricity. These factors include Alabama Power’s 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 are 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 Power’s service territory. 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 MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Alabama Power in Item 7 of the Form 10-K.

Environmental Matters

Compliance costs related to federal and state environmental statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. Environmental compliance spending over the next several years may differ materially from the amounts estimated. The timing, specific requirements, and estimated costs could change as environmental statutes and regulations are adopted or modified. Further, higher costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. See MANAGEMENT’S 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.

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

New Source Review Actions

See MANAGEMENT’S 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. On February 23, 2012, the EPA filed a motion in the U.S. District Court for the Northern District of Alabama seeking vacatur of the judgment and recusal of the judge in the case involving Alabama Power. At the same time, the EPA asked the U.S. Court of Appeals for the Eleventh Circuit to stay its appeal of the judgment in favor of Alabama Power. Alabama Power filed oppositions to the EPA’s motion and its request for a stay. On March 29, 2012, the U.S. Court of Appeals for the Eleventh Circuit denied the EPA’s request to stay its appeal. The U.S. District Court for the Northern District of Alabama has not ruled on the EPA’s motion seeking vacatur of the judgment. The ultimate outcome of this matter cannot be determined at this time.

Climate Change Litigation

Hurricane Katrina Case

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Climate Change Litigation – Hurricane Katrina Case” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Environmental Matters – Climate Change Litigation – Hurricane Katrina Case” in Item 8 of the Form 10-K for additional information. On March 20, 2012, the U.S. District Court for the Southern District of Mississippi dismissed the amended class action complaint filed on May 27, 2011 by the plaintiffs. On April 16, 2012, the plaintiffs appealed the case to the U.S. Court of Appeals for the Fifth Circuit. The ultimate outcome of this matter cannot be determined at this time.

Environmental Statutes and Regulations

General

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – General” of Alabama Power in Item 7 of the Form 10-K for information regarding Alabama Power’s estimated base level capital expenditures to comply with existing statutes and regulations for 2012 through 2014, as well as Alabama Power’s preliminary estimates for potential incremental environmental compliance investments associated with complying with the EPA’s final Mercury and Air Toxics Standards (MATS) rule (formerly referred to as the Utility Maximum Achievable Control Technology rule) and the EPA’s proposed water and coal combustion byproducts rules.

Alabama Power is continuing to develop its compliance strategy and to assess the potential costs of complying with the MATS rule and the EPA’s proposed water and coal combustion byproducts rules. As part of its compliance strategy, Alabama Power has entered into agreements for the construction of two baghouses to control the emissions of mercury and particulates from generating units with an aggregate capacity of 1,901 MWs. The cost of the two baghouses is included in the estimated costs associated with compliance with the MATS rule detailed in the Form 10-K, as referenced above.

Alabama Power’s compliance strategy, including potential unit retirement and replacement decisions, and future environmental capital expenditures are dependent on a final assessment of the MATS rule and will be affected by the final requirements of new or revised environmental regulations that are promulgated, including any proposed environmental regulations; the outcome of any legal challenges to the environmental rules; the cost, availability, and existing inventory of emissions allowances; and Alabama Power’s fuel mix. These costs may arise from existing unit retirements, installation of additional environmental controls, upgrades to the transmission system, the addition of new

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

generating resources, and changing fuel sources for certain existing units. Alabama Power’s preliminary analysis further indicates that the short timeframe for compliance with the MATS rule could significantly affect electric system reliability and cause an increase in costs of materials and services. The ultimate outcome of these matters cannot be determined at this time.

As part of Southern Electric Generating Company’s (SEGCO) environmental compliance strategy, the Board of Directors of SEGCO approved adding natural gas as the primary fuel source in 2015 for its 1,000 MWs of generating capacity and the construction of the necessary natural gas pipeline. SEGCO is jointly owned by Alabama Power and Georgia Power. The capacity of SEGCO’s units is sold to Alabama Power and Georgia Power through a PPA. See Note 4 to the financial statements of Alabama Power in Item 8 of the Form 10-K for additional information. The impact of SEGCO’s ultimate compliance strategy on such PPA costs cannot be determined at this time; however, if such costs cannot continue to be recovered through retail rates, they could have a material impact on Alabama Power’s financial statements.

Air Quality

See MANAGEMENT’S 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 on the eight-hour ozone air quality standards and the MATS rule.

On May 1, 2012, the EPA released its final determination of nonattainment areas based on the 2008 eight-hour ozone air quality standards. None of the areas within Alabama Power’s service territory were designated as nonattainment areas.

Numerous petitions for administrative reconsideration of the MATS rule, including a petition by Southern Company and its subsidiaries, including Alabama Power, have been filed with the EPA. Challenges to the final rule have also been filed in the U.S. District Court of Appeals for the District of Columbia by numerous states, environmental organizations, industry groups, and others. The impact of the MATS rule will depend on the outcome of these and any other legal challenges and, therefore, cannot be determined at this time.

Coal Combustion Byproducts

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Coal Combustion Byproducts” of Alabama Power in Item 7 of the Form 10-K for additional information. On April 5, 2012, 10 environmental groups filed a lawsuit in the U.S. District Court for the District of Columbia seeking to require the EPA to complete its rulemaking process and issue final regulations pertaining to the regulation of coal combustion byproducts as soon as possible. Other parties are expected to file similar challenges. The ultimate outcome of this matter cannot be determined at this time.

Global Climate Issues

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Global Climate Issues” of Alabama Power in Item 7 of the Form 10-K for additional information. On April 13, 2012, the EPA published proposed regulations to establish standards of performance for greenhouse gas emissions from new fossil fuel steam electric generating units. As proposed, the standards would not apply to existing units. The EPA has delayed its plans to propose greenhouse gas emissions performance standards for modified sources and emissions guidelines for existing sources. The impact of this rulemaking will depend on the scope and specific requirements of the final rule and the outcome of any legal challenges and, therefore, cannot be determined at this time.

PSC Matters

Retail Fuel Cost Recovery

See MANAGEMENT’S 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 Power’s fuel cost recovery. Alabama Power’s under recovered fuel costs as of March 31, 2012 totaled $6 million as compared to $31

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

million at December 31, 2011. These under recovered fuel costs at March 31, 2012 are included in deferred under recovered regulatory clause revenues on Alabama Power’s 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.

Income Tax Matters

Bonus Depreciation

In December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (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 through 2013. Consequently, Alabama Power’s positive cash flow benefit is estimated to be between $85 million and $110 million in 2012.

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 Power’s 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 air quality and water 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 ultimate liabilities, if any, arising from such current proceedings would have a material effect on Alabama Power’s financial statements.

