UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015March 31, 2016
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission 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 |
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| 1-6468 | | Georgia Power Company (A Georgia Corporation) 241 Ralph McGill Boulevard, N.E. Atlanta, Georgia 30308 (404) 506-6526 | | 58-0257110 |
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| 001-31737 | | Gulf Power Company (A Florida Corporation) One Energy Place Pensacola, Florida 32520 (850) 444-6111 | | 59-0276810 |
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| 001-11229 | | Mississippi Power Company (A Mississippi Corporation) 2992 West Beach Boulevard Gulfport, Mississippi 39501 (228) 864-1211 | | 64-0205820 |
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| 333-98553 | | Southern Power Company (A Delaware Corporation) 30 Ivan Allen Jr. Boulevard, N.W. Atlanta, Georgia 30308 (404) 506-5000 | | 58-2598670 |
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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| | | | | | | | |
| 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.)
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| | | | | |
| Registrant | | Description of Common Stock | | Shares Outstanding at September 30, 2015March 31, 2016 |
|
| The Southern Company | | Par Value $5 Per Share | | 908,938,919918,258,425 |
|
| 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 | | 5,642,717 |
|
| Mississippi Power Company | | Without Par Value | | 1,121,000 |
|
| Southern Power Company | | Par Value $0.01 Per Share | | 1,000 |
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This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, and Southern Power Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrants.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2015March 31, 2016
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| | PART I—FINANCIAL INFORMATION | |
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| Item 1. | Financial Statements (Unaudited) | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
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| Item 4. | | |
INDEX TO QUARTERLY REPORT ON FORM 10-Q
September 30, 2015March 31, 2016
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| | | Page Number |
| | | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | Inapplicable |
| Item 3. | Defaults Upon Senior Securities | Inapplicable |
| Item 4. | Mine Safety Disclosures | Inapplicable |
| Item 5. | Other Information | Inapplicable |
| Item 6. | | |
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| Term | Meaning |
| | |
| 2012 MPSC CPCN Order | A detailed order issued by the Mississippi PSC in April 2012 confirming the CPCN originally approved by the Mississippi PSC in 2010 authorizing the acquisition, construction, and operation of the Kemper IGCC |
| 2013 ARP | Alternative Rate Plan approved by the Georgia PSC in 2013 for Georgia Power for the years 2014 through 2016 and subsequently extended through 2019 |
| AFUDC | Allowance for funds used during construction |
| AGL Resources | AGL Resources Inc., a Georgia corporation |
| Alabama Power | Alabama Power Company |
| ASC | Accounting Standards Codification |
| ASU | Accounting Standards Update |
| Baseload Act | State of Mississippi legislation designed to enhance the Mississippi PSC's authority to facilitate development and construction of baseload generation in the State of Mississippi |
| Bridge Agreement | Senior unsecured Bridge Credit Agreement, dated as of September 30, 2015, among Southern Company, the lenders identified therein, and Citibank, N.A. |
| CCR | Coal combustion residuals |
| Clean Air Act | Clean Air Act Amendments of 1990 |
Contractor | Westinghouse and CB&I Stone & Webster, Inc. (formerly known as Stone & Webster, Inc.), a subsidiary of The Shaw Group Inc., which was acquired by Chicago Bridge & Iron Company N.V. |
CO2 | Carbon dioxide |
| COD | Commercial operation date |
| Contractor | Westinghouse and its affiliate, WECTEC Global Project Services Inc. (formerly known as CB&I Stone & Webster, Inc.), formerly a subsidiary of The Shaw Group Inc. and Chicago Bridge & Iron Company N.V. |
| 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 |
| Eligible Project Costs | Certain costs of construction relating to Plant Vogtle Units 3 and 4 that are eligible for financing under the Title XVII Loan Guarantee Program |
| EPA | U.S. Environmental Protection Agency |
| FASB | Financial Accounting Standards Board |
| FERC | Federal Energy Regulatory Commission |
| FFB | Federal Financing Bank |
| Fitch | Fitch Ratings, 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, 20142015 |
| GAAP | GenerallyU.S. generally accepted accounting principles |
| Georgia Power | Georgia Power Company |
| Gulf Power | Gulf Power Company |
| IGCC | Integrated coal gasification combined cycle |
| IIC | Intercompany interchange contract |
| Internal Revenue Code | Internal Revenue Code of 1986, as amended |
| IRS | Internal Revenue Service |
| ITC | Investment tax credit |
| Kemper IGCC | IGCC facility under construction by Mississippi Power in Kemper County, Mississippi |
| KWH | Kilowatt-hour |
| LIBOR | London Interbank Offered Rate |
| MATS rule | Mercury and Air Toxics Standards rule |
| Merger | The merger of Merger Sub with and into AGL Resources on the terms and subject to the conditions set forth in the Merger Agreement, with AGL Resources continuing as the surviving corporation and a wholly-owned, direct subsidiary of Southern Company |
DEFINITIONS
(continued)
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| |
| Term | Meaning |
| |
| Merger Agreement | Agreement and Plan of Merger, dated as of August 23, 2015, among Southern Company, AGL Resources, and Merger Sub |
DEFINITIONS
(continued)
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Term | Meaning |
| |
| Merger Sub | AMS Corp., a Georgia corporation and a wholly-owned, direct subsidiary of Southern Company |
| Mirror CWIP | A regulatory liability account for use in mitigating future rate impacts for Mississippi Power customers |
| Mississippi Power | Mississippi Power Company |
| mmBtu | Million British thermal units |
| Moody's | Moody's Investors Service, Inc. |
| MW | Megawatt |
| NCCR | Georgia Power's Nuclear Construction Cost Recovery |
| NRC | U.S. Nuclear Regulatory Commission |
| 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 Georgia Power's Plant Vogtle |
| power pool | The operating arrangement whereby the integrated generating resources of the traditional operating companies and Southern Power Company (excluding subsidiaries) are subject to joint commitment and dispatch in order to serve their combined load obligations |
| PPA | Power purchase agreement |
| PSC | Public Service Commission |
| PTC | Production tax credit |
| Rate CNP | Alabama Power's Rate Certificated New Plant |
| Rate CNP Compliance | Alabama Power's Rate Certificated New Plant Compliance |
Rate CNP Environmental | Alabama Power's Rate Certificated New Plant Environmental |
Rate CNP PPA | Alabama Power's Rate Certificated New Plant Power Purchase Agreement |
| Rate RSE | Alabama Power's Rate Stabilization and Equalization plan |
| registrants | Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power Company |
| ROE | Return on equity |
| S&P | Standard and Poor's Ratings Services, a division of The McGraw Hill Companies, Inc. |
| scrubber | Flue gas desulfurization system |
| SEC | U.S. Securities and Exchange Commission |
| SMEPA | South Mississippi Electric Power Association |
| Southern Company | The Southern Company |
| Southern Company system | Southern Company, the traditional operating companies, Southern Power, Southern Electric Generating Company, Southern Nuclear, Southern Company Services, Inc. (the Southern Company system service company), Southern Communications Services, Inc., and other subsidiaries |
| Southern Nuclear | Southern Nuclear Operating Company, Inc. |
| Southern Power | Southern Power Company and its subsidiaries |
| traditional operating companies | Alabama Power, Georgia Power, Gulf Power, and Mississippi Power |
Tranquillity | RE Tranquillity Holdings, LLC |
Tranquillity Credit Agreement | Secured Credit Agreement, dated as of July 31, 2015, by and among RE Tranquillity LLC, an indirect subsidiary of Southern Power Company, the several lenders and issuing banks party thereto, and Norddeutsche Landesbank Girozentrale, New York Branch, as Administrative Agent |
| Vogtle Owners | Georgia Power, Oglethorpe Power Corporation, the Municipal Electric Authority of Georgia, and the City of Dalton, Georgia, an incorporated municipality in the State of Georgia acting by and through its Board of Water, Light, and Sinking Fund Commissioners |
| Westinghouse | Westinghouse Electric Company LLC |
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 rates, the potential financing of the Merger, the expected timing of the completion of the Merger, the proposed settlement agreement between the Vogtle Owners and the Contractor, the strategic goals for the wholesale business, economic recovery, fuel and environmental cost recovery and other rate actions, current and proposed environmental regulations and related compliance plans and estimated expenditures, access to sources of capital, projections for the qualified pension plan contributions, financing activities, completion dates of acquisitions, construction projects, and changing fuel sources, filings with state and federal regulatory authorities, estimated sales and purchases under power sale and purchase agreements, and estimated construction and other plans and expenditures. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "could," "should," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential," or "continue" or the negative of these terms or other similar terminology. There are various factors that could cause actual results to differ materially from those suggested by the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include:
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• | the impact of recent and future federal and state regulatory changes, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry, environmental laws including regulation of water, CCR, and emissions of sulfur, nitrogen, CO2, soot, particulate matter, hazardous air pollutants, including mercury, and other substances, and also changes in tax and other laws and regulations to which Southern Company and its subsidiaries are subject, as well as changes in application of existing laws and regulations;
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current and future litigation, regulatory investigations, proceedings, or inquiries, including 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 last recession, population and business growth (and declines), the effects of energy conservation and efficiency measures, including from the development and deployment of alternative energy sources such as self-generation and distributed generation technologies, and any potential economic impacts resulting from federal fiscal decisions;
available sources and costs of fuels;
effects of inflation;
the ability to control costs and avoid cost overruns during the development and construction of facilities, which include the development and construction of generating facilities with designs that have not been finalized or previously constructed, including changes in labor costs and productivity, adverse weather conditions, shortages and inconsistent quality of equipment, materials, and labor, contractor or supplier delay, non-performance under construction or other agreements, operational readiness, including specialized operator training and required site safety programs, unforeseen engineering or design problems, start-up activities (including major equipment failure and system integration), and/or operational performance (including additional costs to satisfy any operational parameters ultimately adopted by any PSC);
the ability to construct facilities in accordance with the requirements of permits and licenses, to satisfy any environmental performance standards and the requirements of tax credits and other incentives, and to integrate facilities into the Southern Company system upon completion of construction;
investment performance of Southern Company's employee and retiree benefit plans and the Southern Company system's 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;
legal proceedings and regulatory approvals and actions related to Plant Vogtle Units 3 and 4, including Georgia PSC approvals and NRC actions and related legal proceedings involving the commercial parties;
the ability to complete the proposed settlement among the Vogtle Owners and the Contractor, including the satisfaction of conditions to such settlement;
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
(continued)This Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements include, among other things, statements concerning retail rates, the potential financing of the Merger, the expected timing of the completion of the Merger, the strategic goals for the wholesale business, economic conditions, fuel and environmental cost recovery and other rate actions, current and proposed environmental regulations and related compliance plans and estimated expenditures, pending or potential litigation matters, access to sources of capital, financing activities, completion dates of acquisitions and construction projects, filings with state and federal regulatory authorities, federal income tax benefits, estimated sales and purchases under power sale and purchase agreements, and estimated construction and other plans and 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, environmental laws regulating emissions, discharges, and disposal to air, water, and land, 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, without limitation, 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 last recession, population and business growth (and declines), the effects of energy conservation and efficiency measures, including from the development and deployment of alternative energy sources such as self-generation and distributed generation technologies, and any potential economic impacts resulting from federal fiscal decisions;
available sources and costs of fuels;
effects of inflation;
the ability to control costs and avoid cost overruns during the development and construction of facilities, which include the development and construction of generating facilities with designs that have not been finalized or previously constructed, including changes in labor costs and productivity, adverse weather conditions, shortages and inconsistent quality of equipment, materials, and labor, contractor or supplier delay, non-performance under construction, operating, or other agreements, operational readiness, including specialized operator training and required site safety programs, unforeseen engineering or design problems, start-up activities (including major equipment failure and system integration), and/or operational performance (including additional costs to satisfy any operational parameters ultimately adopted by any PSC);
the ability to construct facilities in accordance with the requirements of permits and licenses, to satisfy any environmental performance standards and the requirements of tax credits and other incentives, and to integrate facilities into the Southern Company system upon completion of construction;
investment performance of Southern Company's employee and retiree benefit plans and the Southern Company system's 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;
legal proceedings and regulatory approvals and actions related to Plant Vogtle Units 3 and 4, including Georgia PSC approvals and NRC actions;
actions related to cost recovery for the Kemper IGCC, including the ultimate impact of the 2015 decision of the Mississippi Supreme Court, the Mississippi PSC's AugustDecember 2015 interim rate order, and related legal or regulatory proceedings, Mississippi PSC review of the prudence of Kemper IGCC costs and approval of further permanent rate recovery plans, actions relating to proposed securitization, the ability to utilize bonus depreciation, which currently requires that assets be placed in service in 2015, satisfaction of requirements to utilize ITCs and grants, and the ultimate impact of the termination of the proposed sale of an interest in the Kemper IGCC to SMEPA;
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
(continued)
the ability to successfully operate the electric utilities' generating, transmission, and distribution facilities and the successful performance of necessary corporate functions;
the inherent risks involved in operating and constructing nuclear generating facilities, including environmental, health, regulatory, natural disaster, terrorism, and financial risks;
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 expected timing, likelihood, and benefits of completion of the Merger, including the failure to receive, on a timely basis or otherwise, the required approvals by AGL Resources' shareholders and government or regulatory agencies (including the terms of such approvals), the possibility that long-term financing for the Merger may not be put in place prior to the closing, the risk that a condition to closing of the Merger or funding of the Bridge Agreement may not be satisfied, the possibility that the anticipated benefits from the Merger cannot be fully realized or may take longer to realize than expected, the possibility that costs related to the integration of Southern Company and AGL Resources will be greater than expected, the credit ratings of the combined company or its subsidiaries may be different from what the parties expect, the ability to retain and hire key personnel and maintain relationships with customers, suppliers, or other business partners, the diversion of management time on Merger-related issues, and the impact of legislative, regulatory, and competitive changes;
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 the Southern Company system's business resulting from cyber intrusion or terrorist incidents and the threat of terrorist incidents;
interest rate fluctuations and financial market conditions and the results of financing efforts;
changes in Southern Company's and any of its subsidiaries' credit ratings, including impacts on interest rates, access to capital markets, and collateral requirements;
the impacts of any 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 benefits of the DOE loan guarantees;
the ability of Southern Company's subsidiaries to obtain additional generating capacity (or sell excess generating capacity) at competitive prices;
catastrophic events such as fires, earthquakes, explosions, floods, hurricanes and other storms, droughts, pandemic health events such as influenzas, or other similar occurrences;
the direct or indirect effects on the Southern Company system'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 (including the Form 10-K) filed by the registrants from time to time with the SEC.
The registrants expressly disclaim any obligation to update any forward-looking statements.
THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| | | | For the Three Months
Ended September 30, | | For the Nine Months
Ended September 30, | For the Three Months
Ended March 31, |
| | 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
| | (in millions) | | (in millions) | (in millions) |
| Operating Revenues: | | | | | | | | | | |
| Retail revenues | $ | 4,701 |
| | $ | 4,558 |
| | $ | 11,958 |
| | $ | 12,186 |
| $ | 3,377 |
| | $ | 3,542 |
|
| Wholesale revenues | 520 |
| | 600 |
| | 1,435 |
| | 1,719 |
| 396 |
| | 467 |
|
| Other electric revenues | 169 |
| | 169 |
| | 494 |
| | 503 |
| 181 |
| | 163 |
|
| Other revenues | 11 |
| | 12 |
| | 34 |
| | 42 |
| 11 |
| | 11 |
|
| Total operating revenues | 5,401 |
| | 5,339 |
| | 13,921 |
| | 14,450 |
| 3,965 |
| | 4,183 |
|
| Operating Expenses: | | | | | | | | | | |
| Fuel | 1,520 |
| | 1,656 |
| | 3,932 |
| | 4,765 |
| 911 |
| | 1,212 |
|
| Purchased power | 193 |
| | 194 |
| | 507 |
| | 514 |
| 165 |
| | 144 |
|
| Other operations and maintenance | 1,097 |
| | 1,021 |
| | 3,320 |
| | 3,026 |
| 1,106 |
| | 1,122 |
|
| Depreciation and amortization | 528 |
| | 514 |
| | 1,515 |
| | 1,515 |
| 541 |
| | 487 |
|
| Taxes other than income taxes | 264 |
| | 258 |
| | 761 |
| | 751 |
| 256 |
| | 252 |
|
| Estimated loss on Kemper IGCC | 150 |
| | 418 |
| | 182 |
| | 798 |
| 53 |
| | 9 |
|
| Total operating expenses | 3,752 |
| | 4,061 |
| | 10,217 |
| | 11,369 |
| 3,032 |
| | 3,226 |
|
| Operating Income | 1,649 |
| | 1,278 |
| | 3,704 |
| | 3,081 |
| 933 |
| | 957 |
|
| Other Income and (Expense): | | | | | | | | | | |
| Allowance for equity funds used during construction | 60 |
| | 63 |
| | 163 |
| | 182 |
| 53 |
| | 63 |
|
| Interest expense, net of amounts capitalized | (218 | ) | | (207 | ) | | (612 | ) | | (623 | ) | (246 | ) | | (213 | ) |
| Other income (expense), net | (21 | ) | | (7 | ) | | (41 | ) | | (20 | ) | (21 | ) | | (8 | ) |
| Total other income and (expense) | (179 | ) | | (151 | ) | | (490 | ) | | (461 | ) | (214 | ) | | (158 | ) |
| Earnings Before Income Taxes | 1,470 |
| | 1,127 |
| | 3,214 |
| | 2,620 |
| 719 |
| | 799 |
|
| Income taxes | 500 |
| | 392 |
| | 1,076 |
| | 889 |
| 222 |
| | 274 |
|
| Consolidated Net Income | 970 |
| | 735 |
| | 2,138 |
| | 1,731 |
| 497 |
| | 525 |
|
| Less: | | | | |
| Dividends on Preferred and Preference Stock of Subsidiaries | 11 |
| | 17 |
| | 42 |
| | 51 |
| 11 |
| | 17 |
|
Consolidated Net Income After Dividends on Preferred and Preference Stock of Subsidiaries | $ | 959 |
| | $ | 718 |
| | $ | 2,096 |
| | $ | 1,680 |
| |
| Net income attributable to noncontrolling interests | | 1 |
| | — |
|
| Consolidated Net Income Attributable to Southern Company | | $ | 485 |
| | $ | 508 |
|
| Common Stock Data: | | | | | | | | | | |
| Earnings per share (EPS) — | | | | | | | | | | |
| Basic EPS | $ | 1.05 |
| | $ | 0.80 |
| | $ | 2.30 |
| | $ | 1.88 |
| $ | 0.53 |
| | $ | 0.56 |
|
| Diluted EPS | $ | 1.05 |
| | $ | 0.80 |
| | $ | 2.30 |
| | $ | 1.87 |
| $ | 0.53 |
| | $ | 0.56 |
|
| Average number of shares of common stock outstanding (in millions) | | | | | | | | | | |
| Basic | 910 |
| | 898 |
| | 910 |
| | 894 |
| 916 |
| | 910 |
|
| Diluted | 912 |
| | 902 |
| | 913 |
| | 898 |
| 922 |
| | 915 |
|
| Cash dividends paid per share of common stock | $ | 0.5425 |
| | $ | 0.5250 |
| | $ | 1.6100 |
| | $ | 1.5575 |
| $ | 0.5425 |
| | $ | 0.5250 |
|
The accompanying notes as they relate to Southern Company are an integral part of these consolidated financial statements.
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| | | | For the Three Months
Ended September 30, | | For the Nine Months
Ended September 30, | For the Three Months
Ended March 31, |
| | 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
| | (in millions) | | (in millions) | (in millions) |
| Consolidated Net Income | $ | 970 |
| | $ | 735 |
| | $ | 2,138 |
| | $ | 1,731 |
| $ | 497 |
| | $ | 525 |
|
| Other comprehensive income (loss): | | | | | | | | | | |
| Qualifying hedges: | | | | | | | | | | |
| Changes in fair value, net of tax of $(11), $-, $(10) and $-, respectively | (18 | ) | | — |
| | (16 | ) | | — |
| |
Reclassification adjustment for amounts included in net income,
net of tax of $1, $1, $3 and $2, respectively | 1 |
| | 1 |
| | 4 |
| | 4 |
| |
| Changes in fair value, net of tax of $(72) and $(11), respectively | | (117 | ) | | (18 | ) |
Reclassification adjustment for amounts included in net income,
net of tax of $1 and $1, respectively | | 2 |
| | 1 |
|
| Pension and other post retirement benefit plans: | | | | | | | | | | |
Reclassification adjustment for amounts included in net income,
net of tax of $1, $1, $3 and $2, respectively | 2 |
| | 1 |
| | 5 |
| | 2 |
| |
Reclassification adjustment for amounts included in net income,
net of tax of $1 and $1, respectively | | 1 |
| | 2 |
|
| Total other comprehensive income (loss) | (15 | ) | | 2 |
| | (7 | ) | | 6 |
| (114 | ) | | (15 | ) |
| Less: | | | | |
| Dividends on preferred and preference stock of subsidiaries | (11 | ) | | (17 | ) | | (42 | ) | | (51 | ) | 11 |
| | 17 |
|
| Comprehensive Income | $ | 944 |
| | $ | 720 |
| | $ | 2,089 |
| | $ | 1,686 |
| |
| Comprehensive income attributable to noncontrolling interests | | 1 |
| | — |
|
| Consolidated Comprehensive Income Attributable to Southern Company | | $ | 371 |
| | $ | 493 |
|
The accompanying notes as they relate to Southern Company are an integral part of these consolidated financial statements.
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
| | | | | | | |
| | For the Nine Months
Ended September 30, |
| | 2015 | | 2014 |
| | (in millions) |
| Operating Activities: | | | |
| Consolidated net income | $ | 2,138 |
| | $ | 1,731 |
|
| Adjustments to reconcile consolidated net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 1,787 |
| | 1,798 |
|
| Deferred income taxes | 821 |
| | 330 |
|
| Investment tax credits | 319 |
| | (70 | ) |
| Allowance for equity funds used during construction | (163 | ) | | (182 | ) |
| Stock based compensation expense | 77 |
| | 51 |
|
| Estimated loss on Kemper IGCC | 182 |
| | 798 |
|
| Income taxes receivable, non-current | (444 | ) | | — |
|
| Other, net | 7 |
| | (116 | ) |
| Changes in certain current assets and liabilities — | | | |
| -Receivables | (118 | ) | | (640 | ) |
| -Fossil fuel stock | 239 |
| | 522 |
|
| -Materials and supplies | (22 | ) | | (45 | ) |
| -Other current assets | (18 | ) | | (29 | ) |
| -Accounts payable | (266 | ) | | (92 | ) |
| -Accrued taxes | 408 |
| | 403 |
|
| -Accrued compensation | (129 | ) | | 96 |
|
| -Mirror CWIP | 99 |
| | 112 |
|
| -Other current liabilities | 171 |
| | 20 |
|
| Net cash provided from operating activities | 5,088 |
| | 4,687 |
|
| Investing Activities: | | | |
| Plant acquisitions | (1,128 | ) | | (218 | ) |
| Property additions | (3,490 | ) | | (3,686 | ) |
| Investment in restricted cash | — |
| | (11 | ) |
| Nuclear decommissioning trust fund purchases | (1,164 | ) | | (635 | ) |
| Nuclear decommissioning trust fund sales | 1,159 |
| | 633 |
|
| Cost of removal, net of salvage | (118 | ) | | (106 | ) |
| Change in construction payables, net | 20 |
| | 11 |
|
| Prepaid long-term service agreement | (166 | ) | | (145 | ) |
| Other investing activities | 7 |
| | — |
|
| Net cash used for investing activities | (4,880 | ) | | (4,157 | ) |
| Financing Activities: | | | |
| Increase (decrease) in notes payable, net | 662 |
| | (1,117 | ) |
| Proceeds — | | | |
| Long-term debt issuances | 3,992 |
| | 2,715 |
|
| Interest-bearing refundable deposit | — |
| | 75 |
|
| Common stock issuances | 136 |
| | 484 |
|
| Short-term borrowings | 280 |
| | — |
|
| Redemptions and repurchases — | | | |
| Long-term debt | (2,562 | ) | | (437 | ) |
| Interest-bearing refundable deposits | (275 | ) | | — |
|
| Preferred and preference stock | (412 | ) | | — |
|
| Common stock | (115 | ) | | (5 | ) |
| Short-term borrowings | (255 | ) | | — |
|
| Payment of common stock dividends | (1,465 | ) | | (1,391 | ) |
| Payment of dividends on preferred and preference stock of subsidiaries | (48 | ) | | (51 | ) |
| Other financing activities | 253 |
| | (48 | ) |
| Net cash provided from financing activities | 191 |
| | 225 |
|
| Net Change in Cash and Cash Equivalents | 399 |
| | 755 |
|
| Cash and Cash Equivalents at Beginning of Period | 710 |
| | 659 |
|
| Cash and Cash Equivalents at End of Period | $ | 1,109 |
| | $ | 1,414 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid (received) during the period for — | | | |
| Interest (net of $88 and $80 capitalized for 2015 and 2014, respectively) | $ | 590 |
| | $ | 560 |
|
| Income taxes, net | (13 | ) | | 263 |
|
| Noncash transactions — Accrued property additions at end of period | 483 |
| | 415 |
|
The accompanying notes as they relate to Southern Company are an integral part of these consolidated financial statements.
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Assets | | At September 30,
2015 | | At December 31,
2014 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 1,109 |
| | $ | 710 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 1,432 |
| | 1,090 |
|
| Unbilled revenues | | 488 |
| | 432 |
|
| Under recovered regulatory clause revenues | | 126 |
| | 136 |
|
| Other accounts and notes receivable | | 248 |
| | 307 |
|
| Accumulated provision for uncollectible accounts | | (19 | ) | | (18 | ) |
| Fossil fuel stock, at average cost | | 691 |
| | 930 |
|
| Materials and supplies, at average cost | | 1,046 |
| | 1,039 |
|
| Vacation pay | | 177 |
| | 177 |
|
| Prepaid expenses | | 248 |
| | 665 |
|
| Deferred income taxes, current | | 258 |
| | 506 |
|
| Other regulatory assets, current | | 421 |
| | 346 |
|
| Other current assets | | 45 |
| | 50 |
|
| Total current assets | | 6,270 |
| | 6,370 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 71,929 |
| | 70,013 |
|
| Less accumulated depreciation | | 24,190 |
| | 24,059 |
|
| Plant in service, net of depreciation | | 47,739 |
| | 45,954 |
|
| Other utility plant, net | | 73 |
| | 211 |
|
| Nuclear fuel, at amortized cost | | 869 |
| | 911 |
|
| Construction work in progress | | 9,562 |
| | 7,792 |
|
| Total property, plant, and equipment | | 58,243 |
| | 54,868 |
|
| Other Property and Investments: | | | | |
| Nuclear decommissioning trusts, at fair value | | 1,473 |
| | 1,546 |
|
| Leveraged leases | | 752 |
| | 743 |
|
| Miscellaneous property and investments | | 489 |
| | 203 |
|
| Total other property and investments | | 2,714 |
| | 2,492 |
|
| Deferred Charges and Other Assets: | | | | |
| Deferred charges related to income taxes | | 1,553 |
| | 1,510 |
|
| Unamortized debt issuance expense | | 203 |
| | 202 |
|
| Unamortized loss on reacquired debt | | 232 |
| | 243 |
|
| Other regulatory assets, deferred | | 4,733 |
| | 4,334 |
|
| Income taxes receivable, non-current | | 444 |
| | — |
|
| Other deferred charges and assets | | 823 |
| | 904 |
|
| Total deferred charges and other assets | | 7,988 |
| | 7,193 |
|
| Total Assets | | $ | 75,215 |
| | $ | 70,923 |
|
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2016 | | 2015 |
| | (in millions) |
| Operating Activities: | | | |
| Consolidated net income | $ | 497 |
| | $ | 525 |
|
| Adjustments to reconcile consolidated net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 639 |
| | 578 |
|
| Deferred income taxes | (4 | ) | | 113 |
|
| Allowance for equity funds used during construction | (53 | ) | | (63 | ) |
| Stock based compensation expense | 58 |
| | 56 |
|
| Estimated loss on Kemper IGCC | 53 |
| | 9 |
|
| Other, net | (13 | ) | | 4 |
|
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 235 |
| | 180 |
|
| -Fossil fuel stock | 31 |
| | 76 |
|
| -Materials and supplies | (14 | ) | | 4 |
|
| -Other current assets | (90 | ) | | (89 | ) |
| -Accounts payable | (72 | ) | | (426 | ) |
| -Accrued taxes | (60 | ) | | 197 |
|
| -Accrued compensation | (332 | ) | | (381 | ) |
| -Retail fuel cost over recovery - short-term | 25 |
| | 49 |
|
| -Mirror CWIP | — |
| | 40 |
|
| -Other current liabilities | (35 | ) | | 41 |
|
| Net cash provided from operating activities | 865 |
| | 913 |
|
| Investing Activities: | | | |
| Plant acquisitions | (114 | ) | | (6 | ) |
| Property additions | (1,872 | ) | | (1,091 | ) |
| Investment in restricted cash | (289 | ) | | — |
|
| Distribution of restricted cash | 292 |
| | — |
|
| Nuclear decommissioning trust fund purchases | (316 | ) | | (290 | ) |
| Nuclear decommissioning trust fund sales | 311 |
| | 284 |
|
| Cost of removal, net of salvage | (52 | ) | | (36 | ) |
| Change in construction payables, net | (94 | ) | | 65 |
|
| Prepaid long-term service agreement | (49 | ) | | (37 | ) |
| Other investing activities | (14 | ) | | 4 |
|
| Net cash used for investing activities | (2,197 | ) | | (1,107 | ) |
| Financing Activities: | | | |
| Increase in notes payable, net | 294 |
| | 597 |
|
| Proceeds — | | | |
| Long-term debt issuances | 1,997 |
| | 550 |
|
| Common stock issuances | 270 |
| | 112 |
|
| Short-term borrowings | — |
| | 280 |
|
| Redemptions and repurchases — | | | |
| Long-term debt | (888 | ) | | (333 | ) |
| Common stock repurchased | — |
| | (115 | ) |
| Short-term borrowings | (475 | ) | | — |
|
| Distributions to noncontrolling interests | (4 | ) | | — |
|
| Capital contributions from noncontrolling interests | 131 |
| | — |
|
| Purchase of membership interests from noncontrolling interests | (129 | ) | | — |
|
| Payment of common stock dividends | (497 | ) | | (478 | ) |
| Other financing activities | (17 | ) | | (17 | ) |
| Net cash provided from financing activities | 682 |
| | 596 |
|
| Net Change in Cash and Cash Equivalents | (650 | ) | | 402 |
|
| Cash and Cash Equivalents at Beginning of Period | 1,404 |
| | 710 |
|
| Cash and Cash Equivalents at End of Period | $ | 754 |
| | $ | 1,112 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid (received) during the period for -- | | | |
| Interest (net of $30 and $32 capitalized for 2016 and 2015, respectively) | $ | 224 |
| | $ | 207 |
|
| Income taxes, net | (141 | ) | | (289 | ) |
| Noncash transactions — Accrued property additions at end of period | 731 |
| | 347 |
|
The accompanying notes as they relate to Southern Company are an integral part of these consolidated financial statements.
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Liabilities and Stockholders' Equity | | At September 30,
2015 | | At December 31,
2014 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 3,313 |
| | $ | 3,333 |
|
| Interest-bearing refundable deposits | | — |
| | 275 |
|
| Notes payable | | 1,490 |
| | 803 |
|
| Accounts payable | | 1,419 |
| | 1,593 |
|
| Customer deposits | | 400 |
| | 390 |
|
| Accrued taxes — | | | | |
| Accrued income taxes | | 404 |
| | 151 |
|
| Other accrued taxes | | 566 |
| | 487 |
|
| Accrued interest | | 223 |
| | 295 |
|
| Accrued vacation pay | | 223 |
| | 223 |
|
| Accrued compensation | | 462 |
| | 576 |
|
| Mirror CWIP | | 369 |
| | 271 |
|
| Other current liabilities | | 820 |
| | 570 |
|
| Total current liabilities | | 9,689 |
| | 8,967 |
|
| Long-term Debt | | 22,326 |
| | 20,841 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 11,990 |
| | 11,568 |
|
| Deferred credits related to income taxes | | 183 |
| | 192 |
|
| Accumulated deferred investment tax credits | | 1,004 |
| | 1,208 |
|
| Employee benefit obligations | | 2,408 |
| | 2,432 |
|
| Asset retirement obligations | | 2,952 |
| | 2,168 |
|
| Unrecognized tax benefits | | 369 |
| | 4 |
|
| Other cost of removal obligations | | 1,210 |
| | 1,215 |
|
| Other regulatory liabilities, deferred | | 399 |
| | 398 |
|
| Other deferred credits and liabilities | | 603 |
| | 590 |
|
| Total deferred credits and other liabilities | | 21,118 |
| | 19,775 |
|
| Total Liabilities | | 53,133 |
| | 49,583 |
|
| Redeemable Preferred Stock of Subsidiaries | | 118 |
| | 375 |
|
| Redeemable Noncontrolling Interest | | 41 |
| | 39 |
|
| Stockholders' Equity: | | | | |
| Common Stockholders' Equity: | | | | |
| Common stock, par value $5 per share — | | | | |
| Authorized — 1.5 billion shares | | | | |
| Issued — September 30, 2015: 912 million shares | | | | |
| — December 31, 2014: 909 million shares | | | | |
| Treasury — September 30, 2015: 3.3 million shares | | | | |
| — December 31, 2014: 0.7 million shares | | | | |
| Par value | | 4,558 |
| | 4,539 |
|
| Paid-in capital | | 6,150 |
| | 5,955 |
|
| Treasury, at cost | | (141 | ) | | (26 | ) |
| Retained earnings | | 10,233 |
| | 9,609 |
|
| Accumulated other comprehensive loss | | (136 | ) | | (128 | ) |
| Total Common Stockholders' Equity | | 20,664 |
| | 19,949 |
|
| Preferred and Preference Stock of Subsidiaries | | 609 |
| | 756 |
|
| Noncontrolling Interest | | 650 |
| | 221 |
|
| Total Stockholders' Equity | | 21,923 |
| | 20,926 |
|
| Total Liabilities and Stockholders' Equity | | $ | 75,215 |
| | $ | 70,923 |
|
|
| | | | | | | | |
| Assets | | At March 31,
2016 | | At December 31,
2015 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 754 |
| | $ | 1,404 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 988 |
| | 1,058 |
|
| Unbilled revenues | | 380 |
| | 397 |
|
| Under recovered regulatory clause revenues | | 43 |
| | 63 |
|
| Income taxes receivable, current | | — |
| | 144 |
|
| Other accounts and notes receivable | | 236 |
| | 398 |
|
| Accumulated provision for uncollectible accounts | | (13 | ) | | (13 | ) |
| Fossil fuel stock, at average cost | | 837 |
| | 868 |
|
| Materials and supplies, at average cost | | 1,085 |
| | 1,061 |
|
| Vacation pay | | 181 |
| | 178 |
|
| Prepaid expenses | | 486 |
| | 495 |
|
| Other regulatory assets, current | | 394 |
| | 402 |
|
| Other current assets | | 90 |
| | 71 |
|
| Total current assets | | 5,461 |
| | 6,526 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 76,553 |
| | 75,118 |
|
| Less accumulated depreciation | | 24,566 |
| | 24,253 |
|
| Plant in service, net of depreciation | | 51,987 |
| | 50,865 |
|
| Other utility plant, net | | 218 |
| | 233 |
|
| Nuclear fuel, at amortized cost | | 941 |
| | 934 |
|
| Construction work in progress | | 9,406 |
| | 9,082 |
|
| Total property, plant, and equipment | | 62,552 |
| | 61,114 |
|
| Other Property and Investments: | | | | |
| Nuclear decommissioning trusts, at fair value | | 1,540 |
| | 1,512 |
|
| Leveraged leases | | 761 |
| | 755 |
|
| Miscellaneous property and investments | | 488 |
| | 485 |
|
| Total other property and investments | | 2,789 |
| | 2,752 |
|
| Deferred Charges and Other Assets: | | | | |
| Deferred charges related to income taxes | | 1,572 |
| | 1,560 |
|
| Unamortized loss on reacquired debt | | 220 |
| | 227 |
|
| Other regulatory assets, deferred | | 4,957 |
| | 4,989 |
|
| Income taxes receivable, non-current | | 413 |
| | 413 |
|
| Other deferred charges and assets | | 771 |
| | 737 |
|
| Total deferred charges and other assets | | 7,933 |
| | 7,926 |
|
| Total Assets | | $ | 78,735 |
| | $ | 78,318 |
|
The accompanying notes as they relate to Southern Company are an integral part of these consolidated financial statements.
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Liabilities and Stockholders' Equity | | At March 31,
2016 | | At December 31,
2015 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 2,392 |
| | $ | 2,674 |
|
| Notes payable | | 1,195 |
| | 1,376 |
|
| Accounts payable | | 1,584 |
| | 1,905 |
|
| Customer deposits | | 406 |
| | 404 |
|
| Accrued taxes — | | | | |
| Accrued income taxes | | 14 |
| | 19 |
|
| Other accrued taxes | | 240 |
| | 484 |
|
| Accrued interest | | 255 |
| | 249 |
|
| Accrued vacation pay | | 228 |
| | 228 |
|
| Accrued compensation | | 212 |
| | 549 |
|
| Asset retirement obligations, current | | 237 |
| | 217 |
|
| Liabilities from risk management activities | | 319 |
| | 156 |
|
| Other regulatory liabilities, current | | 210 |
| | 278 |
|
| Other current liabilities | | 564 |
| | 590 |
|
| Total current liabilities | | 7,856 |
| | 9,129 |
|
| Long-term Debt | | 26,091 |
| | 24,688 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 12,274 |
| | 12,322 |
|
| Deferred credits related to income taxes | | 185 |
| | 187 |
|
| Accumulated deferred investment tax credits | | 1,350 |
| | 1,219 |
|
| Employee benefit obligations | | 2,546 |
| | 2,582 |
|
| Asset retirement obligations, deferred | | 3,504 |
| | 3,542 |
|
| Unrecognized tax benefits | | 375 |
| | 370 |
|
| Other cost of removal obligations | | 1,151 |
| | 1,162 |
|
| Other regulatory liabilities, deferred | | 303 |
| | 254 |
|
| Other deferred credits and liabilities | | 754 |
| | 720 |
|
| Total deferred credits and other liabilities | | 22,442 |
| | 22,358 |
|
| Total Liabilities | | 56,389 |
| | 56,175 |
|
| Redeemable Preferred Stock of Subsidiaries | | 118 |
| | 118 |
|
| Redeemable Noncontrolling Interests | | 44 |
| | 43 |
|
| Stockholders' Equity: | | | | |
| Common Stockholders' Equity: | | | | |
| Common stock, par value $5 per share — | | | | |
| Authorized — 1.5 billion shares | | | | |
| Issued -- March 31, 2016: 922 million shares | | | | |
| -- December 31, 2015: 915 million shares | | | | |
| Treasury -- March 31, 2016: 3.4 million shares | | | | |
| -- December 31, 2015: 3.4 million shares | | | | |
| Par value | | 4,604 |
| | 4,572 |
|
| Paid-in capital | | 6,582 |
| | 6,282 |
|
| Treasury, at cost | | (144 | ) | | (142 | ) |
| Retained earnings | | 9,999 |
| | 10,010 |
|
| Accumulated other comprehensive loss | | (244 | ) | | (130 | ) |
| Total Common Stockholders' Equity | | 20,797 |
| | 20,592 |
|
| Preferred and Preference Stock of Subsidiaries | | 609 |
| | 609 |
|
| Noncontrolling Interests | | 778 |
| | 781 |
|
| Total Stockholders' Equity | | 22,184 |
| | 21,982 |
|
| Total Liabilities and Stockholders' Equity | | $ | 78,735 |
| | $ | 78,318 |
|
The accompanying notes as they relate to Southern Company are an integral part of these consolidated financial statements.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRDFIRST QUARTER 20152016 vs. THIRDFIRST QUARTER 20142015
AND
YEAR-TO-DATE 2015 vs. YEAR-TO-DATE 2014
OVERVIEW
Southern Company is a holding company that owns all of the common stock of the traditional operating companies and Southern Power Company and owns 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.
