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 |
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 |
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.
2
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2012
Page Number |
||||||
5 | ||||||
7 | ||||||
PART I FINANCIAL INFORMATION | ||||||
Item 1. |
Financial Statements (Unaudited) |
|||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
|||||
10 | ||||||
11 | ||||||
12 | ||||||
13 | ||||||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
15 | |||||
33 | ||||||
33 | ||||||
34 | ||||||
35 | ||||||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
37 | |||||
51 | ||||||
51 | ||||||
52 | ||||||
53 | ||||||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
55 | |||||
72 | ||||||
72 | ||||||
73 | ||||||
74 | ||||||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
76 | |||||
92 | ||||||
92 | ||||||
93 | ||||||
94 | ||||||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
96 | |||||
115 | ||||||
115 | ||||||
116 | ||||||
117 | ||||||
Managements Discussion and Analysis of Financial Condition and Results of Operations |
119 | |||||
130 | ||||||
Item 3. |
31 | |||||
Item 4. |
31 |
3
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2012
Page Number |
||||||
PART II OTHER INFORMATION | ||||||
Item 1. |
160 | |||||
Item 1A. |
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. |
161 | |||||
165 |
4
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 Powers 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 Powers 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 Powers Nuclear Construction Cost Recovery | |
NDR | Alabama Powers natural disaster reserve | |
NRC | Nuclear Regulatory Commission | |
NSR | New Source Review | |
OCI | Other Comprehensive Income | |
PEP | Mississippi Powers 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 |
5
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 |
6
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, statements concerning 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 Companys 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 Companys 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 PSCs 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 Companys business resulting from terrorist incidents and the threat of terrorist incidents, including cyber intrusion; |
7
| interest rate fluctuations and financial market conditions and the results of financing efforts, including Southern Companys 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 Companys 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.
8
AND SUBSIDIARY COMPANIES
9
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.
10
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.
11
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.
12
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.
13
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.
14
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 systems 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 Companys other business activities include investments in leveraged lease projects and telecommunications. For additional information on these businesses, see BUSINESS The Southern Company System Traditional Operating Companies, Southern Power, and Other Businesses in Item 1 of the Form 10-K.
Southern Company continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and earnings per share. For additional information on these indicators, see MANAGEMENTS DISCUSSION AND ANALYSIS OVERVIEW Key Performance Indicators of Southern Company in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
First Quarter 2012 vs. First Quarter 2011 | ||
| ||
(change in millions) | (% change) | |
$(54) |
(12.8) | |
|
Southern Companys 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 Powers 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.
15
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS 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 |
$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 Powers 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 systems generation, demand for energy within the Southern Company systems service territory, and the availability of the Southern Company systems 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 systems variable cost to produce the energy.
16
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Powers PPAs are generally the responsibility of the counterparties and do not significantly affect net income.
Details of the Southern Company systems 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.
17
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Energy purchases will vary depending on demand for energy within the Southern Company systems service territory, the market prices of wholesale energy as compared to the cost of the Southern Company systems generation, and the availability of the Southern Company systems 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 MANAGEMENTS 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 Powers 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 Powers Plant McDonough Unit 4 in December 2011, partially offset by CWIP related to Mississippi Powers 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
18
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Companys future earnings potential. The level of Southern Companys future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Companys primary business of selling electricity. These factors include the traditional operating companies ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently incurred costs during a time of increasing costs. 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 MANAGEMENTS 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 MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under Environmental Matters in Item 8 of the Form 10-K for additional information.