See the Notes to the Condensed Financial Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Other Matters” of Alabama Power in Item 7 of the Form 10-K for additional information regarding the earthquake and tsunami that struck Japan in March 2011. On March 12, 2012, the NRC issued three orders and a request for information based on the NRC task force report recommendations that included, among other items, additional mitigation strategies for beyond-design-basis events, enhanced spent fuel pool instrumentation capabilities, hardened vents for certain classes of containment structures, site specific evaluations for seismic and flooding hazards, and various plant evaluations to ensure adequate coping capabilities during station blackout and other conditions. The staff of the NRC expects to issue additional implementation guidance by August 2012. The final form and the resulting impact of any changes to safety requirements for nuclear reactors will be dependent on further review and action by the NRC and 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. The ultimate outcome of these events cannot be determined at this time.

 

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ALABAMA POWER COMPANY

MANAGEMENT’S 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 Power’s 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 MANAGEMENT’S 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 Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Pension and Other Postretirement Benefits.

FINANCIAL CONDITION AND LIQUIDITY

Overview

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Overview” of Alabama Power in Item 7 of the Form 10-K for additional information. Alabama Power’s financial condition remained stable at March 31, 2012. 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,” “Financing Activities,” and “Capital Requirements and Contractual Obligations” herein for additional information.

Net cash provided from operating activities totaled $140 million for the first three months of 2012, a decrease of $187 million as compared to the first three months of 2011. The decrease in cash provided from operating activities was primarily due to the timing of income tax payments and refunds, an increase in fossil fuel stock, and a decrease in deferred income taxes. The decrease was partially offset by an increase in receivables. Net cash used for investing activities totaled $235 million for the first three months of 2012 primarily due to gross property additions related to nuclear fuel and transmission, distribution, other production, and steam generation equipment. Net cash provided by financing activities totaled $106 million for the first three months of 2012. This was primarily due to the issuances of senior notes, partially offset by the payment of common stock dividends. 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 2012 include increases of $250 million of securities due within one year, $86 million in property, plant, and equipment associated with routine property additions and nuclear fuel, and $81 million in fossil fuel stock, at average cost, and a decrease of $97 million in other accounts payable.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S 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 Power’s 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. Approximately $750 million will be required through March 31, 2013 to fund maturities and announced redemptions of long-term debt.

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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; the outcome of any legal challenges to the environmental rules; changes in generating plants, including unit retirements and replacements and adding or changing fuel sources at existing units, 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, short-term debt, security issuances, 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 MANAGEMENT’S 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 Power’s current liabilities sometimes exceed current assets because of Alabama Power’s 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.

At March 31, 2012, Alabama Power had approximately $355 million of cash and cash equivalents. Committed credit arrangements with banks at March 31, 2012 were as follows:

 

Expires           Executable Term
Loans
 

Due Within One

Year(a)

 

     

 

 

 

        2012           2013  

2014

and
    Beyond    

      Total       Unused   One
    Year    
  Two
  Year  
      Term    
Out
  No Term
Out

 

 

 

 

 

 

 

(in millions)   (in millions)   (in millions)   (in millions)
$121   $35   $1,150   $1,306   $1,306   $51   $—   $51   $71

 

(a) Reflects facilities expiring on or before March 31, 2013.

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.

Most of these arrangements contain covenants that limit debt levels and typically contain cross default provisions that are restricted only to the indebtedness of Alabama Power. Alabama Power is currently in compliance with all such covenants. Alabama Power expects to renew its credit arrangements, as needed, prior to expiration. These credit arrangements provide liquidity support to Alabama Power’s commercial paper borrowings and variable rate pollution control revenue bonds. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of March 31, 2012 was approximately $793 million.

Alabama Power may meet short-term cash needs through its commercial paper program. 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 the other traditional operating companies. Proceeds from such issuances for the benefit of Alabama Power are loaned directly to Alabama Power. The obligations of each traditional operating company under these arrangements are several and there is no cross affiliate credit support.

Alabama Power had no commercial paper or short-term debt outstanding during the three-months ended March 31, 2012.

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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, 2012, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $310 million. Included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participant 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 Power’s ability to access capital markets, particularly the short-term debt market.

Market Price Risk

Alabama Power’s market risk exposure relative to interest rate changes for the first quarter 2012 has not changed materially compared to the December 31, 2011 reporting period. 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 or heat-rate 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. 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 2012 when compared with the December 31, 2011 reporting period.

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The changes in fair value of energy-related derivative contracts, substantially all of which are composed of regulatory hedges, for the three months ended March 31, 2012 were as follows:

 

    

First Quarter

2012

Changes

 

 

 
     Fair Value  
     (in millions)  

Contracts outstanding at the beginning of the period, assets (liabilities), net

     $(48)           

Contracts realized or settled

     13            

Current period changes(a)

     (18)           

 

 

Contracts outstanding at the end of the period, assets (liabilities), net

     $(53)           

 

 

 

(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, 2012 was a decrease of $5 million, of which $3 million related to natural gas swaps and $2 million related to natural gas options. The change is attributable to both the volume of mmBtu and the price of natural gas. At March 31, 2012, Alabama Power had a net hedge volume of 37 million mmBtu, which consisted of 27 million mmBtu of swaps and 10 million mmBtu of options. The weighted average swap contract cost was approximately $1.72 per mmBtu above market prices. At December 31, 2011, Alabama Power had a net hedge volume of 39 million mmBtu, which consisted of 30 million mmBtu of swaps and 9 million mmBtu of options. The weighted average swap contract cost was approximately $1.45 per mmBtu above market prices. The change in option premiums is primarily attributable to the volatility of the market and the underlying change in the natural gas price. All of the natural gas hedge gains and losses are recovered through Alabama Power’s fuel cost recovery clause.

Regulatory hedges relate to Alabama Power’s 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 Alabama Power’s fuel cost recovery clause.

Unrealized pre-tax gains and losses recognized in income for the three months ended March 31, 2012 and 2011 for energy-related derivative contracts that are not hedges were not material.

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, 2012 were as follows:

 

   

March 31, 2012

Fair Value Measurements

 

 

 
   

Total

Fair Value

    Maturity  
          Year 1     Years 2&3     Years 4&5    

 

 
    (in millions)  

Level 1

    $ —             $ —         $—             $—           

Level 2

    (53)            (42)        (11)            —           

Level 3

    —             —         —             —           

 

 

Fair value of contracts outstanding at end of period

    $(53)            $(42)        $(11)            $—           

 

 

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 all relevant regulations are finalized.

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

For additional information, see MANAGEMENT’S 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 January 2012, Alabama Power issued $250 million aggregate principal amount of Series 2012A 4.10% Senior Notes due January 15, 2042. The proceeds were used for general corporate purposes, including Alabama Power’s continuous construction program. Alabama Power settled $100 million of interest rate swaps related to this issuance at a loss of $1 million. The loss is being amortized to interest expense, in earnings, over 10 years.