Proposed Merger with AGL Resources
On August 23, 2015, Southern Company AGL Resources, and Merger Sub entered into the Merger Agreement.Agreement to acquire AGL Resources. Under the terms of the Merger Agreement, subject to the satisfaction or waiver (if permissible under applicable law) of specified conditions, Merger Sub will be merged with and into AGL Resources. AGL Resources will survive the Merger and become a wholly-owned, direct subsidiary of Southern Company. Upon the consummation of the Merger, each share of common stock of AGL Resources issued and outstanding immediately prior to the effective time of the Merger (Effective Time), other than shares owned by AGL Resources as treasury stock, shares owned by a subsidiary of AGL Resources, and shares owned by shareholders who have properly exercised and perfected dissenters' rights, will be converted into the right to receive $66 in cash, without interest and less any applicable withholding taxes (Merger Consideration). Other equity-based securities of AGL Resources will be cancelled for cash consideration or converted into new awards from Southern Company as described in the Merger Agreement.
Southern Company intends to initially fund the cash consideration for the Merger using approximately $7.0 billiona mix of debt and $1.0 billion of equity. Southern Company finances its capital needs on a portfolio basis and expects to issue approximately $2.0a minimum of $8.0 billion in debt prior to closing the Merger and a minimum of additional$1.2 billion in equity through 2019during 2016. This capital is expected to offset a portionprovide funding for the Merger, the proposed acquisition of PowerSecure International, Inc. (PowerSecure), and Southern Power and other Southern Company system capital projects. Total capital raised in 2016 may increase due to cash needed at the closing of the debt issued to fund the cash consideration for the Merger.Merger, settlement of hedges, and incremental investment opportunities, including additional Southern Power projects in excess of its current capital plans. In addition, Southern Company entered into the $8.1 billion Bridge Agreement on September 30, 2015 to provide financing for the Merger in the event long-term financing is not available.
Through May 5, 2016, the Maryland PSC, the Georgia PSC, the California Public Utilities Commission, and the Virginia State Corporation Commission have approved the Merger. On April 15, 2016, Southern Company, AGL Resources, and Northern Illinois Gas Company (collectively, the Joint Applicants) and the Retail Energy Supply Association filed a settlement agreement with the Illinois Commerce Commission. On April 28, 2016, the Joint Applicants, the Illinois Attorney General's Office, and the Citizens Utility Board filed a settlement agreement with the Illinois Commerce Commission. Collectively, these agreements resolve all remaining contested issues for Illinois Commerce Commission approval of the Merger. On May 5, 2016, Southern Company, AGL Resources, Merger Sub, Pivotal Utility Holdings, Inc. d/b/a Elizabethtown Gas, the Division of Rate Counsel, the Staff of the New Jersey Board of Public Utilities, and New Jersey Large Energy Users Coalition entered into a comprehensive settlement agreement relating to the New Jersey Board of Public Utilities review of the Merger. Additionally, the Federal Communications Commission (FCC) has approved the transfer of control over the FCC licenses of certain AGL Resources subsidiaries. Consummation of the Merger isremains subject to the satisfaction or waiver of certain closing conditions, including, among others, (i) approval of the Merger Agreement by AGL Resources' shareholders, which is scheduled for vote on November 19, 2015, (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (iii) the approval of the California Public Utilities Commission, Georgia PSC, Illinois Commerce Commission Maryland PSC,and the New Jersey Board of Public Utilities and Virginia State Corporation Commission, and other approvals required under applicable state laws, and the approval of the Federal Communications Commission (FCC) for the transfer of control over the FCC licenses of certain subsidiaries of AGL Resources and any other approval which Southern Company and AGL Resources agree are required, (iv)(ii) the absence of a judgment, order, decision, injunction, ruling, or other finding or agency requirement of a governmental entity prohibiting the consummation of the Merger, and (v)(iii) other customary closing conditions, including (a) subject to certain materiality qualifiers, the accuracy of each party's representations and warranties and (b) each party's performance in all material respects of its obligations under the Merger Agreement. Southern Company expects to complete the required state regulatory filings in the fourth quarter 2015.
Subject to certain limitations, either party may terminate the Merger Agreement if the Merger is not consummated by August 23, 2016, which date may be extended by either party to February 23, 2017 if, on August 23, 2016, all
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
conditions to closing other than those relating to (i) regulatory approvals and (ii) the absence of legal restraints preventing consummation of the Merger (to the extent relating to regulatory approvals) have been satisfied. Upon termination of the Merger Agreement under certain specified circumstances, AGL Resources will be required to pay Southern Company a termination fee of $201 million or reimburse Southern Company’s expenses up to $5 million (which reimbursement shall reduce on a dollar-for-dollar basis any termination fee subsequently payable by AGL Resources). Southern Company currently expects to complete the transaction in the second half of 2016.
Prior to the Merger, Southern Company and AGL Resources will continue to operate as separate companies. Accordingly, except for specific references to the pending Merger, the descriptions of strategy and outlook and the risks and challenges Southern Company faces, and the discussion and analysis of results of operations and financial condition set forth herein relate solely to Southern Company. See Note (I) to the Condensed Financial Statements and RISK FACTORS in Item 1Aunder "Southern Company – Proposed Merger with AGL Resources" herein for additional information regarding the Merger.
During the first quarter 2016, Southern Company recorded in its statements of income external transaction costs for financing, legal, and consulting services associated with the proposed Merger of approximately $20 million, of which $6 million is included in operating expenses and the various risks related thereto.$14 million is included in other income and (expense).
The ultimate outcome of these matters cannot be determined at this time. See RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – OVERVIEW – "Proposed Merger with AGL Resources" of Southern Company in Item 7 of the Form 10-K for additional information related to the proposed Merger and the various risks related thereto.
Construction Program
Construction continues on Plant Vogtle Units 3 and 4 (45.7% ownership interest by Georgia Power in the two units, each with approximately 1,100 MWs) and Mississippi Power's 582-MW Kemper IGCC. See RESULTS OF OPERATIONS – "Estimated Loss on Kemper IGCC," FUTURE EARNINGS POTENTIAL – "Construction Program," 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. For information about Southern Power's acquisitions and construction of renewable energy facilities, see Note (I) to the Condensed Financial Statements under "Southern Power" herein.
Key Performance Indicators
Southern Company continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, execution of major construction projects, 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
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $241 | | 33.6 | | $416 | | 24.8 |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(23) | | (4.5) |
Southern Company's third quarter 2015Consolidated net income after dividends on preferred and preference stock of subsidiariesattributable to Southern Company was $959$485 million ($1.05 per share) compared to $718 million ($0.800.53 per share) for the thirdfirst quarter 2014.2016 compared to $508 million ($0.56 per share) for the first quarter 2015. The increasedecrease was primarily relatedthe result of lower retail revenues due to lower pre-tax charges of $150 million ($93 million after tax)milder weather in the thirdfirst quarter 20152016 as compared to a pre-tax charge of $418 million ($258 million after tax)the corresponding period in the third quarter 2014 for2015, higher depreciation and amortization, higher charges related to revisions of the estimated costs expected to be incurred on Mississippi Power's construction of the Kemper IGCC, and an increase in retail base rates.lower wholesale capacity revenues. The increasesdecreases were partially offset by increases in revenues due to increases in non-fuel operationsretail rates and maintenance expenses.sales growth and a decrease in income taxes primarily from income tax benefits at Southern Power.
See Note 3 to the financial statements of Southern Company's year-to-date 2015 net income after dividends on preferred and preference stock of subsidiaries was $2.1 billion ($2.30 per share) compared to $1.7 billion ($1.88 per share) for the corresponding periodCompany under "Integrated Coal Gasification Combined Cycle" in 2014. The increase was primarily the result of lower pre-tax charges of $182 million ($112 million after tax) recorded in 2015 compared to pre-tax charges of $798 million ($493 million after tax) recorded in the corresponding period in 2014 for revisions of estimated costs expected to be incurred on Mississippi Power's constructionItem 8 of the KemperForm 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IGCC, as well as an increase in retail base rates. The increases were partially offset by increases in non-fuel operations and maintenance expenses.
Retail Revenues
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $143 | | 3.1 | | $(228) | | (1.9) |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(165) | | (4.7) |
In the thirdfirst quarter 2015,2016, retail revenues were $4.7$3.4 billion compared to $4.6$3.5 billion for the corresponding period in 2014. For year-to-date 2015, retail revenues were $12.0 billion compared to $12.2 billion for the corresponding period in 2014.2015.
Details of the changes in retail revenues were as follows:
| | | | | Third Quarter 2015 | | Year-to-Date 2015 | | First Quarter 2016 |
| | | (in millions) | | (% change) | | (in millions) | | (% change) | | (in millions) | | (% change) |
| Retail – prior year | | $ | 4,558 |
| | | | $ | 12,186 |
| | | | $ | 3,542 |
| | |
| Estimated change resulting from – | | | | | | | | | | | | |
| Rates and pricing | | 130 |
| | 2.9 |
| | 237 |
| | 1.9 |
| | 110 |
| | 3.1 |
|
| Sales growth | | 11 |
| | 0.2 |
| | 52 |
| | 0.4 |
| | 22 |
| | 0.6 |
|
| Weather | | 50 |
| | 1.1 |
| | 59 |
| | 0.5 |
| | (85 | ) | | (2.4 | ) |
| Fuel and other cost recovery | | (48 | ) | | (1.1 | ) | | (576 | ) | | (4.7 | ) | | (212 | ) | | (6.0 | ) |
| Retail – current year | | $ | 4,701 |
| | 3.1 | % | | $ | 11,958 |
| | (1.9 | )% | | $ | 3,377 |
| | (4.7 | )% |
Revenues associated with changes in rates and pricing increased in the thirdfirst quarter and year-to-date 20152016 when compared to the corresponding periodsperiod in 20142015 primarily due to increased revenues at Alabama Power associated with an increase in rates under rate stabilization and equalization (Rate RSE)Rate CNP Compliance and at Georgia Power related to increases in base tariff increases approvedtariffs under the 2013 ARP and increases in collections for financing costs related to the construction of Plant Vogtle Units 3 and 4 through the NCCR tariff, all effective January 1, 2015, as well as higher contributions from variable demand-driven2016. The increase in rates and pricing from commercial and industrial customers. The year-to-date 2015 increase was partially offset byalso due to the correctionimplementation of an error affecting billings since 2013 to a small number of large commercial and industrial customers under a rate plan allowingrates for variable demand-driven pricingcertain Kemper IGCC in-service assets at GeorgiaMississippi Power.
See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Alabama Power,– Rate RSE" and" "Retail Regulatory Matters – Georgia Power – Rate Plans" and " – Nuclear Construction," and "Integrated Coal Gasification Combined – Cycle – Rate Recovery of Kemper IGCC Costs" in Item 8 of the Form 10-K and Note (A)(B) to the Condensed Financial Statements herein for additional information.
Revenues attributable to changes in sales increased in the thirdfirst quarter 20152016 when compared to the corresponding period in 2014.2015. Weather-adjusted commercialresidential KWH sales increased 1.0%1.4% in the thirdfirst quarter 2015 primarily2016 due to customer growth and increased customer usage. Weather-adjusted residentialcommercial KWH sales increased 0.1%0.8% in the thirdfirst quarter 20152016 primarily due to customer growth, partially offset by decreased customer usage.growth. Industrial KWH sales decreased 0.6%1.0% in the thirdfirst quarter 20152016 primarily due to decreased sales in the chemicals, paper, primary metals, non-manufacturing, and non-manufacturingpipeline sectors, partially offset by increased sales in the transportation,paper and stone, clay, and glass lumber, and pipeline sectors. A strong dollar, low oil prices, and weak global growth conditions have constrained growth in the industrial sector.
Revenues attributable to changes in sales increased for year-to-date 2015 when compared to the corresponding period in 2014. Weather-adjusted commercial KWH sales increased 0.8% for year-to-date 2015 primarily due to customer growth and increased customer usage. Weather-adjusted residential KWH sales increased 0.5% for year-to-date 2015 as a result of customer growth, partially offset by decreased customer usage. Industrial KWH sales increased 0.5% for year-to-date 2015 primarily due to increased sales in the transportation, stone, clay, and glass,
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
pipeline, lumber, and petroleum sectors, partially offset by decreased sales in the primary metals, chemicals, and paper sectors.
In the first quarter 2015, Mississippi Power updated the methodology to estimate the unbilled revenue allocation among customer classes. This change did not have a significant impact on net income. The KWH sales variances discussed above reflect an adjustment to the estimated allocation of Mississippi Power's unbilled thirdfirst quarter and year-to-date 20142015 KWH sales among customer classes that is consistent with the actual allocation in 2015.2016. Without this adjustment, thirdfirst quarter 20152016 weather-adjusted residential sales increased 0.1%1.6%, weather-adjusted commercial sales increased 1.2%1.1%, and industrial KWH sales decreased 0.6%0.8% as compared to the corresponding period in 2014. Also, without this adjustment, year-to-date 2015 weather-adjusted residential sales increased 0.4%, weather-adjusted commercial sales increased 0.7%, and industrial KWH sales increased 0.4% as compared to the corresponding period in 2014.2015.
Fuel and other cost recovery revenues decreased $48 million and $576$212 million in the thirdfirst quarter and year-to-date 2015,2016, respectively, when compared to the corresponding periodsperiod in 20142015 primarily due to a decrease in fuel prices.
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. The
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
traditional operating companies may also have one or more regulatory mechanisms to recover other costs such as environmental and other compliance costs, storm damage, new plants, and PPAs.
Wholesale Revenues
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $(80) | | (13.3) | | $(284) | | (16.5) |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(71) | | (15.2) |
Wholesale revenues consist of PPAs primarily with investor-owned utilities and electric cooperatives and short-term opportunity sales. Wholesale revenues from PPAs (other than solar and wind PPAs) 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. Wholesale revenues at Mississippi Power include FERC-regulated municipal and rural association sales as well as market-based sales. 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 thirdfirst quarter 2015,2016, wholesale revenues were $520$396 million compared to $600$467 million for the corresponding period in 20142015 related to a $52$43 million decrease in energycapacity revenues and a $28 million decrease in energy revenues. The decrease in capacity revenues. For year-to-date 2015,revenues was primarily due to a PPA remarketing from non-affiliate to affiliate at Southern Power, unit retirements at Georgia Power, milder weather and decreased usage at Mississippi Power, and the expiration of a Plant Scherer Unit 3 power sales agreement at Gulf Power. The decrease in energy revenues was primarily related to lower fuel costs.
See FUTURE EARNINGS POTENTIAL – "Other Matters" herein for additional information regarding the expiration of long-term sales agreements at Gulf Power for Plant Scherer Unit 3, which will impact future wholesale earnings.
Other Electric Revenues
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $18 | | 11.0 |
In the first quarter 2016, other electric revenues were $1.4$181 million compared to $163 million for the corresponding period in 2015. The increase was primarily due to an adjustment for customer temporary facilities service revenues at Georgia Power.
Fuel and Purchased Power Expenses
|
| | | | | | |
| | | First Quarter 2016
vs.
First Quarter 2015 |
| | | (change in millions) | | (% change) |
| Fuel | | $ | (301 | ) | | (24.8) |
| Purchased power | | 21 |
| | 14.6 |
| Total fuel and purchased power expenses | | $ | (280 | ) | | |
In the first quarter 2016, total fuel and purchased power expenses were $1.1 billion compared to $1.7$1.4 billion for the corresponding period in 2014 related to2015. The decrease was primarily the result of a $214$223 million decrease in energy revenues and a $70 million decrease in capacity revenues. The decreases in energy revenues were primarily related to lower fuel costs, partially offset by increases in energy revenues from new solar PPAs at Southern Power. The decreases in capacity revenues were primarily due to the expiration of wholesale contracts in December 2014 at Georgia Power, unit retirements at Georgia Power, and PPA expirations at Southern Power.average cost
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
|
| | | | | | | | | | | | |
| | | Third Quarter 2015
vs.
Third Quarter 2014 | | Year-to-Date 2015
vs.
Year-to-Date 2014 |
| | | (change in millions) | | (% change) | | (change in millions) | | (% change) |
| Fuel | | $ | (136 | ) | | (8.2) | | $ | (833 | ) | | (17.5) |
| Purchased power | | (1 | ) | | (0.5) | | (7 | ) | | (1.4) |
| Total fuel and purchased power expenses | | $ | (137 | ) | | | | $ | (840 | ) | | |
In the third quarter 2015, total fuel and purchased power expenses were $1.7 billion compared to $1.9 billion for the corresponding period in 2014. The decrease was primarily the result of a $139 million decrease in the average cost of fuel and purchased power primarily due to lower natural gas and coal prices and a $26$145 million decrease in the volume of KWHs generated, partially offset by a $28 million increase in the volume of KWHs purchased.
For year-to-date 2015, total fuel and purchased power expenses were $4.4 billion compared to $5.3 billion for the corresponding period in 2014. The decrease was primarily the result of a $918 million decrease in the average cost of fuel and purchased power primarily due to lower coal and natural gas prices and a $22 million decrease in the volume of KWHs generated, partially offset by a $100an $88 million increase in the volume of KWHs purchased.
Fuel and purchased power energy transactions at the traditional operating companies are generally offset by fuel revenues and do not have a significant impact on net income. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory 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 impact net income.
Details of the Southern Company system's generation and purchased power were as follows:
| | | | | Third Quarter
2015 | | Third Quarter
2014 | | Year-to-Date 2015 | | Year-to-Date 2014 | | First Quarter
2016 | | First Quarter
2015 |
Total generation (billions of KWHs) | | 53 | | 54 | | 146 | | 147 | | 44 | | 46 |
Total purchased power (billions of KWHs) | | 4 | | 3 | | 10 | | 9 | | 4 | | 3 |
Sources of generation (percent) — | | |
| Coal | | 40 | | 44 | | 37 | | 45 | | 27 | | 33 |
| Nuclear | | 15 | | 15 | | 16 | | 16 | | 17 | | 16 |
| Gas | | 43 | | 40 | | 44 | | 36 | | 47 | | 47 |
| Hydro | | 1 | | 1 | | 2 | | 3 | | 7 | | 3 |
| Renewables | | 1 | | — | | 1 | | — | |
| Other Renewables | | | 2 | | 1 |
Cost of fuel, generated (cents per net KWH) — | | |
| Coal | | 3.86 | | 3.63 | | 3.65 | | 3.87 | | 3.24 | | 3.70 |
| Nuclear | | 0.84 | | 0.84 | | 0.78 | | 0.87 | | 0.82 | | 0.67 |
| Gas | | 2.71 | | 3.42 | | 2.72 | | 3.77 | | 2.16 | | 2.71 |
Average cost of fuel, generated (cents per net KWH) | | 2.90 | | 3.13 | | 2.78 | | 3.34 | | 2.23 | | 2.71 |
Average cost of purchased power (cents per net KWH)(*) | | 5.95 | | 6.77 | | 6.13 | | 7.60 | | 5.27 | | 7.18 |
| |
| (*) | Average cost of purchased power includes fuel purchased by the Southern Company system for tolling agreements where power is generated by the provider. |
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel
In the thirdfirst quarter 2015,2016, fuel expense was $1.5 billion$911 million compared to $1.7$1.2 billion for the corresponding period in 2014.2015. The decrease was primarily due to a 20.8% decrease in the average cost of natural gas per KWH generated and a 9.4%21.9% decrease in the volume of KWHs generated by coal, partially offset by a 7.8% increase in the volume of KWHs generated by natural gas and a 6.3% increase in the average cost of coal per KWH generated.
For year-to-date 2015, fuel expense was $3.9 billion compared to $4.8 billion for the corresponding period in 2014. The decrease was primarily due to a 27.9%20.3% decrease in the average cost of natural gas per KWH generated, a 17.0% decrease in the volume of KWHs generated by coal, and a 5.7%12.4% decrease in the average cost of coal per KWH generated, partially offset by a 22.5%and an 83.1% increase in the volume of KWHs generated by natural gas.hydro facilities resulting from more rainfall.
Purchased Power
In the thirdfirst quarter 2015,2016, purchased power expense was $193$165 million compared to $194$144 million for the corresponding period in 2014.2015. The decreaseincrease was primarily due to a 12.1%50.8% increase in the volume of KWHs purchased, partially offset by a 26.6% decrease in the average cost per KWH purchased primarily as a result of lower natural gas prices, partially offset by an 11.3% increase in the volume of KWHs purchased.
For year-to-date 2015, purchased power expense was $507 million compared to $514 million for the corresponding period in 2014. The decrease was primarily due to a 19.3% decrease in the average cost per KWH purchased primarily as a result of lower natural gas prices, partially offset by a 15.2% increase in the volume of KWHs purchased.and coal prices.
Energy purchases will vary depending on demand for energy within the Southern Company system's service territory, the market prices of wholesale energy as compared to the cost of the Southern Company system's generation, and the availability of the Southern Company system's generation.
Other Operations and Maintenance Expenses
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $76 | | 7.4 | | $294 | | 9.7 |
In the third quarter 2015, other operations and maintenance expenses were $1.1 billion compared to $1.0 billion for the corresponding period in 2014. The increase was primarily due to a $31 million increase in employee compensation and benefits including pension costs, a $26 million increase in generation expenses primarily related to non-outage operations and maintenance, $11 million related to AGL Resources acquisition costs, and a $5 million increase in customer accounts, service, and sales costs primarily related to customer incentive and demand side management programs, partially offset by a $19 million decrease in transmission and distribution costs primarily related to overhead line maintenance and an $11 million decrease in scheduled outage and maintenance costs at generation facilities. In addition, in the third quarter 2014, Alabama Power deferred approximately $16 million of certain non-nuclear outage expenditures under an accounting order.
For year-to-date 2015, other operations and maintenance expenses were $3.3 billion compared to $3.0 billion for the corresponding period in 2014. The increase was primarily due to an $88 million increase in employee compensation and benefits including pension costs, a $69 million increase in generation expenses primarily related to non-outage operations and maintenance, a $26 million increase in customer accounts, service, and sales costs primarily related to customer incentive and demand side management programs, a $19 million increase in scheduled outage and maintenance costs at generation facilities, and $11 million related to AGL Resources acquisition costs, partially offset by a $16 million decrease in transmission and distribution costs primarily related to overhead line maintenance. In addition, in the first nine months of 2014, Alabama Power deferred approximately $57 million of certain non-nuclear outage expenditures under an accounting order.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See Note 3Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(16) | | (1.4) |
In the first quarter 2016, other operations and maintenance expenses were $1.11 billion compared to $1.12 billion for the financial statements of Southern Company under "Retail Regulatory Matters – Alabama Power – Non-Nuclear Outage Accounting Order"corresponding period in Item 8 of the Form 10-K for additional information related2015. The decrease was primarily due to non-nucleara decrease in scheduled outage expenditures. Also see Note (F) to the Condensed Financial Statements herein for additional information related toand maintenance costs at generation facilities and a decrease in employee compensation and benefits including pension costs.
Depreciation and Amortization
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $14 | | 2.7 | | $— | | — |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $54 | | 11.1 |
In the thirdfirst quarter 2015,2016, depreciation and amortization was $528$541 million compared to $514$487 million for the corresponding period in 2014.2015. The increase was primarily due to a $27$43 million increase related to additional plant in service at the traditional operating companies and Southern Power. Also contributing to the increase, Gulf Power and a $9recorded $14 million increase in amortization of regulatory assets associated with the Kemper IGCC at Mississippi Power primarily as a result of interim rates that became effective with the first billing cycle in September (on August 19). These increases were partially offset by a $23 million decrease as a resultless of a reduction in depreciation rates at Alabama Power effective January 1, 2015.
For year-to-date 2015, depreciation and amortization was flatin the first three months of 2016 compared to the corresponding period in 2014
primarily due to a $74 million increase related to additional plant in service at the traditional operating companies and Southern Power and a $10 million increase in amortization of regulatory assets associated with the Kemper IGCC at Mississippi Power primarily2015, as a result of interim rates that became effective with the first billing cycle in September (on August 19). These increases were offset by a $72 million decrease as a result of a reduction in depreciation rates at Alabama Power effective January 1, 2015 and a $15 million reduction in depreciation at Gulf Power, as approvedauthorized by the Florida PSC. PSC in a settlement agreement.
See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Gulf Power – Retail Base Rate Case" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Gulf Power – Retail Base Rate Case" herein for additional information.
Also see Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.
Estimated Loss on Kemper IGCC
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $(268) | | (64.1) | | $(616) | | (77.2) |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $44 | | N/M |
N/M – Not meaningful
In the thirdfirst quarter 20152016 and 2014,2015, estimated probable losses on the Kemper IGCC of $150$53 million and $418 million, respectively, were recorded at Southern Company. For year-to-date 2015 and 2014, estimated probable losses on the Kemper IGCC of $182 million and $798$9 million, respectively, were recorded at Southern Company. These losses reflect revisions of estimated costs expected to be incurred on Mississippi Power's construction of the Kemper IGCC in excess of the $2.88 billion cost cap established by the Mississippi PSC, net of $245 million of grants awarded to the project by the DOE under the Clean Coal Power Initiative Round 2 (DOE(Initial DOE Grants) and excluding the cost of the lignite mine and equipment, the cost of the CO2 pipeline facilities, AFUDC, and certain general exceptions, including change of law, force majeure, and beneficial capital (which exists when Mississippi Power demonstrates that the purpose and effect of the construction cost increase is to produce efficiencies that will result in a neutral or favorable effect on customers relative to the original proposal for the CPCN) (Cost Cap Exceptions). See FUTURE EARNINGS POTENTIAL – "Construction Program – Integrated Coal Gasification Combined Cycle" and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Allowance for Equity Funds Used During Construction
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $(3) | | (4.8) | | $(19) | | (10.4) |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(10) | | (15.9) |
For year-to-date 2015,In the first quarter 2016, AFUDC equity was $163$53 million compared to $182$63 million for the corresponding period in 2014.2015. The decrease was primarily due to Mississippi Power placing the combined cycleenvironmental and the associated common facilities portion of the Kemper IGCCgeneration projects placed in service in August 2014, partially offset by environmentalat Alabama Power and transmission projects under construction by the traditional operating companies. See Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information regarding the Kemper IGCC.Gulf Power.
Interest Expense, Net of Amounts Capitalized
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $11 | | 5.3 | | $(11) | | (1.8) |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $33 | | 15.5 |
In the thirdfirst quarter 2015,2016, interest expense, net of amounts capitalized was $218$246 million compared to $207$213 million in the corresponding period in 2014.2015. The increase was primarily due to an increase in outstanding long-term debt.
For year-to-date 2015, interest expense, net of amounts capitalized was $612 million compared to $623 million in the corresponding period in 2014. The decrease was primarily due todebt, partially offset by a $50 million decrease related to interest on deposits resulting from the termination of thean asset purchase agreement (APA) between Mississippi Power and SMEPA which also required the return of SMEPA's deposits at a lower rate of interest than accrued, partially offset by an increase in outstanding long-term debt. May 2015.
See Note (E) to the Condensed Financial Statements herein for additional information. Also see Note (B) "Integrated Coal Gasification Combined Cycle – Termination of Proposed Sale of Undivided Interest to SMEPA" herein for additional information.
Other Income (Expense), Net |
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $(14) | | N/M | | $(21) | | N/M |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(13) | | N/M |
N/M – Not meaningful
In the thirdfirst quarter 2015,2016, other income (expense), net was $(21) million compared to $(7)$(8) million for the corresponding period in 2014.2015. The change was primarily due to a decrease in sales of non-utility property in 2015 at Alabama Power.Bridge Agreement-related expenses associated with the proposed Merger.
For year-to-date 2015, otherSee Note (I) to the Condensed Financial Statements under "Southern Company – Proposed Merger with AGL Resources" herein for additional information.
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(52) | | (19.0) |
In the first quarter 2016, income (expense), net was $(41)taxes were $222 million compared to $(20)$274 million for the corresponding period in 2014.2015. The changedecrease was primarily due to increased federal income tax benefits from ITCs and PTCs at Southern Power and an increase in donations and a decrease in sales of non-utility property in 2015 at Alabama Power.
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $108 | | 27.6 | | $187 | | 21.0 |
In the third quarter 2015, income taxes were $500 million compared to $392 million for the corresponding period in 2014. The increase primarily reflects a reduction in tax benefits related to the estimated probable losses on Mississippi Power's construction of the Kemper IGCC recorded in 2014 and higher pre-tax earnings.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For year-to-date 2015, income taxes were $1.1 billion compared to $889 million for the corresponding period in 2014. The increase primarily reflects a reduction in tax benefits related to the estimated probable losses on Mississippi Power's construction of the Kemper IGCC recorded in 2014 and beneficial changes that impacted 2014 state income taxes, partially offset by state income tax benefits realized in 2015 and increased federal income tax benefits related to ITCs on Southern Power solar projects in 2015.IGCC.
See Note (G) to the Condensed Financial Statements herein for additional information.
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 the Southern Company system's primary business of selling electricity. These
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
factors include the traditional operating companies' ability to maintain a constructive regulatory environment that continues to allowallows for the timely recovery of prudently-incurred costs during a time of increasing costs and the completion and subsequent operation of the Kemper IGCC and Plant Vogtle Units 3 and 4 as well as other ongoing construction projects. Other major factors include the profitability of theSouthern Power's competitive wholesale business and successfully expandingsuccessful additional investments in renewable and other energy projects. Future earnings for the electricity business in the near term will depend, in part, upon maintaining and growing sales which are subject to a number of factors. These factors include weather, competition, new energy contracts with other utilities and other wholesale customers, energy conservation practiced by customers, the use of alternative energy sources 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 business also depends on numerous factors including regulatory matters, creditworthiness of customers, total generating capacity available and related costs, future acquisitions and construction of generating facilities, including the impact of ITCs,tax credits from renewable energy projects, and the successful remarketing of capacity as current contracts expire. Demand for electricity for the traditional operating companies and Southern Power is partiallyprimarily driven by economic growth. The pace of economic growth and electricity demand may be affected by changes in regional and global economic conditions, which may impact future earnings.
As part of its ongoing effort to adapt to changing market conditions, Southern Company continues to evaluate and consider a wide array of potential business strategies. These strategies may include business combinations, partnerships, and acquisitions involving other utility or non-utility businesses or properties, disposition of certain assets, internal restructuring, or some combination thereof. Furthermore, Southern Company may engage in new business ventures that arise from competitive and regulatory changes in the utility industry. Pursuit of any of the above strategies, or any combination thereof, may significantly affect the business operations, risks, and financial condition of Southern Company. In addition, the proposed Merger will result in a combined company that is subject to various risks that do not currently impact Southern Company.
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 or through market-based contracts. 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.modified, as compliance plans are revised or updated, and as legal challenges to rules are completed. 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 Note 3 to the financial statements of Southern Company under "Environmental Matters – New Source Review Actions" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for additional information.
On August 24, 2015, the U.S. District Court for the Northern District of Alabama entered an order approving the joint stipulation among Alabama Power, the EPA, and the U.S. Department of Justice modifying the 2006 consent decree to resolve all remaining claims for relief alleged in the case. Under the modified consent decree, Alabama Power will, without admitting liability, operate certain units subject to emission rates and an annual emissions cap; use only natural gas at certain other units, including a unit co-owned by Mississippi Power; retire certain units at
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Plants Gorgas and Barry; pay a $100,000 civil penalty; and invest $1.5 million in electric transportation infrastructure projects over three years.
Environmental Statutes and Regulations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental Statutes and Regulations," – "Retail Regulatory Matters – Alabama Power – Environmental Accounting Order," and – "Retail Regulatory Matters – Georgia Power – Integrated Resource Plans" of Southern Company in Item 7 and Note 3 to the financial statements of Southern Company under "Other Matters – Sierra Club Settlement Agreement" in Item 8 of the Form 10-K for additional information on planned unit retirements and fuel conversions at Alabama Power, Georgia Power, and Mississippi Power.
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 regarding the EPA's proposed regulations governing emissions during startup, shutdown, or malfunction (SSM), the final MATS rule the Cross State Air Pollution Rule (CSAPR), and the eight-hour National Ambient Air Quality Standard (NAAQS) for ozone.regional haze regulations.
On April 25, 2016, in response to a June 12, 2015 U.S. Supreme Court opinion, the EPA published a final rule requiring affected states (including Alabama, Florida, Georgia, Mississippi, North Carolina, and Texas) to revise or remove state implementation plan (SIP) provisionsits supplemental finding regarding excess emissions that occur during periodsconsideration of SSM by no later than November 22, 2016. The ultimate impactcosts in support of the final rule will depend on the outcome of any legal challenges and the development and approval of SIPs by the affected states and cannot be determined at this time.
On June 29, 2015, the U.S. Supreme Court issued a decisionMATS rule. This finding that the EPA had failed to properly consider costs in its decision to regulate hazardous air pollutant emissions from electric generating units under thedoes not impact MATS rule compliance requirements, costs, or deadlines, and remandedall units within the case to the U.S. Court of Appeals for the District of Columbia Circuit for further proceedings. The MATS rule remains in effect while the U.S. Court of Appeals for the District of Columbia Circuit and the EPA respond to the decision. The ultimate impact of this decision cannot be determined at this time.
On July 28, 2015, the U.S. Court of Appeals for the District of Columbia Circuit issued an opinion invalidating certain emissions budgets under the CSAPR Phase II emissions trading program for a number of states, including Alabama, Florida, Georgia, North Carolina, and Texas. The court's decision leaves the emissions trading program in place and remands the rule to the EPA for further action consistent with the court's decision. The court rejected all other pending challenges to the rule. The ultimate impact of this decision will depend on additional rulemaking and cannot be determined at this time.
On October 26, 2015, the EPA published a more stringent eight-hour NAAQS for ozone. This new standard could potentially require additional emission controls, improvements in control efficiency, and operational fuel changes and could affect the siting of new generating facilities. The ultimate impact of this matter will depend on any legal challenges and implementation of the final rule and 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 Southern Company in Item 7 of the Form 10-K for additional information regarding the EPA's and the U.S. Army Corps of Engineers' rule revising the definition of waters of the U.S. under the Clean Water Act (CWA) and the EPA's revisionssystem that are subject to effluent guidelines.
On June 29, 2015, the EPA and the U.S. Army Corps of Engineers jointly published a final rule revising the regulatory definition of waters of the U.S. for all CWA programs. The final rule significantly expands the scope of federal jurisdiction under the CWA and could have significant impacts on economic development projects which could affect customer demand growth. In addition, this rule could significantly increase permitting and regulatory requirements and costs associated with the siting of new facilities and the installation, expansion, and maintenance
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of transmission and distribution lines. Thethe MATS rule became effective August 28, 2015, buthave completed the measures necessary to achieve compliance with the MATS rule by the applicable deadlines.
Also on October 9, 2015,April 25, 2016, the U.S. Court of Appeals forEPA issued proposed revisions to the Sixth Circuit issued an order staying implementation of the final rule.regional haze regulations. The ultimate impact of the final ruleproposed revisions will depend on the outcome of thistheir ultimate adoption, implementation, and other pendingany legal challenges and the EPA's and the U.S. Army Corps of Engineers' field-level implementation of the rule and cannot be determined at this time.
On November 3, 2015, the EPA published final revisions to technology-based limits for certain wastestreams from steam electric power plants. These revisions impose stringent steam effluent guidelines and technology requirements for wastewater discharges at affected units. Compliance with these revisions could result in significant additional capital expenditures and could affect future unit retirement and replacement decisions. The ultimate impact of these revisions will depend on any legal challenges and implementation of the final revisions and cannot be determined at this time.
Coal Combustion Residuals
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Coal Combustion Residuals" of Southern Company in Item 7 of the Form 10-K for additional information regarding the EPA's regulation of CCR.
On April 17, 2015, the EPA published the Disposal of Coal Combustion Residuals from Electric Utilities final rule (CCR Rule) in the Federal Register, which became effective on October 19, 2015. Based on initial cost estimates for closure in place and groundwater monitoring of ash ponds pursuant to the CCR Rule, during the second quarter 2015, Southern Company recorded incremental asset retirement obligations (ARO) of approximately $700 million related to the CCR Rule. As further analysis is performed, including evaluation of the expected method of compliance, refinement of assumptions underlying the cost estimates, such as the quantities of CCR at each site, and the determination of timing, including the potential for closing ash ponds prior to the end of their currently anticipated useful life, the traditional operating companies expect to continue to periodically update these estimates. The ultimate impact of the CCR Rule cannot be determined at this timeand will depend on the traditional operating companies' ongoing review of the CCR Rule, the results of initial and ongoing minimum criteria assessments, and the outcome of legal challenges. See Note (A) to the Condensed Financial Statements herein for additional information regarding Southern Company's AROs as of September 30, 2015.
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 regarding the EPA's proposed regulation of CO2 from fossil-fuel-fired electric generating units.
On October 23, 2015, two final actions by the EPA that would limit CO2 emissions from fossil fuel-fired electric generating units were published in the Federal Register. One of the final actions contains specific emission standards governing CO2 emissions from new, modified, and reconstructed units. The other final action establishes guidelines for states to develop plans to meet EPA-mandated CO2 emission rates for existing units. The EPA's final guidelines require state plans to meet interim CO2 performance rates between 2022 and 2029 and final rates in 2030 and thereafter. At the same time, a proposed federal plan and proposed model rule were published that states can adopt or that would be put in place if, in response to the final guidelines, a state either does not submit a state plan or its plan is not approved by the EPA.
These guidelines and standards could result in operational restrictions and material compliance costs, including capital expenditures, which could affect future unit retirement and replacement decisions. Southern Company's results of operations, cash flows, and financial condition could be significantly impacted if such costs are not recovered through regulated rates or through market-based contracts. However, the ultimate financial and operational impact of the final rules on the Southern Company system cannot be determined at this time and will depend on numerous factors including the Southern Company system's ongoing review of the final rules; the outcome of any legal challenges, including legal challenges filed by the traditional operating companies; individual state implementation of the EPA's final guidelines, including the potential that state plans impose different
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
standards; additional rulemaking activities in response to legal challenges and related court decisions; the impact of future changes in generation and emissions-related technology and costs; the impact of future decisions regarding unit retirement and replacement, including the type and amount of any such replacement capacity; and the time periods over which compliance will be required.
FERC Matters
The traditional operating companies and Southern Power have authority from the FERC to sell electricity at market-based rates. Since 2008, that authority, for certain balancing authority areas, has been conditioned on compliance with the requirements of an energy auction, which the FERC found to be tailored mitigation that addresses potential market power concerns. In accordance with FERC regulations governing such authority, the traditional operating companies and Southern Power filed a triennial market power analysis on June 30, 2014, which included continued reliance on the energy auction as tailored mitigation. On April 27, 2015, the FERC issued an order finding that the traditional operating companies' and Southern Power's existing tailored mitigation may not effectively mitigate the potential to exert market power in certain areas served by the traditional operating companies and in some adjacent areas. To retain market-based rate authority, the FERC directed the traditional operating companies and Southern Power to show why market-based rate authority should not be revoked in these areas or to provide a mitigation plan to further address market power concerns. The traditional operating companies and Southern Power filed a request for rehearing on May 27, 2015 and on June 26, 2015 filed their response with the FERC. The ultimate outcome of this matter cannot be determined at this time.
