!0-Q
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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 June 30, 2012

OR

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

 

Commission

File Number

 

Registrant, State of Incorporation,

Address and Telephone Number

 

I.R.S. Employer

Identification No.

1-3526

 

The Southern Company

(A Delaware Corporation)

30 Ivan Allen Jr. Boulevard, N.W.

Atlanta, Georgia 30308

(404) 506-5000

  58-0690070

1-3164

 

Alabama Power Company

(An Alabama Corporation)

600 North 18th Street

Birmingham, Alabama 35203

(205) 257-1000

  63-0004250

1-6468

 

Georgia Power Company

(A Georgia Corporation)

241 Ralph McGill Boulevard, N.E.

Atlanta, Georgia 30308

(404) 506-6526

  58-0257110

001-31737

 

Gulf Power Company

(A Florida Corporation)

One Energy Place

Pensacola, Florida 32520

(850) 444-6111

  59-0276810

001-11229

 

Mississippi Power Company

(A Mississippi Corporation)

2992 West Beach

Gulfport, Mississippi 39501

(228) 864-1211

  64-0205820

333-98553

 

Southern Power Company

(A Delaware Corporation)

30 Ivan Allen Jr. Boulevard, N.W.

Atlanta, Georgia 30308

(404) 506-5000

  58-2598670

 

 

 


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Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Registrant

   Large
Accelerated
Filer
   Accelerated
Filer
   Non-
accelerated

Filer
   Smaller
Reporting
Company

The Southern Company

   X         

Alabama Power Company

         X   

Georgia Power Company

         X   

Gulf Power Company

         X   

Mississippi Power Company

         X   

Southern Power Company

         X   

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

 

Registrant

 

Description of
Common Stock

      Shares Outstanding    
    at June 30, 2012    

The Southern Company

  Par Value $5 Per Share   874,796,883

Alabama Power Company

  Par Value $40 Per Share     30,537,500

Georgia Power Company

  Without Par Value       9,261,500

Gulf Power Company

  Without Par Value       4,542,717

Mississippi Power Company

  Without Par Value       1,121,000

Southern Power Company

  Par Value $0.01 Per Share              1,000

This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, and Southern Power Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.

 

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INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2012

 

         Page
    Number
 

DEFINITIONS

     5       

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     7       
  PART I—FINANCIAL INFORMATION   

Item 1.

 

Financial Statements (Unaudited)

  

Item 2.

 

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

  
 

The Southern Company and Subsidiary Companies

  
 

Condensed Consolidated Statements of Income

     10       
 

Condensed Consolidated Statements of Comprehensive Income

     11       
 

Condensed Consolidated Statements of Cash Flows

     12       
 

Condensed Consolidated Balance Sheets

     13       
 

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

     15       
 

Alabama Power Company

  
 

Condensed Statements of Income

     38       
 

Condensed Statements of Comprehensive Income

     38       
 

Condensed Statements of Cash Flows

     39       
 

Condensed Balance Sheets

     40       
 

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

     42       
 

Georgia Power Company

  
 

Condensed Statements of Income

     59       
 

Condensed Statements of Comprehensive Income

     59       
 

Condensed Statements of Cash Flows

     60       
 

Condensed Balance Sheets

     61       
 

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

     63       
 

Gulf Power Company

  
 

Condensed Statements of Income

     83       
 

Condensed Statements of Comprehensive Income

     83       
 

Condensed Statements of Cash Flows

     84       
 

Condensed Balance Sheets

     85       
 

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

     87       
 

Mississippi Power Company

  
 

Condensed Statements of Income

     106       
 

Condensed Statements of Comprehensive Income

     106       
 

Condensed Statements of Cash Flows

     107       
 

Condensed Balance Sheets

     108       
 

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

     110       
 

Southern Power Company and Subsidiary Companies

  
 

Condensed Consolidated Statements of Income

     133       
 

Condensed Consolidated Statements of Comprehensive Income

     133       
 

Condensed Consolidated Statements of Cash Flows

     134       
 

Condensed Consolidated Balance Sheets

     135       
 

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

     137       
 

Notes to the Condensed Financial Statements

     150       

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     36       

Item 4.

 

Controls and Procedures

     36       

 

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INDEX TO QUARTERLY REPORT ON FORM 10-Q

June 30, 2012

 

         Page
                     Number
 
  PART II—OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     185   

Item 1A.

 

Risk Factors

     185   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     Inapplicable   

Item 3.

 

Defaults Upon Senior Securities

     Inapplicable   

Item 4.

 

Mine Safety Disclosures

     Inapplicable   

Item 5.

 

Other Information

     Inapplicable   

Item 6.

 

Exhibits

     186   
 

Signatures

     190   

 

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DEFINITIONS

 

Term    Meaning
  
2010 ARP    Alternate Rate Plan approved by the Georgia PSC for Georgia Power, which became effective January 1, 2011 and will continue through December 31, 2013
2011 IRP Update    Georgia Power’s 2011 Integrated Resource Plan update filed with the Georgia PSC on August 4, 2011
AFUDC    Allowance for funds used during construction
Alabama Power    Alabama Power Company
ARO    Asset retirement obligation
Clean Air Act    Clean Air Act Amendments of 1990
CPCN    Certificate of public convenience and necessity
CWIP    Construction work in progress
DOE    U.S. Department of Energy
ECO Plan    Mississippi Power’s Environmental Compliance Overview Plan
EPA    U.S. Environmental Protection Agency
FERC    Federal Energy Regulatory Commission
Fitch    Fitch, Inc.
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
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
Moody’s    Moody’s Investors Service, Inc.
MW    Megawatt
MWH    Megawatt-hour
NCCR    Georgia Power’s Nuclear Construction Cost Recovery
NDR    Alabama Power’s natural disaster reserve
NRC    Nuclear Regulatory Commission
NSR    New Source Review
OCI    Other Comprehensive Income
PEP    Mississippi Power’s Performance Evaluation Plan
Plant Vogtle Units 3 and 4    Two new nuclear generating units under construction at Plant Vogtle
Power Pool    The operating arrangement whereby the integrated generating resources of the traditional operating companies and Southern Power are subject to joint commitment and dispatch in order to serve their combined load obligations
PPA    Power Purchase Agreement
PSC    Public Service Commission
registrants    Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power

 

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ROE    Return on equity
SEC    Securities and Exchange Commission
SEGCO    Southern Electric Generating Company
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 Nuclear    Southern Nuclear Operating Company, Inc.

Southern Power

   Southern Power Company

S&P

   Standard and Poor’s Ratings Services, a division of The McGraw Hill Companies, Inc.

traditional operating companies

   Alabama Power, Georgia Power, Gulf Power, and Mississippi Power

Westinghouse

   Westinghouse Electric Company LLC

wholesale revenues

   revenues generated from sales for resale

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, statements concerning retail sales, retail rates, economic recovery, fuel and environmental cost recovery and other rate actions, current and proposed environmental regulations and related estimated expenditures, access to sources of capital, projections for the qualified pension plan and other postretirement benefit plan contributions, financing activities, start and completion of construction projects, plans and estimated costs for new generation resources, filings with state and federal regulatory authorities, impact of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, estimated sales and purchases under new power sale and purchase agreements, and estimated construction and other expenditures. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “could,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” or “continue” or the negative of these terms or other similar terminology. There are various factors that could cause actual results to differ materially from those suggested by the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include:

 

 

the impact of recent and future federal and state regulatory changes, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry, implementation of the Energy Policy Act of 2005, environmental laws including regulation of water, coal combustion byproducts, and emissions of sulfur, nitrogen, carbon, soot, particulate matter, hazardous air pollutants, including mercury, and other substances, financial reform legislation, and also changes in tax and other laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of existing laws and regulations;

 

 

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

 

 

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

 

 

variations in demand for electricity, including those relating to weather, the general economy and recovery from the recent recession, population and business growth (and declines), and the effects of energy conservation measures;

 

 

available sources and costs of fuels;

 

 

effects of inflation;

 

 

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

 

 

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

 

 

advances in technology;

 

 

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

 

 

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

 

 

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

 

 

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

 

 

internal restructuring or other restructuring options that may be pursued;

 

 

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

 

 

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

 

 

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

 

 

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

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

other factors discussed elsewhere herein and in other reports filed by the registrants from time to time with the SEC.

The registrants expressly disclaim any obligation to update any forward-looking statements.

 

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THE SOUTHERN COMPANY

AND SUBSIDIARY COMPANIES

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2012     2011     2012     2011  
     (in millions)     (in millions)  

Operating Revenues:

        

Retail revenues

   $ 3,597      $ 3,842      $ 6,689      $ 7,238   

Wholesale revenues

     415        507        764        956   

Other electric revenues

     154        154        302        303   

Other revenues

     15        18        30        36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     4,181        4,521        7,785        8,533   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Expenses:

        

Fuel

     1,290        1,673        2,354        3,149   

Purchased power

     150        145        291        245   

Other operations and maintenance

     944        910        1,911        1,854   

MC Asset Recovery insurance settlement

     (19     —          (19     —     

Depreciation and amortization

     445        430        886        848   

Taxes other than income taxes

     228        227        453        447   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     3,038        3,385        5,876        6,543   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     1,143        1,136        1,909        1,990   

Other Income and (Expense):

        

Allowance for equity funds used during construction

     32        36        63        71   

Interest expense, net of amounts capitalized

     (220     (199     (431     (421

Other income (expense), net

     13        (4     11        (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and (expense)

     (175     (167     (357     (352
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Before Income Taxes

     968        969        1,552        1,638   

Income taxes

     329        349        529        580   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Net Income

     639        620        1,023        1,058   

Dividends on Preferred and Preference Stock of Subsidiaries

     16        16        32        32   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 623      $ 604      $ 991      $ 1,026   
  

 

 

   

 

 

   

 

 

   

 

 

 

Common Stock Data:

        

Earnings per share (EPS) -

        

Basic EPS

   $ 0.71      $ 0.71      $ 1.14      $ 1.20   

Diluted EPS

   $ 0.71      $ 0.70      $ 1.13      $ 1.20   

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

        

Basic

     872        855        870        851   

Diluted

     880        862        879        858   

Cash dividends paid per share of common stock

   $ 0.4900      $ 0.4725      $ 0.9625      $ 0.9275   

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

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

     For the Three  Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2012     2011     2012     2011  
     (in millions)     (in millions)  

Consolidated Net Income

   $ 639      $ 620      $ 1,023      $ 1,058   

Other comprehensive income (loss):

        

Qualifying hedges:

        

Changes in fair value, net of tax of $(8), $-, $(5) and $2, respectively

     (10            (7     3   

Reclassification adjustment for amounts included in net income, net of tax of $2, $1, $3 and $3, respectively

     2               4        3   

Marketable securities:

        

Change in fair value, net of tax of $-, $2, $- and $1, respectively

            3               2   

Pension and other post retirement benefit plans:

        

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

     1        1        2          
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (7     4        (1     8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends on preferred and preference stock of subsidiaries

     (16     (16     (32     (32
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 616      $ 608      $ 990      $ 1,034   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     For the Six Months
Ended June 30,
 
     2012     2011  
     (in millions)  

Operating Activities:

    

Consolidated net income

   $ 1,023      $ 1,058   

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

    

Depreciation and amortization, total

     1,064        1,011   

Deferred income taxes

     327        427   

Allowance for equity funds used during construction

     (63     (71

Pension, postretirement, and other employee benefits

     13        (38

Stock based compensation expense

     35        27   

Retail fuel cost over recovery—long-term

     44        —     

Other, net

     (17     (6

Changes in certain current assets and liabilities —

    

-Receivables

     (55     (156

-Fossil fuel stock

     (305     81   

-Other current assets

     (53     (106

-Accounts payable

     (167     58   

-Accrued taxes

     45        300   

-Accrued compensation

     (216     (193

-Retail fuel cost over recovery—short-term

     101        (6

-Other current liabilities

     (19     3   
  

 

 

   

 

 

 

Net cash provided from operating activities

     1,757        2,389   
  

 

 

   

 

 

 

Investing Activities:

    

Property additions

     (2,356     (2,126

Investment in restricted cash

     (230     (3

Distribution of restricted cash

     49        61   

Nuclear decommissioning trust fund purchases

     (576     (1,405

Nuclear decommissioning trust fund sales

     574        1,401   

Proceeds from property sales

     2        17   

Cost of removal, net of salvage

     (58     (68

Change in construction payables

     (134     37   

Other investing activities

     (62     22   
  

 

 

   

 

 

 

Net cash used for investing activities

     (2,791     (2,064
  

 

 

   

 

 

 

Financing Activities:

    

Decrease in notes payable, net

     (406     (440

Proceeds —

    

Long-term debt issuances

     2,487        1,950   

Interest-bearing refundable deposit related to asset sale

     150        —     

Common stock issuances

     316        482   

Redemptions —

    

Long-term debt

     (1,319     (1,504

Payment of common stock dividends

     (837     (787

Payment of dividends on preferred and preference stock of subsidiaries

     (32     (32

Other financing activities

     19        (4
  

 

 

   

 

 

 

Net cash provided from (used for) financing activities

     378        (335
  

 

 

   

 

 

 