In March 2012, Alabama Power redeemed approximately $1 million aggregate principal amount of The Industrial Development Board of the Town of West Jefferson Solid Waste Disposal Revenue Bonds (Alabama Power Company Miller Plant Project), Series 2008.

Subsequent to March 31, 2012, Alabama Power redeemed $250 million aggregate principal amount of its Series 2007B 5.875% Senior Notes due April 1, 2047.

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.

 

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GEORGIA POWER COMPANY

 

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GEORGIA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

 

    For the Three Months
Ended March 31,
 
    2012     2011  
    (in millions)  

Operating Revenues:

   

Retail revenues

  $ 1,594      $ 1,815   

Wholesale revenues, non-affiliates

    66        83   

Wholesale revenues, affiliates

    3        11   

Other revenues

    82        80   
 

 

 

   

 

 

 

Total operating revenues

    1,745        1,989   
 

 

 

   

 

 

 

Operating Expenses:

   

Fuel

    440        677   

Purchased power, non-affiliates

    93        74   

Purchased power, affiliates

    159        163   

Other operations and maintenance

    434        422   

Depreciation and amortization

    188        173   

Taxes other than income taxes

    87        87   
 

 

 

   

 

 

 

Total operating expenses

    1,401        1,596   
 

 

 

   

 

 

 

Operating Income

    344        393   

Other Income and (Expense):

   

Allowance for equity funds used during construction

    13        25   

Interest expense, net of amounts capitalized

    (91)        (96)   

Other income (expense), net

    (3)        (1)   
 

 

 

   

 

 

 

Total other income and (expense)

    (81)        (72)   
 

 

 

   

 

 

 

Earnings Before Income Taxes

    263        321   

Income taxes

    92        111   
 

 

 

   

 

 

 

Net Income

    171        210   

Dividends on Preferred and Preference Stock

    4        4   
 

 

 

   

 

 

 

Net Income After Dividends on Preferred and Preference Stock

  $ 167      $ 206   
 

 

 

   

 

 

 

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

    For the Three Months
Ended March 31,
 
    2012     2011  
    (in millions)  

Net Income After Dividends on Preferred and Preference Stock

  $ 167      $ 206   

Other comprehensive income (loss):

   

Qualifying hedges:

   

Reclassification adjustment for amounts included in net income, net of tax of $- and $-, respectively

    1        1   
 

 

 

   

 

 

 

Comprehensive Income

  $ 168      $ 207   
 

 

 

   

 

 

 

The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

 

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GEORGIA POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     For the Three Months
Ended  March 31,
 
     2012     2011  
     (in millions)  

Operating Activities:

    

Net income

   $ 171      $ 210   

Adjustments to reconcile net income to net cash provided from operating activities —

    

Depreciation and amortization, total

     229        210   

Deferred income taxes

     38        56   

Allowance for equity funds used during construction

     (13     (25

Other, net

     33        (14

Changes in certain current assets and liabilities —

    

-Receivables

     258        122   

-Fossil fuel stock

     (122     (30

-Prepaid income taxes

     10        80   

-Other current assets

     (4     (14

-Accounts payable

     (62     (50

-Accrued taxes

     (206     (194

-Accrued compensation

     (80     (65

-Other current liabilities

     60        64   
  

 

 

   

 

 

 

Net cash provided from operating activities

     312        350   
  

 

 

   

 

 

 

Investing Activities:

    

Property additions

     (476     (513

Nuclear decommissioning trust fund purchases

     (287     (830

Nuclear decommissioning trust fund sales

     285        827   

Cost of removal, net of salvage

     (15     1   

Change in construction payables, net of joint owner portion

     (203     93   

Other investing activities

     15        (6
  

 

 

   

 

 

 

Net cash used for investing activities

     (681     (428
  

 

 

   

 

 

 

Financing Activities:

    

Increase (decrease) in notes payable, net

     99        (62

Proceeds —

    

Capital contributions from parent company

     9        171   

Pollution control revenue bonds issuances

            137   

Senior notes issuances

     750        300   

Other long-term debt issuances

            250   

Redemptions —

    

Pollution control revenue bonds

            (84

Senior notes

            (101

Other long-term debt

     (250     (300

Payment of preferred and preference stock dividends

     (4     (4

Payment of common stock dividends

     (227     (224

Other financing activities

     (8     (2
  

 

 

   

 

 

 

Net cash provided from financing activities

     369        81   
  

 

 

   

 

 

 

Net Change in Cash and Cash Equivalents

            3   

Cash and Cash Equivalents at Beginning of Period

     13        8   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 13      $ 11   
  

 

 

   

 

 

 

Supplemental Cash Flow Information:

    

Cash paid during the period for —

    

Interest (net of $6 and $9 capitalized for 2012 and 2011, respectively)

   $ 58      $ 65   

Income taxes (net of refunds)

     28        (77

Noncash transactions — accrued property additions at end of period

     178        350   

The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

 

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GEORGIA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

 

Assets

  At March 31,
2012
    At December 31,
2011
 
    (in millions)  

Current Assets:

   

Cash and cash equivalents

  $ 13      $ 13   

Receivables —

   

Customer accounts receivable

    490        571   

Unbilled revenues

    166        172   

Under recovered regulatory clause revenues

           137   

Joint owner accounts receivable

    59        87   

Other accounts and notes receivable

    45        61   

Affiliated companies

    35        26   

Accumulated provision for uncollectible accounts

    (12     (13

Fossil fuel stock, at average cost

    844        723   

Materials and supplies, at average cost

    400        406   

Vacation pay

    84        82   

Prepaid income taxes

    122        71   

Other regulatory assets, current

    118        108   

Other current assets

    84        106   
 

 

 

   

 

 

 

Total current assets

    2,448        2,550   
 

 

 

   

 

 

 

Property, Plant, and Equipment:

   

In service

    27,884        27,804   

Less accumulated provision for depreciation

    10,294        10,296   
 

 

 

   

 

 

 

Plant in service, net of depreciation

    17,590        17,508   

Other utility plant, net

    54        55   

Nuclear fuel, at amortized cost

    468        443   

Construction work in progress

    3,456        3,274   
 

 

 

   

 

 

 

Total property, plant, and equipment

    21,568        21,280   
 

 

 

   

 

 

 

Other Property and Investments:

   

Equity investments in unconsolidated subsidiaries

    62        63   

Nuclear decommissioning trusts, at fair value

    692        667   

Miscellaneous property and investments

    45        44   
 

 

 

   

 

 

 

Total other property and investments

    799        774   
 

 