Retail Regulatory Matters
Retail Fuel Cost RecoveryConstruction Program
The traditional operating companies each have established fuel cost recovery rates approvedConstruction continues on Plant Vogtle Units 3 and 4 (45.7% ownership interest by their respective state PSCs. Fuel cost recovery revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changesGeorgia Power in the billing factor will not have a significant effecttwo units, each with approximately 1,100 MWs) and Mississippi Power's 582-MW Kemper IGCC. See RESULTS OF OPERATIONS – "Estimated Loss on Kemper IGCC," FUTURE EARNINGS POTENTIAL – "Construction Program," 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. For information about Southern Company's revenues orPower's acquisitions and construction of renewable energy facilities, see Note (I) to the Condensed Financial Statements under "Southern Power" herein.
Key Performance Indicators
Southern Company continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, execution of major construction projects, and earnings per share. For additional information on these indicators, see MANAGEMENT'S DISCUSSION AND ANALYSIS – OVERVIEW – "Key Performance Indicators" of Southern Company in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(23) | | (4.5) |
Consolidated net income but will affect cash flow. The traditional operating companies continuously monitor their under or over recovered fuel cost balances. On September 18, 2015, Georgia Power filed a rate request withattributable to Southern Company was $485 million ($0.53 per share) for the Georgia PSCfirst quarter 2016 compared to lower total annual billings by approximately $268$508 million effective January 1, 2016. The Georgia PSC is scheduled to vote on this matter on December 15,($0.56 per share) for the first quarter 2015. The ultimate outcomedecrease was primarily the result of this matter cannotlower retail revenues due to milder weather in the first quarter 2016 as compared to the corresponding period in 2015, higher depreciation and amortization, higher charges related to revisions of the estimated costs expected to be determinedincurred on Mississippi Power's construction of the Kemper IGCC, and lower wholesale capacity revenues. The decreases were partially offset by increases in revenues due to increases in non-fuel retail rates and sales growth and a decrease in income taxes primarily from income tax benefits at this time.Southern Power.
See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Alabama Power – Rate ECR" and "Retail Regulatory Matters – Georgia Power – Fuel Cost Recovery""Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K for additional information.
Alabama Power
Alabama Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Alabama PSC. Alabama Power currently recovers its costs from the regulated retail business primarily through its Rate RSE, Rate CNP, rate energy cost recovery, and natural disaster reserve rate. In addition, the Alabama PSC issues accounting orders to address current events impacting Alabama Power. See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Alabama Power" in Item 8 of the Form 10-K for additional information regarding Alabama Power's rate mechanisms and accounting orders. The recovery balance of each regulatory clause for Alabama Power is reported in Note (B) to the Condensed Financial Statements herein.
Rate CNP
See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Alabama Power – Rate CNP" and " – Non-Environmental Federal Mandated Costs Accounting Order" in Item 8 of the Form 10-K"Integrated Coal Gasification Combined Cycle" herein for additional information regarding Alabama Power's development of a revised cost recovery mechanism and the normal purchases and normal sales (NPNS) exception for wind PPAs.information.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On March 3,Retail Revenues
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(165) | | (4.7) |
In the first quarter 2016, retail revenues were $3.4 billion compared to $3.5 billion for the corresponding period in 2015.
Details of the changes in retail revenues were as follows:
|
| | | | | | | |
| | | First Quarter 2016 |
| | | (in millions) | | (% change) |
| Retail – prior year | | $ | 3,542 |
| | |
| Estimated change resulting from – | | | | |
| Rates and pricing | | 110 |
| | 3.1 |
|
| Sales growth | | 22 |
| | 0.6 |
|
| Weather | | (85 | ) | | (2.4 | ) |
| Fuel and other cost recovery | | (212 | ) | | (6.0 | ) |
| Retail – current year | | $ | 3,377 |
| | (4.7 | )% |
Revenues associated with changes in rates and pricing increased in the first quarter 2016 when compared to the corresponding period in 2015 the Alabama PSC approved a modificationprimarily due to Rate CNP Environmental to include compliance costs for both environmental and non-environmental mandates. The recoverable non-environmental compliance costs result from laws, regulations, and other mandates directedincreased revenues at the utility industry involving the security, reliability, safety, sustainability, or similar considerations impacting Alabama Power's facilities or operations. This modification to Rate CNP Environmental was effective March 20, 2015 with the revised rate now defined as Rate CNP Compliance. Alabama Power incurred $50 million of non-environmental compliance costs during the first nine months of 2015 and will be limited to recovery of $50 million for the year. Customer rates will not be impacted before January 2016; therefore, the modification will increase the under recovered position for Rate CNP Compliance during 2015.
On August 14, 2015,and at Georgia Power related to increases in base tariffs under the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-13, allowing2013 ARP and the NPNS exception for physical forward transactionsNCCR tariff, all effective January 1, 2016. The increase in nodal energy markets, consistent with the manner in which Alabama Power currently accounts for its two wind PPAs. The new accounting guidance will have no impact on Southern Company's financial statements.
Environmental Accounting Order
In April 2015, as part of its environmental compliance strategy, Alabama Power retired Plant Gorgas Units 6rates and 7. These units represented 200 MWs of Alabama Power's approximately 12,200 MWs of generating capacity. Additionally, in April 2015, Alabama Power ceased using coal at Plant Barry Units 1 and 2 (250 MWs), but such units will remain available on a limited basis with natural gas as the fuel source. No later than April 2016, Alabama Power expects to cease using coal at Plant Greene County Units 1 and 2 (300 MWs) and begin operating those units solely on natural gas. On August 24, 2015, the U.S. District Court for the Northern District of Alabama entered an order approving the joint stipulation in the New Source Review (NSR) action. In accordance with the joint stipulation, Alabama Power retired Plant Barry Unit 3 (225 MWs) and it is no longer available for generation. See Note (B)pricing was also due to the Condensed Financial Statements hereinimplementation of rates for additional information regarding the NSR actions.certain Kemper IGCC in-service assets at Mississippi Power.
In accordance with an accounting order from the Alabama PSC, Alabama Power transferred the unrecovered plant asset balances to a regulatory asset at their respective retirement dates. The regulatory asset will be amortized over the remaining useful lives, as established prior to the decision for retirement, and recovered through Rate CNP. As a result, these decisions will not have a significant impact on Southern Company's financial statements. See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Alabama Power," "Retail Regulatory Matters – Georgia Power – Rate Plans" and " – Nuclear Construction," and "Integrated Coal Gasification Combined – Cycle – Rate CNP"Recovery of Kemper IGCC Costs" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Alabama Power – Rate CNP" herein for additional information.
Renewable Energy
On September 1, 2015,Revenues attributable to changes in sales increased in the Alabama PSC approved Alabama Power's petition for a Renewable Generation Certificate. This will allow Alabama Power to build its own renewable projects each less than 80 MWs or purchase power from other renewable-generated sources up to 500 MWs.
Georgia Power
Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subjectfirst quarter 2016 when compared to the oversight ofcorresponding period in 2015. Weather-adjusted residential KWH sales increased 1.4% in the Georgia PSC. Georgiafirst quarter 2016 due to customer growth and increased customer usage. Weather-adjusted commercial KWH sales increased 0.8% in the first quarter 2016 primarily due to customer growth. Industrial KWH sales decreased 1.0% in the first quarter 2016 primarily due to decreased sales in the chemicals, primary metals, non-manufacturing, and pipeline sectors, partially offset by increased sales in the paper and stone, clay, and glass sectors. A strong dollar, low oil prices, and weak global growth conditions have constrained growth in the industrial sector.
In the first quarter 2015, Mississippi Power currently recovers its costs fromupdated the regulated retail business throughmethodology to estimate the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management (DSM) tariffs, Environmental Compliance Cost Recovery (ECCR) tariffs, and Municipal Franchise Fee (MFF) tariffs. In addition, financing costs relatedunbilled revenue allocation among customer classes. This change did not have a significant impact on net income. The KWH sales variances discussed above reflect an adjustment to the constructionestimated allocation of Plant Vogtle Units 3Mississippi Power's unbilled first quarter 2015 KWH sales among customer classes that is consistent with the actual allocation in 2016. Without this adjustment, first quarter 2016 weather-adjusted residential sales increased 1.6%, weather-adjusted commercial sales increased 1.1%, and 4 are being collected throughindustrial KWH sales decreased 0.8% as compared to the NCCR tariffcorresponding period in 2015.
Fuel and other cost recovery revenues decreased $212 million in the first quarter 2016, respectively, when compared to the corresponding period in 2015 primarily due to a decrease in fuel prices.
Electric rates for the traditional operating companies include provisions to adjust billings for fluctuations in fuel costs, are collected through separateincluding the energy component of purchased power costs. Under these provisions, fuel cost recovery tariffs. See "Construction Program – Nuclear Construction"revenues generally equal fuel expenses, including the energy component of purchased power costs, and "Retail Regulatory Matters – Retail Fuel Cost Recovery" herein for additional information regarding Georgia Power's recent NCCR tariff filing and fuel rate request, respectively. See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Georgia Power" in Item 8 of the Form 10-K for additional information.do not affect net income. The
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Renewables Development
As parttraditional operating companies may also have one or more regulatory mechanisms to recover other costs such as environmental and other compliance costs, storm damage, new plants, and PPAs.
Wholesale Revenues
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(71) | | (15.2) |
Wholesale revenues consist of the Georgia Power Advanced Solar Initiative program, Georgia Power executed ten PPAs that were approved by the Georgia PSC in 2014primarily with investor-owned utilities and provide for the purchase of energyelectric cooperatives and short-term opportunity sales. Wholesale revenues from 515 MWs ofPPAs (other than solar capacity. These PPAs are expected to commence in December 2015 and 2016 andwind PPAs) have terms ranging from 20 to 30 years. As a result of certain acquisitions by Southern Power, Georgia Power expects that 249 MWs of the 515 MWs of contracted capacity will be purchased from solar facilities owned or under development by Southern Power.
On June 15, 2015, Georgia Power executed a PPA to purchase a total of 58 MWs of biomassboth 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. Wholesale revenues at Mississippi Power include FERC-regulated municipal and rural association sales as well as market-based sales. 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 first quarter 2016, wholesale revenues were $396 million compared to $467 million for the corresponding period in 2015 related to a $43 million decrease in capacity revenues and a $28 million decrease in energy revenues. The decrease in capacity revenues was primarily due to a PPA remarketing from a 79-MW facility in Georgia that will begin in 2017 and end in 2047. This PPA was approved by the Georgia PSC on April 15, 2015.non-affiliate to affiliate at Southern Power, unit retirements at Georgia Power, also entered into an energy-only PPA formilder weather and decreased usage at Mississippi Power, and the remaining 21 MWs from the same facility.
On July 21, 2015, the Georgia PSC approved Georgia Power's request to build, own, and operate an up to 46-MW solar generation facility atexpiration of a U.S. Marine Corps base in Albany, Georgia by the end of 2016.
Rate Plans
In accordance with the terms of the 2013 ARP, on October 2, 2015, Georgia Power filed the following tariff adjustments with the Georgia PSC to become effective January 1, 2016 pending its approval:
increase in traditional base tariffs by approximately $49 million;
increase in the environmental compliance cost recovery tariff by approximately $75 million;
increase in the demand-side management tariffs by approximately $7 million; and
increase in the municipal franchise fee tariff by approximately $13 million.
The ultimate outcome of this matter cannot be determined at this time.
Integrated Resource Plan
To comply with the April 16, 2015 effective date of the MATS rule, Plant Branch Units 1, 3, and 4 (1,266 MWs), Plant Yates Units 1 through 5 (579 MWs), and Plant McManus Units 1 and 2 (122 MWs) were retired on April 15, 2015. In addition, operations were discontinued at Plant MitchellScherer Unit 3 (155 MWs) and its decertification will be requestedpower sales agreement at Gulf Power. The decrease in connection with the triennial Integrated Resource Plan in 2016. The switch to natural gas as the primary fuel is complete at Plant Yates Units 7 and 6 and the units were returned to service on May 4, 2015 and June 27, 2015, respectively. On October 13, 2015, Plant Kraft Units 1 through 4 (316 MWs) were retired.
Gulf Power
Renewables
On April 16, 2015, the Florida PSC approved three energy purchase agreements totaling 120 MWs of utility-scale solar generation located at three military installations in northwest Florida. On May 5, 2015, the Florida PSC approved an energy purchase agreement for up to 178 MWs of wind generation in central Oklahoma. Purchases under these agreements will be for energy only and will be recovered through Gulf Power's fuel cost recovery mechanism.
Mississippi Power
2015 Rate Case
On May 15, 2015 and July 10, 2015, Mississippi Power filed alternative rate proposalsrevenues was primarily related to recovery of Kemper IGCC-related costs with the Mississippi PSC. On August 13, 2015, the Mississippi PSC approved the implementation of interim rates designed to collect approximately $159 million annually. lower fuel costs.
See Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle FUTURE EARNINGS POTENTIAL – Rate Recovery of Kemper IGCC Costs – 2015 Rate Case""Other Matters" herein for additional information.information regarding the expiration of long-term sales agreements at Gulf Power for Plant Scherer Unit 3, which will impact future wholesale earnings.
Other Electric Revenues
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $18 | | 11.0 |
In the first quarter 2016, other electric revenues were $181 million compared to $163 million for the corresponding period in 2015. The increase was primarily due to an adjustment for customer temporary facilities service revenues at Georgia Power.
Fuel and Purchased Power Expenses
|
| | | | | | |
| | | First Quarter 2016
vs.
First Quarter 2015 |
| | | (change in millions) | | (% change) |
| Fuel | | $ | (301 | ) | | (24.8) |
| Purchased power | | 21 |
| | 14.6 |
| Total fuel and purchased power expenses | | $ | (280 | ) | | |
In the first quarter 2016, total fuel and purchased power expenses were $1.1 billion compared to $1.4 billion for the corresponding period in 2015. The decrease was primarily the result of a $223 million decrease in the average cost
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Renewablesof fuel and purchased power primarily due to lower natural gas and coal prices and a $145 million decrease in the volume of KWHs generated, partially offset by an $88 million increase in the volume of KWHs purchased.
Fuel and purchased power energy transactions at the traditional operating companies are generally offset by fuel revenues and do not have a significant impact on net income. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory 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 impact net income.
Details of the Southern Company system's generation and purchased power were as follows:
|
| | | | |
| | | First Quarter
2016 | | First Quarter
2015 |
Total generation (billions of KWHs) | | 44 | | 46 |
Total purchased power (billions of KWHs) | | 4 | | 3 |
Sources of generation (percent) — | | | | |
| Coal | | 27 | | 33 |
| Nuclear | | 17 | | 16 |
| Gas | | 47 | | 47 |
| Hydro | | 7 | | 3 |
| Other Renewables | | 2 | | 1 |
Cost of fuel, generated (cents per net KWH) — | | | | |
| Coal | | 3.24 | | 3.70 |
| Nuclear | | 0.82 | | 0.67 |
| Gas | | 2.16 | | 2.71 |
Average cost of fuel, generated (cents per net KWH) | | 2.23 | | 2.71 |
Average cost of purchased power (cents per net KWH)(*) | | 5.27 | | 7.18 |
| |
| (*) | Average cost of purchased power includes fuel purchased by the Southern Company system for tolling agreements where power is generated by the provider. |
Fuel
In Aprilthe first quarter 2016, fuel expense was $911 million compared to $1.2 billion for the corresponding period in 2015. The decrease was primarily due to a 21.9% decrease in the volume of KWHs generated by coal, a 20.3% decrease in the average cost of natural gas per KWH generated, a 12.4% decrease in the average cost of coal per KWH generated, and May 2015, Mississippian 83.1% increase in the volume of KWHs generated by hydro facilities resulting from more rainfall.
Purchased Power entered into separate PPAs
In the first quarter 2016, purchased power expense was $165 million compared to $144 million for three solar facilitiesthe corresponding period in 2015. The increase was primarily due to a 50.8% increase in the volume of KWHs purchased, partially offset by a 26.6% decrease in the average cost per KWH purchased primarily as a result of lower natural gas and coal prices.
Energy purchases will vary depending on demand for a combined totalenergy within the Southern Company system's service territory, the market prices of approximately 105 MWs. Mississippi Power would purchase allwholesale energy as compared to the cost of the energy producedSouthern Company system's generation, and the availability of the Southern Company system's generation.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(16) | | (1.4) |
In the first quarter 2016, other operations and maintenance expenses were $1.11 billion compared to $1.12 billion for the corresponding period in 2015. The decrease was primarily due to a decrease in scheduled outage and maintenance costs at generation facilities and a decrease in employee compensation and benefits including pension costs.
Depreciation and Amortization
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $54 | | 11.1 |
In the first quarter 2016, depreciation and amortization was $541 million compared to $487 million for the corresponding period in 2015. The increase was primarily due to a $43 million increase related to additional plant in service at the traditional operating companies and Southern Power. Also contributing to the increase, Gulf Power recorded $14 million less of a reduction in depreciation in the first three months of 2016 compared to the corresponding period in 2015, as authorized by the solar facilities forFlorida PSC in a settlement agreement.
See Note 3 to the 25-year termfinancial statements of Southern Company under "Retail Regulatory Matters – Gulf Power – Retail Base Rate Case" in Item 8 of the contracts. If approvedForm 10-K and Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Gulf Power – Retail Base Rate Case" herein for additional information.
Estimated Loss on Kemper IGCC
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $44 | | N/M |
N/M – Not meaningful
In the first quarter 2016 and 2015, estimated probable losses on the Kemper IGCC of $53 million and $9 million, respectively, were recorded at Southern Company. These losses reflect revisions of estimated costs expected to be incurred on Mississippi Power's construction of the Kemper IGCC in excess of the $2.88 billion cost cap established by the Mississippi PSC, net of $245 million of grants awarded to the project by the DOE under the Clean Coal Power Initiative Round 2 (Initial DOE Grants) and excluding the cost of the lignite mine and equipment, the cost of the CO2 pipeline facilities, AFUDC, and certain general exceptions, including change of law, force majeure, and beneficial capital (which exists when Mississippi Power demonstrates that the purpose and effect of the construction cost increase is to produce efficiencies that will result in a neutral or favorable effect on customers relative to the original proposal for the CPCN) (Cost Cap Exceptions). See FUTURE EARNINGS POTENTIAL – "Construction Program – Integrated Coal Gasification Combined Cycle" and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Allowance for Equity Funds Used During Construction
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(10) | | (15.9) |
In the first quarter 2016, AFUDC equity was $53 million compared to $63 million for the corresponding period in 2015. The decrease was primarily due to environmental and generation projects placed in service at Alabama Power and Gulf Power.
Interest Expense, Net of Amounts Capitalized
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $33 | | 15.5 |
In the first quarter 2016, interest expense, net of amounts capitalized was $246 million compared to $213 million in the corresponding period in 2015. The increase was primarily due to an increase in outstanding long-term debt, partially offset by a decrease related to interest on deposits resulting from the termination of an asset purchase agreement between Mississippi Power and SMEPA in May 2015.
See Note (E) to the Condensed Financial Statements herein for additional information.
Other Income (Expense), Net |
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(13) | | N/M |
N/M – Not meaningful
In the first quarter 2016, other income (expense), net was $(21) million compared to $(8) million for the corresponding period in 2015. The change was primarily due to Bridge Agreement-related expenses associated with the proposed Merger.
See Note (I) to the Condensed Financial Statements under "Southern Company – Proposed Merger with AGL Resources" herein for additional information.
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(52) | | (19.0) |
In the first quarter 2016, income taxes were $222 million compared to $274 million for the corresponding period in 2015. The decrease was primarily due to increased federal income tax benefits from ITCs and PTCs at Southern Power and an increase in tax benefits related to estimated probable losses on Mississippi Power's construction of the Kemper IGCC.
See Note (G) to the Condensed Financial Statements herein for additional information.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are expectednot 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 the Southern Company system's primary business of selling electricity. These
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
factors include the traditional operating companies' ability to maintain a constructive regulatory environment that allows for the timely recovery of prudently-incurred costs during a time of increasing costs and the completion and subsequent operation of the Kemper IGCC and Plant Vogtle Units 3 and 4 as well as other ongoing construction projects. Other major factors include the profitability of Southern Power's competitive wholesale business and successful additional investments in renewable and other energy projects. Future earnings for the electricity business in the near term will depend, in part, upon maintaining and growing sales which are subject to a number of factors. These factors include weather, competition, new energy contracts with other utilities and other wholesale customers, energy conservation practiced by customers, the use of alternative energy sources 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 business also depends on numerous factors including regulatory matters, creditworthiness of customers, total generating capacity available and related costs, future acquisitions and construction of generating facilities, the impact of tax credits from renewable energy projects, and the successful remarketing of capacity as current contracts expire. Demand for electricity is primarily driven by economic growth. The pace of economic growth and electricity demand may be affected by changes in regional and global economic conditions, which may impact future earnings.
As part of its ongoing effort to adapt to changing market conditions, Southern Company continues to evaluate and consider a wide array of potential business strategies. These strategies may include business combinations, partnerships, and acquisitions involving other utility or non-utility businesses or properties, disposition of certain assets, internal restructuring, or some combination thereof. Furthermore, Southern Company may engage in new business ventures that arise from competitive and regulatory changes in the utility industry. Pursuit of any of the above strategies, or any combination thereof, may significantly affect the business operations, risks, and financial condition of Southern Company. In addition, the proposed Merger will result in a combined company that is subject to various risks that do not currently impact Southern Company.
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 servicerates on a timely basis or through market-based contracts. 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, as compliance plans are revised or updated, and as legal challenges to rules are completed. 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.
Environmental Statutes and Regulations
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 regarding the EPA's final MATS rule and regional haze regulations.
On April 25, 2016, in response to a June 2015 U.S. Supreme Court opinion, the EPA published its supplemental finding regarding consideration of costs in support of the MATS rule. This finding does not impact MATS rule compliance requirements, costs, or deadlines, and all units within the Southern Company system that are subject to
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the MATS rule have completed the measures necessary to achieve compliance with the MATS rule by the end ofapplicable deadlines.
Also on April 25, 2016, and the resulting energy purchases will be recovered through Mississippi Power's fuel cost recovery mechanism.EPA issued proposed revisions to the regional haze regulations. The ultimate outcomeimpact of this matterthe proposed revisions will depend on their ultimate adoption, implementation, and any legal challenges and cannot be determined at this time.
Retail Regulatory Matters
Construction Program
Construction continues on Plant Vogtle Units 3 and 4 (45.7% ownership interest by Georgia Power in the two units, each with approximately 1,100 MWs) and Mississippi Power's 582-MW Kemper IGCC. See RESULTS OF OPERATIONS – "Estimated Loss on Kemper IGCC," FUTURE EARNINGS POTENTIAL – "Construction Program," 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. For information about Southern Power's acquisitions and construction of renewable energy facilities, see Note (I) to the Condensed Financial Statements under "Southern Power" herein.
Key Performance Indicators
Southern Company continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, execution of major construction projects, and earnings per share. For additional information on these indicators, see MANAGEMENT'S DISCUSSION AND ANALYSIS – OVERVIEW – "Key Performance Indicators" of Southern Company in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(23) | | (4.5) |
Consolidated net income attributable to Southern Company was $485 million ($0.53 per share) for the first quarter 2016 compared to $508 million ($0.56 per share) for the first quarter 2015. The decrease was primarily the result of lower retail revenues due to milder weather in the first quarter 2016 as compared to the corresponding period in 2015, higher depreciation and amortization, higher charges related to revisions of the estimated costs expected to be incurred on Mississippi Power's construction of the Kemper IGCC, and lower wholesale capacity revenues. The decreases were partially offset by increases in revenues due to increases in non-fuel retail rates and sales growth and a decrease in income taxes primarily from income tax benefits at Southern Power.
See Note 3 to the financial statements of Southern Company under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(165) | | (4.7) |
In the first quarter 2016, retail revenues were $3.4 billion compared to $3.5 billion for the corresponding period in 2015.
Details of the changes in retail revenues were as follows:
|
| | | | | | | |
| | | First Quarter 2016 |
| | | (in millions) | | (% change) |
| Retail – prior year | | $ | 3,542 |
| | |
| Estimated change resulting from – | | | | |
| Rates and pricing | | 110 |
| | 3.1 |
|
| Sales growth | | 22 |
| | 0.6 |
|
| Weather | | (85 | ) | | (2.4 | ) |
| Fuel and other cost recovery | | (212 | ) | | (6.0 | ) |
| Retail – current year | | $ | 3,377 |
| | (4.7 | )% |
Revenues associated with changes in rates and pricing increased in the first quarter 2016 when compared to the corresponding period in 2015 primarily due to increased revenues at Alabama Power under Rate CNP Compliance and at Georgia Power related to increases in base tariffs under the 2013 ARP and the NCCR tariff, all effective January 1, 2016. The increase in rates and pricing was also due to the implementation of rates for certain Kemper IGCC in-service assets at Mississippi Power.
See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Alabama Power," "Retail Regulatory Matters – Georgia Power – Rate Plans" and " – Nuclear Construction," and "Integrated Coal Gasification Combined – Cycle – Rate Recovery of Kemper IGCC Costs" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for additional information.
Revenues attributable to changes in sales increased in the first quarter 2016 when compared to the corresponding period in 2015. Weather-adjusted residential KWH sales increased 1.4% in the first quarter 2016 due to customer growth and increased customer usage. Weather-adjusted commercial KWH sales increased 0.8% in the first quarter 2016 primarily due to customer growth. Industrial KWH sales decreased 1.0% in the first quarter 2016 primarily due to decreased sales in the chemicals, primary metals, non-manufacturing, and pipeline sectors, partially offset by increased sales in the paper and stone, clay, and glass sectors. A strong dollar, low oil prices, and weak global growth conditions have constrained growth in the industrial sector.
In the first quarter 2015, Mississippi Power updated the methodology to estimate the unbilled revenue allocation among customer classes. This change did not have a significant impact on net income. The KWH sales variances discussed above reflect an adjustment to the estimated allocation of Mississippi Power's unbilled first quarter 2015 KWH sales among customer classes that is consistent with the actual allocation in 2016. Without this adjustment, first quarter 2016 weather-adjusted residential sales increased 1.6%, weather-adjusted commercial sales increased 1.1%, and industrial KWH sales decreased 0.8% as compared to the corresponding period in 2015.
Fuel and other cost recovery revenues decreased $212 million in the first quarter 2016, respectively, when compared to the corresponding period in 2015 primarily due to a decrease in fuel prices.
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. The
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
traditional operating companies may also have one or more regulatory mechanisms to recover other costs such as environmental and other compliance costs, storm damage, new plants, and PPAs.
Wholesale Revenues
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(71) | | (15.2) |
Wholesale revenues consist of PPAs primarily with investor-owned utilities and electric cooperatives and short-term opportunity sales. Wholesale revenues from PPAs (other than solar and wind PPAs) 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. Wholesale revenues at Mississippi Power include FERC-regulated municipal and rural association sales as well as market-based sales. 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 first quarter 2016, wholesale revenues were $396 million compared to $467 million for the corresponding period in 2015 related to a $43 million decrease in capacity revenues and a $28 million decrease in energy revenues. The decrease in capacity revenues was primarily due to a PPA remarketing from non-affiliate to affiliate at Southern Power, unit retirements at Georgia Power, milder weather and decreased usage at Mississippi Power, and the expiration of a Plant Scherer Unit 3 power sales agreement at Gulf Power. The decrease in energy revenues was primarily related to lower fuel costs.
See FUTURE EARNINGS POTENTIAL – "Other Matters" herein for additional information regarding the expiration of long-term sales agreements at Gulf Power for Plant Scherer Unit 3, which will impact future wholesale earnings.
Other Electric Revenues
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $18 | | 11.0 |
In the first quarter 2016, other electric revenues were $181 million compared to $163 million for the corresponding period in 2015. The increase was primarily due to an adjustment for customer temporary facilities service revenues at Georgia Power.
Fuel and Purchased Power Expenses
|
| | | | | | |
| | | First Quarter 2016
vs.
First Quarter 2015 |
| | | (change in millions) | | (% change) |
| Fuel | | $ | (301 | ) | | (24.8) |
| Purchased power | | 21 |
| | 14.6 |
| Total fuel and purchased power expenses | | $ | (280 | ) | | |
In the first quarter 2016, total fuel and purchased power expenses were $1.1 billion compared to $1.4 billion for the corresponding period in 2015. The decrease was primarily the result of a $223 million decrease in the average cost
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of fuel and purchased power primarily due to lower natural gas and coal prices and a $145 million decrease in the volume of KWHs generated, partially offset by an $88 million increase in the volume of KWHs purchased.
Fuel and purchased power energy transactions at the traditional operating companies are generally offset by fuel revenues and do not have a significant impact on net income. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory 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 impact net income.
Details of the Southern Company system's generation and purchased power were as follows:
|
| | | | |
| | | First Quarter
2016 | | First Quarter
2015 |
Total generation (billions of KWHs) | | 44 | | 46 |
Total purchased power (billions of KWHs) | | 4 | | 3 |
Sources of generation (percent) — | | | | |
| Coal | | 27 | | 33 |
| Nuclear | | 17 | | 16 |
| Gas | | 47 | | 47 |
| Hydro | | 7 | | 3 |
| Other Renewables | | 2 | | 1 |
Cost of fuel, generated (cents per net KWH) — | | | | |
| Coal | | 3.24 | | 3.70 |
| Nuclear | | 0.82 | | 0.67 |
| Gas | | 2.16 | | 2.71 |
Average cost of fuel, generated (cents per net KWH) | | 2.23 | | 2.71 |
Average cost of purchased power (cents per net KWH)(*) | | 5.27 | | 7.18 |
| |
| (*) | Average cost of purchased power includes fuel purchased by the Southern Company system for tolling agreements where power is generated by the provider. |
Fuel
In the first quarter 2016, fuel expense was $911 million compared to $1.2 billion for the corresponding period in 2015. The decrease was primarily due to a 21.9% decrease in the volume of KWHs generated by coal, a 20.3% decrease in the average cost of natural gas per KWH generated, a 12.4% decrease in the average cost of coal per KWH generated, and an 83.1% increase in the volume of KWHs generated by hydro facilities resulting from more rainfall.
Purchased Power
In the first quarter 2016, purchased power expense was $165 million compared to $144 million for the corresponding period in 2015. The increase was primarily due to a 50.8% increase in the volume of KWHs purchased, partially offset by a 26.6% decrease in the average cost per KWH purchased primarily as a result of lower natural gas and coal prices.
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.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operations and Maintenance Expenses
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(16) | | (1.4) |
In the first quarter 2016, other operations and maintenance expenses were $1.11 billion compared to $1.12 billion for the corresponding period in 2015. The decrease was primarily due to a decrease in scheduled outage and maintenance costs at generation facilities and a decrease in employee compensation and benefits including pension costs.
Depreciation and Amortization
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $54 | | 11.1 |
In the first quarter 2016, depreciation and amortization was $541 million compared to $487 million for the corresponding period in 2015. The increase was primarily due to a $43 million increase related to additional plant in service at the traditional operating companies and Southern Power. Also contributing to the increase, Gulf Power recorded $14 million less of a reduction in depreciation in the first three months of 2016 compared to the corresponding period in 2015, as authorized by the Florida PSC in a settlement agreement.
See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Gulf Power – Retail Base Rate Case" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Gulf Power – Retail Base Rate Case" herein for additional information.
Estimated Loss on Kemper IGCC
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $44 | | N/M |
N/M – Not meaningful
In the first quarter 2016 and 2015, estimated probable losses on the Kemper IGCC of $53 million and $9 million, respectively, were recorded at Southern Company. These losses reflect revisions of estimated costs expected to be incurred on Mississippi Power's construction of the Kemper IGCC in excess of the $2.88 billion cost cap established by the Mississippi PSC, net of $245 million of grants awarded to the project by the DOE under the Clean Coal Power Initiative Round 2 (Initial DOE Grants) and excluding the cost of the lignite mine and equipment, the cost of the CO2 pipeline facilities, AFUDC, and certain general exceptions, including change of law, force majeure, and beneficial capital (which exists when Mississippi Power demonstrates that the purpose and effect of the construction cost increase is to produce efficiencies that will result in a neutral or favorable effect on customers relative to the original proposal for the CPCN) (Cost Cap Exceptions). See FUTURE EARNINGS POTENTIAL – "Construction Program – Integrated Coal Gasification Combined Cycle" and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Allowance for Equity Funds Used During Construction
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(10) | | (15.9) |
In the first quarter 2016, AFUDC equity was $53 million compared to $63 million for the corresponding period in 2015. The decrease was primarily due to environmental and generation projects placed in service at Alabama Power and Gulf Power.
Interest Expense, Net of Amounts Capitalized
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $33 | | 15.5 |
In the first quarter 2016, interest expense, net of amounts capitalized was $246 million compared to $213 million in the corresponding period in 2015. The increase was primarily due to an increase in outstanding long-term debt, partially offset by a decrease related to interest on deposits resulting from the termination of an asset purchase agreement between Mississippi Power and SMEPA in May 2015.
See Note (E) to the Condensed Financial Statements herein for additional information.
Other Income (Expense), Net |
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(13) | | N/M |
N/M – Not meaningful
In the first quarter 2016, other income (expense), net was $(21) million compared to $(8) million for the corresponding period in 2015. The change was primarily due to Bridge Agreement-related expenses associated with the proposed Merger.
See Note (I) to the Condensed Financial Statements under "Southern Company – Proposed Merger with AGL Resources" herein for additional information.
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(52) | | (19.0) |
In the first quarter 2016, income taxes were $222 million compared to $274 million for the corresponding period in 2015. The decrease was primarily due to increased federal income tax benefits from ITCs and PTCs at Southern Power and an increase in tax benefits related to estimated probable losses on Mississippi Power's construction of the Kemper IGCC.
See Note (G) to the Condensed Financial Statements herein for additional information.
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 the Southern Company system's primary business of selling electricity. These
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
factors include the traditional operating companies' ability to maintain a constructive regulatory environment that allows for the timely recovery of prudently-incurred costs during a time of increasing costs and the completion and subsequent operation of the Kemper IGCC and Plant Vogtle Units 3 and 4 as well as other ongoing construction projects. Other major factors include the profitability of Southern Power's competitive wholesale business and successful additional investments in renewable and other energy projects. Future earnings for the electricity business in the near term will depend, in part, upon maintaining and growing sales which are subject to a number of factors. These factors include weather, competition, new energy contracts with other utilities and other wholesale customers, energy conservation practiced by customers, the use of alternative energy sources 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 business also depends on numerous factors including regulatory matters, creditworthiness of customers, total generating capacity available and related costs, future acquisitions and construction of generating facilities, the impact of tax credits from renewable energy projects, and the successful remarketing of capacity as current contracts expire. Demand for electricity is primarily driven by economic growth. The pace of economic growth and electricity demand may be affected by changes in regional and global economic conditions, which may impact future earnings.
As part of its ongoing effort to adapt to changing market conditions, Southern Company continues to evaluate and consider a wide array of potential business strategies. These strategies may include business combinations, partnerships, and acquisitions involving other utility or non-utility businesses or properties, disposition of certain assets, internal restructuring, or some combination thereof. Furthermore, Southern Company may engage in new business ventures that arise from competitive and regulatory changes in the utility industry. Pursuit of any of the above strategies, or any combination thereof, may significantly affect the business operations, risks, and financial condition of Southern Company. In addition, the proposed Merger will result in a combined company that is subject to various risks that do not currently impact Southern Company.
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 or through market-based contracts. 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, as compliance plans are revised or updated, and as legal challenges to rules are completed. 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.
Environmental Statutes and Regulations
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 regarding the EPA's final MATS rule and regional haze regulations.
On April 25, 2016, in response to a June 2015 U.S. Supreme Court opinion, the EPA published its supplemental finding regarding consideration of costs in support of the MATS rule. This finding does not impact MATS rule compliance requirements, costs, or deadlines, and all units within the Southern Company system that are subject to
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the MATS rule have completed the measures necessary to achieve compliance with the MATS rule by the applicable deadlines.
Also on April 25, 2016, the EPA issued proposed revisions to the regional haze regulations. The ultimate impact of the proposed revisions will depend on their ultimate adoption, implementation, and any legal challenges and cannot be determined at this time.
Retail Regulatory Matters
Retail Fuel Cost Recovery
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Retail 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 – Rate ECR" and "Retail Regulatory Matters – Georgia Power – Fuel Cost Recovery" in Item 8 of the Form 10-K for additional information regarding retail fuel cost recovery.
The traditional operating companies each have established fuel cost recovery rates approved by their respective state PSCs. Fuel cost recovery revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Southern Company's revenues or net income, but will affect cash flow. The traditional operating companies continuously monitor their under or over recovered fuel cost balances and make appropriate filings with their state PSCs to adjust fuel cost recovery rates as necessary.
On April 14, 2016, Georgia Power filed a request with the Georgia PSC to decrease fuel rates by 15% effective June 1, 2016, which is expected to reduce annual billings by approximately $313 million. Georgia Power is currently scheduled to file its next fuel case by February 28, 2017. The ultimate outcome of this matter cannot be determined at this time.
Renewables
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Renewables" of Southern Company in Item 7 of the Form 10-K for additional information regarding the Southern Company system's renewables activity.
As part of the Georgia Power Advanced Solar Initiative, four PPAs totaling 149 MWs of Georgia Power's solar contracted capacity from Southern Power began in the first quarter 2016.
In November 2015, the Mississippi PSC issued orders approving three solar facilities for a combined total of approximately 105 MWs. Mississippi Power will purchase all of the energy produced by the solar facilities for the 25-year term under each of the three PPAs, two of which were finalized as of December 31, 2015 and one of which was finalized as of March 2, 2016. The projects are expected to be in service by the end of 2016 and the resulting energy purchases are expected to be recovered through Mississippi Power's fuel cost recovery mechanism.
The Florida PSC issued a final approval order on Gulf Power's Community Solar Pilot Program on April 15, 2016. The program will offer all Gulf Power customers an opportunity to voluntarily contribute to the construction and operation of a solar photovoltaic facility with electric generating capacity of up to 1 MW through annual subscriptions. The energy generated from the solar facility is expected to provide power to all of Gulf Power's customers.
Alabama Power
Alabama Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Alabama PSC. Alabama Power currently recovers its costs from the regulated retail business primarily through its Rate RSE, Rate CNP Compliance, rate energy cost recovery, and natural disaster reserve rate. In addition, the Alabama PSC issues accounting orders to address current events impacting Alabama Power. See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Alabama Power" in
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 8 of the Form 10-K for additional information regarding Alabama Power's rate mechanisms and accounting orders. The recovery balance of each regulatory clause for Alabama Power is reported in Note (B) to the Condensed Financial Statements herein.
Georgia Power
Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management tariffs, Environmental Compliance Cost Recovery tariffs, and Municipal Franchise Fee tariffs. In addition, financing costs related to the construction of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through separate fuel cost recovery tariffs. See Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Georgia Power – Fuel Cost Recovery" herein and Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Georgia Power – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding Georgia Power's fuel cost recovery and the NCCR tariff, respectively.
Pursuant to the terms and conditions of a settlement agreement related to Southern Company's proposed acquisition of AGL Resources approved by the Georgia PSC on April 14, 2016, Georgia Power's 2013 ARP will continue in effect until December 31, 2019, and Georgia Power will be required to file its next base rate case by July 1, 2019. Furthermore, through December 31, 2019, Georgia Power and Atlanta Gas Light Company (collectively, Utilities) will retain the merger savings, net of transition costs, as defined in the settlement agreement; through December 31, 2022, net merger savings will be shared on a 60/40 basis between customers and the Utilities; thereafter, all merger savings will be retained by customers. See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Georgia Power" in Item 8 of the Form 10-K for additional information regarding the 2013 ARP and Note (I) to the Condensed Financial Statements under "Southern Company – Proposed Merger with AGL Resources" herein for additional information regarding the Merger.
Construction Program
Overview
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, 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 approval 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.