Net Change in Cash and Cash Equivalents

     (656     (10

Cash and Cash Equivalents at Beginning of Period

     1,315        447   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 659      $ 437   
  

 

 

   

 

 

 

Supplemental Cash Flow Information:

    

Cash paid (received) during the period for —

    

Interest (net of $41 and $35 capitalized for 2012 and 2011, respectively)

   $ 391      $ 419   

Income taxes, net

     (34     (355

Noncash transactions — accrued property additions at end of period

     488        407   

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

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

Assets

  At June 30,
2012
    At December 31,
2011
 
    (in millions)  

Current Assets:

   

Cash and cash equivalents

  $ 659      $ 1,315   

Restricted cash and cash equivalents

    192        8   

Receivables —

   

Customer accounts receivable

    1,164        1,074   

Unbilled revenues

    497        376   

Under recovered regulatory clause revenues

    20        143   

Other accounts and notes receivable

    261        282   

Accumulated provision for uncollectible accounts

    (23     (26

Fossil fuel stock, at average cost

    1,672        1,367   

Materials and supplies, at average cost

    919        903   

Vacation pay

    161        160   

Prepaid expenses

    577        385   

Other regulatory assets, current

    208        239   

Other current assets

    66        46   
 

 

 

   

 

 

 

Total current assets

    6,373        6,272   
 

 

 

   

 

 

 

Property, Plant, and Equipment:

   

In service

    61,577        59,744   

Less accumulated depreciation

    21,616        21,154   
 

 

 

   

 

 

 

Plant in service, net of depreciation

    39,961        38,590   

Other utility plant, net

    53        55   

Nuclear fuel, at amortized cost

    807        774   

Construction work in progress

    5,745        5,591   
 

 

 

   

 

 

 

Total property, plant, and equipment

    46,566        45,010   
 

 

 

   

 

 

 

Other Property and Investments:

   

Nuclear decommissioning trusts, at fair value

    1,235        1,207   

Leveraged leases

    660        649   

Miscellaneous property and investments

    260        262   
 

 

 

   

 

 

 

Total other property and investments

    2,155        2,118   
 

 

 

   

 

 

 

Deferred Charges and Other Assets:

   

Deferred charges related to income taxes

    1,390        1,365   

Unamortized debt issuance expense

    157        156   

Unamortized loss on reacquired debt

    288        285   

Deferred under recovered regulatory clause revenues

    29        48   

Other regulatory assets, deferred

    3,484        3,532   

Other deferred charges and assets

    455        481   
 

 

 

   

 

 

 

Total deferred charges and other assets

    5,803        5,867   
 

 

 

   

 

 

 

Total Assets

  $ 60,897      $ 59,267   
 

 

 

   

 

 

 

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

 

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Table of Contents

THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

Liabilities and Stockholders’ Equity

  At June 30,
2012
    At December 31,
2011
 
    (in millions)  

Current Liabilities:

   

Securities due within one year

  $ 2,075      $ 1,717   

Interest-bearing refundable deposit related to asset sale

    150          

Notes payable

    453        859   

Accounts payable

    1,253        1,553   

Customer deposits

    363        347   

Accrued taxes —

   

Accrued income taxes

    17        13   

Unrecognized tax benefits

    6        22   

Other accrued taxes

    337        425   

Accrued interest

    237        226   

Accrued vacation pay

    204        205   

Accrued compensation

    246        450   

Liabilities from risk management activities

    160        209   

Other regulatory liabilities, current

    144        125   

Other current liabilities

    443        426   
 

 

 

   

 

 

 

Total current liabilities

    6,088        6,577   
 

 

 

   

 

 

 

Long-term Debt

    19,459        18,647   
 

 

 

   

 

 

 

Deferred Credits and Other Liabilities:

   

Accumulated deferred income taxes

    9,352        8,809   

Deferred credits related to income taxes

    216        224   

Accumulated deferred investment tax credits

    704        611   

Employee benefit obligations

    2,409        2,442   

Asset retirement obligations

    1,385        1,321   

Other cost of removal obligations

    1,195        1,165   

Other regulatory liabilities, deferred

    295        297   

Other deferred credits and liabilities

    588        514   
 

 

 

   

 

 

 

Total deferred credits and other liabilities

    16,144        15,383   
 

 

 

   

 

 

 

Total Liabilities

    41,691        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 — June 30, 2012: 875 million shares

   

— December 31, 2011: 866 million shares

   

Treasury — June 30, 2012: 0.6 million shares

   

— December 31, 2011: 0.5 million shares

   

Par value

    4,377        4,328   

Paid-in capital

    4,755        4,410   

Treasury, at cost

    (18     (17

Retained earnings

    9,122        8,968   

Accumulated other comprehensive loss

    (112     (111
 

 

 

   

 

 

 

Total Common Stockholders’ Equity

    18,124        17,578   

Preferred and Preference Stock of Subsidiaries

    707        707   
 

 

 

   

 

 

 

Total Stockholders’ Equity

    18,831        18,285   
 

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

  $ 60,897      $ 59,267   
 

 

 

   

 

 

 

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

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SECOND QUARTER 2012 vs. SECOND QUARTER 2011

AND

YEAR-TO-DATE 2012 vs. YEAR-TO-DATE 2011

OVERVIEW

Southern Company is a holding company that owns all of the common stock of the traditional operating companies—Alabama Power, Georgia Power, Gulf Power, and Mississippi Power—and Southern Power and other direct and indirect subsidiaries. Discussion of the results of operations is focused on the Southern Company system’s primary business of electricity sales by the traditional operating companies and Southern Power. The four traditional operating companies are vertically integrated utilities providing electric service in four Southeastern states. Southern Power constructs, acquires, owns, and manages generation assets, including renewable energy projects, and sells electricity at market-based rates in the wholesale market. Southern Company’s other business activities include investments in leveraged lease projects and telecommunications. For additional information on these businesses, see BUSINESS—The Southern Company System—“Traditional Operating Companies,” “Southern Power,” and “Other Businesses” in Item 1 of the Form 10-K.

Southern Company continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and earnings per share. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS—OVERVIEW—“Key Performance Indicators” of Southern Company in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Net Income

 

Second Quarter 2012 vs. Second Quarter 2011    Year-to-Date 2012 vs. Year-to-Date 2011
(change in millions)    (% change)    (change in millions)    (% change)

$19

   3.1    $(35)    (3.4)

Southern Company’s second quarter 2012 net income after dividends on preferred and preference stock of subsidiaries was $623 million ($0.71 per share) compared to $604 million ($0.71 per share) for the second quarter 2011. The increase for the second quarter 2012 when compared to the corresponding period in 2011 was primarily the result of increases in revenues associated with the elimination of a tax-related adjustment under Alabama Power’s rate structure, an increase related to retail revenue rate effects at Georgia Power, an increase related to retail base revenues at Gulf Power, increases in usage and customer growth, an insurance recovery received related to the litigation settlement with MC Asset Recovery, LLC, and lower income taxes. The net income increase for the second quarter 2012 was partially offset by a decrease in revenues due to milder weather, an increase in operations and maintenance expenses, an increase in depreciation on additional plant in service related to new generation, transmission, distribution, and environmental projects, an increase in interest expense, and lower energy revenues at Southern Power.

Southern Company’s year-to-date 2012 net income after dividends on preferred and preference stock of subsidiaries was $991 million ($1.14 per share) compared to $1.03 billion ($1.20 per share) for year-to-date 2011. The net income decrease for year-to-date 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 operations and maintenance expenses, an increase in depreciation on additional plant in service related to new generation, transmission, distribution, and environmental projects, an increase in interest expense, and lower energy revenues at Southern Power. The net income decrease for year-to-date 2012 was partially offset by increases in revenues associated with the elimination of a tax-related adjustment under Alabama Power’s rate structure, an increase related to retail revenue rate effects at Georgia Power, an increase related to retail base and retail interim revenues at Gulf Power, increases in usage and customer growth, and an insurance recovery received related to the litigation settlement with MC Asset Recovery, LLC.

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Retail Revenues

 

Second Quarter 2012 vs. Second Quarter 2011   Year-to-Date 2012 vs. Year-to-Date 2011
(change in millions)    (% change)   (change in millions)   (% change)

$(245)

   (6.4)   $(549)   (7.6)

In the second quarter 2012, retail revenues were $3.60 billion compared to $3.84 billion for the corresponding period in 2011. For year-to-date 2012, retail revenues were $6.69 billion compared to $7.24 billion for the corresponding period in 2011.

Details of the change to retail revenues were as follows:

 

     Second Quarter
2012
     Year-to-Date
2012
 
     (in millions)         (% change)         (in millions)         (% change)   

Retail – prior year

     $3,842                 $7,238             

Estimated change in –

           

Rates and pricing

            75                2.0                    134                    1.9          

Sales growth (decline)

            23                0.6                40                    0.5          

Weather

     (84)             (2.2)               (197)               (2.7)         

Fuel and other cost recovery

     (259)             (6.8)               (526)               (7.3)         

 

 

Retail – current year

     $3,597                   (6.4)%           $  6,689               (7.6)%       

 

 

Revenues associated with changes in rates and pricing increased in the second quarter and year-to-date 2012 when compared to the corresponding periods in 2011 primarily due to the elimination of a tax-related adjustment under Alabama Power’s rate structure and an increase related to retail base and retail interim revenues at Gulf Power. Also contributing to the increase were increases in retail revenues at Georgia Power due to base tariff increases effective April 1, 2012 related to placing Plant McDonough-Atkinson Units 4 and 5 in service, the NCCR and demand-side management tariff increases effective January 1, 2012, as approved by the Georgia PSC, and the rate pricing effect of decreased customer usage, partially offset by lower contributions from market-driven rates from commercial and industrial customers.

Revenues attributable to changes in sales increased in the second quarter and year-to-date 2012 when compared to the corresponding periods in 2011. For second quarter 2012, the increase was due to a 2.1% increase in weather-adjusted residential KWH sales and a 1.2% increase in weather-adjusted commercial KWH sales, partially offset by a 0.1% decrease in industrial KWH sales. The increases in weather-adjusted residential and commercial KWH sales for the second quarter 2012 are due to increases in usage and customer growth. The decrease in industrial KWH sales for the second quarter 2012 is primarily due to decreases in the textiles and paper sectors, largely offset by increases in the pipeline and transportation sectors. For year-to-date 2012, the increase was due to a 1.3% increase in weather-adjusted residential KWH sales and a 0.9% increase in industrial KWH sales, while weather-adjusted commercial KWH sales remained flat. The increase in weather-adjusted residential KWH sales for year-to-date 2012 is due to increases in usage and customer growth. The increase in industrial KWH sales year-to-date 2012 is primarily due to increases in the pipeline, lumber, and transportation sectors, partially offset by decreases in the textiles sector.

Revenues resulting from changes in weather decreased $84 million in the second quarter 2012 and $197 million year-to-date 2012 when compared to the corresponding periods in 2011 as a result of milder weather.

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Fuel and other cost recovery revenues decreased $259 million in the second quarter 2012 and decreased $526 million for year-to-date 2012 when compared to the corresponding periods 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 energy component of purchased power costs, and do not affect net income.

Wholesale Revenues

 

 

Second Quarter 2012 vs. Second Quarter 2011    Year-to-Date 2012 vs. Year-to-Date 2011

 

(change in millions)    (% change)    (change in millions)    (% change)

$(92)

   (18.1)    $(192)    (20.1)

 

Wholesale revenues consist of PPAs with investor-owned utilities and electric cooperatives, unit power sales contracts, and short-term opportunity sales. Wholesale revenues from PPAs and unit power sales contracts have both capacity and energy components. Capacity revenues reflect the recovery of fixed costs and a return on investment. Energy revenues will vary depending on fuel prices, the market prices of wholesale energy compared to the Southern Company system’s generation, demand for energy within the Southern Company system’s service territory, and the availability of the Southern Company system’s generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. Short-term opportunity sales are made at market-based rates that generally provide a margin above the Southern Company system’s variable cost to produce the energy.

In the second quarter 2012, wholesale revenues were $415 million compared to $507 million for the corresponding period in 2011, reflecting a $106 million decrease in energy revenues, partially offset by a $14 million increase in capacity revenues. The decrease in energy revenues was primarily related to a reduction in the average price of energy and lower energy sales mainly due to lower customer demand.

For year-to-date 2012, wholesale revenues were $764 million compared to $956 million for the corresponding period in 2011, reflecting a $213 million decrease in energy revenues, partially offset by a $21 million increase in capacity revenues. The decrease in energy revenues was primarily related to a reduction in the average price of energy and lower energy sales mainly due to lower customer demand.

Fuel and Purchased Power Expenses

 

 

    

Second Quarter 2012
vs.

Second Quarter 2011

 

Year-to-Date 2012
vs.

Year-to-Date 2011

 

     (change in millions)      (% change)   (change in millions)      (% change)

Fuel

     $(383)               (22.9)     $(795)               (25.2)

Purchased power

     5                3.4     46                18.8

 

      

 

 

    

Total fuel and purchased power expenses

     $(378)                   $(749)              

 

      

 

 

    

In the second quarter 2012, total fuel and purchased power expenses were $1.44 billion compared to $1.82 billion for the corresponding period in 2011. The decrease was primarily the result of a $415 million decrease in the average cost of fuel and purchased power and a $133 million decrease in the volume of KWHs generated, partially offset by a $170 million increase in the volume of KWHs purchased.