New Source Review Actions
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters New Source Review Actions of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under Environmental Matters New Source Review Actions in Item 8 of the Form 10-K for additional information. 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
19
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the Eleventh Circuit to stay its appeal of the judgment in favor of Alabama Power. Alabama Power filed oppositions to the EPAs motion and its request for a stay. On March 29, 2012, the U.S. Court of Appeals for the Eleventh Circuit denied the EPAs request to stay its appeal. The U.S. District Court for the Northern District of Alabama has not ruled on the EPAs 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 MANAGEMENTS 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 MANAGEMENTS 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 systems estimated base level capital expenditures to comply with existing statutes and regulations for 2012 through 2014, as well as the Southern Company systems preliminary estimates for potential incremental environmental compliance investments associated with complying with the EPAs final Mercury and Air Toxics Standards (MATS) rule (formerly referred to as the Utility Maximum Achievable Control Technology rule) and the EPAs 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 EPAs proposed water and coal combustion byproducts rules.
The Southern Company systems 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 systems 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 Companys (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 SEGCOs units is sold to Alabama Power and Georgia Power through a PPA. The impact of SEGCOs 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 Companys financial statements.
20
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Air Quality
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters Environmental Statutes and Regulations Air Quality of 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 MANAGEMENTS 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 MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters Global Climate Issues of Southern Company in Item 7 of the Form 10-K for additional information. 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 Companys 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 Companys 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 Companys Condensed Balance Sheet herein were approximately $169 million, and Gulf Power and Mississippi Power had a total over recovered fuel balance included in Southern Companys 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 Companys 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
21
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Fuel Cost Recovery of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under Retail Regulatory Matters Alabama Power Fuel Cost Recovery and Retail Regulatory Matters Georgia Power Fuel Cost Recovery in Item 8 of the Form 10-K for additional information.
Georgia Power
2011 Integrated Resource Plan Update
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters Environmental Statutes and Regulations Air Quality, Water Quality, and Coal Combustion Byproducts of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under Retail Regulatory Matters 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 Georgias Multi-Pollutant Rule; Georgia Powers 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 Powers 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 Powers 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 Companys tax credit utilization will be deferred. Consequently, Southern Companys 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
22
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 MANAGEMENTS 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 Companys 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 projects 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 Companys subsidiaries are subject to extensive governmental regulation related to public health and the environment, such as regulation of air emissions and water discharges. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as 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 Companys 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 MANAGEMENTS 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
23
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS 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 Companys results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENTS DISCUSSION AND ANALYSIS ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates of Southern Company in Item 7 of the Form 10-K for a complete discussion of Southern Companys critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, Unbilled Revenues, and Pension and Other Postretirement Benefits.
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Overview of Southern Company in Item 7 of the Form 10-K for additional information. Southern Companys 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 Companys 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.
24
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Requirements and Contractual Obligations
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Capital Requirements and Contractual Obligations of Southern Company in Item 7 of the Form 10-K for a description of Southern Companys 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 Companys 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 Companys investment opportunities.
Except as described below with respect to potential DOE loan guarantees, the traditional operating companies and Southern Power plan to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, security issuances, term loans, short-term borrowings, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Sources of Capital of Southern Company in Item 7 of the Form 10-K for additional information.
In June 2010, Georgia Power reached an agreement with the DOE to accept terms for a conditional commitment for federal loan guarantees that would apply to future Georgia Power borrowings related to the construction of Plant Vogtle Units 3 and 4. Any borrowings guaranteed by the DOE would be full recourse to Georgia Power and secured by a first priority lien on Georgia Powers 45.7% undivided ownership interest in Plant Vogtle Units 3 and 4. Total guaranteed borrowings would not exceed the lesser of 70% of eligible project costs, or approximately $3.46 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.
25
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southern Companys current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet 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.
26
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS 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 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 Companys ability to access capital markets, particularly the short-term debt market.
Market Price Risk
Southern Company is exposed to market risks, primarily commodity price risk and interest rate risk. Southern Company may also occasionally have limited exposure to foreign currency exchange rates. To manage the volatility attributable to these exposures, Southern Company nets the exposures, where possible, to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to Southern Companys policies in areas such as counterparty exposure and risk management practices. Southern Companys policy is that derivatives are to be used primarily for hedging purposes and mandates strict adherence to all applicable risk management policies. Derivative positions are monitored using techniques including, but not limited to, market valuation, value at risk, stress testing, and sensitivity analysis.