The two largest construction projects currently underway in the Southern Company system are Plant Vogtle Units 3 and 4 (45.7% ownership interest by Georgia Power in the two units, each with approximately 1,100 MWs) and Mississippi Power's 582-MW Kemper IGCC. See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Georgia Power – Nuclear 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. For additional information about costs relating to Southern Power's acquisitions that involve construction of renewable energy facilities, see Note 12 to the financial statements of Southern Company under "Southern Power – Construction Projects" in Item 8 of the Form 10-K and Note (I) to the Condensed Financial Statements under "Southern Power – Construction Projects" herein.
Also see FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" herein for additional information regarding Southern Company's capital requirements for its subsidiaries' construction programs.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Integrated Coal Gasification Combined Cycle
From 2013 through September 30, 2015, Southern Company recorded pre-tax charges totaling $2.23Mississippi Power's current cost estimate for the Kemper IGCC in total is approximately $6.58 billion, ($1.4which includes approximately $5.35 billion after tax)of costs subject to the construction cost cap and is net of $137 million in additional DOE grants Mississippi Power received for revisions of estimated coststhe Kemper IGCC on April 8, 2016 (Additional DOE Grants), which are expected to be incurred onused to reduce future rate impacts for customers. Mississippi Power's construction of the Kemper IGCC abovePower does not intend to seek any rate recovery for any related costs that exceed the $2.88 billion cost cap, established by the Mississippi PSC, net of the Initial DOE Grants and excluding the Cost Cap Exceptions. In the aggregate, Southern Company has incurred charges of $2.47 billion ($1.52 billion after tax) as a result of changes in the cost estimate above the cost cap for the Kemper IGCC through March 31, 2016. Mississippi Power's current cost estimate includes costs through September 30, 2016. In subsequent periods, any further changes in the estimated costs to complete construction of the Kemper IGCC subject to the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions, will be reflected in Southern Company's statements of income and these changes could be material.
On February 12, 2015, the Mississippi Supreme Court reversed the Mississippi PSC's March 2013 order that authorized Mississippi Power's collection of $156 million annually to be recorded as Mirror CWIP and directed the Mississippi PSC to enter an order requiring Mississippi Power to refund the Mirror CWIP amounts collected. The Mississippi PSC ordered that the Mirror CWIP rate be terminated effective July 20, 2015. Refunds of $342 million collected by Mississippi Power through July 2015 billings plus associated carrying costs will begin in November 2015.
On May 20, 2015, SMEPA notified Mississippi Power of its termination of the APA. Mississippi Power previously received a total of $275 million of deposits from SMEPA that were required to be returned to SMEPA with interest in connection with the termination of the APA. On June 3, 2015, Southern Company, pursuant to its guarantee obligation, returned approximately $301 million to SMEPA. Subsequently, Mississippi Power issued an 18-month promissory note in the aggregate principal amount of approximately $301 million to Southern Company.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The return of approximately $301 million to SMEPA in June 2015 in connection with the termination of the APA, the required refund of the approximately $369 million of Mirror CWIP rate collections, including associated carrying costs through September 30, 2015, the termination of the Mirror CWIP rates, and the likely repayment to the IRS of approximately $235 million of unrecognized tax benefits associated with the ITCs that were allocated to the Kemper IGCC under Section 48A (Phase II) of the Internal Revenue Code if the in-service date of the Kemper IGCC extends beyond April 19, 2016 have adversely impacted Mississippi Power's financial condition.
As a result of the Mississippi Supreme Court's decision and these financial impacts, on July 10, 2015, Mississippi Power submitted a filing with the Mississippi PSC that included a request for interim rates, until such time as the Mississippi PSC renders a final decision on permanent rates, designed to recover Mississippi Power's costs associated with the Kemper IGCC assets that are commercially operational and currently providing service to customers (the transmission facilities, combined cycle, natural gas pipeline, and water pipeline) and other related costs (In-Service Asset Proposal). These interim rates are designed to collect approximately $159 million annually. On August 13, 2015, the Mississippi PSC approved the implementation of the interim rates that became effective with the first billing cycle in September (on August 19), subject to refund and certain other conditions. In addition, the Mississippi PSC reserved the right to modify or terminate the interim rates based upon a material change in circumstances. The Mississippi PSC is scheduled to issue a final order on or before December 8, 2015 related to permanent rates for the In-Service Asset Proposal. The ultimate outcome of these matters cannot be determined at this time.
Nuclear ConstructionCivil Lawsuit
On April 15, 2015, the Georgia PSC issued26, 2016, a procedural order in connection with the twelfth Vogtle Construction Monitoring (VCM) report, which included a requested amendment (Requested Amendment) to the Plant Vogtle Units 3 and 4 certificate to reflect the Contractor's revised forecast for completion of Plant Vogtle Units 3 and 4 (second quarter of 2019 and second quarter of 2020, respectively) as well as to include the estimated owner's costs associated with the proposed 18-month Contractor delay and to increase the estimated total in-service capital cost of Plant Vogtle Units 3 and 4 to $5.0 billion. Pursuant to this order, the Georgia PSC deemed the Requested Amendment unnecessary and withdrawn until the completion of construction of Plant Vogtle Unit 3. The Georgia PSC recognized that the certified cost does not constitute a cost recovery cap. In accordance with the Georgia Integrated Resource Planning Act, any costs incurred by Georgia Power in excess of the certified amount will be included in rate base, provided Georgia Power shows the costs to be reasonable and prudent. Financing costs up to the certified amount will be collected through the NCCR tariff until the units are placed in service, while financing costs on any construction-related costs in excess of the $4.4 billion certified amount are expected to be recovered through AFUDC.
On August 28, 2015, Georgia Power filed its thirteenth VCM report with the Georgia PSC covering the period from January 1 through June 30, 2015, which requested approval for an additional $148 million of construction capital costs incurred during that period and reflected estimated financing costs during the construction period to total approximately $2.4 billion.
On October 30, 2015, Georgia Power filed to increase the NCCR tariff by approximately $19 million, effective January 1, 2016, pending Georgia PSC approval.
On October 27, 2015, Westinghouse and Chicago Bridge & Iron Company, N.V. (CB&I) announced an agreement under which Westinghouse or one of its affiliates will acquire CB&I Stone & Webster, Inc. (S&W) (formerly known as Stone & Webster, Inc.) from CB&I, subject to satisfaction of certain conditions to closing. In addition, on October 27, 2015, Westinghouse and the Vogtle Owners entered into a term sheet (Term Sheet) setting forth the terms of a settlement agreement to resolve disputes between the Vogtle Owners and the Contractor under the engineering, procurement, and construction agreement between the Vogtle Owners and the Contractor (Vogtle 3 and 4 Agreement), including the litigation pending in the U.S. District Court for the Southern District of Georgia between the Contractor and the Vogtle Owners (Vogtle Construction Litigation).
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In accordance with the Term Sheet, the Vogtle Owners and the Contractor will enter into mutual releases of all open claims which have been asserted, including any potential extension of such open claims, as well as future claims based on events occurring prior to the effective date of the release that potentially could have been asserted under the original terms of the Vogtle 3 and 4 Agreement, including the Vogtle Construction Litigation, which will be dismissed with prejudice. In addition, among other items, the Term Sheet provides that the guaranteed substantial completion dates under the Vogtle 3 and 4 Agreement will be revised to match the current estimated in-service dates of June 30, 2019 for Unit 3 and June 30, 2020 for Unit 4 and Georgia Power, based on its ownership interest, will pay to the Contractor and capitalize to the project cost approximately $350 million, of which approximately $120 million has been paid previously under the dispute resolution procedures of the Vogtle 3 and 4 Agreement. The settlement of the pending disputes between the Vogtle Owners and the Contractor, including the Vogtle Construction Litigation, is subject to consummation of Westinghouse's proposed acquisition of S&W. If this proposed acquisition is not completed, the Vogtle Construction Litigation will continue and the Contractor may from time to time continue to assert that it is entitled to additional payments with respect to its allegations, any of which could be substantial.
Additionally, there are certain risks associated with the construction program in general and certain risks associated with the licensing, construction, and operation of nuclear generating units in particular, 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.
Income Tax Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters" of Southern Company in Item 7 of the Form 10-K for additional information.
Investment Tax Credits
The IRS allocated $279 million (Phase II) of Internal Revenue Code Section 48A tax credits tocomplaint against Mississippi Power was filed in connection withHarrison County Circuit Court by Biloxi Freezing & Processing Inc., Gulfside Casino Partnership, and John Carlton Dean. The plaintiffs allege that Mississippi Power violated the Kemper IGCC. These tax credits are dependent upon meetingMississippi Unfair Trade Practices Act and concealed, falsely represented, and failed to fully disclose important facts concerning the IRS certification requirements, including an in-service date no later than April 19, 2016cost and the capture and sequestration (via enhanced oil recovery) of at least 65% of the CO2 produced by the Kemper IGCC during operations in accordance with the Internal Revenue Code. Through September 30, 2015, Southern Company had recorded tax benefits totaling $276 million for the Phase II credits, of which approximately $235 million had been utilized. While the in-service date for the remainderschedule of the Kemper IGCC is currently expectedand that Mississippi Power's alleged breaches interfered with and destroyed economically advantageous relationships between the plaintiffs and their current and prospective business associates. The plaintiffs seek unspecified actual damages and punitive damages as well as attorney's fees, costs, and interest. The plaintiffs also seek an injunction to occur in the first half of 2016,prevent any Kemper IGCC costs from being charged to customers through electric rates. Mississippi Power now anticipates the in-service date to occur subsequent to April 19, 2016, butbelieves this legal challenge has not made a final determination to that effect. Due tono merit; however, an adverse outcome in this uncertainty,proceeding could have an impact on Southern Company has reflected these tax credits as unrecognized tax benefitsCompany's results of operations, financial condition, and reclassified the Phase II credits to a current liability on its September 30, 2015 balance sheet, with no impact to net income. Repayment to the IRS would occur with the quarterly estimated tax payment following a final determination that the in-service date would occur subsequent to April 19, 2016. Any cash funding requirements necessary forliquidity. Mississippi Power to make this repayment are expected to be provided by Southern Company. See Notes (B)will vigorously defend the matter, and (G) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" and "Unrecognized Tax Benefits – Investment Tax Credits," respectively, herein for additional information. The ultimatefinal outcome of this tax matter cannot be determined at this time.
Section 174 Research and Experimental Deduction
Southern Company reflected deductions for research and experimental (R&E) expenditures related to the Kemper IGCC in its federal income tax calculations for 2013, 2014, and 2015. In May 2015, Southern Company amended its 2008 through 2013 federal income tax returns to include deductions for Kemper IGCC-related R&E expenditures. Due to the uncertainty related to this tax position, Southern Company had unrecognized tax benefits associated with these R&E deductions totaling approximately $414 million as of September 30, 2015. See Note 5 to the financial statements of Southern Company under "Unrecognized Tax Benefits" in Item 8 of the Form 10-K and Notes (B) and (G) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle"
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and "Unrecognized Tax Benefits – Section 174 Research and Experimental Deduction," respectively, herein for additional information. The ultimate outcome of this tax 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 occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
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) to the Condensed Financial Statements 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 Note (B) 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.
The SEC is conducting a formal investigation of Southern Company and Mississippi Power concerning the estimated costs and expected in-service date of the Kemper IGCC. Southern Company and Mississippi Power believe the investigation is focused primarily on periods subsequent to 2010 and on accounting matters, disclosure controls and procedures, and internal controls over financial reporting associated with the Kemper IGCC. See ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" herein for additional
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
information on the Kemper IGCC estimated construction costs and expected in-service date. Southern Company and Mississippi Power are cooperating fully with the SEC. The ultimate outcome of this matter cannot be determined at this time; however, it is not expected to have a material impact on the financial statements of Southern Company.
Through 2015, capacity revenues from long-term non-affiliate sales out of Gulf Power's ownership of Plant Scherer Unit 3 (205 MWs) represented the majority of Gulf Power's wholesale earnings. The capacity revenues associated with these contracts covering 100% of Gulf Power's ownership represented 82% of Gulf Power's wholesale capacity revenues in 2015. Due to the expiration of a wholesale contract at the end of 2015 and another wholesale contract at the end of May 2016, Gulf Power's remaining contracted sales from the unit from June 2016 through 2019 will cover approximately 24% of the unit. The expiration of the contract in 2015 and the scheduled future expiration of the remaining contracts are not expected to have a material impact on Southern Company's earnings. The alternatives Gulf Power is actively evaluating include, without limitation, rededication of the asset to serve retail customers for whom it was originally planned and built, replacement long-term wholesale contracts or other sales into the wholesale market, or an asset sale. On May 5, 2016, Gulf Power delivered a letter to the Florida PSC requesting recognition of Gulf Power's ownership in Plant Scherer Unit 3 as being in service to retail customers when and as the contracts expire. The ultimate outcome of this matter cannot be determined at this time.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Company prepares its consolidated financial statements in accordance with GAAP. Significant accounting policies are described in Note 1 to the financial statements of Southern Company in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Company's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Southern Company in Item 7 of the Form 10-K for a complete discussion of Southern Company's critical accounting policies and estimates related to Electric Utility Regulation, ContingentAsset Retirement Obligations, and Pension and Other Postretirement Benefits.Benefits, and Contingent Obligations.
Kemper IGCC Estimated Construction Costs, Project Completion Date, and Rate Recovery
During 2015,2016, Mississippi Power further revised its cost estimate to complete construction and start-up of the Kemper IGCC to an amount that exceeds the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions. Mississippi Power does not intend to seek any rate recovery for any costs related to the construction of the Kemper IGCC that exceed the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions.
As a result of the revisions to the cost estimate, Southern Company recorded total pre-tax charges to income for the estimated probable losses on the Kemper IGCC of $53 million ($33 million after tax) in the first quarter 2016, $183 million ($113 million after tax) in the fourth quarter 2015, $150 million ($93 million after tax) in the third quarter 2015, $23 million ($14 million after tax) in the second quarter 2015, $9 million ($6 million after tax) in the first quarter 2015, $70 million ($43 million after tax) in the fourth quarter 2014, $418 million ($258 million after tax) in the third quarter 2014, $380 million ($235 million after tax) in the first quarter 2014, $40 million ($25 million after tax) in the fourth quarter 2013, $150 million ($93 million after tax) in the third quarter 2013, $450 million ($278 million after tax) in the second quarter 2013, and $540 million ($333 million after tax) in the first quarter 2013. In the aggregate, Southern Company has incurred charges of $2.23$2.47 billion ($1.41.52 billion after tax) as a result of changes in the cost estimate above the cost cap for the Kemper IGCC through September 30, 2015.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Mississippi Power has experienced, and may continue to experience, material changes in the cost estimate for the Kemper IGCC. In subsequent periods, any further changes in the estimated costs to complete construction and start-up of the Kemper IGCC subject to the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions, will be reflected in Southern Company's statements of income and these changes could be material.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Any further cost increases and/or extensions of the in-service date with respect to the Kemper IGCC may result from factors including, but not limited to, labor costs and productivity, adverse weather conditions, shortages and inconsistent quality of equipment, materials, and labor, contractor or supplier delay, non-performance under constructionoperating or other agreements, operational readiness, including specialized operator training and required site safety programs, unforeseen engineering or design problems, start-up activities for this first-of-a-kind technology (including, but not limited to, major equipment failure and system integration), and/or operational performance (including, but not limited to, additional costs to satisfy any operational parameters ultimately adopted by the Mississippi PSC).
Mississippi Power's revised cost estimate includes costs through JuneSeptember 30, 2016. Any extension of the in-service date beyond JuneSeptember 30, 2016 is currently estimated to result in additional base costs of approximately $25 million to $30$35 million per month, which includes maintaining necessary levels of start-up labor, materials, and fuel, as well as operational resources required to execute start-up and commissioning activities. However, additional costs may be required for remediation of any further equipment and/or design issues identified. Any extension of the in-service date with respect to the Kemper IGCC beyond JuneSeptember 30, 2016 would also increase costs for the Cost Cap Exceptions, which are not subject to the $2.88 billion cost cap established by the Mississippi PSC. These costs include AFUDC, which is currently estimated to total approximately $12$14 million per month, as well as carrying costs and operating expenses on Kemper IGCC assets placed in service and consulting fees and legal fees a portion of which are being deferred as regulatory assets and are estimated to total approximately $6$2 million per month.
Given the significant judgment involved in estimating the future costs to complete construction and start-up, the project completion date, the ultimate rate recovery for the Kemper IGCC, and the potential impact on Southern Company's results of operations, Southern Company considers these items to be critical accounting estimates. See Note 3 to the financial statements of Southern Company under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.
Asset Retirement ObligationsRecently Issued Accounting Standards
AROsOn February 25, 2016, the FASB issued ASU No. 2016-02, Leases(Topic 842) (ASU 2016-02). ASU 2016-02 requires lessees to recognize on the balance sheet a lease liability and a right-of-use asset for all leases. ASU 2016-02 also changes the recognition, measurement, and presentation of expense associated with leases and provides clarification regarding the identification of certain components of contracts that would represent a lease. The accounting required by lessors is relatively unchanged and there is no change to the accounting for existing leveraged leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. Southern Company is currently evaluating the new standard and has not yet determined its ultimate impact; however, adoption of ASU 2016-02 is expected to have a significant impact on Southern Company's balance sheet.
On March 30, 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation(Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 changes the accounting for income taxes and the cash flow presentation for share-based payment award transactions. Most significantly, entities are computedrequired to recognize all excess tax benefits and deficiencies related to the exercise or vesting of stock compensation as the fair value of the ultimate costs for an asset's future retirement and are recordedincome tax expense or benefit in the period in which the liability is incurred. The costs are capitalized as part of theincome statement. Southern Company currently recognizes any excess tax benefits and deficiencies related long-lived asset and depreciated over the asset's useful life. In the absence of quoted market prices, AROs are estimated using present value techniques in which estimates of future cash outlays associated with the asset retirements are discounted using a credit-adjusted risk-free rate. Estimates of the timing and amounts of future cash outlays are based on projections of when and how the assets will be retired and the cost of future removal activities.
The liability for AROs primarily relates to the decommissioningexercise and vesting of the nuclear facilities - Alabama Power's Plant Farley and Georgia Power's ownership interestsstock compensation in Plant Hatch and Plant Vogtle Units 1 and 2 - and facilities that are subject to the CCR Rule, primarily ash ponds. In addition, theadditional paid-in capital. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. Southern Company systemis currently evaluating the new standard and has retirement obligations related to various landfill sites, asbestos removal, mine reclamation, and disposal of polychlorinated biphenyls in certain transformers. The Southern Company system also has identified retirement obligations related to certain transmission and distribution facilities, certain wireless communication towers, property associated with the Southern Company system's rail lines and natural gas pipelines, and certain structures authorized by the U.S. Army Corps of Engineers. However, liabilities for the removal of these assets have not been recorded because the settlement timing for the retirement obligations related to these assets is indeterminable and, therefore, the fair value of the retirement obligations cannot be reasonably estimated. A liability for these AROs will be recognized when sufficient information becomes available to support a reasonable estimation of the ARO.yet determined its ultimate impact.
As a result of the final CCR Rule discussed above, Alabama Power, Gulf Power, and Mississippi Power recorded new AROs for facilities that are subject to the CCR Rule. Georgia Power had previously recorded AROs as a result of state requirements in Georgia which closely align with the requirements of the CCR Rule. The cost estimates are
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
based on information using various assumptions related to closure and post-closure costs, timing of future cash outlays, inflation and discount rates, and the potential methods for complying with the CCR Rule requirements for closure in place. As further analysis is performed, including evaluation of the expected method of compliance, refinement of assumptions underlying the cost estimates, such as the quantities of CCR at each site, and the determination of timing, including the potential for closing ash ponds prior to the end of their currently anticipated useful life, the traditional operating companies expect to continue to periodically update these estimates.
Given the significant judgment involved in estimating AROs, Southern Company considers the liabilities for AROs to be critical accounting estimates.
See Note 1 to the financial statements of Southern Company under "Asset Retirement Obligations and Other Costs of Removal" and "Nuclear Decommissioning" in Item 8 of the Form 10-K and Note (A) to the Condensed Financial Statements under "Asset Retirement Obligations" herein for additional information.
Recently Issued Accounting Standards
The FASB's ASC 606, Revenue from Contracts with Customers, revises the accounting for revenue recognition effective for fiscal years beginning after December 15, 2017. Southern Company continues to evaluate the requirements of ASC 606. The ultimate impact of the new standard has not yet been determined.
On April 7, 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30):Simplifying the Presentation of Debt Issuance Costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability and is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted and Southern Company intends to adopt the ASU in the fourth quarter 2015. The ASU is required to be applied retrospectively to all periods presented beginning in the year of adoption. Southern Company currently reflects unamortized debt issuance costs in unamortized debt issuance expense on its balance sheet. Upon adoption, the reclassification will not have a material impact on the results of operations, financial position, or cash flows of Southern Company.
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 September 30, 2015.March 31, 2016. Through September 30, 2015,March 31, 2016, Southern Company has incurred non-recoverable cash expenditures of $1.8$2.11 billion and is expected to incur approximately $0.4$0.36 billion in additional non-recoverable cash expenditures through completion of the Kemper IGCC. Southern Company intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.
Net cash provided from operating activities totaled $5.1$0.9 billion for the first ninethree months of 2015, an increase of $0.4 billion from2016 and the corresponding period in 2014. The increase in net cash provided from operating activities was primarily due to an increase in fuel cost recovery, partially offset by timing of accounts payable.2015. Net cash used for investing activities totaled $4.9$2.2 billion for the first ninethree months of 20152016 primarily due to gross property additions for installation of equipment to comply with environmental standards, construction of generation, transmission, and distribution facilities and acquisitionsinstallation of solar facilities.equipment to comply with environmental standards. Net cash provided from financing activities totaled $0.2$0.7 billion for the first ninethree months of 20152016 primarily due to issuances of long-term debt, partially offset by redemptions of short-term and long-term debt and common stock dividend payments and redemptions of long-term debt and preferred and preference stock.payments. Fluctuations in cash flow from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant balance sheet changes for the first ninethree months of 20152016 include an increase of $3.4$1.4 billion in total property, plant, and equipment to comply with environmental standards and construction of generation, transmission, and distribution facilities; a $0.4$0.7 billion increasedecrease in income taxes receivable, non-currentcash and cash equivalents due to the funding of acquisitions and construction of renewable energy projects; a $0.4 billion increase in accumulated deferred income taxes for deductions primarily related to R&E expenditures for the Kemper IGCC; an increase of $0.4 billion in accounts receivable primarily related to increases in customer billings; a $1.5$1.1 billion increase in short-term and long-term debt to fund the subsidiaries' continuous construction programs and for other general corporate purposes; a $0.3 billion decrease in accounts payable due to the timing of vendor payments; and a $0.8$0.3 billion increasedecrease in AROs primarily relatedaccrued compensation due to the CCR Rule. See Notes (A), (B), and (G) to the Condensed Financial Statements herein for additional information regarding AROs, the Kemper IGCC, and R&E expenditures, respectively.timing of payments.
At the end of the thirdfirst quarter 2015,2016, the market price of Southern Company's common stock was $44.70$51.73 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $22.73$22.65 per share, representing a market-to-book ratio of 197%228%, compared to $49.11, $21.98,$46.79, $22.59, and 223%207%, respectively, at the end of 2014.2015. Southern Company's common stock dividend for the thirdfirst quarter 20152016 was $0.5425 per share compared to $0.5250 per share in the thirdfirst quarter 2014.2015.
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 for new generating facilities and to comply with existing environmental statutes and regulations, scheduled maturities of long-term debt, as well as related interest, derivative obligations, preferred and preference stock dividends, leases, purchase commitments, trust funding requirements, and unrecognized tax benefits. Approximately $3.3$2.5 billion will be required through September 30, 2016March 31, 2017 to fund maturities and announced redemptions of long-term debt. See "Sources of Capital" herein for additional information. Subsequent
In addition to September 30, 2015, Alabama Power repaidthe cash consideration for the Merger to be paid by Southern Company at maturity $400 million aggregate principal amountthe effective time of its Series 2012B 0.550% Senior Notes due October 15, 2015.the Merger, Southern Company will also assume AGL Resources' outstanding indebtedness (approximately $4.3 billion at March 31, 2016). See OVERVIEW herein for additional information regarding the Merger as well as Note (I) to the Condensed Financial Statements herein.
The Southern Company system's construction program is currently estimated to be $7.7 billion for 2015, $5.6total $7.3 billion for 2016, and $4.3$5.2 billion for 2017, which includesand $5.5 billion for 2018. These amounts include expenditures of approximately $0.7 billion
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
related to the construction and start-up of the Kemper IGCC of $834 million for 2015in 2016; $0.6 billion, $0.7 billion, and $281 million for$0.4 billion to continue construction on Plant Vogtle Units 3 and 4 in 2016, 2017, and approximately2018, respectively; and $2.2 billion, $0.9 billion, and $1.4 billion for Southern Power's acquisitions and/or construction of new Southern Power generating facilities in 2015.2016, 2017, and 2018, respectively.
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 regulatory requirements; changes in FERC rules and regulations; PSC approvals; changes in the expected environmental compliance program; 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. Additionally, planned expenditures for plant acquisitions may vary materially due to market opportunities and Southern Power's ability to execute its growth strategy. See Note 112 to the financial statements of Southern Company under "Acquisitions""Southern Power" in Item 8 of the Form 10-K and Note (I) to the Condensed Financial Statements under "Southern Power" herein for additional information regarding Southern Power's plant acquisitions. See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Georgia Power – Nuclear 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 information regarding additional factors that may impact construction expenditures.
In addition to the Merger Consideration to be paid by Southern Company at the Effective Time, in connection with the Merger, Southern Company will also assume AGL Resources' outstanding indebtedness (approximately $4
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
billion on June 30, 2015). See OVERVIEW herein for additional information regarding the Merger, including the Merger Consideration.
Sources of Capital
Southern Company intends to meet its future capital needs through operating cash flows, short-term debt, term loans, 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 and debt to be raisedissuances in 2015,2016, as well as in subsequent years, will be contingent on Southern Company's investment opportunities and the Southern Company system's capital requirements.
Except as described herein, the traditional operating companies and Southern Power plan to obtain the funds required for construction and other purposes from operating cash flows, external security issuances, term loans, short-term borrowings, and equity contributions or loans 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 addition, Georgia Power may make borrowings through a loan guarantee agreement (Loan Guarantee Agreement) between Georgia Power and the DOE, the proceeds of which may be used to reimburse Georgia Power for Eligible Project Costs incurred in connection with its construction of Plant Vogtle Units 3 and 4. Under the Loan Guarantee Agreement, the DOE agreed to guarantee borrowings of up to $3.46 billion (not to exceed 70% of Eligible Project Costs) to be made by Georgia Power under a multi-advance credit facility (FFB Credit Facility) among Georgia Power, the DOE, and the FFB. Eligible Project Costs incurred through September 30, 2015 would allow for borrowings of up to $2.2 billion under the FFB Credit Facility, of which Georgia Power has borrowed $1.8 billion. See Note 6 to the financial statements of Southern Company under "DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K for additional information regarding the Loan Guarantee Agreement and Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Georgia Power – Nuclear Construction" herein for additional information regarding Plant Vogtle Units 3 and 4.
Eligible Project Costs incurred through March 31, 2016 would allow for borrowings of up to $2.5 billion under the FFB Credit Facility, of which Georgia Power has borrowed $2.2 billion.
Mississippi Power received $245 million of Initial DOE Grants in prior years that were used for the construction of the Kemper IGCC. An additional $25 million of grants from the DOE Grants is expected to be received for commercial operation of the Kemper IGCC. On April 8, 2016, Mississippi Power received approximately $137 million in
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Additional DOE Grants for the Kemper IGCC, which are expected to be used to reduce future rate impacts for customers. In addition, see Note (B)3 to the Condensed Financial Statementsfinancial statements of Southern Company under "Integrated Coal Gasification Combined Cycle" hereinin Item 8 of the Form 10-K for information regarding legislation related to the securitization of certain costs of the Kemper IGCC.
As of September 30, 2015,March 31, 2016, Southern Company's current liabilities exceeded current assets by $3.4$2.4 billion, primarily due to long-term debt that is due within one year, including approximately $0.5$0.9 billion at Southern Company, $0.6the parent company, $0.2 billion at Alabama Power, $1.4$0.5 billion at Georgia Power, $0.4$0.1 billion at Gulf Power, $0.3 billion at Mississippi Power, and $0.4 billion at Southern Power. In addition, Mississippi Power has $0.5 billion in short-term bank loans scheduled to mature on April 1, 2016. To meet short-term cash needs and contingencies, Southern Company has substantial cash flow from operating activities and access to capital markets and financial institutions. Southern Company, the traditional operating companies, and Southern Power intend to utilize operating cash flows, as well as commercial paper, lines of credit, bank notes, and securities issuances, as market conditions permit, as well as, under certain circumstances for the traditional operating companies and Southern Power, equity contributions and/or loans from Southern Company to meet their short-term capital needs. In addition, for the remainder of 2015,2016, Georgia Power expects to utilize borrowings through the FFB Credit Facility as an additional source of long-term borrowed funds.
The financial condition of Mississippi Power and its ability to obtain funds needed for normal business operations and completion of the construction and start-up of the Kemper IGCC were adversely affected by the return of approximately $301 million of interest bearing refundable deposits to SMEPA in June 2015 in connection with the termination of the APA, the required refund of Mirror CWIP rate collections beginning in early November 2015 of approximately $369 million, including associated carrying costs, the termination of the Mirror CWIP rate, and the likely repayment of unrecognized tax benefits associated with the Phase II tax credits of $235 million. On August
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
13, 2015, the Mississippi PSC approved the implementation of interim rates, subject to refund and certain other conditions, and is scheduled to issue a final order on or before December 8, 2015 related to permanent rates for the In-Service Asset Proposal. Mississippi Power plans to obtain the funds required for construction and other purposes from operating cash flows and lines of credit (to the extent available) as well as loans and, under certain circumstances, equity contributions from Southern Company. See Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.
At September 30, 2015,March 31, 2016, Southern Company and its subsidiaries had approximately $1.1$0.8 billion of cash and cash equivalents. Committed credit arrangements with banks at September 30, 2015March 31, 2016 were as follows:
| | | | | Expires | | | | | | Executable Term Loans | | Due Within One Year | Expires | | | | Executable Term Loans | | Due Within One Year |
| Company | | 2015 | | 2016 | | 2017 | | 2018 | | 2020 | | Total | | Unused | | One Year | | Two Years | | Term Out | | No Term Out | 2016 | 2017 | 2018 | 2020 | | Total | | Unused | | One Year | | Two Years | | Term Out | | No Term Out |
| | | (in millions) | | | | (in millions) | | (in millions) | | (in millions) | | | | (in millions) | | (in millions) | | (in millions) |
Southern Company (a) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,000 |
| | $ | 1,250 |
| | $ | 2,250 |
| | $ | 2,250 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | 1,000 |
| $ | 1,250 |
| | $ | 2,250 |
| | $ | 2,250 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Alabama Power | | — |
| | 40 |
| | — |
| | 500 |
| | 800 |
| | 1,340 |
| | 1,339 |
| | — |
| | — |
| | — |
| | 40 |
| 40 |
| — |
| 500 |
| 800 |
| | 1,340 |
| | 1,340 |
| | — |
| | — |
| | — |
| | 40 |
|
| Georgia Power | | — |
| | — |
| | — |
| | — |
| | 1,750 |
| | 1,750 |
| | 1,732 |
| | — |
| | — |
| | — |
| | — |
| — |
| — |
| — |
| 1,750 |
| | 1,750 |
| | 1,732 |
| | — |
| | — |
| | — |
| | — |
|
| Gulf Power | | 20 |
| | 225 |
| | 30 |
| | — |
| | — |
| | 275 |
| | 275 |
| | 50 |
| | — |
| | 50 |
| | 195 |
| 75 |
| 40 |
| 165 |
| — |
| | 280 |
| | 280 |
| | 45 |
| | — |
| | 45 |
| | 40 |
|
Mississippi Power (b) | | 15 |
| | 220 |
| | — |
| | — |
| | — |
| | 235 |
| | 210 |
| | 30 |
| | 30 |
| | 60 |
| | 175 |
| 205 |
| — |
| — |
| — |
| | 205 |
| | 180 |
| | 30 |
| | 15 |
| | 45 |
| | 160 |
|
Southern Power (c) | | — |
| | — |
| | — |
| | — |
| | 600 |
| | 600 |
| | 567 |
| | — |
| | — |
| | — |
| | — |
| |
Southern Power Company (b) | | — |
| — |
| — |
| 600 |
| | 600 |
| | 560 |
| | — |
| | — |
| | — |
| | — |
|
| Other | | — |
| | 70 |
| | — |
| | — |
| | — |
| | 70 |
| | 70 |
| | — |
| | — |
| | — |
| | 70 |
| 70 |
| — |
| — |
| — |
| | 70 |
| | 70 |
| | 20 |
| | — |
| | 20 |
| | 50 |
|
| Total | | $ | 35 |
| | $ | 555 |
| | $ | 30 |
| | $ | 1,500 |
| | $ | 4,400 |
| | $ | 6,520 |
| | $ | 6,443 |
| | $ | 80 |
| | $ | 30 |
| | $ | 110 |
| | $ | 480 |
| $ | 390 |
| $ | 40 |
| $ | 1,665 |
| $ | 4,400 |
| | $ | 6,495 |
| | $ | 6,412 |
| | $ | 95 |
| | $ | 15 |
| | $ | 110 |
| | $ | 290 |
|
| |
| (a) | Excludes the $8.1 billion Bridge Agreement entered into in September 2015 that will be funded only to the extent necessary to provide financing for the Merger as discussed herein. |
| |
| (b) | Subsequent to September 30, 2015, a $15 million bankExcludes credit arrangement expired pursuant to its terms. |
| |
(c) | Excludes the Tranquillityagreements (Project Credit AgreementFacilities) assumed with the acquisition of Tranquillity on August 28, 2015,certain solar facilities, which isare non-recourse to Southern Power Company, the proceeds of which are being used to finance project costs related to Tranquillity'ssuch solar facilityfacilities currently under construction in California.construction. See Note (I) to the Condensed Financial Statements under "Southern Power" herein for additional information regarding Tranquillity.information. |
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.
As reflected in the table above, in August 2015, Southern Company, Alabama Power, Georgia Power, and Southern Power Company each amended and restated their multi-year credit arrangements, which, among other things, extended the maturity dates from 2018 to 2020. Southern Company and Southern Power Company increased their borrowing ability under these arrangements to $1.25 billion from $1.0 billion and to $600 million from $500 million, respectively. Georgia Power increased its borrowing ability by $150 million under its facility maturing in 2020 and terminated its aggregate $150 million facilities maturing in 2016. In September 2015, Southern Company entered into an additional multi-year credit arrangement for $1.0 billion with a maturity date of 2018. Also in September 2015, Alabama Power entered into a new $500 million three-year credit arrangement which replaced a majority of Alabama Power's bi-lateral credit arrangements.
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 September 30, 2015 was approximately $1.8 billion. In addition, at September 30, 2015, the traditional operating companies had approximately $354 million of fixed rate pollution control revenue bonds outstanding that were required to be reoffered within the next 12 months, of which $120 million were remarketed subsequent to September 30, 2015.
Most of these bank credit arrangements, as well as the term loan arrangements of Southern Company, Alabama Power, Mississippi Power, and Southern Power, contain covenants that limit debt levels and contain cross acceleration or cross default provisions to other indebtedness (including guarantee obligations) that are restricted only to the
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
indebtedness of the individual company. Such cross default provisions to other indebtedness would trigger an event of default if the applicable borrower defaulted on indebtedness or guarantee obligations over a specified threshold. Such cross acceleration provisions to other indebtedness would trigger an event of default if the applicable borrower defaulted on indebtedness, the payment of which was then accelerated. Southern Company, the traditional operating companies, and Southern Power Company are currently in compliance with all such covenants. None of the bank credit arrangements contain material adverse change clauses at the time of borrowings.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Subject to applicable market conditions, Southern Company and its subsidiaries expect to renew or replace their bank credit arrangements as needed, prior to expiration. In connection therewith, Southern Company and its subsidiaries may extend the maturity dates and/or increase or decrease the lending commitments thereunder.
A portion of the unused credit with banks is allocated to provide liquidity support to the traditional operating companies' pollution control revenue bonds and commercial paper programs. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of March 31, 2016 was approximately $1.8 billion. In addition, at March 31, 2016, the traditional operating companies had approximately $269 million of fixed rate pollution control revenue bonds outstanding that were required to be reoffered within the next 12 months.
Southern Company intends to initially fund the cash consideration for the Merger using approximately $7.0 billiona mix of debt and $1.0equity. Southern Company finances its capital needs on a portfolio basis and expects to issue a minimum of $8.0 billion in debt prior to closing the Merger and a minimum of equity.$1.2 billion in equity during 2016. This capital is expected to provide funding for the Merger, the proposed acquisition of PowerSecure, and Southern Power and other Southern Company system capital projects. Total capital raised in 2016 may increase due to cash needed at the closing of the Merger, settlement of hedges, and incremental investment opportunities, including additional Southern Power projects in excess of its current capital plans. Southern Company expects to issue approximately $2.0 billion of additional equity through 2019 to offset a portion of the debt issued to fund the cash consideration for the Merger.Merger in several tranches including long-dated maturities. The amount of debt issued at each maturity will depend on prevailing market conditions at the time of the offering and other factors. In addition, Southern Company entered into the $8.1 billion Bridge Agreement on September 30, 2015 to provide financing for the Merger in the event long-term financing is not available.
The Bridge Agreement provides for total loan commitments See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Southern Company in an aggregate amount of $8.1 billion to fund the paymentItem 7 of the cash consideration payable under the Merger Agreement and other cash payments required in connection with the consummation of the Merger, the Bridge Agreement and the borrowings thereunder, the other financing transactions related to the Merger, and the payment of fees and expenses incurred in connection with the foregoing. If funded, the loan under the Bridge Agreement will mature and be payable in full on the date that is 364 days after the funding of the commitments under the Bridge Agreement (Closing Date).
In connection with the Bridge Agreement, Southern Company will pay a ticking feeForm 10-K for the benefit of the lenders thereto, accruing from November 21, 2015, in an amount equal to 0.125% per annum of the aggregate commitments under the Bridge Agreement, which fee will accrue through the earlier of (i) the date of termination of the commitments and (ii) the Closing Date. If the loan is funded, Southern Company will pay (i) interest at a fluctuating rate per annum equal to, at its election, the base rate or euro-dollar rate plus, in each case, an applicable margin, calculated as provided in the Bridge Agreement and (ii) on each of the dates set forth below, a duration fee equal to the applicable percentage set forth below of the aggregate principal amount of the loan outstanding on such date:
|
| |
Date | Duration Fee |
90 days after the Closing Date | 0.50% |
180 days after the Closing Date | 0.75% |
270 days after the Closing Date | 1.00% |
Additionally, under the terms of the Bridge Agreement, Southern Company is required to pay certain customary fees to the lenders as set forth in related letters. As of September 30, 2015, Southern Company had no outstanding loans under the Bridge Agreement.additional information.