For year-to-date 2012, total fuel and purchased power expenses were $2.64 billion compared to $3.39 billion for the corresponding period in 2011. The decrease was primarily the result of a $777 million decrease in the average cost of fuel and purchased power and a $430 million decrease in the volume of KWHs generated, partially offset by a $458 million increase in the volume of KWHs purchased.

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Fuel expenses at the traditional operating companies are generally offset by fuel revenues and do not have a significant effect on net income. See FUTURE EARNINGS POTENTIAL—“PSC Matters—Retail Fuel Cost Recovery” herein for additional information. Fuel expenses incurred under Southern Power’s PPAs are generally the responsibility of the counterparties and do not significantly affect net income.

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

 

    

Second Quarter

2012

  

Second Quarter

2011

  

Year-to-Date

2012

  

Year-to-Date

2011

 

Total generation (billions of KWHs)

      44       48       83       94

Total purchased power (billions of KWHs)

       5        2        9        4

 

Sources of generation (percent) —

           

Coal

      41       56       38       54

Nuclear

      17       15       18       16

Gas

      41       26       41       27

Hydro

       1        3        3        3

 

Cost of fuel, generated (cents per net KWH) 

           

Coal

   4.18    4.06    4.14    4.01

Nuclear

   0.83    0.72    0.81    0.70

Gas

   2.56    4.23    2.66    4.08

 

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

   2.94    3.56    2.90    3.48

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

   4.09    7.51    3.98    8.07

 

 

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

Fuel

In the second quarter 2012, fuel expense was $1.29 billion compared to $1.67 billion for the corresponding period in 2011. The decrease was primarily due to a 39.5% 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.

For year-to-date 2012, fuel expense was $2.35 billion compared to $3.15 billion for the corresponding period in 2011. The decrease was primarily due to a 34.8% 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.

Purchased Power

In the second quarter 2012, purchased power expense was $150 million compared to $145 million for the corresponding period in 2011. The increase was primarily due to a 93.3% 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 45.5% decrease in the average cost per KWH purchased.

For year-to-date 2012, purchased power expense was $291 million compared to $245 million for the corresponding period in 2011. The increase was primarily due to a 158.9% 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 50.7% decrease in the average cost per KWH purchased.

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

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Other Operations and Maintenance Expenses

 

 

Second Quarter 2012 vs. Second Quarter 2011    Year-to-Date 2012 vs. Year-to-Date 2011

 

(change in millions)    (% change)    (change in millions)    (% change)

$34

   3.7    $57    3.1

 

In the second quarter 2012, other operations and maintenance expenses were $944 million compared to $910 million for the corresponding period in 2011. The increase was primarily the result of a $28 million increase in administrative and general costs primarily due to increases in pension costs and other employee benefits and a $16 million increase in transmission and distribution costs. The increase was partially offset by a $10 million decrease at Mississippi Power related to the expiration of an operating lease for Plant Daniel Units 3 and 4, as well as a $4 million decrease primarily related to scheduled outage and maintenance costs and commodity and labor costs.

For year-to-date 2012, other operations and maintenance expenses were $1.91 billion compared to $1.85 billion for the corresponding period in 2011. The increase was primarily the result of a $71 million increase in administrative and general costs primarily due to increases in pension costs, outside services, and other employee benefits. Also contributing to the increase was a $15 million increase in transmission and distribution costs and a $6 million net increase in customer accounts and customer service related costs. The increase was partially offset by a $21 million decrease at Mississippi Power related to the expiration of an operating lease for Plant Daniel Units 3 and 4, as well as an $18 million decrease primarily related to scheduled outage and maintenance costs and commodity and labor costs.

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FINANCIAL CONDITION AND LIQUIDITY—“Purchase of the Plant Daniel Combined Cycle Generating Units” of Southern Company in Item 7 of the Form 10-K for additional information.

MC Asset Recovery Insurance Settlement

 

 

Second Quarter 2012 vs. Second Quarter 2011    Year-to-Date 2012 vs. Year-to-Date 2011

 

(change in millions)    (% change)    (change in millions)    (% change)

$(19)

   N/M    $(19)    N/M

 

N/M – Not meaningful

In the second quarter 2012, Southern Company received an insurance recovery related to the litigation settlement with MC Asset Recovery, LLC, which resulted in income of $19 million. See Note (B) to the Condensed Financial Statements under “Insurance Recovery” herein for additional information.

Depreciation and Amortization

 

 

Second Quarter 2012 vs. Second Quarter 2011    Year-to-Date 2012 vs. Year-to-Date 2011

 

(change in millions)    (% change)    (change in millions)    (% change)

$15

   3.5    $38    4.5

 

In the second quarter 2012, depreciation and amortization was $445 million compared to $430 million for the corresponding period in 2011. For year-to-date 2012, depreciation and amortization was $886 million compared to $848 million for the corresponding period in 2011. The increases were primarily the result of an increase in depreciation due to additional plant in service related to new generation at Georgia Power’s Plant McDonough-Atkinson Units 4 and 5, as well as transmission, distribution, and environmental projects.

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Allowance for Equity Funds Used During Construction

 

Second Quarter 2012 vs. Second Quarter 2011

   Year-to-Date 2012 vs. Year-to-Date 2011

(change in millions)

   (% change)    (change in millions)    (% change)

$(4)

   (11.1)    $(8)    (11.3)

In the second quarter 2012, AFUDC equity was $32 million compared to $36 million for the corresponding period in 2011. For year-to-date 2012, AFUDC equity was $63 million compared to $71 million for the corresponding period in 2011. The decreases were primarily due to the completion of Georgia Power’s Plant McDonough-Atkinson Units 4 and 5 in December 2011 and April 2012, respectively, partially offset by increases in CWIP related to Mississippi Power’s Kemper IGCC.

Interest Expense, Net of Amounts Capitalized

 

Second Quarter 2012 vs. Second Quarter 2011

   Year-to-Date 2012 vs. Year-to-Date 2011

(change in millions)

   (% change)    (change in millions)    (% change)

$21

   10.6    $10    2.4

In the second quarter 2012, interest expense, net of amounts capitalized was $220 million compared to $199 million for the corresponding period in 2011. For year-to-date 2012, interest expense, net of amounts capitalized was $431 million compared to $421 million for the corresponding period in 2011. The increases were primarily due to a $23 million reduction in interest expense in 2011 at Georgia Power resulting from the settlement of litigation with the Georgia Department of Revenue and a net increase in interest expense related to senior notes. The increases were partially offset by a decrease related to the conclusion of certain state and federal income tax audits, a decrease in interest expense on existing variable rate pollution control revenue bonds, and an increase in capitalized interest associated with construction projects at Mississippi Power and Southern Power.

Other Income (Expense), Net

 

Second Quarter 2012 vs. Second Quarter 2011

   Year-to-Date 2012 vs. Year-to-Date 2011

(change in millions)

   (% change)    (change in millions)    (% change)

$17

   N/M    $13    N/M

N/M – Not meaningful

In the second quarter 2012, other income (expense), net was $13 million compared to $(4) million for the corresponding period in 2011. For year-to-date 2012, other income (expense), net was $11 million compared to $(2) million for the corresponding period in 2011. The increases were primarily due to the conclusion of certain federal income tax audits.

Income Taxes

 

Second Quarter 2012 vs. Second Quarter 2011

   Year-to-Date 2012 vs. Year-to-Date 2011

(change in millions)

   (% change)    (change in millions)    (% change)

$(20)

   (5.7)    $(51)    (8.8)

In the second quarter 2012, income taxes were $329 million compared to $349 million for the corresponding period in 2011. For year-to-date 2012, income taxes were $529 million compared to $580 million for the corresponding period in 2011. The decreases were primarily due to lower pre-tax earnings and state income tax credits. See Note (G) to the Condensed Financial Statements herein under “Unrecognized Tax Benefits” for additional information.

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Southern Company’s future earnings potential. The level of Southern Company’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Company’s primary business of selling electricity. These factors include the traditional operating companies’ ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently incurred costs during a time of increasing costs. Another major factor is the profitability of the competitive wholesale supply business. Future earnings for the electricity business in the near term will depend, in part, upon maintaining energy sales which is subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities and other wholesale customers, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in the service territory. In addition, the level of future earnings for the wholesale supply business also depends on numerous factors including creditworthiness of customers, total generating capacity available and related costs, future acquisitions and construction of generating facilities, and the successful remarketing of capacity as current contracts expire. Changes in economic conditions impact sales for the traditional operating companies and Southern Power, and the pace of the economic recovery remains uncertain. The timing and extent of the economic recovery will impact growth and may impact future earnings. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form 10-K.

Environmental Matters

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

New Source Review Actions

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL — “Environmental Matters — New Source Review Actions” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters — New Source Review Actions” in Item 8 of the Form 10-K for additional information. On February 23, 2012, the EPA filed a motion in the U.S. District Court for the Northern District of Alabama seeking vacatur of the judgment and recusal of the judge in the case involving Alabama Power (including claims related to a unit co-owned by Mississippi Power). The U.S. District Court for the Northern District of Alabama has not ruled on the EPA’s motion seeking vacatur of the judgment. The ultimate outcome of this matter cannot be determined at this time.

Climate Change Litigation

Hurricane Katrina Case

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters — Climate Change Litigation — Hurricane Katrina Case” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Environmental Matters — Climate Change Litigation – Hurricane Katrina Case” in Item 8 of the Form 10-K for additional information. On March 20, 2012, the U.S. District Court for the

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Southern District of Mississippi dismissed the amended class action complaint filed in May 2011 by the plaintiffs. On April 16, 2012, the plaintiffs appealed the case to the U.S. Court of Appeals for the Fifth Circuit. The ultimate outcome of this matter cannot be determined at this time.

Environmental Statutes and Regulations

General

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

The Southern Company system is continuing to develop its compliance strategy and to assess the potential costs of complying with the MATS rule and the EPA’s proposed water and coal combustion byproducts rules. As part of the development of its compliance strategy for the MATS rule, the Southern Company system has entered into agreements for the construction of baghouses to control the emissions of mercury and particulates from certain generating units. While further analysis of the MATS rule is required and the ultimate costs remain uncertain, the compliance decisions made through the second quarter 2012 have allowed the Southern Company system to further develop its cost estimates for compliance with the MATS rule. As a result, estimated compliance costs for the MATS rule in the 2012 through 2014 period have been revised from up to $2.7 billion to approximately $1.8 billion as follows:

 

     2012      2013    2014  

 

 
            (in millions)       

MATS rule

   $ 150       $440    $ 1,215   

 

 

In addition, the Southern Company system has further developed its estimated capital expenditures and associated timing of these expenditures to comply with the proposed water and coal combustion byproducts rules, resulting in a reduction, due primarily to timing, in estimated compliance costs for 2012 through 2014. Potential incremental environmental compliance investments to comply with the proposed water and coal combustion byproducts rules have been revised from up to $1.5 billion to approximately $500 million over the 2012 through 2014 period based on the assumption that coal combustion byproducts will continue to be regulated as non-hazardous solid waste under the proposed rule. These potential incremental environmental compliance investments are estimated as follows:

 

     2012      2013    2014  

 

 
            (in millions)       

Proposed water and coal combustion byproducts rules

   $ 10       $85    $ 405   

 

 

While the Southern Company system’s ultimate costs of compliance with the MATS rule and the proposed water and coal combustion byproducts rules remain uncertain, the Southern Company system estimates that compliance costs through 2021 (assuming that coal combustion byproducts will continue to be regulated as non-hazardous solid waste under the proposed rule) will be at the low end of the $13 billion to $18 billion range provided in the Form 10-K. Included in this amount is approximately $750 million that is also included in the 2012 through 2014 base level capital investment of the traditional operating companies described in the Form 10-K in anticipation of these rules.

 

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The Southern Company system’s ultimate compliance strategy and actual 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; 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. Compliance costs may arise from retirement and replacement of existing units, installation of additional environmental controls, upgrades to the transmission system, and changing fuel sources for certain existing units. The Southern Company system’s preliminary analysis further indicates that the short timeframe for compliance with the MATS rule could significantly affect electric system reliability and cause an increase in costs of materials and services. The ultimate outcome of these matters cannot be determined at this time.

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

Air Quality

See MANAGEMENT’S DISCUSSION AND ANALYSIS — FUTURE EARNINGS POTENTIAL — “Environmental Matters – Environmental Statutes and Regulations — Air Quality” of Southern Company in Item 7 of the Form 10-K for additional information on the eight-hour ozone and fine particulate matter 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. The potential impact of the revised standard and nonattainment designation will depend on further evaluation and implementation by the Georgia Environmental Protection Division and cannot be determined at this time.

On June 14, 2012, the EPA proposed a rule that would increase the stringency of the fine particulate matter national ambient air quality standards. If adopted, the proposed standards could result in the designation of new nonattainment areas within the Southern Company system’s service territory. As part of a related settlement, the EPA has agreed to finalize the proposed rule by December 14, 2012. The ultimate outcome of this rulemaking will depend on the final rule and the outcome of any legal challenges and cannot be determined at this time.