 

   

 

 

 

Deferred Charges and Other Assets:

   

Deferred charges related to income taxes

    757        756   

Other regulatory assets, deferred

    1,562        1,604   

Other deferred charges and assets

    203        187   
 

 

 

   

 

 

 

Total deferred charges and other assets

    2,522        2,547   
 

 

 

   

 

 

 

Total Assets

  $ 27,337      $ 27,151   
 

 

 

   

 

 

 

The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

 

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GEORGIA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

 

Liabilities and Stockholder’s Equity

   At March 31,
2012
    At December 31,
2011
 
     (in millions)  

Current Liabilities:

    

Securities due within one year

   $ 855      $ 455   

Notes payable

     614        515   

Accounts payable —

    

Affiliated

     287        337   

Other

     470        686   

Customer deposits

     222        213   

Accrued taxes —

    

Accrued income taxes

     47        36   

Unrecognized tax benefits

     9        14   

Other accrued taxes

     89        304   

Accrued interest

     119        92   

Accrued vacation pay

     60        60   

Accrued compensation

     47        125   

Liabilities from risk management activities

     80        68   

Other regulatory liabilities, current

     84        65   

Nuclear decommissioning trust securities lending collateral

     12        32   

Other current liabilities

     144        139   
  

 

 

   

 

 

 

Total current liabilities

     3,139        3,141   
  

 

 

   

 

 

 

Long-term Debt

     8,117        8,018   
  

 

 

   

 

 

 

Deferred Credits and Other Liabilities:

    

Accumulated deferred income taxes

     4,491        4,388   

Deferred credits related to income taxes

     120        122   

Accumulated deferred investment tax credits

     217        220   

Employee benefit obligations

     901        905   

Asset retirement obligations

     745        734   

Other cost of removal obligations

     105        110   

Other deferred credits and liabilities

     254        224   
  

 

 

   

 

 

 

Total deferred credits and other liabilities

     6,833        6,703   
  

 

 

   

 

 

 

Total Liabilities

     18,089        17,862   
  

 

 

   

 

 

 

Preferred Stock

     45        45   
  

 

 

   

 

 

 

Preference Stock

     221        221   
  

 

 

   

 

 

 

Common Stockholder’s Equity:

    

Common stock, without par value—

    

Authorized - 20,000,000 shares

    

Outstanding - 9,261,500 shares

     398        398   

Paid-in capital

     5,540        5,522   

Retained earnings

     3,052        3,112   

Accumulated other comprehensive loss

     (8     (9
  

 

 

   

 

 

 

Total common stockholder’s equity

     8,982        9,023   
  

 

 

   

 

 

 

Total Liabilities and Stockholder’s Equity

   $ 27,337      $ 27,151   
  

 

 

   

 

 

 

The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.

 

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GEORGIA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER 2012 vs. FIRST QUARTER 2011

OVERVIEW

Georgia Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service territory located within the State of Georgia and to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Georgia Power’s 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, and fuel prices. In addition, Georgia Power is currently constructing two new nuclear units and one new combined cycle generating unit. Appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Georgia Power for the foreseeable future.

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 MANAGEMENT’S 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 2012 vs. First Quarter 2011

 

(change in millions)    (% change)
$(39)    (18.9)

 

Georgia Power’s net income after dividends on preferred and preference stock for the first quarter 2012 was $167 million compared to $206 million for the corresponding period in 2011. The decrease was primarily due to a decrease in operating revenues as a result of milder weather, higher depreciation and operations and maintenance expense, and lower AFUDC, partially offset by an increase related to retail revenue rate effects and lower income taxes in the first quarter 2012.

Retail Revenues

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)
$(221)    (12.2)

 

In the first quarter 2012, retail revenues were $1.59 billion compared to $1.82 billion for the corresponding period in 2011.

 

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Details of the change to retail revenues were as follows:

 

    

First Quarter

2012

 

 

 
     (in millions)      (% change)  

Retail — prior year

   $ 1,815               

Estimated change in —

     

Rates and pricing

     22                  1.2         

Sales growth (decline)

     (7)                 (0.4)        

Weather

     (50)                 (2.8)        

Fuel cost recovery

     (186)                 (10.2)        

 

 

Retail – current year

   $         1,594                  (12.2)%     

 

 

Revenues associated with changes in rates and pricing increased in the first quarter 2012 when compared to the corresponding period in 2011 due to the rate pricing effect of decreased customer usage and the NCCR and demand-side management tariff increases effective January 1, 2012, as approved by the Georgia PSC, partially offset by lower contributions from market-driven rates from commercial and industrial customers.

Revenues attributable to changes in sales decreased in the first quarter 2012 when compared to the corresponding period in 2011. Weather-adjusted commercial and industrial KWH sales decreased 2.4% and 0.2%, respectively, in the first quarter 2012 when compared to the corresponding period in 2011, while weather-adjusted residential KWH sales remained flat. The economy continues to impact commercial sales.

Revenues resulting from changes in weather decreased in the first quarter 2012 when compared to the corresponding period in 2011 due to mild weather in the first quarter 2012 and cold weather in January 2011.

Fuel revenues and costs are allocated between retail and wholesale jurisdictions. Retail fuel cost recovery revenues decreased by $186 million in the first quarter of 2012 when compared to the corresponding period in 2011 due to decreased KWH energy sales and lower fuel costs. See “Fuel and Purchased Power Expenses” herein for additional information.

Electric rates include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these fuel cost recovery 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 2012 vs. First Quarter 2011

 

(change in millions)    (% change)
$(17)    (20.5)

 

Wholesale revenues from sales to non-affiliates consist of PPAs and short-term opportunity sales. Wholesale revenues from PPAs have both capacity and energy components. Capacity revenues reflect the recovery of fixed costs and a return on investment. Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Georgia Power’s and the Southern Company system’s generation, demand for energy within the Southern Company system’s service territory, and the availability of the Southern Company system’s 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 Georgia Power’s variable cost of energy.

 

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In the first quarter 2012, wholesale revenues from non-affiliates were $66 million compared to $83 million in the corresponding period in 2011, primarily due to a $20 million decrease in energy revenues, partially offset by a $3 million increase in capacity revenues. The decrease in the first quarter 2012 was primarily due to a 41.3% decrease in KWH sales due to lower demand resulting from mild weather in the first quarter 2012 and cold weather in January 2011.

Wholesale Revenues — Affiliates

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)
$(8)    (72.7)

 

Wholesale revenues from sales to affiliated companies within the Southern Company system will vary depending on demand and the availability and cost of generating resources at each company. These 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 2012, wholesale revenues from affiliates were $3 million compared to $11 million in the corresponding period in 2011. The decrease was primarily due to a 59.5% decrease in KWH sales due to lower demand resulting from milder weather and the availability of market energy at a lower cost than Georgia Power-owned generation.