Southern Company, the traditional operating companies, and Southern Power make short-term borrowings primarily through commercial paper programs that have the liquidity support of the committed bank credit arrangements described above, excluding the Bridge Agreement. Southern Company, the traditional operating companies, and Southern Power may also borrow through various other arrangements with banks. Commercial paper and short-term bank term loansShort-term borrowings are included in notes payable in the balance sheets.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of short-term borrowings were as follows:
| | | | | Short-term Debt at September 30, 2015 | | Short-term Debt During the Period(*) | | Short-term Debt at March 31, 2016 | | Short-term Debt During the Period(*) |
| | | Amount Outstanding | | Weighted Average Interest Rate | | Average Amount Outstanding | | Weighted Average Interest Rate | | Maximum Amount Outstanding | | Amount Outstanding | | Weighted Average Interest Rate | | Average Amount Outstanding | | Weighted Average Interest Rate | | Maximum Amount Outstanding |
| | | (in millions) | | | | (in millions) | | | | (in millions) | | (in millions) | | | | (in millions) | | | | (in millions) |
| Commercial paper | | $ | 990 |
| | 0.5 | % | | $ | 826 |
| | 0.4 | % | | $ | 1,406 |
| | $ | 757 |
| | 0.8 | % | | $ | 853 |
| | 0.8 | % | | $ | 1,233 |
|
| Short-term bank debt | | 500 |
| | 1.4 | % | | 543 |
| | 1.1 | % | | 555 |
| | 25 |
| | 2.1 | % | | 375 |
| | 1.9 | % | | 500 |
|
| Total | | $ | 1,490 |
| | 0.8 | % | | $ | 1,369 |
| | 0.8 | % | | | | $ | 782 |
| | 0.9 | % | | $ | 1,228 |
| | 1.0 | % | | |
| |
| (*) | Average and maximum amounts are based upon daily balances during the three-month period ended September 30, 2015.March 31, 2016. |
In addition to the short-term borrowings in the table above, the Project Credit Facilities had total amounts outstanding as of March 31, 2016 of $413 million at a weighted average interest rate of 1.99%. For the three months ended March 31, 2016, these credit agreements had a maximum amount outstanding of $413 million, and an average amount outstanding of $260 million at a weighted average interest rate of 1.99%.
Southern Company believes the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, bank notes, and operating cash flows.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Credit Rating Risk
Southern Company and its subsidiaries do 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/or Baa2 or below. These contracts are for physical electricity purchases and sales, fuel purchases, fuel transportation and storage, energy price risk management, transmission, interest rate management, and construction of new generation at Plant Vogtle Units 3 and 4.
The maximum potential collateral requirements under these contracts at September 30, 2015March 31, 2016 were as follows:
| | | Credit Ratings | Maximum Potential Collateral Requirements | Maximum Potential Collateral Requirements |
| | (in millions) | (in millions) |
| At BBB and/or Baa2 | $ | 12 |
| $ | 12 |
|
| At BBB- and/or Baa3 | 504 |
| $ | 511 |
|
| Below BBB- and/or Baa3 | 2,348 |
| $ | 2,335 |
|
Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of Southern Company and its subsidiaries to access capital markets, and would be likely to impact the cost at which they do so.
On June 5, 2015, Fitch downgradedFinancing Activities
During the first three months of 2016, Southern Company issued approximately 6.6 million shares of common stock primarily through the employee equity compensation plan and received proceeds of approximately $270 million. Southern Company may satisfy its obligations with respect to the plans in several ways, including through using newly issued shares or treasury shares or acquiring shares on the open market through independent plan administrators.
The following table outlines the long-term issuer default rating of Mississippi Power to BBB+ from A-. Fitch maintained the negative ratings outlook for Mississippi Power and revised the ratings outlook for Southern Company from stable to negative.
On August 14, 2015, Moody's downgraded the senior unsecured debt rating of Mississippi Power to Baa2 from Baa1. Moody's maintained the negative ratings outlook for Mississippi Power.
On August 17, 2015, S&P downgraded the consolidated long-term issuer rating of Southern Company (including Alabama Power, Georgia Power, and Gulf Power) to A- from A. Also on August 17, 2015, S&P downgraded the issuer rating of Mississippi Power to BBB+ from A. S&P revised its credit rating outlookfinancing activities for Southern Company and its subsidiaries for the traditional operating companies to stable from negative. Separately, on August 24, 2015, S&P revised its credit rating outlook for Southern Company and the traditional operating companies from stable to negative following the announcementfirst three months of the Merger.2016:
|
| | | | | | | | | | | | | | | | | | | |
Company(a) | Senior Note Issuances | | Senior Note Maturities and Redemptions | | Revenue Bond Maturities, Redemptions, and Repurchases | | Other Long-Term Debt Issuances | | Other Long-Term Debt Redemptions and Maturities(b) |
| | (in millions) |
| Alabama Power | $ | 400 |
| | $ | 200 |
| | $ | — |
| | $ | 45 |
| | $ | — |
|
| Georgia Power | 650 |
| | 250 |
| | 4 |
| | — |
| | 1 |
|
| Mississippi Power | — |
| | — |
| | — |
| | 1,100 |
| | 426 |
|
| Southern Power | — |
| | — |
| | — |
| | 2 |
| | 3 |
|
| Other | — |
| | — |
| | — |
| | — |
| | 4 |
|
Elimination(c) | — |
| | — |
| | — |
| | (200 | ) | | — |
|
| Total | $ | 1,050 |
| | $ | 450 |
| | $ | 4 |
| | $ | 947 |
| | $ | 434 |
|
| |
| (a) | Southern Company and Gulf Power did not issue or redeem any long-term debt during the first three months of 2016. |
| |
| (b) | Includes reductions in capital lease obligations resulting from cash payments under capital leases. |
| |
| (c) | Intercompany loans from Southern Company to Mississippi Power eliminated in Southern Company's Consolidated Financial Statements. |
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Also following the announcement of the Merger, on August 24, 2015, Moody's affirmed the rating of Southern Company and revised its credit rating outlook from stable to negative. On the same date, Fitch placed the ratings of Southern Company on ratings watch negative.
Financing Activities
During the first nine months of 2015, Southern Company issued approximately 3.7 million shares of common stock primarily through the employee equity compensation plan and received proceeds of approximately $136 million. During the first nine months of 2015, all sales under the Southern Investment Plan and the employee savings plan were funded with shares acquired on the open market by independent plan administrators. In October 2015, Southern Company began issuing shares of common stock through the Southern Investment Plan and the employee savings plan.
On March 2, 2015, Southern Company announced a program to repurchase up to 20 million shares of Southern Company common stock to offset all or a portion of the incremental shares issued under its employee and director equity compensation plans, including through stock option exercises, until December 31, 2017. Under this program, approximately 2.6 million shares were repurchased through September 30, 2015 at a total cost of approximately $115 million. There were no repurchases during the three months ended September 30, 2015 and no further repurchases under the program are anticipated.
The following table outlines the long-term debt financing activities for Southern Company and its subsidiaries for the first nine months of 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Company | Senior Note Issuances | | Senior Note Redemptions | | Revenue Bond Issuances and Reofferings of Purchased Bonds(a) | | Revenue Bond Maturities and Repurchases | | Other Long-Term Debt Issuances | | Other Long-Term Debt Redemptions and Maturities(b) |
| | (in millions) |
| Southern Company | $ | 600 |
| | $ | 400 |
| | $ | — |
| | $ | — |
| | $ | 400 |
| | $ | — |
|
| Alabama Power | 975 |
| | 250 |
| | 80 |
| | 134 |
| | — |
| | — |
|
| Georgia Power | — |
| | 525 |
| | 274 |
| | 268 |
| | 600 |
| | 20 |
|
| Gulf Power | — |
| | 60 |
| | 13 |
| | 13 |
| | — |
| | — |
|
| Mississippi Power | — |
| | — |
| | — |
| | — |
| | — |
| | 352 |
|
| Southern Power | 650 |
| | 525 |
| | — |
| | — |
| | 400 |
| | 3 |
|
| Other | — |
| | — |
| | — |
| | — |
| | — |
| | 13 |
|
| Total | $ | 2,225 |
| | $ | 1,760 |
| | $ | 367 |
| | $ | 415 |
| | $ | 1,400 |
| | $ | 388 |
|
(a) Includes a reoffering by Alabama Power of $80 million aggregate principal amount of revenue bonds purchased and held since April 2015; reofferings by Georgia Power of $104.6 million and $65 million aggregate principal amount of revenue bonds purchased and held since 2013 and April 2015, respectively; and a reoffering by Gulf Power of $13 million aggregate principal amount of revenue bonds purchased and held in July 2015. Also includes repurchases and reofferings by Georgia Power of $94.6 million and $10 million aggregate principal amount of revenue bonds in August 2015 in connection with optional tenders.
| |
(b) | Includes reductions in capital lease obligations resulting from cash payments under capital leases. |
In June 2015, Southern Company issued $600 million aggregate principal amount of Series 2015A 2.750% Senior Notes due June 15, 2020. The proceeds were used to pay a portion of Southern Company's outstanding short-term indebtedness and for other general corporate purposes.
In September 2015,February 2016, Southern Company entered into a $400 million aggregate principal amount 18-month floatingforward-starting interest rate bank loan bearingswaps to hedge exposure to interest based on one-month LIBOR.rate changes related to anticipated debt issuances. The proceeds were used for working capital and other general corporate purposes.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Also in September 2015, Southern Company repaid at maturity $400 million aggregate principalnotional amount of its Series 2010A 2.375% Senior Notes due September 15, 2015.
Subsequent to September 30, 2015, Southern Company issued $1.0 billion aggregate principal amount of Series 2015A 6.25% Junior Subordinated Notes due October 15, 2075. The proceeds were used to pay a portion of Southern Company's outstanding short-term indebtedness and for other general corporate purposes.the swaps totaled $700 million.
Except as described herein, Southern Company's subsidiaries used the proceeds of the debt issuances shown in the table above for their redemptions and maturities shown in the table above, to repay short-term indebtedness, and for general corporate purposes, including their continuous construction programs and, for Southern Power, its growth strategy.
A portion of the proceeds of Alabama Power's senior note issuances were used in May 2015 to redeem 6.48 million shares ($162 million aggregate stated capital) of Alabama Power's 5.20% Class A Preferred Stock at a redemption price of $25 per share plus accrued and unpaid dividends to the redemption date, 4.0 million shares ($100 million aggregate stated capital) of Alabama Power's 5.30% Class A Preferred Stock at a redemption price of $25 per share plus accrued and unpaid dividends to the redemption date, and 6.0 million shares ($150 million aggregate stated capital) of Alabama Power's 5.625% Series Preference Stock at a redemption price of $25 per share plus accrued and unpaid dividends to the redemption date.
Georgia Power's "Other Long-Term Debt Issuances" reflected in the table above include borrowings under the FFB Credit Facility in an aggregate principal amount of $600 million in June 2015. The interest rate applicable to the $600 million principal amount is 3.283% for an interest period that extends to the final maturity date of February 20, 2044. The proceeds were used to reimburse Georgia Power for Eligible Project Costs relating to the construction of Plant Vogtle Units 3 and 4. Georgia Power settled $350 million of interest rate swaps related to this borrowing for a payment of approximately $6 million, which will be amortized to interest expense over 10 years.
InOn March 2015, Georgia8, 2016, Mississippi Power entered into a $250an unsecured term loan agreement for an aggregate amount of $1.2 billion to repay existing indebtedness and for other general corporate purposes. Mississippi Power borrowed $900 million aggregate principal amount three-month floating rateunder the term loan agreement and has the right to borrow the remaining $300 million on or before October 15, 2016, upon satisfaction of certain customary conditions. Mississippi Power used the initial proceeds to repay $900 million in maturing bank notes on March 8, 2016 and expects the remaining $300 million to be used to repay senior notes maturing in October 2016. The term loan bearingpursuant to this agreement matures on April 1, 2018 and bears interest based on one-month LIBOR. The loan was repaid
During the three months ended March 31, 2016, Southern Power's subsidiaries borrowed $276 million pursuant to the Project Credit Facilities at maturity.a weighted average interest rate of 1.99%.
In April 2015, Mississippi Power entered into two short-term floatingSubsequent to March 31, 2016, Southern Power's subsidiaries borrowed $187 million pursuant to the Project Credit Facilities at a weighted average interest rate bank loans with a maturity date of April 1,of 1.93%.
Also subsequent to March 31, 2016, in an aggregate principal amount of $475 million, bearing interest based on one-month LIBOR. A portion of the proceeds of these loans were used for the repayment of term loans in an aggregate principal amount of $275 million. Mississippi Power also amended three outstanding floating rate bank loans for an aggregate principal amount of $425 million which, among other things, extended the maturity dates from various dates in 2015 to April 1, 2016.
In June 2015, Gulf Power entered into a $40 million aggregate principal amount three-month floating rate bank loan bearing interest based on one-month LIBOR. The loan was repaid at maturity.
In addition toannounced the amounts reflectedredemption in the table above, Mississippi Power previously received a totalMay 2016 of $275 million of deposits from SMEPA that were required to be returned to SMEPA with interest in connection with the termination of the APA. On June 3, 2015, Southern Company, pursuant to its guarantee obligation, returned approximately $301 million to SMEPA. Subsequently, Mississippi Power issued an 18-month floating rate promissory note to Southern Company in an aggregate principal amount of approximately $301 million bearing interest based on one-month LIBOR. See Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle – Termination of Proposed Sale of Undivided Interest to SMEPA" herein for additional information.
Subsequent to September 30, 2015, Alabama Power repaid at maturity $400$125 million aggregate principal amount of its Series 2012B 0.550%2011A 5.75% Senior Notes due October 15, 2015.June 1, 2051.
Also subsequent to September 30, 2015, Gulf Power entered into forward-starting interest rate swaps to hedge exposure to interest rate changes related to an anticipated debt issuance. The notional amount of the swaps totaled $80 million.
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
PART I
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
During the ninethree months ended September 30, 2015,March 31, 2016, there were no material changes to each registrant's disclosures about market risk. For an in-depth discussion of each registrant's market risks, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of each registrant in Item 7 of the Form 10-K 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,Quarterly Report on Form 10-Q, Southern Company, Alabama Power, Georgia Power, Gulf Power, Mississippi Power, and Southern Power Company 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)1934, as amended). 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.controls over financial reporting. |
There have been no changes in Southern Company's, Alabama Power's, Georgia Power's, Gulf Power's, Mississippi Power's, or Southern Power Company'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)1934, as amended) during the thirdfirst quarter 20152016 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 Company's internal control over financial reporting.
ALABAMA POWER COMPANY
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
| | | | For the Three Months
Ended September 30, | | For the Nine Months
Ended September 30, | For the Three Months
Ended March 31, |
| | 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
| | (in millions) | | (in millions) | (in millions) |
| Operating Revenues: | | | | | | | | | | |
| Retail revenues | $ | 1,558 |
| | $ | 1,512 |
| | $ | 4,151 |
| | $ | 4,058 |
| $ | 1,193 |
| | $ | 1,268 |
|
| Wholesale revenues, non-affiliates | 65 |
| | 72 |
| | 188 |
| | 222 |
| 63 |
| | 65 |
|
| Wholesale revenues, affiliates | 20 |
| | 31 |
| | 55 |
| | 168 |
| 22 |
| | 15 |
|
| Other revenues | 52 |
| | 54 |
| | 157 |
| | 166 |
| 53 |
| | 53 |
|
| Total operating revenues | 1,695 |
| | 1,669 |
| | 4,551 |
| | 4,614 |
| 1,331 |
| | 1,401 |
|
| Operating Expenses: | | | | | | | | | | |
| Fuel | 408 |
| | 442 |
| | 1,061 |
| | 1,288 |
| 268 |
| | 310 |
|
| Purchased power, non-affiliates | 56 |
| | 57 |
| | 142 |
| | 153 |
| 36 |
| | 41 |
|
| Purchased power, affiliates | 51 |
| | 54 |
| | 153 |
| | 140 |
| 33 |
| | 53 |
|
| Other operations and maintenance | 371 |
| | 334 |
| | 1,140 |
| | 989 |
| 392 |
| | 399 |
|
| Depreciation and amortization | 163 |
| | 174 |
| | 481 |
| | 521 |
| 172 |
| | 158 |
|
| Taxes other than income taxes | 91 |
| | 88 |
| | 275 |
| | 265 |
| 97 |
| | 94 |
|
| Total operating expenses | 1,140 |
| | 1,149 |
| | 3,252 |
| | 3,356 |
| 998 |
| | 1,055 |
|
| Operating Income | 555 |
| | 520 |
| | 1,299 |
| | 1,258 |
| 333 |
| | 346 |
|
| Other Income and (Expense): | | | | | | | | | | |
| Allowance for equity funds used during construction | 14 |
| | 15 |
| | 43 |
| | 36 |
| 10 |
| | 15 |
|
| Interest expense, net of amounts capitalized | (71 | ) | | (63 | ) | | (205 | ) | | (188 | ) | (73 | ) | | (65 | ) |
| Other income (expense), net | (7 | ) | | 3 |
| | (24 | ) | | (5 | ) | (8 | ) | | (4 | ) |
| Total other income and (expense) | (64 | ) | | (45 | ) | | (186 | ) | | (157 | ) | (71 | ) | | (54 | ) |
| Earnings Before Income Taxes | 491 |
| | 475 |
| | 1,113 |
| | 1,101 |
| 262 |
| | 292 |
|
| Income taxes | 192 |
| | 183 |
| | 427 |
| | 429 |
| 103 |
| | 113 |
|
| Net Income | 299 |
| | 292 |
| | 686 |
| | 672 |
| 159 |
| | 179 |
|
| Dividends on Preferred and Preference Stock | 4 |
| | 10 |
| | 21 |
| | 30 |
| 4 |
| | 10 |
|
| Net Income After Dividends on Preferred and Preference Stock | $ | 295 |
| | $ | 282 |
| | $ | 665 |
| | $ | 642 |
| $ | 155 |
| | $ | 169 |
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | | | | | | | | | |
| | For the Three Months
Ended September 30, | | For the Nine Months
Ended September 30, |
| | 2015 | | 2014 | | 2015 | | 2014 |
| | (in millions) | | (in millions) |
| Net Income | $ | 299 |
| | $ | 292 |
| | $ | 686 |
| | $ | 672 |
|
| Other comprehensive income (loss): | | | | | | | |
| Qualifying hedges: | | | | | | | |
| Changes in fair value, net of tax of $(4), $-, $(4) and $-, respectively | (6 | ) | | — |
| | (6 | ) | | — |
|
Reclassification adjustment for amounts included in net income,
net of tax of $-, $1, $1 and $1, respectively | — |
| | — |
| | 1 |
| | 1 |
|
| Total other comprehensive income (loss) | (6 | ) | | — |
| | (5 | ) | | 1 |
|
| Comprehensive Income | $ | 293 |
| | $ | 292 |
| | $ | 681 |
| | $ | 673 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
| | | | | | | |
| | For the Nine Months
Ended September 30, |
| | 2015 | | 2014 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 686 |
| | $ | 672 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 585 |
| | 631 |
|
| Deferred income taxes | 85 |
| | 68 |
|
| Allowance for equity funds used during construction | (43 | ) | | (36 | ) |
| Other, net | 23 |
| | (33 | ) |
| Changes in certain current assets and liabilities — | | | |
| -Receivables | (160 | ) | | (139 | ) |
| -Fossil fuel stock | 69 |
| | 106 |
|
| -Materials and supplies | 18 |
| | (8 | ) |
| -Other current assets | (28 | ) | | (32 | ) |
| -Accounts payable | (106 | ) | | (64 | ) |
| -Accrued taxes | 371 |
| | 210 |
|
| -Accrued compensation | (32 | ) | | 18 |
|
| -Retail fuel cost over recovery | 81 |
| | 2 |
|
| -Other current liabilities | 30 |
| | 3 |
|
| Net cash provided from operating activities | 1,579 |
| | 1,398 |
|
| Investing Activities: | | | |
| Property additions | (938 | ) | | (966 | ) |
| Nuclear decommissioning trust fund purchases | (349 | ) | | (178 | ) |
| Nuclear decommissioning trust fund sales | 349 |
| | 178 |
|
| Cost of removal, net of salvage | (41 | ) | | (50 | ) |
| Change in construction payables | (48 | ) | | 39 |
|
| Other investing activities | (22 | ) | | (26 | ) |
| Net cash used for investing activities | (1,049 | ) | | (1,003 | ) |
| Financing Activities: | | | |
| Proceeds — | | | |
| Senior notes issuances | 975 |
| | 400 |
|
| Capital contributions from parent company | 13 |
| | 20 |
|
| Pollution control revenue bonds | 80 |
| | — |
|
| Redemptions and repurchases — | | | |
| Preferred and preference stock | (412 | ) | | — |
|
| Pollution control revenue bonds | (134 | ) | | — |
|
| Senior notes | (250 | ) | | — |
|
| Payment of preferred and preference stock dividends | (27 | ) | | (30 | ) |
| Payment of common stock dividends | (428 | ) | | (412 | ) |
| Other financing activities | (11 | ) | | (6 | ) |
| Net cash used for financing activities | (194 | ) | | (28 | ) |
| Net Change in Cash and Cash Equivalents | 336 |
| | 367 |
|
| Cash and Cash Equivalents at Beginning of Period | 273 |
| | 295 |
|
| Cash and Cash Equivalents at End of Period | $ | 609 |
| | $ | 662 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid during the period for — | | | |
| Interest (net of $15 and $13 capitalized for 2015 and 2014, respectively) | $ | 192 |
| | $ | 174 |
|
| Income taxes, net | 47 |
| | 227 |
|
| Noncash transactions — Accrued property additions at end of period | 88 |
| | 57 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Assets | | At September 30,
2015 | | At December 31,
2014 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 609 |
| | $ | 273 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 460 |
| | 345 |
|
| Unbilled revenues | | 134 |
| | 138 |
|
| Under recovered regulatory clause revenues | | 67 |
| | 74 |
|
| Other accounts and notes receivable | | 34 |
| | 23 |
|
| Affiliated companies | | 43 |
| | 37 |
|
| Accumulated provision for uncollectible accounts | | (9 | ) | | (9 | ) |
| Fossil fuel stock, at average cost | | 199 |
| | 268 |
|
| Materials and supplies, at average cost | | 398 |
| | 406 |
|
| Vacation pay | | 65 |
| | 65 |
|
| Prepaid expenses | | 79 |
| | 244 |
|
| Other regulatory assets, current | | 118 |
| | 84 |
|
| Other current assets | | 9 |
| | 5 |
|
| Total current assets | | 2,206 |
| | 1,953 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 23,922 |
| | 23,080 |
|
| Less accumulated provision for depreciation | | 8,623 |
| | 8,522 |
|
| Plant in service, net of depreciation | | 15,299 |
| | 14,558 |
|
| Nuclear fuel, at amortized cost | | 325 |
| | 348 |
|
| Construction work in progress | | 1,117 |
| | 1,006 |
|
| Total property, plant, and equipment | | 16,741 |
| | 15,912 |
|
| Other Property and Investments: | | | | |
| Equity investments in unconsolidated subsidiaries | | 69 |
| | 66 |
|
| Nuclear decommissioning trusts, at fair value | | 712 |
| | 756 |
|
| Miscellaneous property and investments | | 91 |
| | 84 |
|
| Total other property and investments | | 872 |
| | 906 |
|
| Deferred Charges and Other Assets: | | | | |
| Deferred charges related to income taxes | | 530 |
| | 525 |
|
| Deferred under recovered regulatory clause revenues | | 66 |
| | 31 |
|
| Other regulatory assets, deferred | | 1,055 |
| | 1,063 |
|
| Other deferred charges and assets | | 163 |
| | 162 |
|
| Total deferred charges and other assets | | 1,814 |
| | 1,781 |
|
| Total Assets | | $ | 21,633 |
| | $ | 20,552 |
|
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2016 | | 2015 |
| | (in millions) |
| Net Income | $ | 159 |
| | $ | 179 |
|
| Other comprehensive income (loss): | | | |
| Qualifying hedges: | | | |
| Changes in fair value, net of tax of $(1) and $(2), respectively | (2 | ) | | (4 | ) |
Reclassification adjustment for amounts included in net income,
net of tax of $1 and $-, respectively | 1 |
| | — |
|
| Total other comprehensive income (loss) | (1 | ) | | (4 | ) |
| Comprehensive Income | $ | 158 |
| | $ | 175 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETSSTATEMENTS OF CASH FLOWS (UNAUDITED)
|
| | | | | | | | |
| Liabilities and Stockholder's Equity | | At September 30,
2015 | | At December 31,
2014 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 600 |
| | $ | 454 |
|
| Accounts payable — | | | | |
| Affiliated | | 272 |
| | 248 |
|
| Other | | 272 |
| | 443 |
|
| Customer deposits | | 88 |
| | 87 |
|
| Accrued taxes — | | | | |
| Accrued income taxes | | 105 |
| | 2 |
|
| Other accrued taxes | | 117 |
| | 37 |
|
| Accrued interest | | 67 |
| | 66 |
|
| Accrued vacation pay | | 54 |
| | 54 |
|
| Accrued compensation | | 103 |
| | 131 |
|
| Other current liabilities | | 118 |
| | 82 |
|
| Total current liabilities | | 1,796 |
| | 1,604 |
|
| Long-term Debt | | 6,699 |
| | 6,176 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 3,965 |
| | 3,874 |
|
| Deferred credits related to income taxes | | 70 |
| | 72 |
|
| Accumulated deferred investment tax credits | | 120 |
| | 125 |
|
| Employee benefit obligations | | 319 |
| | 326 |
|
| Asset retirement obligations | | 1,288 |
| | 829 |
|
| Other cost of removal obligations | | 742 |
| | 744 |
|
| Other regulatory liabilities, deferred | | 152 |
| | 239 |
|
| Deferred over recovered regulatory clause revenues | | 128 |
| | 47 |
|
| Other deferred credits and liabilities | | 73 |
| | 79 |
|
| Total deferred credits and other liabilities | | 6,857 |
| | 6,335 |
|
| Total Liabilities | | 15,352 |
| | 14,115 |
|
| Redeemable Preferred Stock | | 85 |
| | 342 |
|
| Preference Stock | | 196 |
| | 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 | | 2,328 |
| | 2,304 |
|
| Retained earnings | | 2,483 |
| | 2,255 |
|
| Accumulated other comprehensive loss | | (33 | ) | | (29 | ) |
| Total common stockholder's equity | | 6,000 |
| | 5,752 |
|
| Total Liabilities and Stockholder's Equity | | $ | 21,633 |
| | $ | 20,552 |
|
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2016 | | 2015 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 159 |
| | $ | 179 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 211 |
| | 196 |
|
| Deferred income taxes | 68 |
| | 16 |
|
| Allowance for equity funds used during construction | (10 | ) | | (15 | ) |
| Other, net | (3 | ) | | 2 |
|
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 191 |
| | (3 | ) |
| -Fossil fuel stock | (27 | ) | | — |
|
| -Materials and supplies | (8 | ) | | 12 |
|
| -Other current assets | (79 | ) | | (80 | ) |
| -Accounts payable | (143 | ) | | (229 | ) |
| -Accrued taxes | 64 |
| | 246 |
|
| -Accrued compensation | (75 | ) | | (89 | ) |
| -Retail fuel cost over recovery | (1 | ) | | 34 |
|
| -Other current liabilities | (8 | ) | | 21 |
|
| Net cash provided from operating activities | 339 |
| | 290 |
|
| Investing Activities: | | | |
| Property additions | (313 | ) | | (325 | ) |
| Nuclear decommissioning trust fund purchases | (105 | ) | | (129 | ) |
| Nuclear decommissioning trust fund sales | 105 |
| | 129 |
|
| Cost of removal, net of salvage | (31 | ) | | (13 | ) |
| Change in construction payables | (15 | ) | | 34 |
|
| Other investing activities | (9 | ) | | (9 | ) |
| Net cash used for investing activities | (368 | ) | | (313 | ) |
| Financing Activities: | | | |
| Proceeds — | | | |
| Senior notes issuances | 400 |
| | 550 |
|
| Capital contributions from parent company | 236 |
| | 6 |
|
| Other long-term debt issuances | 45 |
| | — |
|
| Redemptions — Senior notes | (200 | ) | | (250 | ) |
| Payment of common stock dividends | (191 | ) | | (143 | ) |
| Other financing activities | (11 | ) | | (18 | ) |
| Net cash provided from financing activities | 279 |
| | 145 |
|
| Net Change in Cash and Cash Equivalents | 250 |
| | 122 |
|
| Cash and Cash Equivalents at Beginning of Period | 194 |
| | 273 |
|
| Cash and Cash Equivalents at End of Period | $ | 444 |
| | $ | 395 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid (received) during the period for -- | | | |
| Interest (net of $4 and $5 capitalized for 2016 and 2015, respectively) | $ | 76 |
| | $ | 68 |
|
| Income taxes, net | (162 | ) | | (136 | ) |
| Noncash transactions — Accrued property additions at end of period | 106 |
| | 41 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Assets | | At March 31,
2016 | | At December 31,
2015 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 444 |
| | $ | 194 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 311 |
| | 332 |
|
| Unbilled revenues | | 113 |
| | 119 |
|
| Under recovered regulatory clause revenues | | 22 |
| | 43 |
|
| Income taxes receivable, current | | — |
| | 142 |
|
| Other accounts and notes receivable | | 25 |
| | 20 |
|
| Affiliated companies | | 38 |
| | 50 |
|
| Accumulated provision for uncollectible accounts | | (10 | ) | | (10 | ) |
| Fossil fuel stock, at average cost | | 266 |
| | 239 |
|
| Materials and supplies, at average cost | | 406 |
| | 398 |
|
| Vacation pay | | 67 |
| | 66 |
|
| Prepaid expenses | | 129 |
| | 83 |
|
| Other regulatory assets, current | | 99 |
| | 115 |
|
| Other current assets | | 10 |
| | 10 |
|
| Total current assets | | 1,920 |
| | 1,801 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 25,187 |
| | 24,750 |
|
| Less accumulated provision for depreciation | | 8,791 |
| | 8,736 |
|
| Plant in service, net of depreciation | | 16,396 |
| | 16,014 |
|
| Nuclear fuel, at amortized cost | | 359 |
| | 363 |
|
| Construction work in progress | | 550 |
| | 801 |
|
| Total property, plant, and equipment | | 17,305 |
| | 17,178 |
|
| Other Property and Investments: | | | | |
| Equity investments in unconsolidated subsidiaries | | 68 |
| | 71 |
|
| Nuclear decommissioning trusts, at fair value | | 746 |
| | 737 |
|
| Miscellaneous property and investments | | 99 |
| | 96 |
|
| Total other property and investments | | 913 |
| | 904 |
|
| Deferred Charges and Other Assets: | | | | |
| Deferred charges related to income taxes | | 520 |
| | 522 |
|
| Deferred under recovered regulatory clause revenues | | 105 |
| | 99 |
|
| Other regulatory assets, deferred | | 1,105 |
| | 1,114 |
|
| Other deferred charges and assets | | 109 |
| | 103 |
|
| Total deferred charges and other assets | | 1,839 |
| | 1,838 |
|
| Total Assets | | $ | 21,977 |
| | $ | 21,721 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Liabilities and Stockholder's Equity | | At March 31,
2016 | | At December 31,
2015 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 200 |
| | $ | 200 |
|
| Accounts payable — | | | | |
| Affiliated | | 258 |
| | 278 |
|
| Other | | 271 |
| | 410 |
|
| Customer deposits | | 88 |
| | 88 |
|
| Accrued taxes — | | | | |
| Accrued income taxes | | 11 |
| | — |
|
| Other accrued taxes | | 62 |
| | 38 |
|
| Accrued interest | | 65 |
| | 73 |
|
| Accrued vacation pay | | 55 |
| | 55 |
|
| Accrued compensation | | 47 |
| | 119 |
|
| Liabilities from risk management activities | | 37 |
| | 55 |
|
| Other regulatory liabilities, current | | 175 |
| | 240 |
|
| Other current liabilities | | 39 |
| | 39 |
|
| Total current liabilities | | 1,308 |
| | 1,595 |
|
| Long-term Debt | | 6,894 |
| | 6,654 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 4,306 |
| | 4,241 |
|
| Deferred credits related to income taxes | | 69 |
| | 70 |
|
| Accumulated deferred investment tax credits | | 116 |
| | 118 |
|
| Employee benefit obligations | | 377 |
| | 388 |
|
| Asset retirement obligations | | 1,461 |
| | 1,448 |
|
| Other cost of removal obligations | | 705 |
| | 722 |
|
| Other regulatory liabilities, deferred | | 119 |
| | 136 |
|
| Deferred over recovered regulatory clause revenues | | 64 |
| | — |
|
| Other deferred credits and liabilities | | 78 |
| | 76 |
|
| Total deferred credits and other liabilities | | 7,295 |
| | 7,199 |
|
| Total Liabilities | | 15,497 |
| | 15,448 |
|
| Redeemable Preferred Stock | | 85 |
| | 85 |
|
| Preference Stock | | 196 |
| | 196 |
|
| 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 | | 2,585 |
| | 2,341 |
|
| Retained earnings | | 2,425 |
| | 2,461 |
|
| Accumulated other comprehensive loss | | (33 | ) | | (32 | ) |
| Total common stockholder's equity | | 6,199 |
| | 5,992 |
|
| Total Liabilities and Stockholder's Equity | | $ | 21,977 |
| | $ | 21,721 |
|
The accompanying notes as they relate to Alabama Power are an integral part of these condensed financial statements.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRDFIRST QUARTER 20152016 vs. THIRDFIRST QUARTER 2014
AND
YEAR-TO-DATE 2015 vs. YEAR-TO-DATE 2014
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, 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, reliability, fuel, capital expenditures, and restoration following major storms. AppropriatelyAlabama Power has various regulatory mechanisms that operate to address cost recovery. Effectively operating pursuant to these regulatory mechanisms and 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
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 |
| Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) |
| (% change) |
| (change in millions) |
| (% change) |
| $13 | | 4.6 | | $23 | | 3.6 |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) |
| $(14) | | (8.3) |
Alabama Power's net income after dividends on preferred and preference stock for the thirdfirst quarter 20152016 was $295$155 million compared to $282$169 million for the corresponding period in 2014.2015. The increasedecrease was primarily related to a decrease in revenue primarily due to milder weather in the first quarter 2016 as compared to the corresponding period in 2015, an increase in rates under rate stabilization and equalization (Rate RSE) effective January 1, 2015interest expense, and a decrease in depreciation,AFUDC. These decreases were partially offset by increases in other operating expenses. Alabama Power's net income after dividends on preferred and preference stock for year-to-date 2015 was $665 million compared to $642 million for the corresponding period in 2014. The increase was primarily related to an increase in revenues under Rate RSE, a decrease in depreciation,CNP Compliance and a decrease in dividends on preferred and preference stock, partially offset by an increase in non-fuel operations and maintenance expenses and interest expense.stock.
Retail Revenues
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $46 | | 3.0 | | $93 | | 2.3 |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(75) | | (5.9) |
In the thirdfirst quarter 2015,2016, retail revenues were $1.56$1.19 billion compared to $1.51$1.27 billion for the corresponding period in 2014. For year-to-date 2015, retail revenues were $4.15 billion compared to $4.06 billion for the corresponding period in 2014.2015.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of the changes in retail revenues were as follows:
| | | | | Third Quarter
2015 |
| Year-to-Date 2015 | | First Quarter 2016 |
| | | (in millions) |
| (% change) |
| (in millions) |
| (% change) | | (in millions) |
| (% change) |
| Retail – prior year | | $ | 1,512 |
| | | | $ | 4,058 |
| | | | $ | 1,268 |
| | |
| Estimated change resulting from – | | | | | | | | | | | | |
| Rates and pricing | | 69 |
| | 4.5 |
| | 172 |
| | 4.2 |
| | 33 |
| | 2.6 |
|
| Sales growth (decline) | | (2 | ) | | (0.1 | ) | | 8 |
| | 0.2 |
| |
| Sales growth | | | 8 |
| | 0.6 |
|
| Weather | | 2 |
| | 0.1 |
| | — |
| | — |
| | (45 | ) | | (3.5 | ) |
| Fuel and other cost recovery | | (23 | ) | | (1.5 | ) | | (87 | ) | | (2.1 | ) | | (71 | ) | | (5.6 | ) |
| Retail – current year | | $ | 1,558 |
| | 3.0 | % | | $ | 4,151 |
| | 2.3 | % | | $ | 1,193 |
| | (5.9 | )% |
Revenues associated with changes in rates and pricing increased in the thirdfirst quarter 2015 and year-to-date 20152016 when compared to the corresponding periodsperiod in 20142015 primarily due to aincreased revenues under Rate RSE increase effective January 1, 2015.CNP Compliance associated with increases in the average net investments. See Note 3 to the financial statements of Alabama Power under "Retail Regulatory Matters" in Item 8 of the Form 10-K for additional information.
Revenues attributable to sales growth remained relatively flatincreased in the thirdfirst quarter 2015 and increased slightly year-to-date 20152016 when compared to the corresponding periodsperiod in 2014.2015. Weather-adjusted residential and commercial KWH energy sales both increased 0.2%2.3% and 0.9%, respectively, for year-to-date 2015the first quarter 2016 when compared to the corresponding period in 2014.2015 as a result of increased customer demand. Industrial KWH energy sales decreased 0.3%3.5% for year-to-datethe first quarter 2016 when compared to the corresponding period in 2015 as a result of a decrease in demand resulting from changes in production levels primarily in the pipelines, primary metals, sector.and chemicals sectors. A strong dollar, low oil prices, and weak global growth conditions have constrained growth in the industrial sector.
Revenues resulting from changes in weather decreased in the first quarter 2016 due to milder weather experienced in Alabama Power's service territory compared to the corresponding period in 2015. For the first quarter 2016, the resulting decreases were 6.6% and 2.2% for residential and commercial sales revenue, respectively.
Fuel and other cost recovery revenues decreased in the thirdfirst quarter 2015 and year-to-date 20152016 when compared to the corresponding periodsperiod in 20142015 primarily due to a decrease in KWH generation and a decrease in the average cost of fuel.
Electric rates include provisions to recognize the full recovery of fuel costs, purchased power costs, PPAs certificated by the Alabama PSC, and costs associated with the natural disaster reserve. Under these provisions, fuel and other cost recovery revenues generally equal fuel and other cost recovery expenses and do not affect net income.
Wholesale Revenues – Non-Affiliates
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $(7) | | (9.7) | | $(34) | | (15.3) |
Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared See Note 3 to the costfinancial statements of Alabama Power's and the Southern Company system's generation, demand for energy within the Southern Company system's service territory, and the availabilityPower under "Retail Regulatory Matters" in Item 8 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 third quarter 2015, wholesale revenues from sales to non-affiliates were $65 million compared to $72 millionForm 10-K for the corresponding period in 2014. The decrease was primarily due to a 5.7% decrease in KWH sales and a 4.3% decrease in the price of energy. For year-to-date 2015, wholesale revenues from sales to non-affiliates were $188 million compared to $222 million for the corresponding period in 2014. The decrease was primarily due to an 8.7% decrease in KWH sales and a 7.3% decrease in the price of energy.additional information.
In 2014, Alabama Power's fuel diversity led to increased sales to non-affiliates due to higher natural gas prices. In 2015, lower natural gas prices and decreased availability of hydro generation resulted in lower sales of Alabama Power's generation to non-affiliates.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Wholesale Revenues – Affiliates
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $(11) | | (35.5) | | $(113) | | (67.3) |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $7 | | 46.7 |
Wholesale revenues from sales to affiliated companies 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 thirdfirst quarter 2015,2016, wholesale revenues from sales to affiliates were $20$22 million compared to $31$15 million for the corresponding period in 2014. The decrease was primarily due to a 22.9% decrease in the price of energy and a 13.8% decrease in2015. KWH sales. For year-to-date 2015, wholesale revenues from sales to affiliates were $55 million compared to $168 million for the corresponding period in 2014. The decrease wasincreased 78.5% primarily due toas a 52.8% decrease in KWH salesresult of higher available hydro generation and a 30.6% decrease in the price of energy.
In 2014, Alabama Power's fuel diversity led to increased sales to affiliates due to higherlower natural gas prices. In 2015, lower natural gas prices and decreased availability
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
| | | | | Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015
vs.
Year-to-Date 2014 | | First Quarter 2016
vs.