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 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.

 

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Water Quality

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FUTURE EARNINGS POTENTIAL—“Environmental Matters—Environmental Statutes and Regulations – Water Quality” of Southern Company in Item 7 of the Form 10-K for additional information on the proposed rules regarding certain cooling water intake structures. The EPA has entered into an amended settlement agreement to extend the deadline for issuing a final rule until June 27, 2013. The ultimate outcome of this rulemaking will depend on the final rule and the outcome of any legal challenges and cannot be determined at this time.

Coal Combustion Byproducts

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FUTURE EARNINGS POTENTIAL—“Environmental Matters—Environmental Statutes and Regulations—Coal Combustion Byproducts” of Southern Company in Item 7 of the Form 10-K for additional information. Environmental groups and other parties have filed lawsuits 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. The ultimate outcome of these matters cannot be determined at this time.

Global Climate Issues

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FUTURE EARNINGS POTENTIAL—“Environmental Matters—Global Climate Issues” of Southern Company in Item 7 of the Form 10-K for additional information.

On April 13, 2012, the EPA published proposed regulations to establish standards of performance for greenhouse gas emissions from new fossil fuel steam electric generating units. As proposed, the standards would not apply to existing units. The EPA has delayed its plans to propose greenhouse gas emissions performance standards for modified sources and emissions guidelines for existing sources. The impact of this rulemaking will depend on the scope and specific requirements of the final rule and the outcome of any legal challenges and, therefore, cannot be determined at this time.

On June 26, 2012, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit unanimously rejected all challenges to four of the EPA’s actions relating to the greenhouse gas permitting programs under the Clean Air Act. These rules may impact the amount of time it takes to obtain prevention of significant deterioration permits for new generation and major modifications to existing generating units and the requirements ultimately imposed by those permits. The ultimate impact of these rules cannot be determined at this time and will depend on the outcome of any other legal challenges.

PSC Matters

Retail Fuel Cost Recovery

The traditional operating companies each have established fuel cost recovery rates approved by their respective state PSCs. The traditional operating companies have experienced lower pricing for natural gas resulting in an increase in natural gas generation and a decrease in coal generation, which is currently more costly. The lower cost of natural gas has resulted in total over recovered fuel costs at Georgia Power, Gulf Power, and Mississippi Power included in Southern Company’s Condensed Balance Sheet herein of approximately $196 million at June 30, 2012. At June 30, 2012, Alabama Power had under recovered fuel costs included in Southern Company’s Condensed Balance Sheet herein of approximately $16 million. At December 31, 2011, total under recovered fuel costs at Alabama Power and Georgia Power included in Southern Company’s Condensed Balance Sheet herein were approximately $169 million, and Gulf Power and Mississippi Power had a total over recovered fuel balance included in Southern Company’s Condensed Balance Sheet herein of approximately $52 million. Fuel cost recovery revenues are adjusted for differences in actual

 

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Southern Company’s revenues or net income, but will affect annual cash flow. The traditional operating companies continuously monitor their under or over recovered fuel cost balances.

On June 21, 2012, the Georgia PSC approved a decrease in Georgia Power’s fuel cost recovery rates of 19%, which reduced annual billings by $567 million effective June 1, 2012. The decrease in fuel costs resulted from lower natural gas prices as a result of increased natural gas supplies.

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FUTURE EARNINGS POTENTIAL—“PSC Matters—Fuel Cost Recovery” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Retail Regulatory Matters – Alabama Power – Fuel Cost Recovery” and “Retail Regulatory Matters – Georgia Power – Fuel Cost Recovery” in Item 8 of the Form 10-K for additional information.

Alabama Power

Rate CNP

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL—“PSC Matters—Alabama Power —Rate CNP” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Retail Regulatory Matters—Alabama Power—Rate CNP” in Item 8 of the Form 10-K for additional information regarding Alabama Power’s recovery of retail costs through Rate Certificated New Plant Power Purchase Agreement (Rate CNP) and Rate Certificated New Plant Environmental (Rate CNP Environmental). Alabama Power’s under recovered Rate CNP balance as of June 30, 2012 was $2 million as compared to $6 million at December 31, 2011. Alabama Power’s under recovered Rate CNP Environmental balance as of June 30, 2012 was $26 million as compared to $11 million at December 31, 2011. These under recovered balances at June 30, 2012 are included in deferred under recovered regulatory clause revenues on Southern Company’s Condensed Balance Sheet herein. For Rate CNP, this classification is based on an estimate, which includes such factors as purchased power capacity and energy demand. For Rate CNP Environmental, this classification is based on an estimate, which includes such factors as costs to comply with environmental mandates and energy demand. A change in any of these factors could have a material impact on the timing of any recovery of the under recovered retail costs.

Natural Disaster Cost Recovery

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FUTURE EARNINGS POTENTIAL—“PSC Matters—Alabama Power —Natural Disaster Reserve” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Retail Regulatory Matters—Alabama Power—Natural Disaster Reserve” in Item 8 of the Form 10-K for additional information regarding natural disaster cost recovery. At June 30, 2012, the NDR had an accumulated balance of $105 million, which is included in Southern Company’s Condensed Balance Sheet herein under other regulatory liabilities, deferred. The accruals are reflected as operations and maintenance expenses in Southern Company’s Condensed Statement of Income herein.

Georgia Power

2011 Integrated Resource Plan Update

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FUTURE EARNINGS POTENTIAL—“Environmental Matters— Environmental Statutes and Regulations—Air Quality,” “—Water Quality,” and “—Coal Combustion Byproducts” of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under “Retail Regulatory Matters—Georgia Power— Rate Plans” and “– 2011 Integrated Resource Plan Update” in Item 8 of the Form 10-K for additional information regarding proposed and final EPA rules and regulations, including the MATS rule for coal- and oil-fired electric utility steam generating units, revisions to effluent guidelines for steam electric power plants,

 

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and additional regulation of coal combustion byproducts; the State of Georgia’s Multi-Pollutant Rule; Georgia Power’s analysis of the potential costs and benefits of installing the required controls on its fossil generating units in light of these regulations; the 2010 ARP; and the 2011 IRP Update.

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

Income Tax Matters

Bonus Depreciation

In December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term construction projects to be placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term construction projects to be placed in service in 2013), which will have a positive impact on the future cash flows of Southern Company through 2013. Due to the significant amount of estimated bonus depreciation for 2012, a portion of Southern Company’s tax credit utilization will be deferred. Consequently, Southern Company’s positive cash flow benefit is estimated to be between $535 million and $725 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 Program” in Item 8 of the Form 10-K for estimated construction expenditures for the next three years. In addition, see Note 3 to the financial statements of Southern Company under “Retail Regulatory Matters—Georgia Power—Nuclear Construction,” “Retail Regulatory Matters – Georgia Power—Other Construction,” and “Integrated Coal Gasification Combined Cycle” in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under “Retail Regulatory Matters—Georgia Power—Nuclear Construction” and “Integrated Coal Gasification Combined Cycle” herein for additional information.

Investments in Leveraged Leases

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

The recent financial and operational performance of one of Southern Company’s lessees and the associated generation assets has raised potential concerns on the part of Southern Company as to the credit quality of the lessee and the residual value of the assets. Current projections indicate significant uncertainty as to whether the lessee will be able to pay the

 

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

December 2012 semi-annual rent payment in full. Southern Company is currently engaged in discussions with the lessee and the holders of the project’s nonrecourse debt to restructure the debt payments and the related rental payments to allow additional capital investment in the project to be made to improve the operation of the generation assets and the financial viability of the lease transaction. Southern Company believes there is a reasonable possibility that it will be able to reach an agreement with the lessee and the debtholders to restructure the project. However, due to continued poor performance of the generation assets and the uncertainties surrounding the receipt of the December 2012 semi-annual rent payment and its ability to successfully restructure the project, Southern Company has placed the lease on nonaccrual status whereby income associated with this investment will not be recognized in the financial statements beginning in July 2012. If the attempts at restructuring the project are unsuccessful and the project is ultimately abandoned, the potential impairment loss that would be incurred is approximately $90 million on an after-tax basis. The ultimate outcome of this matter cannot be determined at this time.

Other Matters

Southern Company and its subsidiaries are involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Southern Company and its subsidiaries are subject to certain claims and legal actions arising in the ordinary course of business. The business activities of Southern Company’s subsidiaries are subject to extensive governmental regulation related to public health and the environment, such as regulation of air emissions and water discharges. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as air quality and water standards, has increased generally throughout the U.S. In particular, personal injury and other claims for damages caused by alleged exposure to hazardous materials, and common law nuisance claims for injunctive relief and property damage allegedly caused by greenhouse gas and other emissions, have become more frequent. The ultimate outcome of such pending or potential litigation against Southern Company and its subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported in Note (B) herein or in Note 3 to the financial statements of Southern Company in Item 8 of the Form 10-K, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Southern Company’s financial statements.

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

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

 

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ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Southern Company prepares its consolidated financial statements in accordance with GAAP. Significant accounting policies are described in Note 1 to the financial statements of Southern Company in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Company’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Southern Company in Item 7 of the Form 10-K for a complete discussion of Southern Company’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, Unbilled Revenues, and Pension and Other Postretirement Benefits.

FINANCIAL CONDITION AND LIQUIDITY

Overview

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY—“Overview” of Southern Company in Item 7 of the Form 10-K for additional information. Southern Company’s financial condition remained stable at June 30, 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 $1.8 billion for the first six months of 2012, a decrease of $632 million from the corresponding period in 2011. Significant changes in operating cash flow for the first six months of 2012 compared to the corresponding period in 2011 include an increase in fossil fuel stock as a result of milder weather in the first six months of 2012 and lower natural gas prices and a decrease in accrued taxes due to the timing of tax payments. Net cash used for investing activities totaled $2.8 billion for the first six months of 2012, an increase of $727 million from the corresponding period in 2011. The increase was primarily due to property additions to utility plant. Net cash provided from financing activities totaled $378 million for the first six months of 2012 compared to $335 million net cash used for financing activities in the corresponding period in 2011. The change was primarily due to 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 six months of 2012 include an increase of $1.6 billion 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 $812 million due to senior note issuances.

The market price of Southern Company’s common stock at the end of the second quarter 2012 was $46.30 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $20.72 per share, representing a market-to-book ratio of 223%, compared to $40.38, $19.80, and 204%, respectively, at the end of 2011. The dividend for the second quarter 2012 was $0.49 per share compared to $0.4725 per share in the second quarter 2011.

 

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Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FINANCIAL CONDITION AND LIQUIDITY—“Capital Requirements and Contractual Obligations” of Southern Company in Item 7 of the Form 10-K for a description of Southern Company’s capital requirements for the construction programs of the Southern Company system, including estimated capital expenditures to comply with existing environmental regulations, 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 $2.1 billion will be required through June 30, 2013 to fund maturities of long-term debt.

See FUTURE EARNINGS POTENTIAL—“Environmental Statutes and Regulations—General” herein for a description of the Southern Company system’s estimated capital expenditures to comply with the MATS rule and proposed water and coal combustion byproducts rules.

The construction programs are subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; changes in environmental statutes and regulations; the outcome of any legal challenges to the environmental rules; changes in generating plants, including unit retirements and replacements and adding or changing fuel sources at existing units, to meet new regulatory requirements; changes in FERC rules and regulations; PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; storm impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.

Sources of Capital

Southern Company intends to meet its future capital needs through internal cash flow and external security issuances. Equity capital can be provided from any combination of Southern Company’s stock plans, private placements, or public offerings. The amount and timing of additional equity capital to be raised will be contingent on Southern Company’s investment opportunities.

Except as described below with respect to potential DOE loan guarantees, the traditional operating companies and Southern Power plan to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, security issuances, term loans, short-term borrowings, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon prevailing market conditions, regulatory approval, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS—FINANCIAL CONDITION AND LIQUIDITY—“Sources of Capital” of Southern Company in Item 7 of the Form 10-K for additional information.

In June 2010, Georgia Power reached an agreement with the DOE to accept terms for a conditional commitment for federal loan guarantees that would apply to future Georgia Power borrowings related to the construction of Plant Vogtle Units 3 and 4. Any borrowings guaranteed by the DOE would be full recourse to Georgia Power and secured by a first priority lien on Georgia Power’s 45.7% undivided ownership interest in Plant Vogtle Units 3 and 4. Total guaranteed borrowings would not exceed the lesser of 70% of eligible project costs, or approximately $3.46 billion, and are expected to be funded by the Federal Financing Bank. Final approval and issuance of loan guarantees by the DOE are subject to negotiation of definitive agreements, completion of due diligence by the DOE, receipt of any necessary regulatory approvals, and satisfaction of other conditions. In the event that the DOE does not issue a loan guarantee or Georgia Power determines that the final terms and conditions of the loan guarantee by the DOE are not in the best interest of its customers, Georgia Power expects to finance the construction of Plant Vogtle Units 3 and 4 through traditional capital markets financings. There can be no assurance that the DOE will issue loan guarantees for Georgia Power.