27
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Due to cost-based rate regulation and other various cost recovery mechanisms, the traditional operating companies continue to have limited exposure to market volatility in interest rates, foreign currency, commodity fuel prices, and prices of electricity. In addition, Southern Powers exposure to market volatility in commodity fuel prices and prices of electricity is limited because its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. However, Southern Power has been and may continue to be exposed to market volatility in energy-related commodity prices as a result of sales of uncontracted generating capacity. To mitigate residual risks relative to movements in electricity prices, the traditional operating companies enter into physical fixed-price contracts 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
28
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS 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 MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Market Price Risk of Southern Company in Item 7 and Note 1 under Financial Instruments and Note 11 to the financial statements of Southern Company in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein.
Financing Activities
During the first quarter 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.
29
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENTS 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 Companys 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 Companys $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 Powers 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 SMEPAs discretion in the event that Mississippi Powers 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.
30
PART I
Item 3. Quantitative And Qualitative Disclosures About Market Risk.
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Market Price Risk herein for each registrant and Note 1 to the financial statements of each registrant under Financial Instruments, Note 11 to the financial statements of Southern Company, Alabama Power, and Georgia Power, Note 10 to the financial statements of Gulf Power and Mississippi Power, and Note 9 to the financial statements of Southern Power in Item 8 of the Form 10-K. Also, see Note (H) to the Condensed Financial Statements herein for information relating to derivative instruments.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this quarterly report, Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power conducted separate evaluations under the supervision and with the participation of each companys management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon these evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective.
(b) Changes in internal controls.
There have been no changes in Southern Companys and Alabama Powers internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the first quarter 2012 that have materially affected or are reasonably likely to materially affect Southern Companys or Alabama Powers 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 Powers, Gulf Powers, Mississippi Powers, or Southern Powers internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the first quarter 2012 that have materially affected or are reasonably likely to materially affect Georgia Powers, Gulf Powers, Mississippi Powers, or Southern Powers internal control over financial reporting.
31
32
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.
33
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.
34
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.
35
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
Liabilities and Stockholders 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 Stockholders Equity: |
||||||||
Common stock, par value $40 per share |
||||||||
Authorized - 40,000,000 shares |
||||||||
Outstanding - 30,537,500 shares |
1,222 | 1,222 | ||||||
Paid-in capital |
2,194 | 2,182 | ||||||
Retained earnings |
1,948 | 1,956 | ||||||
Accumulated other comprehensive loss |
(14 | ) | (18 | ) | ||||
|
|
|
|
|||||
Total common stockholders equity |
5,350 | 5,342 | ||||||
|
|
|
|
|||||
Total Liabilities and Stockholders Equity |
$ | 18,664 | $ | 18,477 | ||||
|
|
|
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
36
MANAGEMENTS 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 Powers business of selling electricity. These factors include the ability to maintain a constructive regulatory environment, to maintain and grow energy sales given economic conditions, and to effectively manage and secure timely recovery of costs. These costs include those related to projected long-term demand growth, increasingly stringent environmental standards, fuel, capital expenditures, and restoration following major storms. Appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Alabama Power for the foreseeable future.
Alabama Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income after dividends on preferred and preference stock. For additional information on these indicators, see MANAGEMENTS DISCUSSION AND ANALYSIS OVERVIEW Key Performance Indicators of Alabama Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
First Quarter 2012 vs. First Quarter 2011 | ||
| ||
(change in millions) | (% change) | |
$(26) |
(17.1) | |
|
Alabama Powers 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 Powers 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 MANAGEMENTS 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.
37
ALABAMA POWER COMPANY
MANAGEMENTS 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 Powers 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 Powers 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, MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Retail Rate Adjustments of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under Retail Regulatory Matters in Item 8 of the Form 10-K for additional information.