First Quarter 2015 |
| | | (change in millions) |
| (% change) | | (change in millions) | | (% change) | | (change in millions) |
| (% change) |
| Fuel | | $ | (34 | ) | | (7.7) | | $ | (227 | ) | | (17.6 | ) | | $ | (42 | ) | | (13.5) |
| Purchased power – non-affiliates | | (1 | ) | | (1.8) | | (11 | ) | | (7.2 | ) | | (5 | ) | | (12.2) |
| Purchased power – affiliates | | (3 | ) | | (5.6) | | 13 |
| | 9.3 |
| | (20 | ) | | (37.7) |
| Total fuel and purchased power expenses | | $ | (38 | ) | | $ | (225 | ) | | | | $ | (67 | ) | |
In the thirdfirst quarter 2015,2016, total fuel and purchased power expenses were $515$337 million compared to $553$404 million for the corresponding period in 2014.2015. The decrease was primarily due to a $36 million decrease in the average cost of fuel and a $9$33 million decrease related to the volume of KWHs purchased, partially offset by a $5 million increase in the average cost of purchased power and a $2 million increase related to the volume of KWHs generated.
For year-to-date 2015, fuel and purchased power expenses were $1.36 billion compared to $1.58 billion for the corresponding period in 2014. The decrease was primarily due to a $159 million decrease in the average cost of fuel, a $68$23 million decrease related to the volume of KWHs generated, and a $41$19 million decrease in the average cost of purchased power,fuel. These decreases were partially offset by a $43an $8 million increase related toin the volumeaverage cost of KWHs purchased.purchased power.
Fuel and purchased power energy transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through Alabama Power's energy cost recovery clause. Alabama Power, along with the Alabama PSC, continuously monitors the under/over recovered balance to determine whether adjustments to billing rates are required. See Note 3 to the financial statements of Alabama Power under "Retail Regulatory Matters – Rate ECR" in Item 8 of the Form 10-K for additional information.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of Alabama Power's generation and purchased power were as follows:
| | | | | Third Quarter 2015 | | Third Quarter
2014 | | Year-to-Date 2015 |
| Year-to-Date 2014 | | First Quarter 2016 | | First Quarter 2015 |
Total generation (billions of KWHs) | | 17 | | 17 | | 46 | | 50 | | 15 | | 15 |
Total purchased power (billions of KWHs) | | 2 | | 2 | | 5 | | 5 | | 1 | | 2 |
Sources of generation (percent) — | | |
| Coal | | 61 | | 59 | | 56 | | 55 | | 40 | | 47 |
| Nuclear | | 23 | | 23 | | 23 | | 23 | | 27 | | 26 |
| Gas | | 14 | | 16 | | 16 | | 16 | | 19 | | 19 |
| Hydro | | 2 | | 2 | | 5 | | 6 | | 14 | | 8 |
Cost of fuel, generated (cents per net KWH) — | | |
| Coal | | 2.79 | | 3.04 | | 2.85 | | 3.24 | | 2.86 | | 2.89 |
| Nuclear | | 0.81 | | 0.81 | | 0.81 | | 0.84 | | 0.77 | | 0.80 |
| Gas | | 3.11 | | 3.54 | | 3.08 | | 3.83 | | 2.46 | | 3.03 |
Average cost of fuel, generated (cents per net KWH)(a) | | 2.39 | | 2.61 | | 2.40 | | 2.75 | | 2.12 | | 2.33 |
Average cost of purchased power (cents per net KWH)(b) | | 6.90 | | 6.56 | | 5.56 | | 6.32 | | 5.16 | | 4.60 |
| |
(a) | KWHs generated by hydro are excluded from the average cost of fuel, generated. |
| |
(b) | Average cost of purchased power includes fuel, energy, and transmission purchased by Alabama Power for tolling agreements where power is generated by the provider. |
Fuel
In the thirdfirst quarter 2015,2016, fuel expense was $408$268 million compared to $442$310 million for the corresponding period in 2014.2015. The decrease was primarily due to a 12.1%18.8% decrease in the average cost of natural gas per KWH generated, which excludes fuel associated with tolling agreements, an 8.1%and a 15.0% decrease in the volume of KWHs generated by natural gas, and an 8.1% decrease in the average cost of coal, per KWH generated.
For year-to-date 2015, fuel expense was $1.06 billion compared to $1.29 billion for the corresponding period in 2014. The decrease was primarily due to a 19.7% decrease in the average cost of natural gas per KWH generated, which excludes fuel associated with tolling agreements, an 11.8% decrease in the average cost of coal per KWH generated, and a 6.7% decrease in the volume of KWHs generated. The decrease was partially offset by a 20.0% decrease6.8% increase in the volume of KWHs generated by hydro facilities.natural gas.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Purchased Power – Non-Affiliates
For year-to-date 2015,In the first quarter 2016, purchased power expense from non-affiliates was $142$36 million compared to $153$41 million for the corresponding period in 2014.2015. The decrease was related to a 19.5%10.7% decrease in the average cost per KWH purchased as a result of lower natural gas prices partially offset by a 15.3% increase in the amount of energy purchased due to the availability of lower cost generation as a result of more rainfall for hydro generation and lower natural gas prices.
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
For year-to-date 2015,In the first quarter 2016, purchased power expense from affiliates was $153$33 million compared to $140$53 million for the corresponding period in 2014.2015. The increasedecrease was related to a 13.9% increase48.2% decrease in the amount of energy purchased primarily due to milder weather and the availability of Southern Company's lower cost generation sourcesas a result of more rainfall for hydro generation and the decreased availability
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of hydro generation.lower natural gas prices. The increasedecrease was partially offset by a 3.6% decrease20.6% increase in the average cost of purchased power per KWH purchased due to lower natural gas prices.from affiliates.
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
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $37 | | 11.1 | | $151 | | 15.3 |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(7) | | (1.8) |
In the thirdfirst quarter 2015,2016, other operations and maintenance expenses were $371$392 million compared to $334$399 million for the corresponding period in 2014.2015. The increasedecrease was primarily due to an increasea decrease of $18$14 million in employee benefitsteam generation costs including pension costs. In addition, the implementation of an accounting order in 2014 allowed the deferral of non-nuclearprimarily due to scheduled outage costs. Alabama Power deferred approximately $16This decrease was partially offset by a $6 million of non-nuclear outage expendituresincrease in the third quarter 2014. Nuclearnuclear generation costs increased $9 million primarily due to outage amortization costs and labormaterials costs.
For year-to-date 2015, other operationsDepreciation and maintenance expenses were $1.14 billionAmortization
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $14 | | 8.9 |
In the first quarter 2016, depreciation and amortization was $172 million compared to $989$158 million for the corresponding period in 2014. Alabama Power deferred approximately $57 million2015. The increase was primarily the result of non-nuclear outage expendituresan increase in the first nine monthsdepreciation of 2014. In addition, employee benefit costs including pension costs increased $49 million andcompliance related steam generation costs increased $27 million primarily due to labor costs, maintenance costs, and other general operating expenses.
equipment. See Note 3 to the financial statements of Alabama Power under "Retail Regulatory Matters – Non-Nuclear Outage Accounting Order" and "– Cost of Removal Accounting Order"Rate CNP" in Item 8 of the Form 10-K for additional information. See Note (F) to the Condensed Financial Statements herein
Allowance for additional information related to pension costs.
Depreciation and AmortizationEquity Funds Used During Construction
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $(11) | | (6.3) | | $(40) | | (7.7) |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(5) | | (33.3) |
In the thirdfirst quarter 2015, depreciation and amortization2016, AFUDC equity was $163$10 million compared to $174$15 million for the corresponding period in 2014. For year-to-date 2015, depreciation2015. The decrease was primarily associated with capital projects being placed in service for environmental and amortization was $481 million compared to $521 million for the corresponding period in 2014. These decreases were primarily due to a decrease in depreciation rates related to environmental, steam generation transmission, and distribution assets effective January 1, 2015, as authorized by the FERC, partially offset by increases in plant in service.2016.
Interest Expense, Net of Amounts Capitalized
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $8 | | 12.7 | | $17 | | 9.0 |
In the third quarter 2015, interest expense, net of amounts capitalized was $71 million compared to $63 million for the corresponding period in 2014. For year-to-date 2015, interest expense, net of amounts capitalized was $205 million compared to $188 million for the corresponding period in 2014. These increases were primarily due to new debt issuances, a portion of which were used to redeem long-term debt, preferred stock, and preference stock.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Income (Expense),Interest Expense, Net of Amounts Capitalized
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $(10) | | N/M | | $(19) | | N/M |
N/M – Not meaningful |
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $8 | | 12.3 |
In the thirdfirst quarter 2015, other income (expense),2016, interest expense, net of amounts capitalized was $(7)$73 million compared to $3$65 million for the corresponding period in 2014.2015. The changeincrease was primarily due to a decrease in salestiming of non-utility property in 2015.debt issuances, maturities, and redemptions.
For year-to-date 2015, otherIncome Taxes
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(10) | | (8.8) |
In the first quarter 2016, income (expense), net was $(24)taxes were $103 million compared to $(5)$113 million for the corresponding period in 2014.2015. The changedecrease was primarily due to an increaselower pre-tax earnings.
Dividends on Preferred and Preference Stock
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(6) | | (60.0) |
In the first quarter 2016, dividends on preferred and preference stock were $4 million compared to $10 million for the corresponding period in donations2015. The decrease was primarily due to the redemption in May 2015 of certain series of preferred and a decreasepreference stock. See Note 6 to the financial statements of Alabama Power under "Redeemable Preferred Stock" in salesItem 8 of non-utility property in 2015.the Form 10-K for additional information.
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 and growing sales which are subject to a number of factors. These factors include weather, competition, new energy contracts with other utilities, energy conservation practiced by customers, the use of alternative energy sources 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. Demand for electricity for Alabama Power is partiallyprimarily driven by economic growth. The pace of economic growth and electricity demand may be affected by changes in regional and global economic conditions, which 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.modified, as compliance plans are revised or updated, and as legal challenges to rules are completed. Environmental compliance costs are
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recovered through Rate CNP.CNP Compliance. See Note 3 to the financial statements of Alabama Power under "Retail Regulatory Matters – Rate CNP" in Item 8 of the Form 10-K and "Retail Regulatory Matters – Rate CNP" herein for additional information. 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 Note 3 to the financial statements of Alabama Power under "Environmental Matters – New Source Review Actions" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for additional information.
On August 24, 2015, the U.S. District Court for the Northern District of Alabama entered an order approving the joint stipulation among Alabama Power, the EPA, and the U.S. Department of Justice modifying the 2006 consent decree to resolve all remaining claims for relief alleged in the case. Under the modified consent decree, Alabama Power will, without admitting liability, operate certain units subject to emission rates and an annual emissions cap;
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use only natural gas at certain other units, including a unit co-owned by Mississippi Power; retire certain units at Plants Gorgas and Barry; pay a $100,000 civil penalty; and invest $1.5 million in electric transportation infrastructure projects over three years.
Environmental Statutes and Regulations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental Statutes and Regulations" and – "Retail Regulatory Matters – Environmental Accounting Order" of Alabama Power in Item 7 of the Form 10-K and "Retail Regulatory Matters – Environmental Accounting Order" herein for additional information regarding Alabama Power's plan for compliance with environmental statutes and regulations.
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 regarding the EPA's proposed regulations governing emissions during startup, shutdown, or malfunction (SSM), the final MATS rule the Cross State Air Pollution Rule (CSAPR), and the eight-hour National Ambient Air Quality Standard (NAAQS) for ozone.regional haze regulations.
On April 25, 2016, in response to a June 12, 2015 U.S. Supreme Court opinion, the EPA published a finalits supplemental finding regarding consideration of costs in support of the MATS rule. This finding does not impact MATS rule requiring affected states (including Alabama)compliance requirements, costs, or deadlines, and all Alabama Power units that are subject to revise or remove state implementation plan (SIP) provisions regarding excess emissions that occur during periods of SSMthe MATS rule have completed the measures necessary to achieve compliance with the MATS rule by no later than November 22, 2016.the applicable deadlines.
Also on April 25, 2016, the EPA issued proposed revisions to the regional haze regulations. The ultimate impact of the final ruleproposed revisions will depend on the outcome oftheir ultimate adoption, implementation, and any legal challenges and the development and approval of SIPs by the affected states and cannot be determined at this time.
On June 29, 2015, the U.S. Supreme Court issued a decision finding that the EPA had failed to properly consider costs in its decision to regulate hazardous air pollutant emissions from electric generating units under the MATS rule and remanded the case to the U.S. Court of Appeals for the District of Columbia Circuit for further proceedings. The MATS rule remains in effect while the U.S. Court of Appeals for the District of Columbia Circuit and the EPA respond to the decision. The ultimate impact of this decision cannot be determined at this time.
On July 28, 2015, the U.S. Court of Appeals for the District of Columbia Circuit issued an opinion invalidating certain emissions budgets under the CSAPR Phase II emissions trading program for a number of states, including Alabama. The court's decision leaves the emissions trading program in place and remands the rule to the EPA for further action consistent with the court's decision. The court rejected all other pending challenges to the rule. The ultimate impact of this decision will depend on additional rulemaking and cannot be determined at this time.
On October 26, 2015, the EPA published a more stringent eight-hour NAAQS for ozone. This new standard could potentially require additional emission controls, improvements in control efficiency, and operational fuel changes and could affect the siting of new generating facilities. The ultimate impact of this matter will depend on any legal challenges and implementation of the final rule and cannot be determined at this time.FERC Matters
Water Quality
See MANAGEMENT'S DISCUSSION AND ANALYSIS BUSINESS – FUTURE EARNINGS POTENTIAL REGULATION – "Environmental Matters – Environmental Statutes and Regulations – Water Quality" of Alabama "Federal Power Act" in Item 71 of the Form 10-K for additional information regarding the EPA's and the U.S. Army Corpsa discussion of Engineers' rule revising the definition of waters of the U.S. under the Clean Water Act (CWA) and the EPA's revisions to effluent guidelines.
On June 29, 2015, the EPA and the U.S. Army Corps of Engineers jointly published a final rule revising the regulatory definition of waters of the U.S. for all CWA programs. The final rule significantly expands the scope of federal jurisdiction under the CWA and could have significant impacts on economic development projects which could affect customer demand growth. In addition, this rule could significantly increase permitting and regulatory requirements and costs associated with the siting of new facilities and the installation, expansion, and maintenance of transmission and distribution lines. The rule became effective August 28, 2015, but on October 9, 2015, the U.S. Court of Appeals for the Sixth Circuit issued an order staying implementation of the final rule. The ultimate impact
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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of the final rule will dependAlabama Power's hydroelectric developments on the outcome of this and other pending legal challenges and the EPA's and the U.S. Army Corps of Engineers' field-level implementation of the rule and cannot be determined at this time.
On November 3, 2015, the EPA published final revisions to technology-based limits for certain wastestreams from steam electric power plants. These revisions impose stringent steam effluent guidelines and technology requirements for wastewater discharges at affected units. Compliance with these revisions could result in significant additional capital expenditures and could affect future unit retirement and replacement decisions. The ultimate impact of these revisions will depend on any legal challenges and implementation of the final revisions and cannot be determined at this time.
Coal Combustion Residuals
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Coal Combustion Residuals" of Alabama Power in Item 7 of the Form 10-K for additional information regarding the EPA's regulation of CCR.
Coosa River. On April 17, 2015, the EPA published the Disposal of Coal Combustion Residuals from Electric Utilities final rule (CCR Rule) in the Federal Register, which became effective on October 19, 2015. Based on initial cost estimates for closure in place and groundwater monitoring of ash ponds pursuant to the CCR Rule, during the second quarter 2015, Alabama Power recorded incremental asset retirement obligations (ARO) of approximately $401 million related to the CCR Rule. As further analysis is performed, including evaluation of the expected method of compliance, refinement of assumptions underlying the cost estimates, such as the quantities of CCR at each site, and the determination of timing, including the potential for closing ash ponds prior to the end of their currently anticipated useful life, Alabama Power expects to continue to periodically update these estimates. The ultimate impact of the CCR Rule cannot be determined at this timeand will depend on Alabama Power's ongoing review of the CCR Rule, the results of initial and ongoing minimum criteria assessments, and the outcome of legal challenges. See Note (A) to the Condensed Financial Statements herein for additional information regarding Alabama Power's AROs as of September 30, 2015.
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 regarding the EPA's proposed regulation of CO2 from fossil-fuel-fired electric generating units.
On October 23, 2015, two final actions by the EPA that would limit CO2 emissions from fossil fuel-fired electric generating units were published in the Federal Register. One of the final actions contains specific emission standards governing CO2 emissions from new, modified, and reconstructed units. The other final action establishes guidelines for states to develop plans to meet EPA-mandated CO2 emission rates for existing units. The EPA's final guidelines require state plans to meet interim CO2 performance rates between 2022 and 2029 and final rates in 2030 and thereafter. At the same time, a proposed federal plan and proposed model rule were published that states can adopt or that would be put in place if, in response to the final guidelines, a state either does not submit a state plan or its plan is not approved by the EPA.
These guidelines and standards could result in operational restrictions and material compliance costs, including capital expenditures, which could affect future unit retirement and replacement decisions. Alabama Power's results of operations, cash flows, and financial condition could be significantly impacted if such costs are not recovered through regulated rates or through market-based contracts. However, the ultimate financial and operational impact of the final rules on Alabama Power cannot be determined at this time and will depend on numerous factors including the Southern Company system's ongoing review of the final rules; the outcome of any legal challenges, including legal challenges filed by Alabama Power; individual state implementation of the EPA's final guidelines, including the potential that state plans impose different standards; additional rulemaking activities in response to legal challenges and related court decisions; the impact of future changes in generation and emissions-related
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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technology and costs; the impact of future decisions regarding unit retirement and replacement, including the type and amount of any such replacement capacity; and the time periods over which compliance will be required.
FERC Matters
Alabama Power has authority from the FERC to sell electricity at market-based rates. Since 2008, that authority, for certain balancing authority areas, has been conditioned on compliance with the requirements of an energy auction, which the FERC found to be tailored mitigation that addresses potential market power concerns. In accordance with FERC regulations governing such authority, the traditional operating companies (including Alabama Power) and Southern Power filed a triennial market power analysis on June 30, 2014, which included continued reliance on the energy auction as tailored mitigation. On April 27, 2015,21, 2016, the FERC issued an order finding thatgranting in part and denying in part Alabama Power's rehearing request of the traditional operating companies' (includingnew license for Alabama Power's)Power's seven hydroelectric developments on the Coosa River. The order also denied rehearing requests filed by Alabama Rivers Alliance, American Rivers, the Georgia Environmental Protection Division, and Southern Power's existing tailored mitigation may not effectively mitigate the potential to exert market power in certain areas served by the traditional operating companies and in some adjacent areas. To retain market-based rate authority, the FERC directed the traditional operating companies (including Alabama Power) and Southern Power to show why market-based rate authority should not be revoked in these areas or to provide a mitigation plan to further address market power concerns. The traditional operating companies (including Alabama Power) and Southern Power filed a request for rehearing on May 27, 2015 and on June 26, 2015 filed their response with the FERC.Atlanta Regional Commission. The ultimate outcome of this matter cannot be determined at this time.
See REGULATION – "Federal Power Act" of Alabama Power in Item 1 of the Form 10-K for additional information regarding Alabama Power's Warrior River Project license.
On January 30, 2015, the U.S. Court of Appeals for the District of Columbia Circuit issued an order denying Smith Lake Improvement and Stakeholders Association's (SLISA) petition for en banc review of the court's dismissal of SLISA's appeal of the new Warrior River Project license. SLISA did not appeal this decision; therefore, this matter is now concluded and the FERC license is authorized as issued.
Retail Regulatory Matters
Alabama Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Alabama PSC. Alabama Power currently recovers its costs from the regulated retail business primarily through its Rate RSE, Rate CNP Compliance, rate energy cost recovery, and natural disaster reserve rate. In addition, the Alabama PSC issues accounting orders to address current events impacting Alabama Power. See NoteNotes 1 and 3 to the financial statements of Alabama Power under "Nuclear Outage Accounting Order" and Note 3 under "Retail Regulatory Matters"Matters," respectively, in Item 8 of the Form 10-K for additional information regarding Alabama Power's rate mechanisms and accounting orders. The recovery balance of each regulatory clause for Alabama Power is reported in Note (B) to the Condensed Financial Statements herein.
Rate CNP
See Note 3 to the financial statements of Alabama Power under "Retail Regulatory Matters – Rate CNP" and " – Non-Environmental Federal Mandated Costs Accounting Order" in Item 8 of the Form 10-K for additional information regarding Alabama Power's development of a revised cost recovery mechanism and the normal purchases and normal sales (NPNS) exception for wind PPAs.
On March 3, 2015, the Alabama PSC approved a modification to Rate CNP Environmental to include compliance costs for both environmental and non-environmental mandates. The recoverable non-environmental compliance costs result from laws, regulations, and other mandates directed at the utility industry involving the security, reliability, safety, sustainability, or similar considerations impacting Alabama Power's facilities or operations. This modification to Rate CNP Environmental was effective March 20, 2015 with the revised rate now defined as Rate CNP Compliance. Alabama Power incurred $50 million of non-environmental compliance costs during the first nine months of 2015 and will be limited to recovery of $50 million for the year. Customer rates will not be impacted before January 2016; therefore, the modification will increase the under recovered position for Rate CNP Compliance during 2015.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On August 14, 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-13, allowing the NPNS exception for physical forward transactions in nodal energy markets, consistent with the manner in which Alabama Power currently accounts for its two wind PPAs. The new accounting guidance will have no impact on Alabama Power's financial statements.
Environmental Accounting Order
In April 2015, as part of its environmental compliance strategy, Alabama Power retired Plant Gorgas Units 6 and 7. These units represented 200 MWs of Alabama Power's approximately 12,200 MWs of generating capacity. Additionally, in April 2015, Alabama Power ceased using coal at Plant Barry Units 1 and 2 (250 MWs), but such units will remain available on a limited basis with natural gas as the fuel source. No later than April 2016, Alabama Power expects to cease using coal at Plant Greene County Units 1 and 2 (300 MWs) and begin operating those units solely on natural gas. On August 24, 2015, the U.S. District Court for the Northern District of Alabama entered an order approving the joint stipulation in the New Source Review (NSR) action. In accordance with the joint stipulation, Alabama Power retired Plant Barry Unit 3 (225 MWs) and it is no longer available for generation. See Note (B) to the Condensed Financial Statements herein for additional information regarding the NSR actions.
In accordance with an accounting order from the Alabama PSC, Alabama Power transferred the unrecovered plant asset balances to a regulatory asset at their respective retirement dates. The regulatory asset will be amortized over the remaining useful lives, as established prior to the decision for retirement, and recovered through Rate CNP. As a result, these decisions will not have a significant impact on Alabama Power's financial statements. See Note 3 to the financial statements of Alabama Power under "Retail Regulatory Matters – Rate CNP" in Item 8 of the Form 10-K and "Retail Regulatory Matters – Rate CNP" herein for additional information.
Renewable Energy
On September 1, 2015, the Alabama PSC approved Alabama Power's petition for a Renewable Generation Certificate. This will allow Alabama Power to build its own renewable projects each less than 80 MWs or purchase power from other renewable-generated sources up to 500 MWs.
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 occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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) to the Condensed Financial Statements 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 Note (B) 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.
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
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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, ContingentAsset Retirement Obligations, and Pension and Other Postretirement Benefits.
Asset Retirement Obligations
AROs are computed as the fair value of the ultimate costs for an asset's future retirementBenefits, and are recorded in the period in which the liability is incurred. The costs are capitalized as part of the related long-lived asset and depreciated over the asset's useful life. In the absence of quoted market prices, AROs are estimated using present value techniques in which estimates of future cash outlays associated with the asset retirements are discounted using a credit-adjusted risk-free rate. Estimates of the timing and amounts of future cash outlays are based on projections of when and how the assets will be retired and the cost of future removal activities.
The liability for AROs primarily relates to the decommissioning of Alabama Power's nuclear facility, Plant Farley, and facilities that are subject to the CCR Rule, primarily ash ponds. In addition, Alabama Power has retirement obligations related to various landfill sites, underground storage tanks, asbestos removal, disposal of polychlorinated biphenyls in certain transformers, and disposal of sulfur hexafluoride gas in certain substation breakers. Alabama Power also has identified retirement obligations related to certain transmission and distribution facilities and certain wireless communication towers. However, liabilities for the removal of these assets have not been recorded because the settlement timing for the retirement obligations related to these assets is indeterminable and, therefore, the fair value of the retirement obligations cannot be reasonably estimated. A liability for these AROs will be recognized when sufficient information becomes available to support a reasonable estimation of the ARO.
As a result of the final CCR Rule discussed above, Alabama Power recorded new AROs for facilities that are subject to the CCR Rule. The cost estimates are based on information using various assumptions related to closure and post-closure costs, timing of future cash outlays, inflation and discount rates, and the potential methods for complying with the CCR Rule requirements for closure in place. As further analysis is performed, including evaluation of the expected method of compliance, refinement of assumptions underlying the cost estimates, such as the quantities of CCR at each site, and the determination of timing, including the potential for closing ash ponds prior to the end of their currently anticipated useful life, Alabama Power expects to continue to periodically update these estimates.
Given the significant judgment involved in estimating AROs, Alabama Power considers the liabilities for AROs to be critical accounting estimates.
See Note 1 to the financial statements of Alabama Power under "Asset Retirement Obligations and Other Costs of Removal" and "Nuclear Decommissioning" in Item 8 of the Form 10-K and Note (A) to the Condensed Financial Statements under "Asset Retirement Obligations" herein for additional information.Contingent Obligations.
Recently Issued Accounting Standards
The FASB's ASC 606, Revenue from Contracts with Customers, revises the accounting for revenue recognition effective for fiscal years beginning after December 15, 2017. Alabama Power continues to evaluate the requirements of ASC 606. The ultimate impact of the new standard has not yet been determined.
On April 7, 2015,February 25, 2016, the FASB issued Accounting Standards Update (ASU)ASU No. 2015-03,2016-02, Interest – Imputation of Interest (Subtopic 835-30):Leases Simplifying the Presentation of Debt Issuance Costs(Topic 842) (ASU 2016-02). The ASU 2016-02 requires that debt issuance costs relatedlessees to a recognized debt liability be presented inrecognize on the balance sheet as a direct deduction from the carrying amount of that debtlease liability and a right-of-use asset for all leases. ASU 2016-02 also changes the recognition, measurement, and presentation of expense associated with leases and provides clarification regarding the identification of certain components of contracts that would represent a lease. The accounting required by lessors is relatively unchanged. ASU 2016-02 is effective for fiscal years beginning after December 15, 2015. Early2018, with early adoption is permitted andpermitted. Alabama Power intendsis currently evaluating the new standard and has not yet determined its ultimate impact; however, adoption of ASU 2016-02 is expected to adopthave a significant impact on Alabama Power's balance sheet.
On March 30, 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation(Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 changes the accounting for income taxes and the cash flow presentation for share-based payment award transactions. Most significantly, entities are required to recognize all excess tax benefits and deficiencies related to the exercise or vesting of stock compensation as income tax expense or benefit in the fourth quarter 2015. The ASU is required to be applied retrospectively to all periods presented beginning in the year of adoption.income statement. Alabama Power currently reflects unamortized debt issuance costsrecognizes any excess tax benefits and deficiencies related to the exercise and vesting of stock compensation in other deferred chargesadditional paid-in capital. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. Alabama Power is currently evaluating the new standard and assets onhas not yet determined its balance sheet. Upon adoption,ultimate impact.
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the reclassification will not have a material impact on the results of operations, financial position, or cash flows of Alabama Power.
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 September 30, 2015.March 31, 2016. 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 "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.
Net cash provided from operating activities totaled $1.6 billion$339 million for the first ninethree months of 2015,2016, an increase of $181
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$49 million as compared to the first ninethree months of 2014.2015. The increase in net cash provided from operating activities was primarily due to the timing of income taxvendor payments and refunds associated with bonus depreciation anddeferred income taxes, partially offset by the collection of fuel cost recovery revenues partially offset by theand timing of payments of accounts payable.fossil fuel stock purchases. Net cash used for investing activities totaled $1.0 billion$368 million for the first ninethree months of 20152016 primarily due to gross property additions related to environmental, distribution, environmental, transmission,steam generation, and steam generation.transmission. Net cash used forprovided from financing activities totaled $194$279 million for the first ninethree months of 20152016 primarily due to the redemptions and repurchasesissuances of long-term debt and payments of common stock dividends,a capital contribution from Southern Company, partially offset by issuancesa redemption of long-term debt.debt and a common stock dividend payment. Fluctuations in cash flow from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.
Significant balance sheet changes for the first ninethree months of 20152016 include increases of $829 million in property, plant, and equipment, primarily due to additions to distribution, environmental, transmission, and steam generation, $336$250 million in cash and cash equivalents, $523$244 million in additional paid-in capital due to capital contributions from Southern Company, $240 million in long-term debt primarily due to the issuance of additional senior notes, and $459$127 million in AROs associated with the CCR Rule. See Note (A)property, plant, and equipment, primarily due to the Condensed Financial Statements herein for additional information relatedadditions to AROs.environmental, transmission, distribution, and nuclear generation. Other significant changes include decreases of $404$142 million in redeemable preferredincome taxes receivable following the receipt of a federal income tax refund and preference stock$139 million in accounts payable primarily due to redemptions in the second quarter 2015.timing of vendor payments.
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 statutes and 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 $600$200 million will be required through September 30, 2016March 31, 2017 to fund maturities of long-term debt. Subsequent to September 30, 2015, Alabama Power repaid at maturity $400 million aggregate principal amount of its Series 2012B 0.550% Senior Notes due October 15, 2015.
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 additional information on Alabama Power's environmental compliance strategy.
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 regulatory requirements; changes in the expected environmental compliance program; 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
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impacts; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.
Sources of Capital
Alabama Power plans to obtain the funds to meet its future capital needs through operating cash flows, short-term debt, term loans, external security issuances, 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 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.
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At September 30, 2015,March 31, 2016, Alabama Power had approximately $609$444 million of cash and cash equivalents. Committed credit arrangements with banks at September 30, 2015March 31, 2016 were as follows:
| | | Expires | Expires | | | | | | Due Within One Year | Expires | | | | | | Due Within One Year |
| 2016 | 2016 | | 2018 | | 2020 | | Total | | Unused | | Term Out | | No Term Out | 2016 | | 2018 | | 2020 | | Total | | Unused | | Term Out | | No Term Out |
| (in millions) | (in millions) | | | | (in millions) | | (in millions) | (in millions) | | (in millions) | | (in millions) |
| $ | 40 |
| | $ | 500 |
| | $ | 800 |
| | $ | 1,340 |
| | $ | 1,339 |
| | $ | — |
| | $ | 40 |
| 40 |
| | $ | 500 |
| | $ | 800 |
| | $ | 1,340 |
| | $ | 1,340 |
| | $ | — |
| | $ | 40 |
|
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.
As reflected in the table above, in August 2015, Alabama Power amended and restated its multi-year credit arrangement, which, among other things, extended the maturity date from 2018 to 2020. In addition, Alabama Power entered into a new $500 million three-year credit arrangement which replaced a majority of Alabama Power's bi-lateral credit arrangements.
A portion of the unused credit with banks is allocated to provide liquidity support to Alabama Power's variable rate pollution control revenue bonds and commercial paper borrowings. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of September 30, 2015 was approximately $810 million. In addition, at September 30, 2015, Alabama Power had $200 million of fixed rate pollution control revenue bonds outstanding that were required to be reoffered within the next 12 months, of which $120 million were remarketed subsequent to September 30, 2015.
Most of these bank credit arrangements, as well as Alabama Power's term loan arrangements, contain covenants that limit debt levels and contain cross acceleration provisions to other indebtedness (including guarantee obligations) of Alabama Power. Such cross acceleration provisions to other indebtedness would trigger an event of default if Alabama Power defaulted on indebtedness, the payment of which was then accelerated. Alabama Power is currently in compliance with all such covenants. None of the bank credit arrangements contain material adverse change clauses at the time of borrowings.
Subject to applicable market conditions, Alabama Power expects to renew or replace its bank credit arrangements as needed, prior to expiration. In connection therewith, Alabama Power may extend the maturity dates and/or increase or decrease the lending commitments thereunder.
A portion of the unused credit with banks is allocated to provide liquidity support to Alabama Power's pollution control revenue bonds and commercial paper borrowings. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of March 31, 2016 was approximately $810 million. In addition, at March 31, 2016, Alabama Power had $167 million of fixed rate pollution control revenue bonds outstanding that were required to be reoffered within the next 12 months.
In addition, Alabama Power has substantial cash flow from operating activities and access to capital markets, including a commercial paper program, to meet liquidity needs. 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
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 company under these arrangements are several and there is no cross-affiliate credit support.
Alabama Power had no commercial paper orDetails of short-term debt outstanding during the three-month period ended September 30, 2015.borrowings were as follows:
|
| | | | | | | | | | | |
| | | Short-term Debt During the Period(*) |
| | | Average Amount Outstanding | | Weighted Average Interest Rate | | Maximum Amount Outstanding |
| | | (in millions) | | | | (in millions) |
| Commercial paper | | $ | 19 |
| | 0.6 | % | | $ | 100 |
|
| |
| (*) | Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2016. No short-term debt was outstanding at March 31, 2016. |
Alabama Power believes the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, short-term bank notes, and operating cash flows.
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Credit Rating Risk
Alabama Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.
There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and/or Baa2 or below. These contracts are primarily for physical electricity purchases, fuel purchases, fuel transportation and storage, energy price risk management, and transmission. The maximum potential collateral requirements under these contracts at September 30, 2015March 31, 2016 were as follows:
| | | Credit Ratings | Maximum Potential Collateral Requirements | Maximum Potential Collateral Requirements |
| | (in millions) | (in millions) |
| At BBB and/or Baa2 | $ | 1 |
| $ | 1 |
|
| At BBB- and/or Baa3 | 2 |
| $ | 2 |
|
| Below BBB- and/or Baa3 | 372 |
| $ | 349 |
|
Included in these amounts are certain agreements that could require collateral in the event that one or more Southern Company system power pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of Alabama Power to access capital markets, and would be likely to impact the cost at which it does so.
On August 17, 2015, S&P downgraded the consolidated long-term issuer rating of Southern Company (including Alabama Power) to A- from A. S&P revised its credit rating outlook from negative to stable. Separately, on August 24, 2015, S&P revised its credit rating outlook from stable to negative following the announcement of the Merger.
Financing Activities
In March 2015,January 2016, Alabama Power issued $550$400 million aggregate principal amount of Series 2015A 3.750%2016A 4.30% Senior Notes due March 1, 2045.January 2, 2046. The proceeds were used to redeem $250repay at maturity $200 million aggregate principal amount of Alabama Power's Series DD 5.65%FF 5.20% Senior Notes due MarchJanuary 15, 20352016 and for general corporate purposes, including Alabama Power's continuous construction program.
In April 2015, Alabama Power purchased and held $80 million aggregate principal amount of Industrial Development Board of the City of Mobile, Alabama Pollution Control Revenue Bonds (Alabama Power Company Barry Plant Project), Series 2007-B. Alabama Power reoffered these bonds to the public in May 2015.
Also in April 2015, Alabama Power issued $175 million additional aggregate principal amount of its Series 2015A 3.750% Senior Notes due March 1, 2045 (Additional Series 2015A Senior Notes) and $250 million aggregate principal amount of its Series 2015B 2.800% Senior Notes due April 1, 2025 (Series 2015B Senior Notes). A portion of the proceeds of the Additional Series 2015A Senior Notes and the Series 2015B Senior Notes were used in May 2015 to redeem 6.48 million shares ($162 million aggregate stated capital) of Alabama Power's 5.20% Class A Preferred Stock at a redemption price of $25 per share plus accrued and unpaid dividends to the redemption date, 4.0 million shares ($100 million aggregate stated capital) of Alabama Power's 5.30% Class A Preferred Stock at a
ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
redemption price of $25 per share plus accrued and unpaid dividends to the redemption date, and 6.0 million shares ($150 million aggregate stated capital) of Alabama Power's 5.625% Series Preference Stock at a redemption price of $25 per share plus accrued and unpaid dividends to the redemption date, and the remaining net proceeds were used for general corporate purposes, including Alabama Power's continuous construction program.
In June 2015, $18.7 millionMarch 2016, Alabama Power entered into three bank term loan agreements with maturity dates of March 2021, in an aggregate principal amount of the Industrial Development Board$45 million, one of the Citywhich bears interest at 2.38% per annum and two of Mobile, Alabama Pollution Control Revenue Refunding Bonds (Alabama Power Company Project), Series 1994, $6.15 million aggregate principal amount of the Industrial Development Board of the City of Gadsden, Pollution Control Revenue Bonds (Alabama Power Company Project), Series 1994, and $28.85 million aggregate principal amount of the Industrial Development Board of the Town of Parrish, Pollution Control Revenue Refunding Bonds (Alabama Power Company Project), Series 1994A were repaid at maturity.
Subsequent to September 30, 2015, Alabama Power repaid at maturity $400 million aggregate principal amount of its Series 2012B 0.550% Senior Notes due October 15, 2015.which bear interest based on three-month LIBOR.
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.