 

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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. In the event that the DOE does not issue a conditional commitment or a final definitive loan guarantee, Mississippi Power intends to finance the construction of the Kemper IGCC through traditional capital markets financings. 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.

Southern Company’s current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt, as well as cash needs, which can fluctuate significantly due to the seasonality of the business of the Southern Company system. To meet short-term cash needs and contingencies, Southern Company has substantial cash flow from operating activities and access to capital markets, including commercial paper programs which are backed by bank credit facilities.

At June 30, 2012, Southern Company and its subsidiaries had approximately $659 million of cash and cash equivalents. Committed credit arrangements with banks at June 30, 2012, including expiration dates, were as follows:

 

     Expires             Executable Term
Loans
     Due Within One
Year(a)
 
Company    2012      2013     

2014

and
Beyond(b)

     Total      Unused      One
Year
     Two
Years
     Term
Out
     No Term
Out
 
     (in millions)      (in millions)      (in millions)      (in millions)  

Southern Company

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

Alabama Power

     37             101             1,150             1,288             1,288             51             —             51             52       

Georgia Power

     —             —             1,750             1,750             1,745             —             —             —             —       

Gulf Power

     20             60             195             275             275             45             —             45             35       

Mississippi Power

     41             95             165             301             301             25             41             66             70       

Southern Power

     —             —             500             500             500             —             —             —             —       

Other

     —             50             —             50             50             25             —             25             —       

 

 

Total

     $98             $306             $4,760             $5,164             $5,159             $146             $41             $187             $157       

 

 

 

(a) Reflects facilities expiring on or before June 30, 2013.
(b) All remaining Gulf Power and Mississippi Power credit agreements in this column expire in 2014.

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 June 30, 2012 was approximately $1.8 billion.

The traditional operating companies may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of each of the traditional operating companies.

 

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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)

June 30, 2012:

                 

Commercial paper

      $445        0.4%       $477    0.4%    $735

Short-term bank debt

         —    —%         175    1.1%      300

 

     

 

  

Total

   $445    0.4%       $652    0.5%   

 

     

 

  

 

(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 June 30, 2012 were as follows:

 

Credit Ratings   

  Maximum Potential  
Collateral

Requirements

 

     (in millions)

At BBB and Baa2

   $       9      

At BBB- and/or Baa3

   613 

Below BBB- and/or Baa3

   2,668    

 

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 an undivided interest in the Kemper IGCC. Until the acquisition is closed, the deposit bears interest at Mississippi Power’s AFUDC rate, which was 9.967% per annum as of June 30, 2012, and is refundable to SMEPA upon termination of the asset purchase agreement related to such purchase, within 60 days of a request by SMEPA for a full or partial refund, or within 15 days at SMEPA’s discretion in the event that Mississippi Power is assigned a senior unsecured credit rating of BBB+ or lower by S&P or Baa1 or lower by Moody’s or ceases to be rated by either of these rating agencies.

Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, any credit rating downgrade could impact Southern Company’s ability to access capital markets, particularly the short-term debt market.

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Market Price Risk

Southern Company is exposed to market risks, primarily commodity price risk and interest rate risk. Southern Company may also occasionally have limited exposure to foreign currency exchange rates. To manage the volatility attributable to these exposures, Southern Company nets the exposures, where possible, to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to Southern Company’s policies in areas such as counterparty exposure and risk management practices. Southern Company’s policy is that derivatives are to be used primarily for hedging purposes and mandates strict adherence to all applicable risk management policies. Derivative positions are monitored using techniques including, but not limited to, market valuation, value at risk, stress testing, and sensitivity analysis.

Due to cost-based rate regulation and other various cost recovery mechanisms, the traditional operating companies continue to have limited exposure to market volatility in interest rates, foreign currency, commodity fuel prices, and prices of electricity. In addition, Southern Power’s exposure to market volatility in commodity fuel prices and prices of electricity is limited because its long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. However, Southern Power has been and may continue to be exposed to market volatility in energy-related commodity prices as a result of sales of uncontracted generating capacity. To mitigate residual risks relative to movements in electricity prices, the traditional operating companies enter into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, 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 second quarter 2012 when compared with the December 31, 2011 reporting period.

The changes in fair value of energy-related derivative contracts, the majority of which are composed of regulatory hedges, for the three and six months ended June 30, 2012 were as follows:

 

    

Second Quarter

2012

Changes

    

Year-to-Date

2012

Changes

 

 

 
     Fair Value   

 

 
     (in millions)   

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

     $(265)         $(231)   

Contracts realized or settled

     77         126   

Current period changes(a)

     18         (65)   

 

 

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

     $(170)         $(170)   

 

 

 

(a) Current period changes also include the changes in fair value of new contracts entered into during the period, if any.

The changes in the fair value positions of the energy-related derivative contracts, which are substantially all attributable to both the volume and the price of natural gas, for the three and six months ended June 30, 2012 were as follows:

 

    

Second Quarter

2012

Changes

    

Year-to-Date

2012

Changes

 

 

 
     Fair Value   

 

 
     (in millions)   

Natural gas swaps

     $  78         $  59   

Natural gas options

       17           3   

Other energy-related derivatives

       —           (1)   

 

 

Total changes

     $  95         $61   

 

 

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The net hedge volumes of energy-related derivative contracts were as follows:

 

     June 30,
2012
   March 31,
2012
   December 31,
2011

 

     mmBtu Volume
     (in millions)

Commodity—Natural gas swaps

   141    123    123

Commodity—Natural gas options

   101      98      66

 

Total hedge volume

   242    221    189

 

The weighted average swap contract cost above market prices was approximately $0.95 per mmBtu as of June 30, 2012, $1.71 per mmBtu as of March 31, 2012, and $1.51 per mmBtu as of December 31, 2011. 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    June 30,
2012
   December 31,
2011

 

     (in millions)

Regulatory hedges

   $(164)    $(221)

Cash flow hedges

         (1)         (1)

Not designated

         (5)         (9)

 

Total fair value

   $(170)    $(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 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 and six months ended June 30, 2012 were $10 million and $4 million, respectively, and were not material for the corresponding periods in 2011.

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 June 30, 2012 were as follows:

 

    

June 30, 2012

Fair Value Measurements

 

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

 

     (in millions)

Level 1

   $   —     $   —     $ —    $— 

Level 2

     (170)     (116)      (52)       (2)

Level 3

      —      —      —    —

 

Fair value of contracts outstanding at end of period

   $(170)   $(116)   $(52)   $ (2)

 

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 will impose additional requirements on the use of over-the-counter derivatives for both Southern Company and its subsidiaries and their derivative counterparties, which could affect both the use and cost of over-the-counter derivatives. Although all relevant regulations have not been finalized, Southern Company does not expect the impact of these rules to be material.

For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS—FINANCIAL CONDITION AND LIQUIDITY—“Market Price Risk” of Southern Company in Item 7 and Note 1 under “Financial Instruments” and Note 11 to the financial statements of Southern Company in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein.

Financing Activities

During the first six months of 2012, Southern Company issued approximately 9.7 million shares of common stock for $317 million through employee and director stock plans. Since mid-2011, Southern Company has issued additional equity only through its employee and director stock plans. Southern Company plans to use the proceeds received from stock option exercises during 2012 (including the $317 million received through June 30, 2012) and 2013 to repurchase shares to partially offset the incremental shares issued under its employee and director stock plans. Pursuant to board approval, Southern Company may repurchase shares through open market purchases or privately negotiated transactions, in accordance with applicable securities laws.

In addition, Southern Company is not currently issuing 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.

The following table outlines the debt financing activities during the first six months of 2012:

 

Company    Senior Note
Issuances
   Senior Note
Redemptions
and Maturities
   Pollution
Control Bond
Issuances
   Pollution
Control Bond
Redemptions
   Other
Long-Term
Debt Issuances
   Other Long-
Term Debt
Redemptions
and Maturities

 

          (in millions)          

Southern Company

    $    —     $500     $ —     $ —     $ —     $ —

Alabama Power

        250       250        —           1        —        —

Georgia Power

     1,500        —       234         49        —      250

Gulf Power

        100        91        —         —        —        —

Mississippi Power

        400        90        —         —        —        75

Southern Power

        —        —        —         —          4        —

 

Total

   $2,250    $931     $234     $  50     $   4    $325

 

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

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

 

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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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 an undivided interest in the Kemper IGCC. Until the acquisition is closed, the deposit bears interest at Mississippi Power’s AFUDC rate, which was 9.967% per annum at June 30, 2012 and is refundable to SMEPA upon termination of the asset purchase agreement related to such purchase, within 60 days of a request by SMEPA for a full or partial refund, or within 15 days at SMEPA’s discretion in the event that Mississippi Power is assigned a senior unsecured credit rating of BBB+ or lower by S&P or Baa1 or lower by Moody’s or ceases to be rated by either of these rating agencies.

Subsequent to June 30, 2012, Georgia Power redeemed $300 million aggregate principal amount of its Series 2007D 6.375% Senior Notes due July 15, 2047.

Subsequent to June 30, 2012, $85 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 2005 and $100 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Second Series 2005 were redeemed.

In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Company and its subsidiaries plan to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

 

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Table of Contents

PART I

Item 3. Quantitative And Qualitative Disclosures About Market Risk.

See MANAGEMENT’S DISCUSSION AND ANALYSIS—FINANCIAL CONDITION AND LIQUIDITY—“Market Price Risk” herein for each registrant and Note 1 to the financial statements of each registrant under “Financial Instruments,” Note 11 to the financial statements of Southern Company, Alabama Power, and Georgia Power, Note 10 to the financial statements of Gulf Power and Mississippi Power, and Note 9 to the financial statements of Southern Power in Item 8 of the Form 10-K. Also, see Note (H) to the Condensed Financial Statements herein for information relating to derivative instruments.

Item 4. Controls and Procedures.

 

  (a) Evaluation of disclosure controls and procedures.

As of the end of the period covered by this quarterly report, Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power conducted separate evaluations under the supervision and with the participation of each company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based upon these evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective.

 

  (b) Changes in internal controls.

There have been no changes in Southern Company’s, Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the second quarter 2012 that have materially affected or are reasonably likely to materially affect Southern Company’s, Alabama Power’s, Georgia Power’s, Gulf Power’s, Mississippi Power’s, or Southern Power’s internal control over financial reporting.

 

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ALABAMA POWER COMPANY

 

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Table of Contents

ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

 

     For the Three Months     For the Six Months  
     Ended June 30,     Ended June 30,  
     2012     2011     2012     2011  
     (in millions)     (in millions)  

Operating Revenues:

        

Retail revenues

   $ 1,254      $ 1,244      $ 2,346      $ 2,370   

Wholesale revenues, non-affiliates

     70        70        131        138   

Wholesale revenues, affiliates

     6        75        20        150   

Other revenues

     47        51        96        102   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     1,377        1,440        2,593        2,760   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Expenses:

        

Fuel

     343        428        649        823   

Purchased power, non-affiliates

     17        17        32        28   

Purchased power, affiliates

     66        57        106        103   

Other operations and maintenance

     316        290        637        587   

Depreciation and amortization

     160        159        317        316   

Taxes other than income taxes

     85        85        171        170   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     987        1,036        1,912        2,027   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     390        404        681        733   

Other Income and (Expense):

        

Allowance for equity funds used during construction

     4        6        9        11   

Interest income

     4        5        8        9   

Interest expense, net of amounts capitalized

     (73     (77     (146     (151

Other income (expense), net

     (4     (7     (11     (13
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and (expense)

     (69     (73     (140     (144
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Before Income Taxes

     321        331        541        589   

Income taxes

     126        131        210        227   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

     195        200        331        362   

Dividends on Preferred and Preference Stock

     10        10        20        20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income After Dividends on Preferred and Preference Stock

   $ 185      $ 190      $ 311      $ 342   
  

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

     For the Three Months     For the Six Months  
     Ended June 30,     Ended June 30,  
     2012     2011     2012     2011  
     (in millions)     (in millions)  

Net Income After Dividends on Preferred and Preference Stock

   $ 185      $ 190      $ 311      $ 342   

Other comprehensive income (loss):

        

Qualifying hedges:

        

Changes in fair value, net of tax of $(7), $(1), $(4) and $1, respectively

     (11     1        (7     3   

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

     —          (2     —          (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (11     (1     (7     1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 174      $ 189      $ 304      $ 343   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

ALABAMA POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     For the Six Months
Ended June 30,
 
     2012     2011  
     (in millions)  

Operating Activities:

    

Net income

   $ 331      $ 362   

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

    

Depreciation and amortization, total

     380        373   

Deferred income taxes

     85        174   

Allowance for equity funds used during construction

     (9     (11

Pension, postretirement, and other employee benefits

     (8     (24

Stock based compensation expense

     6        4   

Other, net

     (24     (3

Changes in certain current assets and liabilities —

    

-Receivables

     (46     (57

-Fossil fuel stock

     (125     13   

-Materials and supplies

     (6     (5

-Other current assets

     (31     (66

-Accounts payable

     (145     (77

-Accrued taxes

     128        193   

-Accrued compensation

     (45     (52

-Other current liabilities

     (10     (5
  

 

 

   

 

 

 

Net cash provided from operating activities

     481        819   
  

 

 

   

 

 

 