38
ALABAMA POWER COMPANY
MANAGEMENTS 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 Powers and the Southern Company systems generation, demand for energy within the Southern Company systems service territory, and availability of the Southern Company systems 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 Powers 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 Powers Energy Cost Recovery Rate mechanism. See FUTURE EARNINGS POTENTIAL PSC Matters Retail Fuel Cost Recovery herein for additional information.
39
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of Alabama Powers 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 systems generation, demand for energy within the Southern Company systems service territory, and the availability of the Southern Company systems 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.
40
ALABAMA POWER COMPANY
MANAGEMENTS 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 MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Nuclear Outage Accounting Order of Alabama Power in Item 7 of the Form 10-K for additional information.
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 Powers future earnings potential. The level of Alabama Powers future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Alabama Powers primary business of selling electricity. These factors include Alabama Powers ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon maintaining energy sales which 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 Powers 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 MANAGEMENTS 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 MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under Environmental Matters in Item 8 of the Form 10-K for additional information.
41
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
New Source Review Actions
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters New Source Review Actions of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under Environmental Matters New Source Review Actions in Item 8 of the Form 10-K for additional information. 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 EPAs motion and its request for a stay. On March 29, 2012, the U.S. Court of Appeals for the Eleventh Circuit denied the EPAs request to stay its appeal. The U.S. District Court for the Northern District of Alabama has not ruled on the EPAs 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 MANAGEMENTS 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 MANAGEMENTS 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 Powers estimated base level capital expenditures to comply with existing statutes and regulations for 2012 through 2014, as well as Alabama Powers preliminary estimates for potential incremental environmental compliance investments associated with complying with the EPAs final Mercury and Air Toxics Standards (MATS) rule (formerly referred to as the Utility Maximum Achievable Control Technology rule) and the EPAs 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 EPAs 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 Powers 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 Powers fuel mix. These costs may arise from existing unit retirements, installation of additional environmental controls, upgrades to the transmission system, the addition of new
42
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
generating resources, and changing fuel sources for certain existing units. Alabama Powers 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 Companys (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 SEGCOs 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 SEGCOs 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 Powers financial statements.
Air Quality
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters Environmental Statutes and Regulations Air Quality of Alabama Power in Item 7 of the Form 10-K for additional information 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 Powers 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 MANAGEMENTS 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 MANAGEMENTS 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 MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Fuel Cost Recovery of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under Retail Regulatory Matters Fuel Cost Recovery in Item 8 of the Form 10-K for information regarding Alabama Powers fuel cost recovery. Alabama Powers under recovered fuel costs as of March 31, 2012 totaled $6 million as compared to $31
43
ALABAMA POWER COMPANY
MANAGEMENTS 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 Powers Condensed Balance Sheets herein. This classification is based on an estimate which includes such factors as weather, generation availability, energy demand, and the price of energy. A change in any of these factors could have a material impact on the timing of any recovery of the under recovered fuel costs.
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 Powers 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 Powers business activities are subject to extensive governmental regulation related to public health and the environment, such as regulation of air emissions and water discharges. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as 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 Powers 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 MANAGEMENTS 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.
44
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Alabama Power prepares its financial statements in accordance with GAAP. Significant accounting policies are described in Note 1 to the financial statements of Alabama Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Alabama Powers results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENTS DISCUSSION AND ANALYSIS ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates of Alabama Power in Item 7 of the Form 10-K for a complete discussion of Alabama Powers critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Pension and Other Postretirement Benefits.
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Overview of Alabama Power in Item 7 of the Form 10-K for additional information. Alabama Powers 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 MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Capital Requirements and Contractual Obligations of Alabama Power in Item 7 of the Form 10-K for a description of Alabama Powers capital requirements for its construction program, scheduled maturities of long-term debt, as well as the related interest, derivative obligations, preferred and preference stock dividends, leases, purchase commitments, and trust funding requirements. Approximately $750 million will be required through March 31, 2013 to fund maturities and announced redemptions of long-term debt.