Fuel and Purchased Power Expenses

 

First Quarter 2012 vs. First Quarter 2011  

 

 
     (change in millions)      (% change)  

Fuel

   $ (237)                     (35.0)        

Purchased power — non-affiliates

     19                      25.7         

Purchased power — affiliates

     (4)                     (2.5)        

 

    

Total fuel and purchased power expenses

   $ (222)                  

 

    

In the first quarter 2012, total fuel and purchased power expenses were $692 million compared to $914 million in the corresponding period in 2011. The decrease was primarily due to the lower cost of natural gas used for generation and lower demand related to mild weather in the first quarter 2012 compared to cold weather in January 2011.

Fuel and purchased power energy transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Georgia Power’s fuel cost recovery mechanism. See FUTURE EARNINGS POTENTIAL — “PSC Matters — Fuel Cost Recovery” herein for additional information.

 

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Details of Georgia Power’s generation and purchased power were as follows:

 

    

First Quarter

2012

    

First Quarter

2011

 

 

 

Total generation (billions of KWHs)

     13                 16           

Total purchased power (billions of KWHs)

     8                 6           

 

 

Sources of generation (percent) —

     

Coal

     42                 62           

Nuclear

     30                 23           

Gas

     26                 12           

Hydro

     2                 3           

 

 

Cost of fuel, generated (cents per net KWH) 

     

Coal

     4.67                 4.74           

Nuclear

     0.86                 0.68           

Gas

     3.16                 4.37           

 

 

Average cost of fuel, generated (cents per net KWH)

     3.10                 3.73           

Average cost of purchased power (cents per net KWH)*

     3.86                 5.57           

 

 

 

* Average cost of purchased power includes fuel purchased by Georgia Power for tolling agreements where power is generated by the provider.

Fuel

In the first quarter 2012, fuel expense was $440 million compared to $677 million in the corresponding period in 2011. The decrease was due to a 22.1% decrease of KWHs generated as a result of lower KWH demand and a 16.9% decrease in the average cost of fuel per KWH generated primarily due to lower natural gas prices.

Purchased Power – Non-Affiliates

In the first quarter 2012, purchased power expense from non-affiliates was $93 million compared to $74 million in the corresponding period in 2011. The increase was due to a 139.8% increase in KWHs purchased as the market cost of available energy was lower than the additional Georgia Power-owned generation available, partially offset by a decrease of 47.9% in the average cost per KWH purchased.

Energy purchases from non-affiliates will vary depending on the market prices of wholesale energy as compared to the cost of the Southern Company system’s generation, demand for energy within the Southern Company system’s service territory, and the availability of the Southern Company system’s generation.

Other Operations and Maintenance Expenses

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)
$12    2.8

 

In the first quarter 2012, other operations and maintenance expenses were $434 million compared to $422 million in the corresponding period in 2011. The increase was primarily due to a $10 million increase in employee pension expense, a $5 million increase in customer assistance expense, and a $2 million increase in nuclear property insurance, partially offset by an $8 million decrease in power generation expense due to outage timing and scope of outage work performed and a decrease in KWH generated as a result of lower demand due to milder weather in the first quarter 2012.

 

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Depreciation and Amortization

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)
$15    8.7

 

In the first quarter 2012, depreciation and amortization was $188 million compared to $173 million in the corresponding period in 2011. The increase was primarily due to a $12 million increase in depreciation on additional plant in service related to new generation at Plant McDonough Unit 4 that went into service in December 2011, as well as additional transmission, distribution, and environmental projects.

Allowance for Equity Funds Used During Construction

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)
$(12)    (48.0)

 

In the first quarter 2012, AFUDC equity was $13 million compared to $25 million in the corresponding period in 2011. The decrease was due to the completion of Plant McDonough Unit 4 in December 2011.

Interest Expense, Net of Amounts Capitalized

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)
$(5)    (5.2)

 

In the first quarter 2012, interest expense, net of amounts capitalized was $91 million compared to $96 million for the corresponding period in 2011. The decrease for the first quarter 2012 when compared to the corresponding period in 2011 was primarily due to lower interest expense on existing variable rate pollution control revenue bonds.

Income Taxes

 

First Quarter 2012 vs. First Quarter 2011

 

(change in millions)    (% change)
$(19)    (17.1)

 

In the first quarter 2012, income taxes were $92 million compared to $111 million in the corresponding period in 2011 due to lower pre-tax earnings.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Georgia Power’s future earnings potential. The level of Georgia Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Georgia Power’s business of selling electricity. These factors include Georgia Power’s 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 Power’s service territory. 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 MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Georgia Power in Item 7 of the Form 10-K.

 

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Environmental Matters

Compliance costs related to federal and state environmental statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis. Environmental compliance spending over the next several years may differ materially from the amounts estimated. The timing, specific requirements, and estimated costs could change as environmental statutes and regulations are adopted or modified. Further, higher costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Environmental Matters” in Item 8 of the Form 10-K for additional information.

New Source Review Actions

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – New Source Review Actions” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Environmental Matters – New Source Review Actions” in Item 8 of the Form 10-K for additional information. On February 23, 2012, the EPA filed a motion in the U.S. District Court for the Northern District of Alabama seeking vacatur of the judgment and recusal of the judge in the case involving Alabama Power. At the same time, the EPA asked the U.S. Court of Appeals for the Eleventh Circuit to stay its appeal of the judgment in favor of Alabama Power. Alabama Power filed oppositions to the EPA’s motion and its request for a stay. On March 29, 2012, the U.S. Court of Appeals for the Eleventh Circuit denied the EPA’s request to stay its appeal. The U.S. District Court for the Northern District of Alabama has not ruled on the EPA’s motion seeking vacatur of the judgment. The ultimate outcome of this matter cannot be determined at this time.

Climate Change Litigation

Hurricane Katrina Case

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Climate Change Litigation – Hurricane Katrina Case” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Environmental Matters – Climate Change Litigation – Hurricane Katrina Case” in Item 8 of the Form 10-K for additional information. On March 20, 2012, the U.S. District Court for the Southern District of Mississippi dismissed the amended class action complaint filed on May 27, 2011 by the plaintiffs. On April 16, 2012, the plaintiffs appealed the case to the U.S. Court of Appeals for the Fifth Circuit. The ultimate outcome of this matter cannot be determined at this time.