Investing Activities:

    

Property additions

     (436     (485

Distribution of restricted cash from pollution control revenue bonds

            11   

Nuclear decommissioning trust fund purchases

     (88     (252

Nuclear decommissioning trust fund sales

     88        252   

Cost of removal, net of salvage

     (7     (47

Change in construction payables

     (12     (14

Other investing activities

     (9     (22
  

 

 

   

 

 

 

Net cash used for investing activities

     (464     (557
  

 

 

   

 

 

 

Financing Activities:

    

Proceeds —

    

Capital contributions from parent company

     11        5   

Senior notes issuances

     250        700   

Redemptions —

    

Pollution control revenue bonds

     (1       

Senior notes

     (250     (650

Payment of preferred and preference stock dividends

     (20     (20

Payment of common stock dividends

     (270     (277

Other financing activities

     (3     (12
  

 

 

   

 

 

 

Net cash used for financing activities

     (283     (254
  

 

 

   

 

 

 

Net Change in Cash and Cash Equivalents

     (266     8   

Cash and Cash Equivalents at Beginning of Period

     344        154   
  

 

 

   

 

 

 

Cash and Cash Equivalents at End of Period

   $ 78      $ 162   
  

 

 

   

 

 

 

Supplemental Cash Flow Information:

    

Cash paid (received) during the period for —

    

Interest (net of $3 and $5 capitalized for 2012 and 2011, respectively)

   $ 136      $ 141   

Income taxes, net

     31        (100

Noncash transactions—accrued property additions at end of period

     7        14   

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

 

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Table of Contents

ALABAMA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

 

Assets

   At June 30,
2012
    At December 31,
2011
 
     (in millions)   

Current Assets:

    

Cash and cash equivalents

   $ 78      $ 344   

Restricted cash and cash equivalents

     —          1   

Receivables —

    

Customer accounts receivable

     368        332   

Unbilled revenues

     160        126   

Under recovered regulatory clause revenues

     16        —     

Other accounts and notes receivable

     34        35   

Affiliated companies

     57        79   

Accumulated provision for uncollectible accounts

     (9     (10

Fossil fuel stock, at average cost

     469        344   

Materials and supplies, at average cost

     380        375   

Vacation pay

     59        59   

Prepaid expenses

     135        74   

Other regulatory assets, current

     32        44   

Other current assets

     8        11   
  

 

 

   

 

 

 

Total current assets

     1,787        1,814   
  

 

 

   

 

 

 

Property, Plant, and Equipment:

    

In service

     21,110        20,809   

Less accumulated provision for depreciation

     7,562        7,344   
  

 

 

   

 

 

 

Plant in service, net of depreciation

     13,548        13,465   

Nuclear fuel, at amortized cost

     347        330   

Construction work in progress

     390        374   
  

 

 

   

 

 

 

Total property, plant, and equipment

     14,285        14,169   
  

 

 

   

 

 

 

Other Property and Investments:

    

Equity investments in unconsolidated subsidiaries

     61        62   

Nuclear decommissioning trusts, at fair value

     571        540   

Miscellaneous property and investments

     73        73   
  

 

 

   

 

 

 

Total other property and investments

     705        675   
  

 

 

   

 

 

 

Deferred Charges and Other Assets:

    

Deferred charges related to income taxes

     529        532   

Prepaid pension costs

     74        59   

Deferred under recovered regulatory clause revenues

     29        48   

Other regulatory assets, deferred

     1,001        994   

Other deferred charges and assets

     144        186   
  

 

 

   

 

 

 

Total deferred charges and other assets

     1,777        1,819   
  

 

 

   

 

 

 

Total Assets

   $ 18,554      $ 18,477   
  

 

 

   

 

 

 

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

 

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ALABAMA POWER COMPANY

CONDENSED BALANCE SHEETS (UNAUDITED)

 

Liabilities and Stockholder’s Equity

   At June  30,
2012
    At December 31,
2011
 
     (in millions)  

Current Liabilities:

    

Securities due within one year

   $ 500      $ 500   

Accounts payable —

    

Affiliated

     176        203   

Other

     196        322   

Customer deposits

     86        85   

Accrued taxes —

    

Accrued income taxes

     99        32   

Other accrued taxes

     80        34   

Accrued interest

     65        63   

Accrued vacation pay

     48        48   

Accrued compensation

     51        95   

Liabilities from risk management activities

     54        54   

Other regulatory liabilities, current

     3        18   

Other current liabilities

     40        38   
  

 

 

   

 

 

 

Total current liabilities

     1,398        1,492   
  

 

 

   

 

 

 

Long-term Debt

     5,630        5,632   
  

 

 

   

 

 

 

Deferred Credits and Other Liabilities:

    

Accumulated deferred income taxes

     3,319        3,257   

Deferred credits related to income taxes

     81        83   

Accumulated deferred investment tax credits

     145        149   

Employee benefit obligations

     339        343   

Asset retirement obligations

     571        553   

Other cost of removal obligations

     736        703   

Other regulatory liabilities, deferred

     165        156   

Other deferred credits and liabilities

     84        82   
  

 

 

   

 

 

 

Total deferred credits and other liabilities

     5,440        5,326   
  

 

 

   

 

 

 

Total Liabilities

     12,468        12,450   
  

 

 

   

 

 

 

Redeemable Preferred Stock

     342        342   
  

 

 

   

 

 

 

Preference Stock

     343        343   
  

 

 

   

 

 

 

Common Stockholder’s Equity:

    

Common stock, par value $40 per share —

    

Authorized - 40,000,000 shares

    

Outstanding - 30,537,500 shares

     1,222        1,222   

Paid-in capital

     2,207        2,182   

Retained earnings

     1,997        1,956   

Accumulated other comprehensive loss

     (25     (18
  

 

 

   

 

 

 

Total common stockholder’s equity

     5,401        5,342   
  

 

 

   

 

 

 

Total Liabilities and Stockholder’s Equity

   $ 18,554      $ 18,477   
  

 

 

   

 

 

 

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

 

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Table of Contents

ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SECOND QUARTER 2012 vs. SECOND QUARTER 2011

AND

YEAR-TO-DATE 2012 vs. YEAR-TO-DATE 2011

OVERVIEW

Alabama Power operates as a vertically integrated utility providing electricity to retail and wholesale customers within its traditional service territory located within the State of Alabama in addition to wholesale customers in the Southeast. Many factors affect the opportunities, challenges, and risks of Alabama Power’s business of selling electricity. These factors include the ability to maintain a constructive regulatory environment, to maintain and grow energy sales given economic conditions, and to effectively manage and secure timely recovery of costs. These costs include those related to projected long-term demand growth, increasingly stringent environmental standards, fuel, capital expenditures, and restoration following major storms. Appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Alabama Power for the foreseeable future.

Alabama Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income after dividends on preferred and preference stock. For additional information on these indicators, see MANAGEMENT’S DISCUSSION AND ANALYSIS – OVERVIEW – “Key Performance Indicators” of Alabama Power in Item 7 of the Form 10-K.

RESULTS OF OPERATIONS

Net Income

 

Second Quarter 2012 vs. Second Quarter 2011    Year-to-Date 2012 vs. Year-to-Date 2011

 

(change in millions)    (% change)    (change in millions)    (% change)

$(5)

   (2.6)   

$(31)

   (9.1)

 

Alabama Power’s net income after dividends on preferred and preference stock for the second quarter 2012 was $185 million compared to $190 million for the corresponding period in 2011. Alabama Power’s net income after dividends on preferred and preference stock for year-to-date 2012 was $311 million compared to $342 million for the corresponding period in 2011. The decreases for the second quarter and year-to-date 2012 when compared to the corresponding periods in 2011 were related to decreases in weather-related revenues due to milder weather and increases in operations and maintenance expenses in 2012. These decreases were partially offset by increases in revenues associated with the elimination of a tax-related adjustment under Alabama Power’s rate structure and increases in energy sales due to increases in usage and customer growth. See BUSINESS – “Rate Matters – Rate Structure and Cost Recovery Plans” of Alabama Power in Item 1 and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Rate Adjustments” of Alabama Power in Item 7 of the Form 10-K for information regarding the rate structure of Alabama Power.

Retail Revenues

 

Second Quarter 2012 vs. Second Quarter 2011    Year-to-Date 2012 vs. Year-to-Date 2011

 

(change in millions)    (% change)    (change in millions)    (% change)

$10

   0.8   

$(24)

   (1.0)

 

In the second quarter 2012, retail revenues were $1.25 billion compared to $1.24 billion for the corresponding period in 2011. For year-to-date 2012, retail revenues were $2.35 billion compared to $2.37 billion for the corresponding period in 2011.

 

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Details of the change to retail revenues were as follows:

 

    

Second Quarter

2012

 

Year-to-Date

2012

 

   (in millions)   (% change)   (in millions)   (% change)

Retail – prior year

   $1,244     $2,370  

Estimated change in –

        

Rates and pricing

         31    2.5        56    2.4

Sales growth (decline)

         25    2.0        45    1.9

Weather

         (38)   (3.0)         (88)   (3.7)

Fuel and other cost recovery

           (8)   (0.7)         (37)   (1.6)

 

Retail – current year

   $1,254       0.8%   $2,346       (1.0)%

 

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

Revenues attributable to changes in sales increased in the second quarter and year-to-date 2012 when compared to the corresponding periods in 2011. Weather-adjusted residential KWH energy sales increased 5.6% in the second quarter and 3.5% for year-to-date 2012 as a result of increases in usage and customer growth. Weather-adjusted commercial KWH energy sales increased 3.6% in the second quarter 2012 and 1.7% for year-to-date 2012 as a result of increases in usage. Industrial KWH energy sales increased 2.3% in the second quarter 2012 and 2.8% for year-to-date 2012 due to an increase in usage resulting from changes in production levels primarily in the primary metals, chemicals, automotive and plastics, and forest products sectors, partially offset by decreases in the stone, clay, and glass and textiles sectors.

Revenues resulting from changes in weather decreased in the second quarter and year-to-date 2012 when compared to the corresponding periods in 2011. Alabama Power’s service territory experienced milder weather conditions in the second quarter and year-to-date 2012 when compared to the corresponding periods in the prior year. The resulting decreases for the second quarter 2012 were 5.4% and 2.5% for residential and commercial sales revenue, respectively. The resulting decreases for year-to-date 2012 were 7.1% and 2.1% for residential and commercial sales revenue, respectively.

Fuel and other cost recovery revenues decreased in the second quarter and year-to-date 2012 when compared to the corresponding periods in 2011 primarily due to lower fuel costs associated with decreased KWH generation and lower average cost per KWH generated due to lower natural gas prices. Electric rates include provisions to recognize the full recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with the NDR. Under these provisions, fuel and other cost recovery revenues generally equal fuel and other cost recovery expenses and do not affect net income.

See BUSINESS – “Rate Matters – Rate Structure and Cost Recovery Plans” of Alabama Power in Item 1, MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Rate Adjustments” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters” in Item 8 of the Form 10-K for additional information.

 

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Wholesale Revenues – Non-Affiliates

 

Second Quarter 2012 vs. Second Quarter 2011    Year-to-Date 2012 vs. Year-to-Date 2011

 

(change in millions)    (% change)    (change in millions)    (% change)

$—

     

$(7)

   (5.1)

 

Wholesale revenues from sales to non-affiliates will vary depending on the market prices of available wholesale energy compared to the cost of Alabama Power’s and the Southern Company system’s generation, demand for energy within the Southern Company system’s service territory, and availability of the Southern Company system’s generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income.

In the second quarter 2012 and the second quarter 2011, wholesale revenues from non-affiliates were $70 million. For year-to-date 2012, wholesale revenues from non-affiliates were $131 million compared to $138 million for the corresponding period in 2011. The decrease was primarily due to a 4.1% decrease in KWH sales and a 1.2% decrease in the price of energy.

Wholesale Revenues – Affiliates

 

Second Quarter 2012 vs. Second Quarter 2011    Year-to-Date 2012 vs. Year-to-Date 2011

 

(change in millions)    (% change)    (change in millions)    (% change)

$(69)

   (92.0)   

$(130)

   (86.7)

 

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 this energy is generally sold at marginal cost and energy purchases are generally offset by energy revenues through Alabama Power’s energy cost recovery clauses.

In the second quarter 2012, wholesale revenues from affiliates were $6 million compared to $75 million for the corresponding period in 2011. The decrease was primarily due to a 90.2% decrease in KWH sales.

For year-to-date 2012, wholesale revenues from affiliates were $20 million compared to $150 million for the corresponding period in 2011. The decrease was due to an 82.6% decrease in KWH sales and a 23.5% decrease in the price of energy.

Fuel and Purchased Power Expenses

 

    

Second Quarter 2012

vs.

Second Quarter 2011

 

Year-to-Date 2012

vs.

Year-to-Date 2011

 

   (change in millions)   (% change)   (change in millions)   (% change)

Fuel

   $(85)   (19.9)   $(174)   (21.1)

Purchased power – non-affiliates

       —       —        4    14.3

Purchased power – affiliates

       9    15.8        3     2.9

 

   

 

 

Total fuel and purchased power expenses

   $(76)     $(167)  

 

   

 

 

 

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In the second quarter 2012, total fuel and purchased power expenses were $426 million compared to $502 million for the corresponding period in 2011. The decrease was primarily due to a $64 million decrease related to a reduction in total KWHs generated as a result of milder weather in the second quarter 2012, a $22 million decrease in the cost of fuel, and a $46 million decrease in the average cost of purchased power, partially offset by a $55 million increase in KWHs purchased.