45
ALABAMA POWER COMPANY
MANAGEMENTS 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 MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Sources of Capital of Alabama Power in Item 7 of the Form 10-K for additional information.
Alabama Powers current liabilities sometimes exceed current assets because of Alabama Powers debt due within one year and the periodic use of short-term debt as a funding source primarily to meet scheduled maturities of long-term debt, as well as cash needs, which can fluctuate significantly due to the seasonality of the business.
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 |
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 Powers 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.
46
ALABAMA POWER COMPANY
MANAGEMENTS 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 Powers ability to access capital markets, particularly the short-term debt market.
Market Price Risk
Alabama Powers market risk exposure relative to interest rate changes 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.
47
ALABAMA POWER COMPANY
MANAGEMENTS 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 Powers fuel cost recovery clause.
Regulatory hedges relate to Alabama Powers fuel-hedging program where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through Alabama Powers 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.
48
ALABAMA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For additional information, see MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Market Price Risk of 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 Powers 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.
49
50
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.
51
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.
52
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.
53
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
Liabilities and Stockholders 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 Stockholders 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 stockholders equity |
8,982 | 9,023 | ||||||
|
|
|
|
|||||
Total Liabilities and Stockholders Equity |
$ | 27,337 | $ | 27,151 | ||||
|
|
|
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
54
MANAGEMENTS 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 Powers business of selling electricity. These factors include the ability to maintain a constructive regulatory environment, to maintain and grow energy sales given economic conditions, and to effectively manage and secure timely recovery of 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 MANAGEMENTS DISCUSSION AND ANALYSIS OVERVIEW Key Performance Indicators of Georgia Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
First Quarter 2012 vs. First Quarter 2011 | ||
| ||
(change in millions) | (% change) | |
$(39) | (18.9) | |
|
Georgia Powers 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.
55
GEORGIA POWER COMPANY
MANAGEMENTS 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 |
$ | 1,815 | ||||||
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 Powers and the Southern Company systems generation, demand for energy within the Southern Company systems service territory, and the availability of the Southern Company systems 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 Powers variable cost of energy.
56
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Powers fuel cost recovery mechanism. See FUTURE EARNINGS POTENTIAL PSC Matters Fuel Cost Recovery herein for additional information.
57
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of Georgia Powers 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 systems generation, demand for energy within the Southern Company systems service territory, and the availability of the Southern Company systems 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.
58
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Powers future earnings potential. The level of Georgia Powers future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Georgia Powers business of selling electricity. These factors include Georgia Powers ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon maintaining energy sales which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in Georgia Powers service 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 MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL of Georgia Power in Item 7 of the Form 10-K.
59
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under Environmental Matters in Item 8 of the Form 10-K for additional information.
New Source Review Actions
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters New Source Review Actions of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under Environmental Matters New Source Review Actions in Item 8 of the Form 10-K for additional information. 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 EPAs motion and its request for a stay. On March 29, 2012, the U.S. Court of Appeals for the Eleventh Circuit denied the EPAs request to stay its appeal. The U.S. District Court for the Northern District of Alabama has not ruled on the EPAs 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 MANAGEMENTS 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 MANAGEMENTS 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 Powers estimated base level capital expenditures to comply with existing statutes and regulations for 2012 through 2014, as well as Georgia Powers preliminary estimates for potential incremental environmental compliance investments associated with complying with the EPAs final Mercury and Air Toxics Standards (MATS) rule (formerly referred to as the Utility Maximum Achievable Control Technology rule) and the EPAs 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 EPAs proposed water and coal combustion byproducts rules.
60
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Georgia Powers 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 Powers 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 Powers 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 Companys (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 SEGCOs 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 SEGCOs 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 Powers financial statements.
Air Quality
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters Environmental Statutes and Regulations Air Quality of Georgia Power in Item 7 of the Form 10-K for additional information 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 Powers 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 MANAGEMENTS 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 MANAGEMENTS 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.