Environmental Statutes and Regulations

General

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – General” of Georgia Power in Item 7 of the Form 10-K for information regarding Georgia Power’s estimated base level capital expenditures to comply with existing statutes and regulations for 2012 through 2014, as well as Georgia Power’s preliminary estimates for potential incremental environmental compliance investments associated with complying with the EPA’s final Mercury and Air Toxics Standards (MATS) rule (formerly referred to as the Utility Maximum Achievable Control Technology rule) and the EPA’s proposed water and coal combustion byproducts rules. Georgia Power is continuing to develop its compliance strategy and to assess the potential costs of complying with the MATS rule and the EPA’s proposed water and coal combustion byproducts rules.

 

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Georgia Power’s compliance strategy, including potential unit retirement and replacement decisions, and future environmental capital expenditures are dependent on a final assessment of the MATS rule and will be affected by the final requirements of new or revised environmental regulations that are promulgated, including any proposed environmental regulations; the outcome of any legal challenges to the environmental rules; the cost, availability, and existing inventory of emissions allowances; and Georgia Power’s fuel mix. These costs may arise from existing unit retirements, installation of additional environmental controls, upgrades to the transmission system, the addition of new generating resources, and changing fuel sources for certain existing units. Georgia Power’s preliminary analysis further indicates that the short timeframe for compliance with the MATS rule could significantly affect electric system reliability and cause an increase in costs of materials and services. The ultimate outcome of these matters cannot be determined at this time.

As part of Southern Electric Generating Company’s (SEGCO) environmental compliance strategy, the Board of Directors of SEGCO approved adding natural gas as the primary fuel source in 2015 for its 1,000 MWs of generating capacity and the construction of the necessary natural gas pipeline. SEGCO is jointly owned by Georgia Power and Alabama Power. The capacity of SEGCO’s units is sold to Georgia Power and Alabama Power through a PPA. See Note 4 to the financial statements of Georgia Power in Item 8 of the Form 10-K for additional information. The impact of SEGCO’s ultimate compliance strategy on such PPA costs cannot be determined at this time; however, if such costs cannot continue to be recovered through retail rates, they could have a material impact on Georgia Power’s financial statements.

Air Quality

See MANAGEMENT’S 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 on the eight-hour ozone air quality standards and the MATS rule.

On May 1, 2012, the EPA released its final determination of nonattainment areas based on the 2008 eight-hour ozone air quality standards. The only area within Georgia Power’s service territory designated as a nonattainment area was a 15-county area within metropolitan Atlanta.

Numerous petitions for administrative reconsideration of the MATS rule, including a petition by Southern Company and its subsidiaries, including Georgia Power, have been filed with the EPA. Challenges to the final rule have also been filed in the U.S. District Court of Appeals for the District of Columbia by numerous states, environmental organizations, industry groups, and others. The impact of the MATS rule will depend on the outcome of these and any other legal challenges and, therefore, cannot be determined at this time.

Coal Combustion Byproducts

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Coal Combustion Byproducts” of Georgia Power in Item 7 of the Form 10-K for additional information. On April 5, 2012, 10 environmental groups filed a lawsuit in the U.S. District Court for the District of Columbia seeking to require the EPA to complete its rulemaking process and issue final regulations pertaining to the regulation of coal combustion byproducts as soon as possible. Other parties are expected to file similar challenges. The ultimate outcome of this matter cannot be determined at this time.

Global Climate Issues

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Global Climate Issues” of Georgia Power in Item 7 of the Form 10-K for additional information. On April 13, 2012, the EPA published proposed regulations to establish standards of performance for greenhouse gas emissions from new fossil fuel steam electric generating units. As proposed, the standards would not apply to existing units. The EPA has delayed its plans to propose greenhouse gas emissions performance standards for modified sources and emissions guidelines for existing sources. The impact of this rulemaking will depend on the scope and specific requirements of the final rule and the outcome of any legal challenges and, therefore, cannot be determined at this time.

 

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PSC Matters

Fuel Cost Recovery

See MANAGEMENT’S 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, 2012, Georgia Power had a total over recovered fuel cost balance of approximately $22 million compared to an under recovered balance of $137 million at December 31, 2011. The over recovered fuel costs at March 31, 2012 are included in other deferred credits and liabilities on Georgia Power’s Condensed Balance Sheet herein. The under recovered fuel costs at December 31, 2011 are included in current assets on Georgia Power’s Condensed Balance Sheet herein. 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 Power’s revenues or net income, but will affect cash flow.

On March 30, 2012, Georgia Power filed a request with the Georgia PSC to decrease fuel rates by 19%, which is expected to reduce annual billings by $567 million. The decrease in fuel costs is driven primarily by lower natural gas prices as a result of increased natural gas supplies. The Georgia PSC is scheduled to vote on this matter on June 21, 2012. As proposed, the rate decrease would become effective July 1, 2012; however, Georgia Power is currently working with the Georgia PSC to potentially implement the proposed decrease effective June 1, 2012. The ultimate outcome of this matter cannot be determined at this time.

2011 Integrated Resource Plan Update

See MANAGEMENT’S 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” and “– 2011 Integrated Resource Plan Update” in Item 8 of the Form 10-K for additional information regarding proposed and final EPA rules and regulations, including the MATS rule for coal- and oil-fired electric utility steam generating units, revisions to effluent guidelines for steam electric power plants, and additional regulation of coal combustion byproducts; the State of Georgia’s Multi-Pollutant Rule; Georgia Power’s analysis of the potential costs and benefits of installing the required controls on its fossil generating units in light of these regulations; the 2010 ARP; and the 2011 IRP Update.

On March 20, 2012, the Georgia PSC approved Georgia Power’s request to decertify and retire two coal-fired generation units at Plant Branch as of October 31, 2013 and December 31, 2013 and an oil-fired unit at Plant Mitchell as of March 26, 2012, which was included in Georgia Power’s 2011 IRP Update. The Georgia PSC also approved three PPAs totaling 998 MWs with Southern Power for capacity and energy that will commence in 2015 and end in 2030. The PPAs remain subject to FERC approval. The ultimate outcome of this matter cannot be determined at this time.

Income Tax Matters

Bonus Depreciation

In December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (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 through 2013. Consequently, Georgia Power’s positive cash flow benefit is estimated to be between $320 million and $420 million in 2012.

 

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Construction

Nuclear

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Construction – Nuclear” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Construction – Nuclear” in Item 8 of the Form 10-K for additional information regarding the construction of Plant Vogtle Units 3 and 4.