For year-to-date 2012, total fuel and purchased power expenses were $787 million compared to $954 million for the corresponding period in 2011. The decrease was primarily due to a $149 million decrease related to a reduction in total KWHs generated as a result of milder weather for year-to-date 2012, a $25 million decrease in the cost of fuel, and a $51 million decrease in the average cost of purchased power, partially offset by a $58 million increase in KWHs purchased.

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

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

 

    

Second Quarter

2012

  

Second Quarter

2011

  

Year-to-Date

2012

  

Year-to-Date

2011

 

Total generation (billions of KWHs)

   13    17    27    33

Total purchased power (billions of KWHs)

     2      1      3      2

 

Sources of generation (percent) –

           

Coal

   53    56    48    56

Nuclear

   24    23    26    23

Gas

   21    16    20    15

Hydro

    2     5     6     6

 

Cost of fuel, generated (cents per net KWH) 

           

Coal

   3.29    3.13    3.35    3.06

Nuclear

   0.82    0.64    0.78    0.65

Gas

   2.76    4.19    2.88    4.18

 

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

   2.57    2.71    2.54    2.67

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

   3.89    6.02    4.14    5.66

 

 

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

Fuel

In the second quarter 2012, fuel expense was $343 million compared to $428 million for the corresponding period in 2011. The $85 million decrease was due to a 34.1% decrease in the average cost of KWHs generated by natural gas, which excludes fuel associated with tolling agreements, and a 23.5% decrease in KWHs generated by coal, slightly offset by a 6.9% increase in KWHs generated by natural gas.

For year-to-date 2012, fuel expense was $649 million compared to $823 million for the corresponding period in 2011. The $174 million decrease was due to a 31.0% decrease in the average cost of KWHs generated by natural gas, which excludes fuel associated with tolling agreements, and a 29.4% decrease in KWHs generated by coal, slightly offset by an 8.4% increase in KWHs generated by natural gas.

 

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Purchased Power – Non-Affiliates

In the second quarter 2012 and the second quarter 2011, purchased power expense from non-affiliates was $17 million. For year-to-date 2012, purchased power expense from non-affiliates was $32 million compared to $28 million for the corresponding period in 2011. The increase was related to a 388.0% increase in the amount of energy purchased, partially offset by a 76.6% decrease in the average cost per KWH.

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

Purchased Power – Affiliates

In the second quarter 2012, purchased power expense from affiliates was $66 million compared to $57 million for the corresponding period in 2011. The increase was related to a 54.4% increase in the amount of energy purchased, partially offset by a 26.2% decrease in the average cost per KWH.

For year-to-date 2012, purchased power expense from affiliates was $106 million compared to $103 million for the corresponding period in 2011. The increase was related to a 23.2% increase in the amount of energy purchased, partially offset by a 17.0% decrease 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.

Other Operations and Maintenance Expenses

 

Second Quarter 2012 vs. Second Quarter 2011    Year-to-Date 2012 vs. Year-to-Date 2011

 

(change in millions)    (% change)    (change in millions)    (% change)

$26

   9.0    $50    8.5

 

In the second quarter 2012, other operations and maintenance expenses were $316 million compared to $290 million for the corresponding period in 2011. Administrative and general expenses increased $15 million primarily due to pension and other benefit-related expenses. Distribution expenses increased $7 million primarily due to increases in vegetation management and overhead line maintenance costs. Steam production expenses increased $3 million due to environmental mandates which were partially offset by revenues associated with Rate CNP Environmental.

For year-to-date 2012, other operations and maintenance expenses were $637 million compared to $587 million for the corresponding period in 2011. Administrative and general expenses increased $33 million primarily due to pension and other benefit-related expenses, affiliated service company expenses, labor expenses, and property insurance expenses. Nuclear production expenses increased $5 million primarily due to the amortization of nuclear outage expenses of $13 million, partially offset by a decrease in operation costs related to decreases in labor. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Nuclear Outage Accounting Order” of Alabama Power in Item 7 of the Form 10-K for additional information. Additionally, distribution and transmission expenses increased $4 million due to increases in labor expenses and vegetation management.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Income Taxes

 

Second Quarter 2012 vs. Second Quarter 2011    Year-to-Date 2012 vs. Year-to-Date 2011

 

(change in millions)    (% change)    (change in millions)    (% change)

$(5)

   (3.8)    $(17)    (7.5)

 

In the second quarter 2012, income taxes were $126 million compared to $131 million for the corresponding period in 2011. For year-to-date 2012, income taxes were $210 million compared to $227 million for the corresponding period in 2011. The decreases for the second quarter and year-to-date 2012 were primarily due to lower pre-tax earnings as a result of lower revenues due to milder weather and an increase in operations and maintenance expense.

FUTURE EARNINGS POTENTIAL

The results of operations discussed above are not necessarily indicative of Alabama Power’s future earnings potential. The level of Alabama Power’s future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Alabama Power’s primary business of selling electricity. These factors include Alabama Power’s ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently incurred costs during a time of increasing costs. Future earnings in the near term will depend, in part, upon maintaining energy sales which are subject to a number of factors. These factors include weather, competition, new energy contracts with neighboring utilities, energy conservation practiced by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in Alabama Power’s service territory. Changes in economic conditions impact sales for Alabama Power and the pace of the economic recovery remains uncertain. The timing and extent of the economic recovery will impact growth and may impact future earnings. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Alabama Power in Item 7 of the Form 10-K.

Environmental Matters

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

New Source Review Actions

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

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Climate Change Litigation

Hurricane Katrina Case

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

Environmental Statutes and Regulations

General

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

Alabama Power is continuing to develop its compliance strategy and to assess the potential costs of complying with the MATS rule and the EPA’s proposed water and coal combustion byproducts rules. As part of the development of its compliance strategy for the MATS rule, Alabama Power has entered into agreements for the construction of baghouses to control the emissions of mercury and particulates from generating units with an aggregate capacity of 1,901 MWs. While further analysis of the MATS rule is required and the ultimate costs remain uncertain, the compliance decisions made through the second quarter 2012 have allowed Alabama Power to further develop its cost estimates for compliance with the MATS rule. As a result, estimated compliance costs for the MATS rule in the 2012 through 2014 period have been revised from up to $1.2 billion to approximately $660 million as follows:

 

     2012      2013      2014  

 

 
     (in millions)  

MATS rule

   $ 65       $ 155       $ 440   

 

 

 

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In addition, Alabama Power has further developed its estimated capital expenditures and associated timing of these expenditures to comply with the proposed water and coal combustion byproducts rules, resulting in a reduction, due primarily to timing, in estimated compliance costs for 2012 through 2014. Potential incremental environmental compliance investments to comply with the proposed water and coal combustion byproducts rules have been revised from up to $630 million to approximately $175 million over the 2012 through 2014 period, based on the assumption that coal combustion byproducts will continue to be regulated as non-hazardous solid waste under the proposed rule. These potential incremental environmental compliance investments are estimated as follows:

 

     2012      2013      2014  

 

 
     (in millions)  

Proposed water and coal combustion byproducts rules

     $5         $10         $160   

 

 

While Alabama Power’s ultimate costs of compliance with the MATS rule and the proposed water and coal combustion byproducts rules remain uncertain, Alabama Power estimates that compliance costs through 2021 (assuming that coal combustion byproducts will continue to be regulated as non-hazardous solid waste under the proposed rule) will be at the low end of the $5 billion to $7 billion range provided in the Form 10-K.

Alabama Power’s ultimate compliance strategy and actual 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; the outcome of any legal challenges to the environmental rules; the cost, availability, and existing inventory of emissions allowances; and Alabama Power’s fuel mix. Compliance costs may arise from retirement and replacement of existing units, installation of additional environmental controls, upgrades to the transmission system, and changing fuel sources for certain existing units. Alabama Power’s preliminary analysis further indicates that the short timeframe for compliance with the MATS rule could significantly affect electric system reliability and cause an increase in costs of materials and services. The ultimate outcome of these matters cannot be determined at this time.

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

Air Quality

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Air Quality” of Alabama Power in Item 7 of the Form 10-K for additional information on the eight-hour ozone and fine particulate matter air quality standards and the MATS rule.

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

On June 14, 2012, the EPA proposed a rule that would increase the stringency of the fine particulate matter national ambient air quality standards. If adopted, the proposed standards could result in the designation of new nonattainment areas within Alabama Power’s service territory. As part of a related settlement, the EPA has agreed to finalize the proposed rule by December 14, 2012. The ultimate outcome of this rulemaking will depend on the final rule and the outcome of any legal challenges and cannot be determined at this time.

 

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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 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.

Water Quality

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Water Quality” of Alabama Power in Item 7 of the Form 10-K for additional information on the proposed rules regarding certain cooling water intake structures. The EPA has entered into an amended settlement agreement to extend the deadline for issuing a final rule until June 27, 2013. The ultimate outcome of this rulemaking will depend on the final rule and the outcome of any legal challenges and cannot be determined at this time.

Coal Combustion Byproducts

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Environmental Statutes and Regulations – Coal Combustion Byproducts” of Alabama Power in Item 7 of the Form 10-K for additional information. Environmental groups and other parties have filed lawsuits 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. The ultimate outcome of these matters cannot be determined at this time.

Global Climate Issues

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Environmental Matters – Global Climate Issues” of Alabama Power in Item 7 of the Form 10-K for additional information.

On April 13, 2012, the EPA published proposed regulations to establish standards of performance for greenhouse gas emissions from new fossil fuel steam electric generating units. As proposed, the standards would not apply to existing units. The EPA has delayed its plans to propose greenhouse gas emissions performance standards for modified sources and emissions guidelines for existing sources. The impact of this rulemaking will depend on the scope and specific requirements of the final rule and the outcome of any legal challenges and, therefore, cannot be determined at this time.

On June 26, 2012, a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit unanimously rejected all challenges to four of the EPA’s actions relating to the greenhouse gas permitting programs under the Clean Air Act. These rules may impact the amount of time it takes to obtain prevention of significant deterioration permits for new generation and major modifications to existing generating units and the requirements ultimately imposed by those permits. The ultimate impact of these rules cannot be determined at this time and will depend on the outcome of any other legal challenges.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

PSC Matters

Rate CNP

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Retail Rate Adjustments – Rate CNP” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters – Rate CNP” in Item 8 of the Form 10-K for additional information regarding Alabama Power’s recovery of retail costs through Rate Certificated New Plant Power Purchase Agreement (Rate CNP) and Rate CNP Environmental. Alabama Power’s under recovered Rate CNP balance as of June 30, 2012 was $2 million as compared to $6 million at December 31, 2011. Alabama Power’s under recovered Rate CNP Environmental balance as of June 30, 2012 was $26 million as compared to $11 million at December 31, 2011. These under recovered balances at June 30, 2012 are included in deferred under recovered regulatory clause revenues on Alabama Power’s Condensed Balance Sheet herein. For Rate CNP, this classification is based on an estimate, which includes such factors as purchased power capacity and energy demand. For Rate CNP Environmental, this classification is based on an estimate, which includes such factors as costs to comply with environmental mandates and energy demand. A change in any of these factors could have a material impact on the timing of any recovery of the under recovered retail costs.

Retail Fuel Cost Recovery

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Fuel Cost Recovery” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters – Fuel Cost Recovery” in Item 8 of the Form 10-K for information regarding Alabama Power’s fuel cost recovery. Alabama Power’s under recovered fuel costs as of June 30, 2012 totaled $16 million as compared to $31 million at December 31, 2011. These under recovered fuel costs at June 30, 2012 are included in under recovered regulatory clause revenues on Alabama Power’s Condensed Balance Sheet herein. This classification is based on an estimate which includes such factors as weather, generation availability, energy demand, and the price of energy. A change in any of these factors could have a material impact on the timing of any recovery of the under recovered fuel costs.

Natural Disaster Cost Recovery

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “PSC Matters – Natural Disaster Reserve” of Alabama Power in Item 7 and Note 3 to the financial statements of Alabama Power under “Retail Regulatory Matters – Natural Disaster Reserve” in Item 8 of the Form 10-K for additional information regarding natural disaster cost recovery. At June 30, 2012, the NDR had an accumulated balance of $105 million, which is included in Alabama Power’s Condensed Balance Sheet herein under other regulatory liabilities, deferred. The accruals are reflected as operations and maintenance expenses in Alabama Power’s Condensed Statement of Income herein.

Income Tax Matters

Bonus Depreciation

In December 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term construction projects to be placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term construction projects to be placed in service in 2013), which will have a positive impact on the future cash flows of Alabama Power through 2013. Consequently, Alabama Power’s positive cash flow benefit is estimated to be between $85 million and $110 million in 2012.