61
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PSC Matters
Fuel Cost Recovery
See MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL PSC Matters Fuel Cost Recovery of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under Retail Regulatory Matters Fuel Cost Recovery in Item 8 of the Form 10-K for additional information. As of March 31, 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 Powers Condensed Balance Sheet herein. The under recovered fuel costs at December 31, 2011 are included in current assets on Georgia Powers 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 Powers 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 MANAGEMENTS DISCUSSION AND ANALYSIS FUTURE EARNINGS POTENTIAL Environmental Matters Environmental Statutes and Regulations Air Quality, Water Quality, and Coal Combustion Byproducts of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under Retail Regulatory Matters Rate Plans 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 Georgias Multi-Pollutant Rule; Georgia Powers 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 Powers 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 Powers 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 Powers positive cash flow benefit is estimated to be between $320 million and $420 million in 2012.
62
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Construction
Nuclear
See MANAGEMENTS 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 NRCs 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 NRCs 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 NRCs 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 Powers 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.
63
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Consortiums estimated adjustment attributable to Georgia Power (based on Georgia Powers 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 MANAGEMENTS 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.
64
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Powers business activities are subject to extensive governmental regulation related to public health and the environment, such as regulation of air emissions and water discharges. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as 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 Powers 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 MANAGEMENTS 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 Powers results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENTS DISCUSSION AND ANALYSIS ACCOUNTING POLICIES Application of Critical Accounting Policies and Estimates of Georgia Power in Item 7 of the Form 10-K for a complete discussion of Georgia Powers critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, Unbilled Revenues, and Pension and Other Postretirement Benefits.
65
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Overview of Georgia Power in Item 7 of the Form 10-K for additional information. Georgia Powers 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 MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Capital Requirements and Contractual Obligations of Georgia Power in Item 7 of the Form 10-K for a description of Georgia Powers capital requirements for its construction program, scheduled maturities of long-term debt, as well as related interest, derivative obligations, preferred and preference stock dividends, leases, purchase commitments, trust funding requirements, and unrecognized tax benefits. Approximately $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.
66
GEORGIA POWER COMPANY
MANAGEMENTS 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 MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Sources of Capital of Georgia Power in Item 7 of the Form 10-K for additional information.
In June 2010, Georgia Power reached an agreement with the DOE to accept terms for a conditional commitment for federal loan guarantees that would apply to future borrowings by Georgia Power related to the construction of Plant Vogtle Units 3 and 4. Any borrowings guaranteed by the DOE would be full recourse to Georgia Power and secured by a first priority lien on Georgia Powers 45.7% undivided ownership interest in Plant Vogtle Units 3 and 4. Total guaranteed borrowings would not exceed the lesser of 70% of eligible project costs, or approximately $3.46 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 Powers current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt, as well as cash needs, which can fluctuate significantly due to the seasonality of the business.
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 |
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 Powers 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
MANAGEMENTS 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 Powers ability to access capital markets, particularly the short-term debt market.
68
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Market Price Risk
Georgia Powers market risk exposure relative to interest rate changes for the first quarter 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 Powers fuel cost recovery mechanism.
Regulatory hedges relate to Georgia Powers fuel-hedging program where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through Georgia Powers 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.
69
GEORGIA POWER COMPANY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Georgia Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are market observable, and thus fall into Level 2. See Note (C) to the Condensed Financial Statements herein for further discussion on fair value measurements. The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at March 31, 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 MANAGEMENTS DISCUSSION AND ANALYSIS FINANCIAL CONDITION AND LIQUIDITY Market Price Risk of Georgia Power in Item 7 and Note 1 under Financial Instruments and Note 11 to the financial statements of Georgia Power in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein.
Financing Activities
In January 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 Powers 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 Powers short-term debt, to repay two bank loans, each in an aggregate principal amount of $125 million, and for general corporate purposes, including Georgia Powers 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.
70
71
CONDENSED STATEMENTS OF INCOME (UNAUDITED)