GEORGIA POWER COMPANY
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
| | | | For the Three Months
Ended September 30, | | For the Nine Months
Ended September 30, | For the Three Months
Ended March 31, |
| | 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
| | (in millions) | | (in millions) | (in millions) |
| Operating Revenues: | | | | | | | | | | |
| Retail revenues | $ | 2,537 |
| | $ | 2,452 |
| | $ | 6,223 |
| | $ | 6,502 |
| $ | 1,717 |
| | $ | 1,814 |
|
| Wholesale revenues, non-affiliates | 55 |
| | 80 |
| | 173 |
| | 269 |
| 41 |
| | 68 |
|
| Wholesale revenues, affiliates | 5 |
| | 7 |
| | 18 |
| | 38 |
| 5 |
| | 8 |
|
| Other revenues | 94 |
| | 92 |
| | 271 |
| | 277 |
| 109 |
| | 88 |
|
| Total operating revenues | 2,691 |
| | 2,631 |
| | 6,685 |
| | 7,086 |
| 1,872 |
| | 1,978 |
|
| Operating Expenses: | | | | | | | | | | |
| Fuel | 706 |
| | 684 |
| | 1,735 |
| | 2,055 |
| 376 |
| | 526 |
|
| Purchased power, non-affiliates | 90 |
| | 77 |
| | 227 |
| | 219 |
| 83 |
| | 60 |
|
| Purchased power, affiliates | 148 |
| | 172 |
| | 411 |
| | 522 |
| 139 |
| | 149 |
|
| Other operations and maintenance | 462 |
| | 456 |
| | 1,405 |
| | 1,334 |
| 457 |
| | 474 |
|
| Depreciation and amortization | 214 |
| | 211 |
| | 633 |
| | 628 |
| 211 |
| | 216 |
|
| Taxes other than income taxes | 107 |
| | 111 |
| | 302 |
| | 320 |
| 97 |
| | 99 |
|
| Total operating expenses | 1,727 |
| | 1,711 |
| | 4,713 |
| | 5,078 |
| 1,363 |
| | 1,524 |
|
| Operating Income | 964 |
| | 920 |
| | 1,972 |
| | 2,008 |
| 509 |
| | 454 |
|
| Other Income and (Expense): | | | | | | | | | | |
| Interest expense, net of amounts capitalized | (90 | ) | | (88 | ) | | (272 | ) | | (262 | ) | (94 | ) | | (89 | ) |
| Other income (expense), net | 18 |
| | 14 |
| | 34 |
| | 29 |
| 17 |
| | 15 |
|
| Total other income and (expense) | (72 | ) | | (74 | ) | | (238 | ) | | (233 | ) | (77 | ) | | (74 | ) |
| Earnings Before Income Taxes | 892 |
| | 846 |
| | 1,734 |
| | 1,775 |
| 432 |
| | 380 |
|
| Income taxes | 337 |
| | 317 |
| | 657 |
| | 660 |
| 160 |
| | 140 |
|
| Net Income | 555 |
| | 529 |
| | 1,077 |
| | 1,115 |
| 272 |
| | 240 |
|
| Dividends on Preferred and Preference Stock | 4 |
| | 4 |
| | 13 |
| | 13 |
| 4 |
| | 4 |
|
| Net Income After Dividends on Preferred and Preference Stock | $ | 551 |
| | $ | 525 |
| | $ | 1,064 |
| | $ | 1,102 |
| $ | 268 |
| | $ | 236 |
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| | | | For the Three Months
Ended September 30, | | For the Nine Months
Ended September 30, | For the Three Months
Ended March 31, |
| | 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
| | (in millions) | | (in millions) | (in millions) |
| Net Income | $ | 555 |
| | $ | 529 |
| | $ | 1,077 |
| | $ | 1,115 |
| $ | 272 |
| | $ | 240 |
|
| Other comprehensive income (loss): | | | | | | | | | | |
| Qualifying hedges: | | | | | | | | | | |
Changes in fair value, net of tax of $(7), $-, $(7) and $-,
respectively | (11 | ) | | — |
| | (10 | ) | | — |
| |
Reclassification adjustment for amounts included in net
income, net of tax of $-, $1, $1 and $1, respectively | 1 |
| | — |
| | 2 |
| | 1 |
| |
| Changes in fair value, net of tax of $- and $(9), respectively | | — |
| | (14 | ) |
Reclassification adjustment for amounts included in net
income, net of tax of $- and $-, respectively | | 1 |
| | — |
|
| Total other comprehensive income (loss) | (10 | ) | | — |
| | (8 | ) | | 1 |
| 1 |
| | (14 | ) |
| Comprehensive Income | $ | 545 |
| | $ | 529 |
| | $ | 1,069 |
| | $ | 1,116 |
| $ | 273 |
| | $ | 226 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
GEORGIA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) | | | | For the Nine Months
Ended September 30, | For the Three Months
Ended March 31, |
| | 2015 | | 2014 | 2016 | | 2015 |
| | (in millions) | (in millions) |
| Operating Activities: | | | | | | |
| Net income | $ | 1,077 |
| | $ | 1,115 |
| $ | 272 |
| | $ | 240 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | | | | |
| Depreciation and amortization, total | 766 |
| | 757 |
| 261 |
| | 256 |
|
| Deferred income taxes | 12 |
| | 121 |
| 55 |
| | (7 | ) |
| Allowance for equity funds used during construction | (24 | ) | | (29 | ) | (14 | ) | | (15 | ) |
| Retail fuel cost over recovery — long-term | — |
| | (44 | ) | |
| Deferred expenses | (45 | ) | | (35 | ) | 38 |
| | 33 |
|
| Pension, postretirement, and other employee benefits | 40 |
| | 28 |
| |
| Other, net | 30 |
| | 24 |
| (9 | ) | | 4 |
|
| Changes in certain current assets and liabilities — | | | | | | |
| -Receivables | 37 |
| | (377 | ) | 155 |
| | 166 |
|
| -Fossil fuel stock | 141 |
| | 337 |
| 36 |
| | 67 |
|
| -Prepaid income taxes | 244 |
| | 19 |
| 38 |
| | 170 |
|
| -Other current assets | (17 | ) | | (24 | ) | 12 |
| | (13 | ) |
| -Accounts payable | (118 | ) | | (7 | ) | 4 |
| | (261 | ) |
| -Accrued taxes | 54 |
| | 148 |
| (235 | ) | | (217 | ) |
| -Accrued compensation | (34 | ) | | 20 |
| (66 | ) | | (81 | ) |
| -Retail fuel cost over recovery — short-term | — |
| | (14 | ) | |
| -Other current liabilities | (3 | ) | | 29 |
| 16 |
| | 21 |
|
| Net cash provided from operating activities | 2,160 |
| | 2,068 |
| 563 |
| | 363 |
|
| Investing Activities: | | | | | | |
| Property additions | (1,321 | ) | | (1,364 | ) | (553 | ) | | (422 | ) |
| Nuclear decommissioning trust fund purchases | (815 | ) | | (457 | ) | (211 | ) | | (161 | ) |
| Nuclear decommissioning trust fund sales | 810 |
| | 455 |
| 206 |
| | 155 |
|
| Cost of removal, net of salvage | (57 | ) | | (39 | ) | (15 | ) | | (16 | ) |
| Change in construction payables, net of joint owner portion | 44 |
| | 16 |
| (101 | ) | | 37 |
|
| Prepaid long-term service agreements | (60 | ) | | (66 | ) | (11 | ) | | (9 | ) |
| Other investing activities | 11 |
| | (3 | ) | (4 | ) | | 11 |
|
| Net cash used for investing activities | (1,388 | ) | | (1,458 | ) | (689 | ) | | (405 | ) |
| Financing Activities: | | | | | | |
| Decrease in notes payable, net | (26 | ) | | (836 | ) | |
| Increase (decrease) in notes payable, net | | (158 | ) | | 434 |
|
| Proceeds — | | | | | | |
| Capital contributions from parent company | 41 |
| | 39 |
| 218 |
| | 11 |
|
| Pollution control revenue bonds | 274 |
| | 40 |
| |
| FFB loan | 600 |
| | 1,000 |
| |
| Senior notes issuances | | 650 |
| | — |
|
| Short-term borrowings | 250 |
| | — |
| — |
| | 250 |
|
| Redemptions and repurchases — | | | | | | |
| Pollution control revenue bonds | (268 | ) | | (37 | ) | (4 | ) | | — |
|
| Senior notes | (525 | ) | | — |
| (250 | ) | | — |
|
| Short-term borrowings | (250 | ) | | — |
| |
| Payment of preferred and preference stock dividends | (13 | ) | | (13 | ) | |
| Payment of common stock dividends | (776 | ) | | (715 | ) | (326 | ) | | (259 | ) |
| FFB loan issuance costs | — |
| | (49 | ) | |
| Other financing activities | (18 | ) | | (6 | ) | (11 | ) | | (5 | ) |
| Net cash used for financing activities | (711 | ) | | (577 | ) | |
| Net cash provided from financing activities | | 119 |
| | 431 |
|
| Net Change in Cash and Cash Equivalents | 61 |
| | 33 |
| (7 | ) | | 389 |
|
| Cash and Cash Equivalents at Beginning of Period | 24 |
| | 30 |
| 67 |
| | 24 |
|
| Cash and Cash Equivalents at End of Period | $ | 85 |
| | $ | 63 |
| $ | 60 |
| | $ | 413 |
|
| Supplemental Cash Flow Information: | | | | | | |
| Cash paid during the period for — | | | | |
| Interest (net of $10 and $13 capitalized for 2015 and 2014, respectively) | $ | 251 |
| | $ | 235 |
| |
| Cash paid (received) during the period for — | | | | |
| Interest (net of $5 and $6 capitalized for 2016 and 2015, respectively) | | $ | 86 |
| | $ | 79 |
|
| Income taxes, net | 311 |
| | 309 |
| (88 | ) | | (34 | ) |
| Noncash transactions — Accrued property additions at end of period | 192 |
| | 220 |
| 290 |
| | 177 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
| | | Assets | | At September 30,
2015 | | At December 31,
2014 | | At March 31,
2016 | | At December 31,
2015 |
| | | (in millions) | | (in millions) |
| Current Assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 85 |
| | $ | 24 |
| | $ | 60 |
| | $ | 67 |
|
| Receivables — | | | | | | | | |
| Customer accounts receivable | | 758 |
| | 553 |
| | 509 |
| | 541 |
|
| Unbilled revenues | | 243 |
| | 201 |
| | 182 |
| | 188 |
|
| Joint owner accounts receivable | | 52 |
| | 121 |
| | 73 |
| | 227 |
|
| Income taxes receivable, current | | | — |
| | 114 |
|
| Other accounts and notes receivable | | 47 |
| | 61 |
| | 37 |
| | 57 |
|
| Affiliated companies | | 22 |
| | 18 |
| | 16 |
| | 18 |
|
| Accumulated provision for uncollectible accounts | | (7 | ) | | (6 | ) | | (2 | ) | | (2 | ) |
| Fossil fuel stock, at average cost | | 298 |
| | 439 |
| | 366 |
| | 402 |
|
| Materials and supplies, at average cost | | 439 |
| | 438 |
| | 463 |
| | 449 |
|
| Vacation pay | | 90 |
| | 91 |
| | 92 |
| | 91 |
|
| Prepaid income taxes | | 24 |
| | 278 |
| | 118 |
| | 156 |
|
| Other regulatory assets, current | | 124 |
| | 136 |
| | 126 |
| | 123 |
|
| Other current assets | | 94 |
| | 74 |
| | 61 |
| | 92 |
|
| Total current assets | | 2,269 |
| | 2,428 |
| | 2,101 |
| | 2,523 |
|
| Property, Plant, and Equipment: | | | | | | | | |
| In service | | 31,546 |
| | 31,083 |
| | 32,318 |
| | 31,841 |
|
| Less accumulated provision for depreciation | | 11,046 |
| | 11,222 |
| | 11,045 |
| | 10,903 |
|
| Plant in service, net of depreciation | | 20,500 |
| | 19,861 |
| | 21,273 |
| | 20,938 |
|
| Other utility plant, net | | 10 |
| | 211 |
| | 158 |
| | 171 |
|
| Nuclear fuel, at amortized cost | | 544 |
| | 563 |
| | 582 |
| | 572 |
|
| Construction work in progress | | 4,390 |
| | 4,031 |
| | 4,817 |
| | 4,775 |
|
| Total property, plant, and equipment | | 25,444 |
| | 24,666 |
| | 26,830 |
| | 26,456 |
|
| Other Property and Investments: | | | | | | | | |
| Equity investments in unconsolidated subsidiaries | | 62 |
| | 58 |
| | 60 |
| | 64 |
|
| Nuclear decommissioning trusts, at fair value | | 761 |
| | 789 |
| | 793 |
| | 775 |
|
| Miscellaneous property and investments | | 38 |
| | 38 |
| | 43 |
| | 43 |
|
| Total other property and investments | | 861 |
| | 885 |
| | 896 |
| | 882 |
|
| Deferred Charges and Other Assets: | | | | | | | | |
| Deferred charges related to income taxes | | 678 |
| | 698 |
| | 680 |
| | 679 |
|
| Deferred under recovered regulatory clause revenues | | — |
| | 197 |
| |
| Other regulatory assets, deferred | | 2,075 |
| | 1,753 |
| | 2,138 |
| | 2,152 |
|
| Other deferred charges and assets | | 399 |
| | 403 |
| | 157 |
| | 173 |
|
| Total deferred charges and other assets | | 3,152 |
| | 3,051 |
| | 2,975 |
| | 3,004 |
|
| Total Assets | | $ | 31,726 |
| | $ | 31,030 |
| | $ | 32,802 |
| | $ | 32,865 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
GEORGIA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
| | | Liabilities and Stockholder's Equity | | At September 30,
2015 | | At December 31,
2014 | | At March 31,
2016 | | At December 31,
2015 |
| | | (in millions) | | (in millions) |
| Current Liabilities: | | | | | | | | |
| Securities due within one year | | $ | 1,362 |
| | $ | 1,154 |
| | $ | 458 |
| | $ | 712 |
|
| Notes payable | | 130 |
| | 156 |
| | — |
| | 158 |
|
| Accounts payable — | | | | | | | | |
| Affiliated | | 444 |
| | 451 |
| | 370 |
| | 411 |
|
| Other | | 515 |
| | 555 |
| | 549 |
| | 750 |
|
| Customer deposits | | 260 |
| | 253 |
| | 266 |
| | 264 |
|
| Accrued taxes — | | | | | | | | |
| Accrued income taxes | | 75 |
| | 1 |
| | — |
| | 12 |
|
| Other accrued taxes | | 311 |
| | 332 |
| | 101 |
| | 325 |
|
| Accrued interest | | 99 |
| | 96 |
| | 102 |
| | 99 |
|
| Accrued vacation pay | | 62 |
| | 63 |
| | 62 |
| | 62 |
|
| Accrued compensation | | 120 |
| | 153 |
| | 60 |
| | 142 |
|
| Asset retirement obligations, current | | | 184 |
| | 179 |
|
| Other current liabilities | | 345 |
| | 256 |
| | 211 |
| | 181 |
|
| Total current liabilities | | 3,723 |
| | 3,470 |
| | 2,363 |
| | 3,295 |
|
| Long-term Debt | | 8,709 |
| | 8,683 |
| | 10,268 |
| | 9,616 |
|
| Deferred Credits and Other Liabilities: | | | | | | | | |
| Accumulated deferred income taxes | | 5,493 |
| | 5,507 |
| | 5,686 |
| | 5,627 |
|
| Deferred credits related to income taxes | | 101 |
| | 106 |
| | 105 |
| | 105 |
|
| Accumulated deferred investment tax credits | | 188 |
| | 196 |
| | 201 |
| | 204 |
|
| Employee benefit obligations | | 893 |
| | 903 |
| | 930 |
| | 949 |
|
| Asset retirement obligations | | 1,332 |
| | 1,223 |
| |
| Asset retirement obligations, deferred | | | 1,699 |
| | 1,737 |
|
| Other deferred credits and liabilities | | 266 |
| | 255 |
| | 395 |
| | 347 |
|
| Total deferred credits and other liabilities | | 8,273 |
| | 8,190 |
| | 9,016 |
| | 8,969 |
|
| Total Liabilities | | 20,705 |
| | 20,343 |
| | 21,647 |
| | 21,880 |
|
| Preferred Stock | | 45 |
| | 45 |
| | 45 |
| | 45 |
|
| Preference Stock | | 221 |
| | 221 |
| | 221 |
| | 221 |
|
| Common Stockholder's Equity: | | | | | | | | |
| Common stock, without par value — | | | | | | | | |
| Authorized — 20,000,000 shares | | | | | | | | |
| Outstanding — 9,261,500 shares | | 398 |
| | 398 |
| | 398 |
| | 398 |
|
| Paid-in capital | | 6,251 |
| | 6,196 |
| | 6,504 |
| | 6,275 |
|
| Retained earnings | | 4,123 |
| | 3,835 |
| | 4,002 |
| | 4,061 |
|
| Accumulated other comprehensive loss | | (17 | ) | | (8 | ) | | (15 | ) | | (15 | ) |
| Total common stockholder's equity | | 10,755 |
| | 10,421 |
| | 10,889 |
| | 10,719 |
|
| Total Liabilities and Stockholder's Equity | | $ | 31,726 |
| | $ | 31,030 |
| | $ | 32,802 |
| | $ | 32,865 |
|
The accompanying notes as they relate to Georgia Power are an integral part of these condensed financial statements.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRDFIRST QUARTER 20152016 vs. THIRDFIRST QUARTER 2014
AND
YEAR-TO-DATE 2015 vs. YEAR-TO-DATE 2014
OVERVIEW
Georgia Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service territory located within the State of Georgia and to wholesale customers in the Southeast.
Many factors affect the opportunities, challenges, and risks of Georgia Power's business of selling electricity. These factors include the ability to maintain a constructive regulatory environment, to maintain and grow energy sales, 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, reliability, and fuel. In addition, construction continues on Plant Vogtle Units 3 and 4 in which4. Georgia Power will own a 45.7% interest in these two nuclear generating units to increase its generation diversity and meet future supply needs. AppropriatelyGeorgia Power has various regulatory mechanisms that operate to address cost recovery. Effectively operating pursuant to these regulatory mechanisms andappropriately balancing required costs and capital expenditures with customer prices will continue to challenge Georgia Power for the foreseeable future.
Pursuant to the terms and conditions of a settlement agreement related to Southern Company's proposed acquisition of AGL Resources approved by the Georgia PSC on April 14, 2016, Georgia Power's 2013 ARP will continue in effect until December 31, 2019, and Georgia Power will be required to file its next base rate case by July 1, 2019. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters" herein for additional information.
Georgia Power continues to focus on several key performance indicators. These indicators include, but are not limited to, customer satisfaction, plant availability, system reliability, the execution of major construction projects, and net income after dividends on preferred and preference stock. For additional information on these indicators, see MANAGEMENT'S DISCUSSION AND ANALYSIS – OVERVIEW – "Key Performance Indicators" of Georgia Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) |
| (% change) | | (change in millions) | | (% change) |
| $26 | | 5.0 | | $(38) | | (3.4) |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) |
| $32 | | 13.6 |
Georgia Power's net income after dividends on preferred and preference stock for the thirdfirst quarter 20152016 was $551$268 million compared to $525$236 million for the corresponding period in 2014. For year-to-date 2015, net income after dividends on preferred and preference stock was $1.06 billion compared to $1.10 billion for the corresponding period in 2014.2015. The increase in the thirdfirst quarter 20152016 was primarily due to an increase in retail base revenues effective January 1, 2015,2016, as authorized by the Georgia PSC, and lower non-fuel operating expenses, partially offset by higher non-fuel operating expenses. The decrease in year-to-date 2015 was primarilylower retail revenues due to higher non-fuel operating expenses andmilder weather in the correction of an error affecting billings since 2013 to a small number of large commercial and industrial customers under a rate plan allowing for variable demand-driven pricing, partially offset by increases in retail base revenues effective January 1, 2015,first quarter 2016 as authorized by the Georgia PSC.
See Note (A)compared to the Condensed Financial Statements hereincorresponding period in 2015.
Retail Revenues
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) |
| $(97) | | (5.3) |
In the first quarter 2016, retail revenues were $1.72 billion compared to $1.81 billion for additional information.the corresponding period in 2015.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) |
| (% change) | | (change in millions) |
| (% change) |
| $85 | | 3.5 | | $(279) | | (4.3) |
In the third quarter 2015, retail revenues were $2.54 billion compared to $2.45 billion for the corresponding period in 2014. For year-to-date 2015, retail revenues were $6.22 billion compared to $6.50 billion for the corresponding period in 2014.
Details of the changes in retail revenues were as follows:
| | | | | Third Quarter
2015 | | Year-to-Date 2015 | | First Quarter 2016 |
| | | (in millions) |
| (% change) | | (in millions) | | (% change) | | (in millions) |
| (% change) |
| Retail – prior year | | $ | 2,452 |
| | | | $ | 6,502 |
| | | | $ | 1,814 |
| | |
| Estimated change resulting from – | | | | | | | | | | | | |
| Rates and pricing | | 29 |
| | 1.2 |
| | 32 |
| | 0.5 |
| | 43 |
| | 2.4 |
|
| Sales growth | | 13 |
| | 0.5 |
| | 49 |
| | 0.7 |
| | 8 |
| | 0.4 |
|
| Weather | | 44 |
| | 1.8 |
| | 50 |
| | 0.8 |
| | (32 | ) | | (1.8 | ) |
| Fuel cost recovery | | (1 | ) | | — |
| | (410 | ) | | (6.3 | ) | | (116 | ) | | (6.4 | ) |
| Retail – current year | | $ | 2,537 |
| | 3.5 | % | | $ | 6,223 |
| | (4.3 | )% | | $ | 1,717 |
| | (5.4 | )% |
Revenues associated with changes in rates and pricing increased in the thirdfirst quarter 20152016 when compared to the corresponding period in 20142015 primarily due to increases in base tariff increasestariffs approved under the 2013 ARP and increases in collections for financing costs related to the construction of Plant Vogtle Units 3 and 4 through the NCCR tariff, which were bothall effective January 1, 2015 as well as higher contributions from variable demand-driven pricing from commercial and industrial customers. Revenues associated with changes in rates and pricing increased for year-to-date 2015 when compared to the corresponding period in 2014 primarily due to the base tariff increases and increases in collections for financing costs described above, partially offset by the correction of an error affecting billings since 2013 to a small number of large commercial and industrial customers under a rate plan allowing for variable demand-driven pricing.2016. See Note 3 to the financial statements of Georgia Power under "Retail Regulatory Matters – Rate Plans" and " – Nuclear Construction" in Item 8 of the Form 10-K and Note (A) to the Condensed Financial Statements herein for additional information.
Revenues attributable to changes in sales increased in the thirdfirst quarter andyear-to-date 2015 when compared to the corresponding periods in 2014. Weather-adjusted residential KWH sales increased 0.1%, weather-adjusted commercial KWH sales increased 1.8%, and weather-adjusted industrial KWH sales decreased 0.3% in the third quarter 20152016 when compared to the corresponding period in 2014. For year-to-date 2015, weather-adjusted2015. Weather-adjusted residential KWH sales increased 1.1%0.5%, weather-adjusted commercial KWH sales increased 1.3%0.8%, and weather-adjusted industrial KWH sales increased 1.2%1.4% in the first quarter 2016 when compared to the corresponding period in 2014. An increase2015. Increases of approximately 26,00024,000 residential customers since September 30, 2014 contributed to the increase in weather-adjusted residential KWH sales. Increased customer usage and an increase of approximately 3,000 commercial customers since September 30, 2014March 31, 2015 contributed to the increaseincreases in weather-adjusted residential KWH sales and weather-adjusted commercial sales.KWH sales, respectively. Increased demand in the paper, stone, clay, and glass, food processing, transportation, rubber, and pipelinenon-manufacturing sectors was the main contributor to the year-to-date increase in weather-adjusted industrial KWH sales, partially offset by a decreasedecreased demand in the chemicalspipeline, military, and primary metalstextiles sectors. A strong dollar, low oil prices, and weak global growth conditions have constrained growth in the industrial sector.
Fuel revenues and costs are allocated between retail and wholesale jurisdictions. Retail fuel cost recovery revenues decreased $1 million and $410$116 million in the thirdfirst quarter and year-to-date 2015, respectively,2016 when compared to the corresponding periodsperiod in 20142015 primarily due to lower coal and natural gas costs.prices, more available hydro generation, and lower energy sales resulting from milder weather in the first quarter 2016 as compared to the corresponding period in 2015. Electric rates include provisions to adjust
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these fuel cost recovery provisions, fuel revenues generally equal fuel expenses and do not affect net income. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Fuel Cost Recovery" herein for additional information.
Wholesale Revenues – Non-Affiliates
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $(25) | | (31.3) | | $(96) | | (35.7) |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(27) | | (39.7) |
Wholesale revenues from sales to non-affiliates consist of PPAs and short-term opportunity sales. Wholesale revenues from PPAs have both capacity and energy components. Wholesale capacity revenues from PPAs are recognized either on a levelized basis over the appropriate contract period or the amounts billable under the contract terms and provide for recovery of fixed costs and a return on investment. Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Georgia Power's and the Southern Company system's generation, demand for energy within the Southern Company system's service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
have a significant impact on net income. Short-term opportunity sales are made at market-based rates that generally provide a margin above Georgia Power's variable cost to produce the energy.
In the thirdfirst quarter 2015,2016, wholesale revenues from sales to non-affiliates were $55$41 million compared to $80$68 million for the corresponding period in 20142015 related to an $8a $14 million decrease in energy revenues and a $17 million decrease in capacity revenues. For year-to-date 2015, wholesale revenues from sales to non-affiliates were $173 million compared to $269 million for the corresponding period in 2014 related to a $57 million decrease in energy revenues and a $39$13 million decrease in capacity revenues. The decreasesdecrease in energy revenues werewas primarily due to lower natural gas prices.fuel prices, including higher hydro generation availability. The decreasesdecrease in capacity revenues reflectreflects the expirationretirement of wholesale contracts in December 2014 and the retirements14 coal-fired generating units after March 31, 2015 as a result of Plant Branch Units 1, 3, and 4, Plant Yates Units 1 through 5, and Plant McManus Units 1 and 2.Georgia Power's environmental compliance strategy.
Wholesale Revenues – Affiliates
| | | Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 | |
| First Quarter 2016 vs. First Quarter 2015 | | First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) | | (change in millions) | | (% change) |
| (% change) |
$(2)(3) | | (28.6) | | $(20) | | (52.6) | | (37.5) |
Wholesale revenues from sales to affiliated companies will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since the energy is generally sold at marginal cost.
In the thirdfirst quarter 2015,2016, wholesale revenues from sales to affiliates were $5 million compared to $7$8 million for the corresponding period in 2014. For year-to-date 2015, wholesale revenues from sales to affiliates were $18 million compared to $38 million for the corresponding period in 2014.2015. The decreases weredecrease was due to lower natural gasfuel prices and a 41.7% and 52.9%44.4% decrease in KWH sales in the thirdfirst quarter 2015 and year-to-date 2015, respectively,2016, primarily due to the higher cost of Georgia Power-owned generation as compared to the market cost of available energy.
Other Revenues
Table of Contents |
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) |
| $21 | | 23.9 |
GEORGIA POWER COMPANYIn the first quarter 2016, other revenues were $109 million compared to $88 million for the corresponding period in 2015. The increase was primarily due to a $14 million increase related to an adjustment for customer temporary facilities service revenues and a $3 million increase in outdoor lighting revenues.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
| | | | | Third Quarter 2015
vs.
Third Quarter 2014 | | Year-to-Date 2015
vs.
Year-to-Date 2014 | | First Quarter 2016
vs.
First Quarter 2015 |
| | | (change in millions) |
| (% change) | | (change in millions) | | (% change) | | (change in millions) |
| (% change) |
| Fuel | | $ | 22 |
| | 3.2 |
| | $ | (320 | ) | | (15.6 | ) | | $ | (150 | ) | | (28.5 | ) |
| Purchased power – non-affiliates | | 13 |
| | 16.9 |
| | 8 |
| | 3.7 |
| | 23 |
| | 38.3 |
|
| Purchased power – affiliates | | (24 | ) | | (14.0 | ) | | (111 | ) | | (21.3 | ) | | (10 | ) | | (6.7 | ) |
| Total fuel and purchased power expenses | | $ | 11 |
| | | | $ | (423 | ) | | | | $ | (137 | ) | | |
In the thirdfirst quarter 2015,2016, total fuel and purchased power expenses were $944$598 million compared to $933$735 million in the corresponding period in 2014.2015. The increase in the third quarter 2015 was primarily due to an increase of $44 million in the volume of KWHs purchased due to lower natural gas prices and a $37 million increase in the average cost of fuel related to higher coal prices, partially offset by a $35 million decrease in the average cost of purchased power due to lower natural gas prices and a $35 million decrease in the volume of KWHs generated due to higher coal prices.
For year-to-date 2015, total fuel and purchased power expenses were $2.37 billion compared to $2.80 billion in the corresponding period in 2014. The decrease in year-to-date 2015first quarter 2016 was primarily due to a $394decrease of $89 million decrease in the average cost of fuel and purchased power related to lower coal and natural gas prices and more rainfall for hydro generation and a $135net decrease of $48 million decrease in the volume of KWHs generated due to higher coal prices, partially offset by a $106 million increase in the volume of KWHsand purchased due to milder weather as compared to the corresponding period in 2015 resulting in lower natural gas prices.customer demand.
Fuel and purchased power energy transactions do not have a significant impact on earnings since these fuel expenses are generally offset by fuel revenues through Georgia Power's fuel cost recovery mechanism. See
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Fuel Cost Recovery" herein for additional information.
Details of Georgia Power's generation and purchased power were as follows:
| | | | | Third Quarter
2015 | | Third Quarter
2014 | | Year-to-Date 2015 |
| Year-to-Date 2014 | | First Quarter 2016 | | First Quarter 2015 |
Total generation (billions of KWHs) | | 19 | | 19 | | 53 | | 55 | | 16 | | 17 |
Total purchased power (billions of KWHs) | | 7 | | 6 | | 18 | | 16 | | 6 | | 6 |
Sources of generation (percent) — | | |
| Coal | | 41 | | 45 | | 38 | | 45 | | 30 | | 34 |
| Nuclear | | 22 | | 20 | | 23 | | 21 | | 23 | | 22 |
| Gas | | 36 | | 34 | | 37 | | 32 | | 42 | | 42 |
| Hydro | | 1 | | 1 | | 2 | | 2 | | 5 | | 2 |
Cost of fuel, generated (cents per net KWH) — | | |
| Coal | | 5.42 | | 4.19 | | 4.65 | | 4.49 | | 3.56 | | 4.71 |
| Nuclear | | 0.86 | | 0.86 | | 0.76 | | 0.90 | | 0.86 | | 0.54 |
| Gas | | 2.57 | | 3.41 | | 2.62 | | 3.84 | | 2.01 | | 2.63 |
Average cost of fuel, generated (cents per net KWH) | | 3.37 | | 3.25 | | 2.98 | | 3.51 | | 2.22 | | 2.86 |
Average cost of purchased power (cents per net KWH)(*) | | 4.54 | | 5.03 | | 4.50 | | 5.42 | | 4.32 | | 4.39 |
| |
| (*) | Average cost of purchased power includes fuel purchased by Georgia Power for tolling agreements where power is generated by the provider. |
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel
In the thirdfirst quarter 2015,2016, fuel expense was $706$376 million compared to $684$526 million in the corresponding period in 2014. The increase was primarily due to a 29.4% increase in the average cost of coal per KWH generated, partially offset by a 24.6% decrease in the average cost of natural gas per KWH generated and an 11.5% decrease in the volume of KWHs generated by coal.
For year-to-date 2015, fuel expense was $1.74 billion compared to $2.06 billion in the corresponding period in 2014.2015. The decrease was primarily due to a 15.1%22.4% decrease in the average cost of fuel per KWH generated and an 18.5%a 15.5% decrease in the volume of KWHs generated by coal, partially offset by a 9.5% increase in the volume of KWHs generated by natural gas.coal.
Purchased Power – Non-Affiliates
In the thirdfirst quarter 2015,2016, purchased power expense from non-affiliates was $90$83 million compared to $77$60 million in the corresponding period in 2014.2015. The increase was primarily due to a 42.9%75.3% increase in the volume of KWHs purchased, to meet customer demand, partially offset by a 15.0% decrease in the average cost per KWH purchased primarily resulting from lower natural gas prices.
For year-to-date 2015, purchased power expense from non-affiliates was $227 million compared to $219 million in the corresponding period in 2014. The increase was primarily due to a 46.0% increase in the volume of KWHs purchased to meet customer demand, partially offset by a 26.4%28.1% decrease in the average cost per KWH purchased primarily resulting from lower natural gas prices.
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 thirdfirst quarter 2015,2016, purchased power expense from affiliates was $148$139 million compared to $172$149 million in the corresponding period in 2014. For year-to-date 2015, purchased power expense from affiliates2015. The decrease was $411 million compared to $522 millionthe result of an 8.8% decrease in the corresponding period in 2014. The decreases were due to decreasesvolume of 11.0% and 17.2% in the average cost per KWHKWHs purchased in the thirdfirst quarter 2015 and year-to-date 2015, respectively, primarily resulting from2016 as Georgia Power's units generally dispatched at a lower natural gas prices.cost than other Southern Company system resources.
Energy purchases from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC or other contractual agreements, all as approved by the FERC.
Other Operations and Maintenance Expenses
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) |
| (% change) | | (change in millions) | | (% change) |
| $6 | | 1.3 | | $71 | | 5.3 |
In the third quarter 2015, other operations and maintenance expenses were $462 million compared to $456 million in the corresponding period in 2014. The increase was primarily due to increases of $10 million in employee compensation and benefits including pension costs and $5 million primarily related to customer incentive and demand-side management costs due to additional customer participation, partially offset by a decrease of $10 million in transmission and distribution overhead line maintenance. See Note (F) to the Condensed Financial Statements herein for additional information related to pension costs.
For year-to-date 2015, other operations and maintenance expenses were $1.41 billion compared to $1.33 billion in the corresponding period in 2014. The increase was primarily due to increases of $39 million in employee compensation and benefits including pension costs, $13 million in scheduled outage-related costs, and $17 million
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
primarily related to customer incentiveOther Operations and demand-side management costs due to additional customer participation.
Depreciation and AmortizationMaintenance Expenses
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $3 | | 1.4 | | $5 | | 0.8 |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) |
| $(17) | | (3.6) |
For year-to-date 2015, depreciationIn the first quarter 2016, other operations and amortization was $633maintenance expenses were $457 million compared to $628$474 million in the corresponding period in 2014.2015. The decrease was primarily due to decreases of $17 million in scheduled outage and maintenance costs at generation facilities and $7 million in employee benefits including pension costs, partially offset by an increase of $3 million for integrated transmission system billings. See Note (F) to the Condensed Financial Statements herein for additional information related to pension costs.
Income Taxes
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) |
| $20 | | 14.3 |
In the first quarter 2016, income taxes were $160 million compared to $140 million in the corresponding period in 2015. The increase was primarily due to a $16 million increase related to additional plant in service, partially offset by a $9 million decrease related to other cost of removal and a $3 million decrease due to a change in useful lives.
Taxes Other Than Income Taxes
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $(4) | | (3.6) | | $(18) | | (5.6) |
In the third quarter 2015, taxes other than income taxes were $107 million compared to $111 million in the corresponding period in 2014. For the year-to-date 2015, taxes other than income taxes were $302 million compared to $320 million in the corresponding period in 2014. The decrease in year-to-date 2015 was primarily due to decreases of $9 million in municipal franchise fees related to lower retail revenues and $7 million in property taxes.
Interest Expense, Net of Amounts Capitalized
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $2 | | 2.3 | | $10 | | 3.8 |
In the third quarter 2015, interest expense, net of amounts capitalized was $90 million compared to $88 million in the corresponding period in 2014. For year-to-date 2015, interest expense, net of amounts capitalized was $272 million compared to $262 million in the corresponding period in 2014. The increases were primarily due to increased outstanding long-term debt borrowings from the FFB.
Income Taxes
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) |
| (% change) | | (change in millions) | | (% change) |
| $20 | | 6.3 | | $(3) | | (0.5) |
In the third quarter 2015, income taxes were $337 million compared to $317 million in the corresponding period in 2014. For year-to-date 2015, income taxes were $657 million compared to $660 million in the corresponding period in 2014. The increase in the third quarter 2015 was primarily due to higher pre-tax earnings. The decrease in year-to-date 2015 was due to lower pre-tax earnings, partially offset by the recognition in 2014 of tax benefits related to emission allowances and state apportionment and lower non-taxable AFUDC equity.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Georgia Power's future earnings potential. The level of Georgia Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Georgia Power's business of selling electricity. These factors include Georgia Power's
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 and the completion and subsequent operation of ongoing construction projects, primarily Plant Vogtle Units 3 and 4. Future earnings in the near term will depend, in part, upon maintaining and growing sales which are subject to a number of factors. These factors include weather, competition, new energy contracts with other utilities, energy conservation practiced by customers, the use of alternative energy sources by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in Georgia Power's service territory. Demand for electricity for Georgia Power is partiallyprimarily driven by economic growth. The pace of economic growth and electricity demand may be affected by changes in regional and global economic conditions, which may impact future earnings. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Georgia Power in Item 7 of the Form 10-K.
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. Georgia Power's Environmental Compliance Cost Recovery (ECCR) tariff allows for the recovery of capital and operations and maintenance costs related to environmental controls mandated by state and federal regulations. 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.modified, as compliance plans are revised or updated, and as legal challenges to rules are completed. Further, higher costs that are recovered through regulated rates could contribute to reduced demand for electricity, which could negatively affect results of operations, cash flows, and financial condition. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Georgia Power in Item 7 and Note 3 to the financial statements of Georgia Power under "Environmental Matters" in Item 8 of the Form 10-K for additional information.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Environmental Statutes and Regulations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Integrated Resource Plans" of Georgia Power in Item 7 of the Form 10-K and "Retail Regulatory Matters – Integrated Resource Plan" herein for additional information on planned unit retirements and fuel conversions at Georgia Power.
Air Quality
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters –Environmental Statutes and Regulations – Air Quality" of Georgia Power in Item 7 of the Form 10-K for additional information regarding the EPA's proposed regulations governing emissions during startup, shutdown, or malfunction (SSM), the final MATS rule the Cross State Air Pollution Rule (CSAPR), and the eight-hour National Ambient Air Quality Standard (NAAQS) for ozone.regional haze regulations.
On April 25, 2016, in response to a June 12, 2015 U.S. Supreme Court opinion, the EPA published a finalits supplemental finding regarding consideration of costs in support of the MATS rule. This finding does not impact MATS rule requiring affected states (includingcompliance requirements, costs, or deadlines, and all Georgia Alabama, and Florida)Power units that are subject to revise or remove state implementation plan (SIP) provisions regarding excess emissions that occur during periods of SSMthe MATS rule have completed the measures necessary to achieve compliance with the MATS rule by no later than November 22, 2016.the applicable deadlines.
Also on April 25, 2016, the EPA issued proposed revisions to the regional haze regulations. The ultimate impact of the final ruleproposed revisions will depend on the outcome oftheir ultimate adoption, implementation, and any legal challenges and the development and approval of SIPs by the affected states and cannot be determined at this time.
On June 29, 2015, the U.S. Supreme Court issued a decision finding that the EPA had failed to properly consider costs in its decision to regulate hazardous air pollutant emissions from electric generating units under the MATS rule and remanded the case to the U.S. Court of Appeals for the District of Columbia Circuit for further proceedings. The MATS rule remains in effect while the U.S. Court of Appeals for the District of Columbia Circuit and the EPA respond to the decision. The ultimate impact of this decision cannot be determined at this time.
On July 28, 2015, the U.S. Court of Appeals for the District of Columbia Circuit issued an opinion invalidating certain emissions budgets under the CSAPR Phase II emissions trading program for a number of states, including
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Georgia, Alabama, and Florida. The court's decision leaves the emissions trading program in place and remands the rule to the EPA for further action consistent with the court's decision. The court rejected all other pending challenges to the rule. The ultimate impact of this decision will depend on additional rulemaking and cannot be determined at this time.
On October 26, 2015, the EPA published a more stringent eight-hour NAAQS for ozone. This new standard could potentially require additional emission controls, improvements in control efficiency, and operational fuel changes and could affect the siting of new generating facilities. The ultimate impact of this matter will depend on any legal challenges and implementation of the final rule and 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 Georgia Power in Item 7 of the Form 10-K for additional information regarding the EPA's and the U.S. Army Corps of Engineers' rule revising the definition of waters of the U.S. under the Clean Water Act (CWA) and the EPA's revisions to effluent guidelines.
On June 29, 2015, the EPA and the U.S. Army Corps of Engineers jointly published a final rule revising the regulatory definition of waters of the U.S. for all CWA programs. The final rule significantly expands the scope of federal jurisdiction under the CWA and could have significant impacts on economic development projects which could affect customer demand growth. In addition, this rule could significantly increase permitting and regulatory requirements and costs associated with the siting of new facilities and the installation, expansion, and maintenance of transmission and distribution lines. The rule became effective August 28, 2015, but on October 9, 2015, the U.S. Court of Appeals for the Sixth Circuit issued an order staying implementation of the final rule. The ultimate impact of the final rule will depend on the outcome of this and other pending legal challenges and the EPA's and the U.S. Army Corps of Engineers' field-level implementation of the rule and cannot be determined at this time.
On November 3, 2015, the EPA published final revisions to technology-based limits for certain wastestreams from steam electric power plants. These revisions impose stringent steam effluent guidelines and technology requirements for wastewater discharges at affected units. Compliance with these revisions could result in significant additional capital expenditures and could affect future unit retirement and replacement decisions. The ultimate impact of these revisions will depend on any legal challenges and implementation of the final revisions and cannot be determined at this time.
Coal Combustion Residuals
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Coal Combustion Residuals" of Georgia Power in Item 7 of the Form 10-K for additional information regarding the EPA's regulation of CCR.