 

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FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Other Matters

Alabama Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Alabama Power is subject to certain claims and legal actions arising in the ordinary course of business. Alabama Power’s business activities are subject to extensive governmental regulation related to public health and the environment, such as regulation of air emissions and water discharges. Litigation over environmental issues and claims of various types, including property damage, personal injury, common law nuisance, and citizen enforcement of environmental requirements such as air quality and water standards, has increased generally throughout the U.S. In particular, personal injury and other claims for damages caused by alleged exposure to hazardous materials, and common law nuisance claims for injunctive relief and property damage allegedly caused by greenhouse gas and other emissions, have become more frequent. The ultimate outcome of such pending or potential litigation against Alabama Power cannot be predicted at this time; however, for current proceedings not specifically reported in Note (B) herein or in Note 3 to the financial statements of Alabama Power in Item 8 of the Form 10-K, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Alabama Power’s financial statements.

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

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – “Other Matters” of Alabama Power in Item 7 of the Form 10-K for additional information regarding the earthquake and tsunami that struck Japan in March 2011. On March 12, 2012, the NRC issued three orders and a request for information based on the NRC task force report recommendations that included, among other items, additional mitigation strategies for beyond-design-basis events, enhanced spent fuel pool instrumentation capabilities, hardened vents for certain classes of containment structures, site specific evaluations for seismic and flooding hazards, and various plant evaluations to ensure adequate coping capabilities during station blackout and other conditions. The staff of the NRC expects to issue additional implementation guidance by the end of 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.

ACCOUNTING POLICIES

Application of Critical Accounting Policies and Estimates

Alabama Power prepares its financial statements in accordance with GAAP. Significant accounting policies are described in Note 1 to the financial statements of Alabama Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Alabama Power’s results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT’S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – “Application of Critical Accounting Policies and Estimates” of Alabama Power in Item 7 of the Form 10-K for a complete discussion of Alabama Power’s critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Pension and Other Postretirement Benefits.

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FINANCIAL CONDITION AND LIQUIDITY

Overview

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Overview” of Alabama Power in Item 7 of the Form 10-K for additional information. Alabama Power’s financial condition remained stable at June 30, 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 $481 million for the first six months of 2012, a decrease of $338 million as compared to the first six months of 2011. The decrease in cash provided from operating activities was primarily due to an increase in fossil fuel stock, a decrease in deferred income taxes, and the timing of income tax payments and refunds associated with bonus depreciation. Net cash used for investing activities totaled $464 million for the first six months of 2012 primarily due to gross property additions related to nuclear fuel and transmission, distribution, and steam generating equipment. Net cash used for financing activities totaled $283 million for the first six months of 2012. This was primarily due to 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 six months of 2012 include increases of $125 million in fossil fuel stock, at average cost, $116 million in property, plant, and equipment associated with routine property additions and nuclear fuel, $67 million in accrued income taxes, and $61 million in prepaid expenses and decreases of $266 million in cash and cash equivalents and $126 million in other accounts payable.

Capital Requirements and Contractual Obligations

See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Capital Requirements and Contractual Obligations” of Alabama Power in Item 7 of the Form 10-K for a description of Alabama Power’s capital requirements for its construction program, including estimated capital expenditures to comply with existing environmental regulations, 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 $500 million will be required through June 30, 2013 to fund maturities of long-term debt.

See FUTURE EARNINGS POTENTIAL – “Environmental Statutes and Regulations – General” herein for a description of the Alabama Power’s estimated capital expenditures to comply with the MATS rule and proposed water and coal combustion byproducts rules.

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.

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Sources of Capital

Alabama Power plans to obtain the funds required for construction and other purposes from sources similar to those utilized in the past. Alabama Power has primarily utilized funds from operating cash flows, short-term debt, security issuances, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Sources of Capital” of Alabama Power in Item 7 of the Form 10-K for additional information.

Alabama Power’s current liabilities sometimes exceed current assets because of Alabama Power’s debt due within one year and the periodic use of short-term debt as a funding source primarily to meet scheduled maturities of long-term debt, as well as cash needs, which can fluctuate significantly due to the seasonality of the business.

At June 30, 2012, Alabama Power had approximately $78 million of cash and cash equivalents. Committed credit arrangements with banks at June 30, 2012, including expiration dates, were as follows:

 

Expires           Executable Term
Loans
 

Due Within One

Year(a)

 

     

 

 

 

        2012           2013  

2014

and
    Beyond    

      Total       Unused   One
    Year    
  Two
  Years  
      Term    
Out
  No Term
Out

 

 

 

 

 

 

 

(in millions)   (in millions)   (in millions)   (in millions)
$37   $101   $1,150   $1,288   $1,288   $51   $—     $51   $52

 

(a) Reflects facilities expiring on or before June 30, 2013.

See Note 6 to the financial statements of Alabama Power under “Bank Credit Arrangements” in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under “Bank Credit Arrangements” herein for additional information.

Most of these arrangements contain covenants that limit debt levels and typically contain cross default provisions that are restricted only to the indebtedness of Alabama Power. Alabama Power is currently in compliance with all such covenants. Alabama Power expects to renew its credit arrangements, as needed, prior to expiration. These credit arrangements provide liquidity support to Alabama Power’s commercial paper borrowings and variable rate pollution control revenue bonds. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of June 30, 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.

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Details of short-term borrowings 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)  

June 30, 2012:

              

Commercial paper

     $—               —  %             $22             0.2%             $57       

 

 

 

(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

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 June 30, 2012, the maximum potential collateral requirements under these contracts at a rating below BBB- and/or Baa3 were approximately $311 million. Included in these amounts are certain agreements that could require collateral in the event that one or more Power Pool participant has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, any credit rating downgrade could impact Alabama Power’s ability to access capital markets, particularly the short-term debt market.

Market Price Risk

Alabama Power’s market risk exposure relative to interest rate changes for the second 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 for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, 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 second quarter 2012 when compared with the December 31, 2011 reporting period.

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The changes in fair value of energy-related derivative contracts, substantially all of which are composed of regulatory hedges, for the three and six months ended June 30, 2012 were as follows:

 

    

Second Quarter

2012

Changes

    

Year-to-Date

2012

Changes

 

 

 
     Fair Value  
     (in millions)  

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

     $(53)         $(48)   

Contracts realized or settled

     16         30   

Current period changes(a)

     5         (14)   

 

 

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

     $(32)         $(32)   

 

 

 

(a) Current period changes also include the changes in fair value of new contracts entered into during the period, if any.

The changes in the fair value positions of the energy-related derivative contracts, which are substantially all attributable to both the volume and the price of natural gas, for the three and six months ended June 30, 2012 were as follows:

 

    

Second Quarter

2012

Changes

    

Year-to-Date

2012

Changes

 

 

 
     Fair Value  
     (in millions)  

Natural gas swaps

     $16         $14   

Natural gas options

     5         2   

Other energy-related derivatives

     —           —     

 

 

Total changes

     $21         $16   

 

 

The net hedge volumes of energy-related derivative contracts were as follows:

 

     June 30,
2012
     March 31,
2012
     December 31,
2011
 

 

 
     mmBtu Volume  
     (in millions)  

Commodity – Natural gas swaps

     32         27         30   

Commodity – Natural gas options

     11         10         9   

 

 

Total hedge volume

     43         37         39   

 

 

The weighted average swap contract cost above market prices was approximately $0.93 per mmBtu as of June 30, 2012, $1.72 per mmBtu as of March 31, 2012, and $1.45 per mmBtu as of December 31, 2011. The change in option premiums is primarily attributable to the volatility of the market and the underlying change in the natural gas price. A majority of the natural gas hedge gains and losses is recovered through Alabama Power’s retail fuel cost recovery clause.

Regulatory hedges relate to Alabama Power’s fuel-hedging program where gains and losses are initially recorded as regulatory liabilities and assets, respectively, and then are included in fuel expense as they are recovered through Alabama Power’s fuel cost recovery clause.

Unrealized pre-tax gains and losses recognized in income for the three and six months ended June 30, 2012 and 2011 for energy-related derivative contracts that are not hedges were not material.

 

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ALABAMA POWER COMPANY

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Alabama Power uses over-the-counter contracts that are not exchange traded but are fair valued using prices which are market observable, and thus fall into Level 2. See Note (C) to the Condensed Financial Statements herein for further discussion on fair value measurements. The maturities of the energy-related derivative contracts and the level of the fair value hierarchy in which they fall at June 30, 2012 were as follows:

 

    

June 30, 2012

Fair Value Measurements

 

 

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

 

 
     (in millions)   

Level 1

     $—           $—           $—              $—           

Level 2

     (32)         (25)         (7)              —           

Level 3

     —           —           —              —           

 

 

Fair value of contracts outstanding at end of period

     $(32)         $(25)         $(7)             $—           

 

 

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 will impose additional requirements on the use of over-the-counter derivatives for both Alabama Power and its derivative counterparties, which could affect both the use and cost of over-the-counter derivatives. Although all relevant regulations have not been finalized, Alabama Power does not expect the impact of these rules to be material.

For additional information, see MANAGEMENT’S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – “Market Price Risk” of Alabama Power in Item 7 and Note 1 under “Financial Instruments” and Note 11 to the financial statements of Alabama Power in Item 8 of the Form 10-K and Note (H) to the Condensed Financial Statements herein.

Financing Activities

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

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

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

In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Alabama Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.

 

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GEORGIA POWER COMPANY

 

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GEORGIA POWER COMPANY

CONDENSED STATEMENTS OF INCOME (UNAUDITED)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2012     2011     2012     2011  
     (in millions)     (in millions)  

Operating Revenues:

        

Retail revenues

   $ 1,857      $ 2,070      $ 3,451      $ 3,885   

Wholesale revenues, non-affiliates

     75        97        141        180   

Wholesale revenues, affiliates

     6        16        9        27   

Other revenues

     82        82        164        162   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     2,020        2,265        3,765        4,254   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Expenses:

        

Fuel

     572        784        1,012        1,461   

Purchased power, non-affiliates

     94        96        187        170   

Purchased power, affiliates

     129        157        288        320   

Other operations and maintenance

     411        419        845        841   

Depreciation and amortization

     185        178        373        351   

Taxes other than income taxes

     94        94        181        181   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,485        1,728        2,886        3,324   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating Income

     535        537        879        930   

Other Income and (Expense):

        

Allowance for equity funds used during construction

     13        22        26        47   

Interest expense, net of amounts capitalized

     (90     (71     (181     (167

Other income (expense), net

     (6     (5     (9     (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and (expense)

     (83     (54     (164     (126
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Before Income Taxes

     452        483        715        804   

Income taxes

     152        169        244        280   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

     300        314        471        524   

Dividends on Preferred and Preference Stock

     5        5        9        9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income After Dividends on Preferred and Preference Stock

   $ 295      $ 309      $ 462      $ 515   
  

 

 

   

 

 

   

 

 

   

 

 

 

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

     For the Three Months
Ended June 30,
     For the Six Months
Ended June 30,
 
     2012      2011      2012      2011  
     (in millions)      (in millions)  

Net Income After Dividends on Preferred and Preference Stock

   $ 295       $ 309       $ 462       $ 515   

Other comprehensive income (loss):

           

Qualifying hedges:

           

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

     —           —           1         1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive income (loss)

     —           —           1         1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive Income

   $ 295       $ 309       $ 463       $ 516   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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GEORGIA POWER COMPANY

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

     For the Six Months
Ended June 30,
 
     2012     2011  
     (in millions)  

Operating Activities:

    

Net income

   $ 471      $ 524   

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

    

Depreciation and amortization, total

     458        426   

Deferred income taxes

     128        189   

Allowance for equity funds used during construction

     (26     (47

Retail fuel cost over recovery—long-term

     44        —     

Deferred expenses

     26        33   

Other, net

     (3     (73

Changes in certain current assets and liabilities —

    

-Receivables

     19        (100

-Fossil fuel stock

     (147     55   

-Prepaid income taxes

     13        77   

-Other current assets

     8        (14

-Accounts payable

     (37     60   

-Accrued taxes

     (77     (123

-Accrued compensation

     (60     (42

-Retail fuel cost over recovery—short-term

     55        —     

-Other current liabilities

     43        46   
  

 

 

   

 

 

 

Net cash provided from operating activities

     915        1,011   
  

 

 

   

 

 

 

Investing Activities:

    

Property additions

     (812     (931

Investment of restricted cash

     (234     —     

Distribution of restricted cash

     49        —     

Nuclear decommissioning trust fund purchases

     (488     (1,152

Nuclear decommissioning trust fund sales

     486        1,149   

Cost of removal, net of salvage

     (34     (9

Change in construction payables, net of joint owner portion

     (161     34   

Other investing activities

     (14     (12
  

 

 

   

 

 

 

Net cash used for investing activities

     (1,208     (921
  

 

 

   

 

 

 

Financing Activities:

    

Decrease in notes payable, net

     (513     (253

Proceeds —

    

Capital contributions from parent company

     18        183   

Pollution control revenue bonds issuances

     234        250   

Senior notes issuances

     1,500        550   

Other long-term debt issuances

     —          250   

Redemptions —

    

Pollution control revenue bonds

     (49     (197

Senior notes

     —          (101

Other long-term debt

     (250     (300

Payment of preferred and preference stock dividends

     (9     (9

Payment of common stock dividends