On February 16, 2012, a group of petitioners who had intervened in the NRC’s combined construction and operating licenses (COLs) proceedings for Plant Vogtle Units 3 and 4 filed a petition in the U.S. Court of Appeals for the District of Columbia Circuit seeking judicial review and a stay of the NRC’s issuance of the COLs. In addition, on February 16, 2012, another group of petitioners filed a petition with the U.S. Court of Appeals for the District of Columbia Circuit seeking judicial review of the NRC’s certification of the Westinghouse Design Certification Document, as amended (DCD). On April 3, 2012, the U.S. Court of Appeals for the District of Columbia Circuit granted a motion filed by these two groups of petitioners to consolidate their challenges. On April 18, 2012, another group of petitioners filed a motion to stay the effectiveness of the order issuing the COLs for Plant Vogtle Units 3 and 4 with the U.S. District Court for the District of Columbia. Georgia Power has filed a motion to intervene in these proceedings and intends to vigorously contest these petitions.

In 2009, the Georgia PSC voted to certify construction of Plant Vogtle Units 3 and 4. In addition, the Georgia PSC voted to approve inclusion of the related CWIP accounts in rate base. Also in 2009, the Governor of the State of Georgia signed into law the Georgia Nuclear Energy Financing Act that allows Georgia Power to recover financing costs for nuclear construction projects by including the related CWIP accounts in rate base during the construction period. 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. The Georgia PSC has ordered Georgia Power to report against this total certified cost of approximately $6.1 billion. In addition, in December 2010, the Georgia PSC approved Georgia Power’s NCCR tariff. The NCCR tariff became effective January 1, 2011 and adjustments are filed with the Georgia PSC on November 1 of each year to become effective on January 1 of the following year. 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, 2012, approximately $68 million of these 2009 and 2010 costs remained in CWIP.

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 Westinghouse and Stone & Webster, Inc. (collectively, Consortium) have established both informal and formal dispute resolution procedures in accordance with the engineering, procurement, and construction agreement to design, engineer, procure, construct, and test two AP1000 nuclear units with electric generating capacity of approximately 1,100 MWs each and related facilities, structures, and improvements at Plant Vogtle entered into by the parties (Vogtle 3 and 4 Agreement) in order to resolve issues arising during the course of constructing a project of this magnitude. The Consortium and Georgia Power (on behalf of the Owners) have successfully initiated both formal and informal claims through these procedures, including ongoing claims, to resolve disputes and expect to resolve any existing and future disputes through these procedures as well.

 

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During the course of construction activities, issues have arisen that may impact the project budget and schedule, including costs associated with design changes to the DCD, and costs associated with delays in the project schedule related to the timing of approval of the DCD and issuance of the COLs. The Owners and the Consortium have begun negotiations regarding these issues, including the assertion by the Consortium that the Owners are responsible for these costs under the terms of the Vogtle 3 and 4 Agreement. In preliminary discussions, the Consortium has provided its initial estimate of its proposed adjustment to the contract price. The Consortium’s estimated adjustment attributable to Georgia Power (based on Georgia Power’s ownership interest) is approximately $400 million (in 2008 dollars) with respect to these issues, which include an initial estimate of costs for efforts to maintain the projected in-service dates of 2016 and 2017 for Plant Vogtle Units 3 and 4, respectively. Georgia Power has not agreed with the amount of these proposed adjustments or that the Owners have responsibility for any costs related to these issues. Georgia Power expects negotiations with the Consortium to continue over the next several months during which time the parties will attempt to reach a mutually acceptable compromise of their positions. If a compromise cannot be reached, formal dispute resolution, including litigation, may follow. Georgia Power intends to vigorously defend its positions. If these costs are imposed upon the Owners, Georgia Power would seek an amendment to the certified cost of Plant Vogtle Units 3 and 4, if necessary. Additional claims by the Consortium or Georgia Power (on behalf of the Owners) are expected to arise throughout the construction of Plant Vogtle Units 3 and 4.

In addition, there are processes in place to assure compliance with the design requirements specified in the DCD and the COLs, including rigorous inspection by Southern Nuclear and the NRC that occurs throughout construction. A recent routine NRC inspection identified that certain details of the rebar construction in the Plant Vogtle Unit 3 nuclear island were not consistent with the DCD. Georgia Power expects to receive official notice of these findings from the NRC. Georgia Power, on behalf of the Owners, is currently engaged in constructive discussions with the Consortium to identify appropriate corrective actions. Various inspection issues are expected as construction proceeds.

There are pending technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4, including legal challenges to the NRC issuance of the COLs and certification of the DCD. Similar additional challenges at the state and federal level are expected as construction proceeds.

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.

The ultimate outcome of these matters cannot be determined at this time.

Other Construction

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Construction – Other Construction” of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under “Construction – Other Construction” in Item 8 of the Form 10-K for additional information.

Georgia Power placed Plant McDonough Unit 5 into service on April 26, 2012. Plant McDonough Unit 6 is expected to be placed into service in November 2012. Plant McDonough Unit 1 was retired on February 29, 2012.

 

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Other Matters

Georgia Power is involved in various other matters being litigated and regulatory matters 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 Power’s 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 air quality and water 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 ultimate liabilities, if any, arising from such current proceedings would have a material effect on Georgia Power’s financial statements.

See the Notes to the Condensed Financial Statements herein for a discussion of various other contingencies, regulatory matters, and other matters being litigated which may affect future earnings potential.

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Other Matters” of Georgia Power in Item 7 of the Form 10-K for additional information regarding the earthquake and tsunami that struck Japan in March 2011. On March 12, 2012, the NRC issued three orders and a request for information based on the NRC task force report recommendations that included, among other items, additional mitigation strategies for beyond-design-basis events, enhanced spent fuel pool instrumentation capabilities, hardened vents for certain classes of containment structures, including the one in use at Plant Hatch, site specific evaluations for seismic and flooding hazards, and various plant evaluations to ensure adequate coping capabilities during station blackout and other conditions. The staff of the NRC expects to issue additional implementation guidance by August 2012. The final form and the resulting impact of any changes to safety requirements for nuclear reactors will be dependent on further review and action by the NRC and cannot be determined at this time. 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. The ultimate outcome of these events cannot be determined at this time.

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 Power’s 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 MANAGEMENT’S 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 Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, Unbilled Revenues, and Pension and Other Postretirement Benefits.

 

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GEORGIA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FINANCIAL CONDITION AND LIQUIDITY

Overview

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Overview” of Georgia Power in Item 7 of the Form 10-K for additional information. Georgia Power’s financial condition remained stable at March 31, 2012. 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,” “Financing Activities,” and “Capital Requirements and Contractual Obligations” herein for additional information.

Net cash provided from operating activities totaled $312 million for the first three months of 2012 compared to $350 million for the corresponding period in 2011. The $38 million decrease is primarily due to lower retail operating revenues and higher fuel inventory additions in the first quarter 2012. Net cash used for investing activities totaled $681 million primarily due to gross property additions to utility plant in the first three months of 2012. Net cash provided from financing activities totaled $369 million for the first three months of 2012 compared to $81 million for the corresponding period in 2011. The $288 million increase is primarily due to increased debt issuances in the first quarter 2012.

Significant balance sheet changes for the first three months of 2012 include increases of $288 million in total property, plant, and equipment and $121 million in fossil fuel stock, as well as the elimination of $137 million in under recovered fuel.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S 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 Power’s 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 $855 million will be required through March 31, 2013 to fund maturities of long-term debt.

On March 20, 2012, the Georgia PSC approved three PPAs totaling 998 MWs with Southern Power for capacity and energy that will commence in 2015 and end in 2030. However, these PPAs remain subject to FERC approval. See FUTURE EARNINGS POTENTIAL – “PSC Matters – 2011 Integrated Resource Plan Update” herein for additional information. These PPAs will be accounted for as leases and are expected to result in additional obligations of approximately $56 million in 2015, $66 million in 2016, and a total of $973 million thereafter. The ultimate outcome of this matter cannot be determined at this time.

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; the outcome of any legal challenges to the environmental rules; changes in generating plants, including unit retirements and replacements and adding or changing fuel sources at existing units, 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.

 

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GEORGIA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S 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 Power’s 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 $3.46 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 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 Power’s 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.

At March 31, 2012, Georgia Power had approximately $13 million of cash and cash equivalents. Committed credit arrangements with banks at March 31, 2012 were as follows:

 

Expires           Executable Term
Loans
 

Due Within One

Year(a)

 

     

 

 

 

        2012           2013  

2014

and
    Beyond    

      Total       Unused   One
    Year    
  Two
  Year  
      Term    
Out
  No Term
Out

 

 

 

 

 

 

 

(in millions)   (in millions)   (in millions)   (in millions)
$—   $—   $1,750   $1,750   $1,745   $—   $—   $—   $—

 

(a) Reflects facilities expiring on or before March 31, 2013.

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.

Most of these arrangements contain covenants that limit debt levels and typically contain cross default provisions that are restricted only to the indebtedness of Georgia Power. Georgia Power is currently in compliance with all such covenants. Georgia Power expects to renew its credit arrangements, as needed, prior to expiration. These credit arrangements provide liquidity support to Georgia Power’s commercial paper borrowings and variable rate pollution control revenue bonds. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of March 31, 2012 was approximately $868 million.

 

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GEORGIA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 the other traditional operating companies. Proceeds from such issuances for the benefit of Georgia Power are loaned directly to Georgia Power. The obligations of each traditional operating company under these arrangements are several and there is no cross affiliate credit support.

Details of short-term borrowings, excluding $2 million of notes payable related to other energy service contracts, were as follows:

 

     Short-term Debt at  the
End of the Period
     Short-term Debt During the Period (a)  
     Amount
Outstanding
     Weighted    
Average    
Interest    
Rate    
         Average
    Outstanding
     Weighted
Average
Interest
Rate
     Maximum    
Amount    
Outstanding    
 

 

    

 

 

 
     (in millions)             (in millions)               (in millions)        

March 31, 2012:

              

Commercial paper

     $    312           0.3%                 $    229               0.2%              $    517           

Short-term bank debt

     300           1.1%                 290               1.2%              300           

 

    

Total

     $    612           0.7%                 $    519               0.8%           

 

    

 

(a) Average and maximum amounts are based upon daily balances during the period.

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. The maximum potential collateral requirements under these contracts at March 31, 2012 were as follows:

 

Credit Ratings    Maximum Potential
Collateral Requirements  

 

     (in millions)

At BBB- and/or Baa3

   $      68

Below BBB- and/or Baa3

      1,540

 

Included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participant 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 Power’s ability to access capital markets, particularly the short-term debt market.

 

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GEORGIA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Market Price Risk

Georgia Power’s market risk exposure relative to interest rate changes for the first quarter 2012 has not changed materially compared with the December 31, 2011 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 or heat-rate 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. 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 2012 relative to fuel and electricity prices when compared with the December 31, 2011 reporting period.

The changes in fair value of energy-related derivative contracts, substantially all of which are composed of regulatory hedges, for the three months ended March 31, 2012 were as follows:

 

    

First Quarter

2012

Changes

   

 

     Fair Value    
     (in millions)    

Contracts outstanding at the beginning of the period, assets (liabilities), net

   $(82)  

Contracts realized or settled

     19  

Current period changes(a)

     (23)  

 

Contracts outstanding at the end of the period, assets (liabilities), net

   $(86)  

 

 

(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, 2012 was a decrease of $4 million, of which $8 million related to a decrease from natural gas options, partially offset by an increase of $4 million from natural gas swaps. The change is attributable to both the volume of mmBtu and the price of natural gas. At March 31, 2012, Georgia Power had a net hedge volume of 85 million mmBtu, which consisted of 25 million mmBtu of swaps and 60 million mmBtu of options. The weighted average swap contract cost was approximately $2.13 per mmBtu above market prices. At December 31, 2011, Georgia Power had a net hedge volume of 73 million mmBtu, which consisted of 29 million mmBtu of swaps and 44 million mmBtu of options. The weighted average swap contract cost was approximately $1.65 per mmBtu above market prices. The change in option premiums is primarily attributable to the volatility of the market and the underlying change in the natural gas price. All natural gas hedge gains and losses are recovered through Georgia Power’s fuel cost recovery mechanism.

Regulatory hedges relate to Georgia Power’s 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 Georgia Power’s fuel cost recovery mechanism.

Unrealized pre-tax gains and losses recognized in income for the three months ended March 31, 2012 and 2011 for energy-related derivative contracts that are not hedges were not material.

 

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GEORGIA POWER COMPANY

MANAGEMENT’S 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, 2012 were as follows:

 

    

March 31, 2012

Fair Value Measurements

 

     Total   Maturity
     Fair Value   Year 1   Years 2&3

 

         (in millions)    

Level 1

   $ —    $ —    $ — 

Level 2

     (86)     (66)     (20)

Level 3

    —    —    —

 

Fair value of contracts outstanding at end of period

   $(86)   $(66)   $(20)

 

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 all relevant regulations are finalized.

For additional information, see MANAGEMENT’S 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 2012, Georgia Power entered into a six-month floating rate bank loan in an aggregate amount of $100 million, bearing interest based on one-month LIBOR. The proceeds were used for general corporate purposes, including Georgia Power’s continuous construction program.

In March 2012, Georgia Power issued $750 million aggregate principal amount of Series 2012A 4.30% Senior Notes due March 15, 2042. The proceeds were used to repay a portion of Georgia Power’s short-term debt, to repay two bank loans, each in an aggregate principal amount of $125 million, and for general corporate purposes, including Georgia Power’s continuous construction program.

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.

 

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GULF POWER COMPANY

 

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GULF POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)