On April 17, 2015, the EPA published the Disposal of Coal Combustion Residuals from Electric Utilities final rule (CCR Rule) in the Federal Register, which became effective on October 19, 2015. Based on initial cost estimates for closure in place and groundwater monitoring of ash ponds pursuant to the CCR Rule, during the second quarter 2015, Georgia Power recorded incremental asset retirement obligations (ARO) of approximately $82 million related to the CCR Rule. As further analysis is performed, including evaluation of the expected method of compliance, refinement of assumptions underlying the cost estimates, such as the quantities of CCR at each site, and the determination of timing, including the potential for closing ash ponds prior to the end of their currently anticipated useful life, Georgia Power expects to continue to periodically update these estimates. The ultimate impact of the CCR Rule cannot be determined at this timeand will depend on Georgia Power's ongoing review of the CCR Rule, the results of initial and ongoing minimum criteria assessments, and the outcome of legal challenges. See Note (A) to the Condensed Financial Statements herein for additional information regarding Georgia Power's AROs as of September 30, 2015.
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Global Climate Issues
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Global Climate Issues" of Georgia Power in Item 7 of the Form 10-K for additional information regarding the EPA's proposed regulation of CO2 from fossil-fuel-fired electric generating units.
On October 23, 2015, two final actions by the EPA that would limit CO2 emissions from fossil fuel-fired electric generating units were published in the Federal Register. One of the final actions contains specific emission standards governing CO2 emissions from new, modified, and reconstructed units. The other final action establishes guidelines for states to develop plans to meet EPA-mandated CO2 emission rates for existing units. The EPA's final guidelines require state plans to meet interim CO2 performance rates between 2022 and 2029 and final rates in 2030 and thereafter. At the same time, a proposed federal plan and proposed model rule were published that states can adopt or that would be put in place if, in response to the final guidelines, a state either does not submit a state plan or its plan is not approved by the EPA.
These guidelines and standards could result in operational restrictions and material compliance costs, including capital expenditures, which could affect future unit retirement and replacement decisions. Georgia Power's results of operations, cash flows, and financial condition could be significantly impacted if such costs are not recovered through regulated rates or through market-based contracts. However, the ultimate financial and operational impact of the final rules on Georgia Power cannot be determined at this time and will depend on numerous factors including the Southern Company system's ongoing review of the final rules; the outcome of any legal challenges, including legal challenges filed by Georgia Power; individual state implementation of the EPA's final guidelines, including the potential that state plans impose different standards; additional rulemaking activities in response to legal challenges and related court decisions; the impact of future changes in generation and emissions-related technology and costs; the impact of future decisions regarding unit retirement and replacement, including the type and amount of any such replacement capacity; and the time periods over which compliance will be required.
FERC Matters
Georgia Power has authority from the FERC to sell electricity at market-based rates. Since 2008, that authority, for certain balancing authority areas, has been conditioned on compliance with the requirements of an energy auction, which the FERC found to be tailored mitigation that addresses potential market power concerns. In accordance with FERC regulations governing such authority, the traditional operating companies (including Georgia Power) and Southern Power filed a triennial market power analysis on June 30, 2014, which included continued reliance on the energy auction as tailored mitigation. On April 27, 2015, the FERC issued an order finding that the traditional operating companies' (including Georgia Power's) and Southern Power's existing tailored mitigation may not effectively mitigate the potential to exert market power in certain areas served by the traditional operating companies and in some adjacent areas. To retain market-based rate authority, the FERC directed the traditional operating companies (including Georgia Power) and Southern Power to show why market-based rate authority should not be revoked in these areas or to provide a mitigation plan to further address market power concerns. The traditional operating companies (including Georgia Power) and Southern Power filed a request for rehearing on May 27, 2015 and on June 26, 2015 filed their response with the FERC. The ultimate outcome of this matter cannot be determined at this time.
Retail Regulatory Matters
Georgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the oversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, which includes traditional base tariff rates, Demand-Side Management (DSM) tariffs, ECCR tariffs, and Municipal Franchise Fee (MFF) tariffs. In addition, financing costs related to the construction of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through separate fuel cost recovery tariffs. See "Fuel Cost Recovery" below and Note 3 to the financial statements of Georgia Power under "Retail Regulatory Matters – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding fuel cost recovery and the NCCR tariff, respectively.
Pursuant to the terms and conditions of a settlement agreement related to Southern Company's proposed acquisition of AGL Resources approved by the Georgia PSC on April 14, 2016, Georgia Power's 2013 ARP will continue in effect until December 31, 2019, and Georgia Power will be required to file its next base rate case by July 1, 2019. Furthermore, through December 31, 2019, Georgia Power and Atlanta Gas Light Company (collectively, Utilities) will retain the merger savings, net of transition costs, as defined in the settlement agreement; through December 31, 2022, net merger savings will be shared on a 60/40 basis between customers and the Utilities; thereafter, all merger savings will be retained by customers. See Note 3 to the financial statements of Georgia Power under "Retail Regulatory Matters" in Item 8 of the Form 10-K for additional information.
GEORGIA POWER COMPANYRenewables
See MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Renewables Development– FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Renewables" of Georgia Power in Item 7 of the Form 10-K for information regarding renewable energy projects.
As part of the Georgia Power Advanced Solar Initiative, program, Georgia Power executed tenfour PPAs that were approved by the Georgia PSC in 2014 and provide for the purchase of energy from 515totaling 149 MWs of solar capacity. These PPAs are expected to commence in December 2015 and 2016 and have terms rangingcontracted capacity from 20 to 30 years. As a result of certain acquisitions by Southern Power Georgia Power expects that 249 MWs of the 515 MWs of contracted capacity will be purchased from solar facilities owned or under development by Southern Power.
On June 15, 2015, Georgia Power executed a PPA to purchase a total of 58 MWs of biomass capacity and energy from a 79-MW facility in Georgia that will begin in 2017 and end in 2047. This PPA was approved by the Georgia PSC on April 15, 2015. Georgia Power also entered into an energy-only PPA for the remaining 21 MWs from the same facility.
On July 21, 2015, the Georgia PSC approved Georgia Power's request to build, own, and operate an up to 46-MW solar generation facility at a U.S. Marine Corps base in Albany, Georgia by the end of 2016.
Rate Plans
In accordance with the terms of the 2013 ARP, on October 2, 2015, Georgia Power filed the following tariff adjustments with the Georgia PSC to become effective January 1, 2016 pending its approval:
increase in traditional base tariffs by approximately $49 million;
increasebegan in the environmental compliance cost recovery tariff by approximately $75 million;first quarter 2016.
increase in the demand-side management tariffs by approximately $7 million; and
increase in the municipal franchise fee tariff by approximately $13 million.
The ultimate outcome of this matter cannot be determined at this time.
Integrated Resource Plan
To comply with the April 16, 2015 effective date of the MATS rule, Plant Branch Units 1, 3, and 4 (1,266 MWs), Plant Yates Units 1 through 5 (579 MWs), and Plant McManus Units 1 and 2 (122 MWs) were retired on April 15, 2015. In addition, operations were discontinued at Plant Mitchell Unit 3 (155 MWs) and its decertification will be requested in connection with the triennial Integrated Resource Plan in 2016. The switch to natural gas as the primary fuel is complete at Plant Yates Units 7 and 6 and the units were returned to service on May 4, 2015 and June 27, 2015, respectively. On October 13, 2015, Plant Kraft Units 1 through 4 (316 MWs) were retired.
Fuel Cost Recovery
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Fuel Cost Recovery" of Georgia Power in Item 7 of the Form 10-K for information regarding fuel cost recovery.
Georgia Power has established fuel cost recovery rates approved by the Georgia PSC. On September 18, 2015,April 14, 2016, Georgia Power filed a rate request with the Georgia PSC to lower totaldecrease fuel rates by 15% effective June 1, 2016, which is expected to reduce annual billings by approximately $268 million effective January 1, 2016. The$313 million. Georgia PSCPower is currently scheduled to vote on this matter on December 15, 2015.file its next fuel case by February 28, 2017. The ultimate outcome of this matter cannot be determined at this time.
Fuel cost recovery revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Georgia Power's revenues or net income, but will affect cash flow. See Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Georgia Power – Fuel Cost Recovery" herein for additional information.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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Nuclear Construction
See Note 3 to the financial statements of Georgia Power under "Retail Regulatory Matters – Nuclear Construction" in Item 8 of the Form 10-K for additional information regarding the construction of Plant Vogtle Units 3 and 4, Vogtle Construction Monitoring (VCM) reports, the NCCR tariff, the Vogtle Construction Litigation (as defined below), and pending litigation.the Contractor Settlement Agreement (as defined below).
In 2008, Georgia Power, acting for itself and as agent for the Vogtle Owners, entered into an agreement (Vogtle 3 and 4 Agreement) with the Contractor, pursuant to which the Contractor agreed to design, engineer, procure,
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construct, and test Plant Vogtle Units 3 and 4. Current anticipated in-service dates for Plant Vogtle Units4 (Vogtle 3 and 4 are the second quarter 2019 and the second quarter 2020, respectively.Agreement).
Under the terms of the Vogtle 3 and 4 Agreement, the Vogtle Owners agreed to pay a purchase price that is subject to certain price escalations and adjustments, including fixed escalation amounts and index-based adjustments, as well as adjustments for change orders, and performance bonuses for early completion and unit performance. The Vogtle 3 and 4 Agreement also provides for liquidated damages upon the Contractor's failure to fulfill the schedule and performance guarantees, subject to a cap. In addition, the Vogtle 3 and 4 Agreement provides for limited cost sharing by the Vogtle Owners for Contractor costs under certain conditions (which have not occurred), with maximum additional capital costs under this provision attributable to Georgia Power (based on Georgia Power's ownership interest) of approximately $114 million. Each Vogtle Owner is severally (and not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to the Contractor under the Vogtle 3 and 4 Agreement. Georgia Power's proportionate share is 45.7%.
On December 31, 2015, Westinghouse acquired Stone & Webster, Inc. from Chicago Bridge & Iron Company, N.V. (CB&I) and changed the name of Stone & Webster, Inc. to WECTEC Global Project Services Inc. (WECTEC). Certain payment obligations of Westinghouse and CB&I Stone & Webster, Inc. (S&W) (formerly known as Stone & Webster, Inc.)WECTEC under the Vogtle 3 and 4 Agreement arewere originally guaranteed by Toshiba Corporation (Toshiba)(Westinghouse's parent company) and The Shaw Group Inc. (Shaw Group) (a(which is now a subsidiary of Chicago Bridge & Iron Company, N.V. (CBCB&I)), respectively. On March 9, 2016, in connection with Westinghouse's acquisition of WECTEC and pursuant to the settlement agreement described below, the guarantee of The Shaw Group Inc. was terminated. The guarantee of Toshiba Corporation remains in place. In the event of certain credit rating downgrades of any Vogtle Owner, such Vogtle Owner will be required to provide a letter of credit or other credit enhancement. Additionally, as a result of credit rating downgrades of Toshiba Corporation, Westinghouse provided the Vogtle Owners with letters of credit in an aggregate amount of $920 million in accordance with, and subject to adjustment under, the terms of the Vogtle 3 and 4 Agreement.
The Vogtle Owners may terminate the Vogtle 3 and 4 Agreement at any time for their convenience, provided that the Vogtle Owners will be required to pay certain termination costs. The Contractor may terminate the Vogtle 3 and 4 Agreement under certain circumstances, including certain Vogtle Owner suspension or delays of work, action by a governmental authority to permanently stop work, certain breaches of the Vogtle 3 and 4 Agreement by the Vogtle Owners, Vogtle Owner insolvency, and certain other events.
In 2009, the NRC issued an Early Site Permit and Limited Work Authorization which allowed limited workGeorgia PSC voted to begin on Plant Vogtle Units 3 and 4. The NRC certified the Westinghouse Design Control Document, as amended (DCD), for the AP1000 nuclear reactor design, in late 2011, and issued combined construction and operating licenses (COLs) in early 2012. Receipt of the COLs allowed full construction to begin. There have been technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4, at the federal and state level, and additional challenges may arise as construction proceeds.
In 2012, the Vogtle Owners and the Contractor began negotiations regarding the costs associated with design changes to the DCD and the delays in the timing of approval of the DCD and issuance of the COLs, including the assertion by the Contractor that the Vogtle Owners are responsible for these costs under the terms of the Vogtle 3 and 4 Agreement. Also in 2012, Georgia Power and the other Vogtle Owners filed suit against the Contractor in the U.S. District Court for the Southern District of Georgia seeking a declaratory judgment that the Vogtle Owners are not responsible for these costs. In 2012, the Contractor also filed suit against Georgia Power and the other Vogtle Owners in the U.S. District Court for the District of Columbia alleging the Vogtle Owners are responsible for these costs. The Contractor also asserted it is entitled to extensions of the guaranteed substantial completion dates of April 2016 and April 2017 for Plant Vogtle Units 3 and 4, respectively. In May 2014, the Contractor filed an amended counterclaim to the suit pending in the U.S. District Court for the Southern District of Georgia alleging that (i) the design changes to the DCD imposed by the NRC delayed module production and the impacts to the Contractor are recoverable by the Contractor under the Vogtle 3 and 4 Agreement and (ii) the changes to the basemat rebar design required by the NRC caused additional costs and delays recoverable by the Contractor under the Vogtle 3 and 4 Agreement. On March 10, 2015, the U.S. Court of Appeals for the District of Columbia Circuit affirmed the decision of the U.S. District Court for the District of Columbia, which had dismissed the Contractor's suit, ruling that the proper venue is the U.S. District Court for the Southern District of Georgia. The case is pending in the U.S. District Court for the Southern District of Georgia (Vogtle Construction Litigation). The portion of additional costs claimed by the Contractor in its initial complaint that would be attributable to Georgia Power (based on Georgia Power's ownership interest) is approximately $425 million in 2008 dollars (approximately $591 million in 2015 dollars). The Contractor did not specify in its amended counterclaim the amounts relating to these new allegations; however, the Contractor subsequently asserted estimated minimum damages related to the amended counterclaim (based on Georgia Power's ownership interest) of approximately $113 million in 2014 dollars (approximately $118
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million in 2015 dollars). In June 2015, the Contractor updated its estimated damages under the initial complaint and the amended counterclaim to an aggregate (based on Georgia Power's ownership interest) of approximately $714 million (in 2015 dollars).
On October 27, 2015, Westinghouse and CB&I announced an agreement under which Westinghouse or one of its affiliates will acquire S&W from CB&I, subject to satisfaction of certain conditions to closing. In addition, on October 27, 2015, Westinghouse and the Vogtle Owners entered into a term sheet (Term Sheet) setting forth the terms of a settlement agreement to resolve disputes between the Vogtle Owners and the Contractor under the Vogtle 3 and 4 Agreement, including the Vogtle Construction Litigation.
In accordance with the Term Sheet: (i) the Vogtle Owners and the Contractor will enter into mutual releases of all open claims which have been asserted, including any potential extension of such open claims, as well as future claims based on events occurring prior to the effective date of the release that potentially could have been asserted under the original terms of the Vogtle 3 and 4 Agreement, including the Vogtle Construction Litigation, which will be dismissed with prejudice; (ii) the Vogtle 3 and 4 Agreement will be amended to restrict the Contractor's ability to seek further increases in the contract price by clarifying and limiting the circumstances that constitute nuclear regulatory changes in law; (iii) enhanced dispute resolution procedures will be implemented; (iv) the guaranteed substantial completion dates under the Vogtle 3 and 4 Agreement will be revised to match the current estimated in-service dates of June 30, 2019 for Unit 3 and June 30, 2020 for Unit 4 (as discussed below); (v) delay liquidated damages will now commence from the current estimated nuclear fuel loading date for each unit, which is December 31, 2018 for Unit 3 and December 31, 2019 for Unit 4, rather than the original guaranteed substantial completion dates under the Vogtle 3 and 4 Agreement; and (vi) Georgia Power, based on its ownership interest, will pay to the Contractor and capitalize to the project cost approximately $350 million, of which approximately $120 million has been paid previously under the dispute resolution procedures of the Vogtle 3 and 4 Agreement. In addition, the Vogtle Owners and the Contractor resolved other open existing items relating to the scope of the project under the Vogtle 3 and 4 Agreement, including cyber security, for which costs were reflected in Georgia Power's previously disclosed in-service cost estimate. Further, as part of the proposed settlement and in connection with Westinghouse's proposed acquisition of S&W: (i) the Vogtle Owners will terminate the parent guarantee of Shaw Group with respect to certain obligations of S&W, subject to obtaining the consent of the DOE under loan guarantee agreements relating to Plant Vogtle Units 3 and 4, while the parent guarantee of Toshiba with respect to certain obligations of Westinghouse will remain in place; (ii) Westinghouse will make provisions to engage Fluor Enterprises, Inc., a subsidiary of Fluor Corporation, as a new construction subcontractor; and (iii) the Vogtle Owners, CB&I, and Shaw Group also will enter into mutual releases of any and all claims against each other arising out of thecertify construction of Plant Vogtle Units 3 and 4.
The settlement of the pending disputes between the Vogtle Owners and the Contractor, including the Vogtle Construction Litigation, is subject to consummation of Westinghouse's proposed acquisition of S&W. If this proposed acquisition is not completed, the Vogtle Construction Litigation will continue and the Contractor may from time to time continue to assert that it is entitled to additional payments with respect to its allegations, any of which could be substantial.
Georgia Power will submit the ultimate settlement agreement terms and the related amendments to the Vogtle 3 and 4 Agreement to the Georgia PSC for its review.
Georgia Power is required to file semi-annual VCM reports with the Georgia PSC by February 28 and August 31 each year. If the projected certified construction capital costs to be borne by Georgia Power increase by 5% above the certified cost or the projected in-service dates are significantly extended, Georgia Power is required to seek an amendment to the Plant Vogtle Units 3 and 4 certificate from the Georgia PSC. In February 2013, Georgia Power requested an amendment to the certificate to increase the estimated in-service capital cost of Plant Vogtle Units 3 and 4 from $4.4 billion to $4.8 billion and to extend the estimated in-service dates to the fourth quarter 2017 (from April 2016) and the fourth quarter 2018 (from April 2017) for Plant Vogtle Units 3 and 4, respectively. In October 2013, the Georgia PSC approved a stipulation (2013 Stipulation) entered into bybetween Georgia Power and the Georgia PSC staffStaff (Staff) to waive the requirement to amend the Plant Vogtle Units 3 and 4 certificate until the completion of Plant Vogtle Unit 3 or earlier if deemed appropriate by the Georgia PSC and Georgia Power.
On April 15, 2015, the Georgia PSC issued a procedural order in connection with the twelfth VCM report, which included a requested amendment (Requested Amendment) to the Plant Vogtle Units 3 and 4 certificate to reflect the
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Contractor's revised forecast for completion of Plant Vogtle Units 3 and 4 (second quarter of 2019 and second quarter of 2020, respectively) as well as additional estimated owner-relatedVogtle Owner's costs, which includeof approximately $10 million per month, including property taxes, oversight costs, compliance costs, and other operational readiness costs to include the estimated owner'sVogtle Owner's costs associated with the proposed 18-month Contractor delay and to increase the estimated total in-service capital cost of Plant Vogtle Units 3 and 4 to $5.0 billion. Pursuant to thisthe Georgia PSC's procedural order, the Georgia PSC deemed the Requested Amendment unnecessary and withdrawn until the completion of construction of Plant Vogtle Unit 3 consistent with the 2013 Stipulation. The Georgia PSC recognized that the certified cost and the 2013 Stipulation do not constitute a cost recovery cap. In accordance with the Georgia Integrated Resource Planning Act, any costs incurred by Georgia Power in excess of the certified amount will be included in rate base, provided Georgia Power shows the costs to be reasonable and prudent. Financing costs up to the certified amount will be collected through the NCCR tariff until the units are placed in service and contemplated in a general base rate case, while financing costs on any construction-related costs in excess of the $4.4 billion certified amount are expected to be recovered through AFUDC.
On December 31, 2015, Westinghouse and the Vogtle Owners entered into a definitive settlement agreement (Contractor Settlement Agreement) to resolve disputes between the Vogtle Owners and the Contractor under the Vogtle 3 and 4 Agreement, including litigation that was pending in the U.S. District Court for the Southern District of Georgia (Vogtle Construction Litigation). Effective December 31, 2015, Georgia Power, acting for itself and as agent for the other Vogtle Owners, and the Contractor entered into an amendment to the Vogtle 3 and 4 Agreement to implement the Contractor Settlement Agreement. The Contractor Settlement Agreement and the related amendment to the Vogtle 3 and 4 Agreement (i) restrict the Contractor's ability to seek further increases in the contract price by clarifying and limiting the circumstances that constitute nuclear regulatory changes in law; (ii) provide for enhanced dispute resolution procedures; (iii) revise the guaranteed substantial completion dates to match the current estimated in-service dates of June 30, 2019 for Unit 3 and June 30, 2020 for Unit 4; (iv) provide that delay liquidated damages will commence from the current estimated nuclear fuel loading date for each unit, which is December 31, 2018 for Unit 3 and December 31, 2019 for Unit 4; and (v) provide that Georgia Power, based on its ownership interest, will pay to the Contractor and capitalize to the project cost approximately $350 million, of which approximately $241 million had been paid as of March 31, 2016. In addition, the Contractor Settlement Agreement provides for the resolution of other open existing items relating to the scope of the project under the Vogtle 3 and 4 Agreement, including cyber security, for which costs were reflected in Georgia Power's previously disclosed in-service cost estimate. Further, as part of the settlement and Westinghouse's acquisition of WECTEC: (i) Westinghouse engaged Fluor Enterprises, Inc., a subsidiary of Fluor Corporation, as a new construction subcontractor; and (ii) the Vogtle Owners, CB&I, and The Shaw Group Inc. entered into mutual releases of any and all claims arising out of events or circumstances in connection with the construction of Plant Vogtle Units 3 and 4 that occurred on or before the date of the Contractor Settlement Agreement. On January 5, 2016, the Vogtle Construction Litigation was dismissed with prejudice.
On January 21, 2016, Georgia Power submitted the Contractor Settlement Agreement and the related amendment to the Vogtle 3 and 4 Agreement to the Georgia PSC for its review. In accordance with the Georgia PSC's subsequent order, on April 5, 2016, Georgia Power filed supplemental information in support of the Contractor Settlement Agreement and Georgia Power's position that all construction costs to date have been prudently incurred and that the current estimated in-service capital cost and schedule are reasonable. The Staff will conduct a review of all costs incurred related to Plant Vogtle Units 3 and 4, the schedule for completion of Plant Vogtle Units 3 and 4, and the Contractor Settlement Agreement and the Staff is authorized to engage in related settlement discussions with Georgia Power and any intervenors.
The order provides that the Staff is required to report to the Georgia PSC by October 19, 2016 with respect to the status of its review and any settlement-related negotiations. If a settlement with the Staff is reached with respect to costs of Plant Vogtle Units 3 and 4, the Georgia PSC will then conduct a hearing to consider whether to approve that settlement. If a settlement with the Staff is not reached, the Georgia PSC will determine how to proceed, including (i) modifying the 2013 Stipulation, (ii) directing Georgia Power to file a request for an amendment to the certificate
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for Plant Vogtle Units 3 and 4, (iii) issuing a scheduling order to address remaining disputed issues, or (iv) taking any other option within its authority.
The Georgia PSC has approved twelvethirteen VCM reports covering the periods through December 31, 2014,June 30, 2015, including construction capital costs incurred, which through that date totaled $3.0$3.1 billion. On August 28, 2015,February 26, 2016, Georgia Power filed its thirteenthfourteenth VCM report with the Georgia PSC covering the period from JanuaryJuly 1 through June 30, 2015, whichDecember 31, 2015. The fourteenth VCM report does not include a requested amendment to the certified cost of Plant Vogtle Units 3 and 4. Georgia Power is requesting approval for an additional $148of $160 million of construction capital costs incurred during that period and reflected estimated financing costs during the construction period to total approximately $2.4 billion.period. Georgia Power will continueanticipates to incur average financing costs of approximately $30$27 million per month from January 2016 until Plant Vogtle Units 3 and 4 are placed in service. The updated in-service capital cost forecast is $5.44 billion and includes costs related to the Contractor Settlement Agreement. Estimated financing costs during the construction period total approximately $2.4 billion. Georgia Power's CWIP balance for Plant Vogtle Units 3 and 4 was approximately $3.7 billion as of March 31, 2016.
On October 30, 2015, Georgia Power filedThere have been technical and procedural challenges to increase the NCCR tariff by approximately $19 million, effective January 1, 2016, pending Georgia PSC approval.
construction and licensing of Plant Vogtle Units 3 and 4, at the federal and state level, and additional challenges may arise as construction proceeds. Processes are in place that are designed to assure compliance with the requirements specified in the DCDWestinghouse Design Control Document and the COLs,combined construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the NRC. Various design and other licensing-based compliance issues may arise as construction proceeds, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be delays in the project schedule that could result in increased costs either to the Vogtle Owners or the Contractor or to both.
As construction continues, the risk remains that ongoing challenges with Contractor performance including additional challenges in its fabrication, assembly, delivery, and installation of the shield building and structural modules, delays in the receipt of the remaining permits necessary for the operation of Plant Vogtle Units 3 and 4, or other issues could arise and may further impact project schedule and cost. In addition, the IRS allocated production tax credits to each of Plant Vogtle Units 3 and 4, which require the applicable unit to be placed in service before 2021.
Future claims by the Contractor or Georgia Power (on behalf of the Vogtle Owners) could arise throughout construction. These claims may be resolved through formal and informal dispute resolution procedures under the Vogtle 3 and 4 Agreement but alsoand, under the enhanced dispute resolution procedures, may be resolved through litigation.litigation after the completion of nuclear fuel load for both units.
See RISK FACTORS of Georgia Power in Item 1A of the Form 10-K for a discussion of certain risks associated with the licensing, construction, and operation of nuclear generating units, including potential impacts that could result from a major incident at a nuclear facility anywhere in the world.
The ultimate outcome of these matters cannot be determined at this time.
Other Matters
Georgia Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Georgia Power is subject to certain claims and legal actions arising in the ordinary course of business. Georgia Power's business activities are subject to extensive governmental regulation related to public
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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 occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
The ultimate outcome of such pending or potential litigation against Georgia Power cannot be predicted at this time; however, for current proceedings not specifically reported in Note (B) to the Condensed Financial Statements herein
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or in Note 3 to the financial statements of Georgia Power in Item 8 of the Form 10-K, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Georgia Power's financial statements. See Note (B) 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.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Georgia Power prepares its financial statements in accordance with GAAP. Significant accounting policies are described in Note 1 to the financial statements of Georgia Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Georgia Power's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Georgia Power in Item 7 of the Form 10-K for a complete discussion of Georgia Power's critical accounting policies and estimates related to Electric Utility Regulation, ContingentAsset Retirement Obligations, and Pension and Other Postretirement Benefits.
Asset Retirement Obligations
AROs are computed as the fair value of the ultimate costs for an asset's future retirementBenefits, and are recorded in the period in which the liability is incurred. The costs are capitalized as part of the related long-lived asset and depreciated over the asset's useful life. In the absence of quoted market prices, AROs are estimated using present value techniques in which estimates of future cash outlays associated with the asset retirements are discounted using a credit-adjusted risk-free rate. Estimates of the timing and amounts of future cash outlays are based on projections of when and how the assets will be retired and the cost of future removal activities.
The liability for AROs primarily relates to the decommissioning of Georgia Power's nuclear facilities, which include Georgia Power's ownership interests in Plant Hatch and Plant Vogtle Units 1 and 2, and facilities that are subject to the CCR Rule, primarily ash ponds. In addition, Georgia Power has retirement obligations related to various landfill sites, underground storage tanks, and asbestos removal. Georgia Power also has identified retirement obligations related to certain transmission and distribution facilities, including the disposal of polychlorinated biphenyls in certain transformers; leasehold improvements; equipment on customer property; and property associated with Georgia Power's rail lines and natural gas pipelines. However, liabilities for the removal of these assets have not been recorded because the settlement timing for the retirement obligations related to these assets is indeterminable and, therefore, the fair value of the retirement obligations cannot be reasonably estimated. A liability for these AROs will be recognized when sufficient information becomes available to support a reasonable estimation of the ARO.
Georgia Power previously recorded AROs as a result of state requirements in Georgia which closely align with the requirements of the CCR Rule discussed above. The cost estimates are based on information using various assumptions related to closure and post-closure costs, timing of future cash outlays, inflation and discount rates, and the potential methods for complying with the CCR Rule requirements for closure in place. As further analysis is performed, including evaluation of the expected method of compliance, refinement of assumptions underlying the cost estimates, such as the quantities of CCR at each site, and the determination of timing, including the potential
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for closing ash ponds prior to the end of their currently anticipated useful life, Georgia Power expects to continue to periodically update these estimates.
Given the significant judgment involved in estimating AROs, Georgia Power considers the liabilities for AROs to be critical accounting estimates.
See Note 1 to the financial statements of Georgia Power under "Asset Retirement Obligations and Other Costs of Removal" and "Nuclear Decommissioning" in Item 8 of the Form 10-K and Note (A) to the Condensed Financial Statements under "Asset Retirement Obligations" herein for additional information.Contingent Obligations.
Recently Issued Accounting Standards
The Financial Accounting Standards Board's (FASB) ASC 606, Revenue from Contracts with Customers, revises the accounting for revenue recognition effective for fiscal years beginning after December 15, 2017. Georgia Power continues to evaluate the requirements of ASC 606. The ultimate impact of the new standard has not yet been determined.
On April 7, 2015,February 25, 2016, the FASB issued Accounting Standards Update (ASU)ASU No. 2015-03,2016-02, Interest – Imputation of Interest (Subtopic 835-30):Leases Simplifying the Presentation of Debt Issuance Costs(Topic 842) (ASU 2016-02). The ASU 2016-02 requires that debt issuance costs relatedlessees to a recognized debt liability be presented inrecognize on the balance sheet as a direct deduction from the carrying amount of that debtlease liability and a right-of-use asset for all leases. ASU 2016-02 also changes the recognition, measurement, and presentation of expense associated with leases and provides clarification regarding the identification of certain components of contracts that would represent a lease. The accounting required by lessors is relatively unchanged. ASU 2016-02 is effective for fiscal years beginning after December 15, 2015. Early2018, with early adoption is permitted andpermitted. Georgia Power intendsis currently evaluating the new standard and has not yet determined its ultimate impact; however, adoption of ASU 2016-02 is expected to adopthave a significant impact on Georgia Power's balance sheet.
On March 30, 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation(Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 changes the accounting for income taxes and the cash flow presentation for share-based payment award transactions. Most significantly, entities are required to recognize all excess tax benefits and deficiencies related to the exercise or vesting of stock compensation as income tax expense or benefit in the fourth quarter 2015. The ASU is required to be applied retrospectively to all periods presented beginning in the year of adoption.income statement. Georgia Power currently reflects unamortized debt issuance costsrecognizes any excess tax benefits and deficiencies related to the exercise and vesting of stock compensation in other deferred chargesadditional paid-in capital. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. Georgia Power is currently evaluating the new standard and assets onhas not yet determined its balance sheet. Upon adoption, the reclassification will not have a material impact on the results of operations, financial position, or cash flows of Georgia Power.ultimate impact.
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Georgia Power in Item 7 of the Form 10-K for additional information. Georgia Power's financial condition remained stable at September 30, 2015.March 31, 2016. Georgia Power intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.
Net cash provided from operating activities totaled $2.16 billion$563 million for the first ninethree months of 20152016 compared to $2.07 billion$363 million for the corresponding period in 2014.2015. The increase was primarily due to increased fuel cost recovery, partially offset by lower deferred taxes.the timing of vendor payments. Net cash used for investing activities totaled $1.39 billion$689 million for the first ninethree months of 20152016 compared to $1.46 billion
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$405 million for the corresponding period in 20142015 primarily related to installation of equipment to comply with environmental standards and construction of generation, transmission, and distribution facilities. Net cash used forprovided from financing activities totaled $711$119 million for the first ninethree months of 20152016 compared to $577$431 million in the corresponding period in 2014.2015. The increasedecrease in cash used forprovided from financing activities is primarily due to an increase in common stock dividends, lower borrowings from the FFB for the construction of Plant Vogtle 3 and 4, and a redemption and a maturity of senior notes and a reduction in 2015.short-term debt, partially offset by senior note issuances and an increase in capital contributions received from Southern Company. Fluctuations in cash flow from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.
Significant balance sheet changes for the first ninethree months of 20152016 include increasesan increase in long-term debt of $778$398 million primarily related to issuances of senior notes, an increase of $374 million in property, plant, and equipment to comply with environmental standards and construction of generation, transmission, and distribution facilities, and an increase of $229 million in other regulatory assets, deferred of $322 millionpaid-in capital primarily relateddue to AROs and deferred plant retirement costs.capital contributions received from Southern Company.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Requirements and Contractual Obligations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Georgia Power in Item 7 of the Form 10-K for a description of Georgia Power's capital requirements for its construction program, including estimated capital expenditures for Plant Vogtle Units 3 and 4 and to comply with existing environmental statutes and regulations, scheduled maturities of long-term debt, as well as related interest, derivative obligations, preferred and preference stock dividends, leases, purchase commitments, and trust funding requirements. Approximately $1.4 billion$458 million will be required through September 30, 2016March 31, 2017 to fund maturities of long-term debt. See "Sources of Capital" herein for additional information.
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 regulatory requirements; changes in FERC rules and regulations; Georgia PSC approvals; changes in the expected environmental compliance program; 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. See Note 3 to the financial statements of Georgia Power under "Retail Regulatory Matters – Nuclear Construction" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Georgia Power – Nuclear Construction" herein for information regarding additional factors that may impact construction expenditures.
Sources of Capital
Except as described below with respect to the DOE loan guarantees, Georgia Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, short-term debt, external security issuances, term loans, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Georgia Power in Item 7 of the Form 10-K for additional information.
In addition, Georgia Power may make borrowings through a loan guarantee agreement (Loan Guarantee Agreement) between Georgia Power and the DOE, the proceeds of which may be used to reimburse Georgia Power for Eligible Project Costs incurred in connection with its construction of Plant Vogtle Units 3 and 4. Under the Loan Guarantee Agreement, the DOE agreed to guarantee borrowings of up to $3.46 billion (not to exceed 70% of Eligible Project Costs) to be made by Georgia Power under a multi-advance credit facility (FFB Credit Facility) among Georgia Power, the DOE, and the FFB. Eligible Project Costs incurred through September 30, 2015March 31, 2016 would allow for borrowings
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of up to $2.2$2.5 billion under the FFB Credit Facility, of which Georgia Power has borrowed $1.8$2.2 billion. See Note 6 to the financial statements of Georgia Power under "DOE Loan Guarantee Borrowings" in Item 8 of the Form 10-K for additional information regarding the Loan Guarantee Agreement and Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Georgia Power – Nuclear Construction" herein for additional information regarding Plant Vogtle Units 3 and 4.
As of September 30, 2015,March 31, 2016, Georgia Power's current liabilities exceeded current assets by $1.45 billion$262 million primarily due to approximately $1.49 billion of long-term debt due within one year and notes payable.year. Georgia Power intends to utilize operating cash flows, as well as FFB borrowings, commercial paper, lines of credit, bank notes, and external securities issuances, as market conditions permit, and equity contributions from Southern Company to fund its short-term capital needs. Georgia Power has substantial cash flow from operating activities and access to the capital markets and financial institutions to meet liquidity needs.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At September 30, 2015,March 31, 2016, Georgia Power had approximately $85$60 million of cash and cash equivalents. CommittedGeorgia Power's committed credit arrangementsarrangement with banks at September 30, 2015 were as follows:
|
| | | | | | | | | | | | | | | | | | |
| Expires | | | | Due Within One Year |
| 2020 | | Total | | Unused | | Term Out | | No Term Out |
| (in millions) | | (in millions) | | (in millions) |
| $ | 1,750 |
| | $ | 1,750 |
| | $ | 1,732 |
| | $ | — |
| | $ | — |
|
See Note 6 to the financial statementsMarch 31, 2016 was $1.75 billion of Georgia Power under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.
As reflected in the table above, in August 2015, Georgia Power amended and restated its multi-yearwhich $1.73 billion was unused. This credit arrangement which, among other things, extended the maturity date from 2018 toexpires in 2020. Georgia Power increased its borrowing ability by $150 million under its facility maturing in 2020 and terminated its aggregate $150 million facilities maturing in 2016.
A portion of the unused credit with banks is allocated to provide liquidity support to Georgia Power's variable rate pollution control revenue bonds and commercial paper program. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of September 30, 2015 was approximately $872 million. In addition, at September 30, 2015, Georgia Power had $121 million of fixed rate pollution control revenue bonds outstanding that were required to be reoffered within the next 12 months.
This bank credit arrangement contains a covenant that limits debt levels and contains a cross acceleration provision to other indebtedness (including guarantee obligations) of Georgia Power. Such a cross acceleration provision to other indebtedness would trigger an event of default if Georgia Power defaulted on indebtedness, the payment of which was then accelerated. Georgia Power is currently in compliance with this covenant. This bank credit arrangement does not contain a material adverse change clause at the time of borrowing.
Subject to applicable market conditions, Georgia Power expects to renew or replace this credit arrangement, as needed, prior to expiration. In connection therewith, Georgia Power may extend the maturity date and/or increase or decrease the lending commitments thereunder.
See Note 6 to the financial statements of Georgia Power under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.
A portion of the unused credit with banks is allocated to provide liquidity support to Georgia Power's pollution control revenue bonds and commercial paper program. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of March 31, 2016 was approximately $868 million. In addition, at March 31, 2016, Georgia Power had $69 million of fixed rate pollution control revenue bonds outstanding that were required to be reoffered within the next 12 months.
Georgia Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Georgia Power and the other traditional operating companies. Proceeds from such issuances for the benefit of Georgia Power are loaned directly to Georgia Power. The obligations of each company under these arrangements are several and there is no cross-affiliate credit support.
Details of short-term borrowings were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | Short-term Debt at September 30, 2015 | | Short-term Debt During the Period(*) |
| | | Amount Outstanding | | Weighted Average Interest Rate | | Average Amount Outstanding | | Weighted Average Interest Rate | | Maximum Amount Outstanding |
| | | (in millions) | | | | (in millions) | | | | (in millions) |
| Commercial paper | | $ | 130 |
| | 0.5 | % | | $ | 193 |
| | 0.4 | % | | $ | 325 |
|
|
| | | | | | | | | | | |
| | | Short-term Debt During the Period(*) |
| | | Average Amount Outstanding | | Weighted Average Interest Rate | | Maximum Amount Outstanding |
| | | (in millions) | | | | (in millions) |
| Commercial paper | | $ | 29 |
| | 0.7 | % | | $ | 158 |
|
| |
| (*) | Average and maximum amounts are based upon daily balances during the three-month period ended September 30, 2015.March 31, 2016. No short-term debt was outstanding at March 31, 2016. |
Georgia Power believes the need for working capital can be adequately met by utilizing commercial paper programs, lines of credit, short-term bank notes, and operating cash flows.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Credit Rating Risk
Georgia Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.
There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- and/or Baa3 or below. These contracts are for physical electricity purchases and sales, fuel purchases, fuel transportation and storage, energy price risk management, transmission, and construction of new generation at Plant Vogtle Units 3 and 4.
The maximum potential collateral requirements under these contracts at September 30, 2015March 31, 2016 were as follows:
| | | Credit Ratings | Maximum Potential
Collateral
Requirements | Maximum Potential
Collateral
Requirements |
| | (in millions) | (in millions) |
| At BBB- and/or Baa3 | $ | 102 |
| $ | 93 |
|
| Below BBB- and/or Baa3 | 1,287 |
| $ | 1,247 |
|
Included in these amounts are certain agreements that could require collateral in the event that one or more Southern Company system power pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of Georgia Power to access capital markets and would be likely to impact the cost at which it does so.
On August 17, 2015, S&P downgraded the consolidated long-term issuer rating of Southern Company (including Georgia Power) to A- from A. S&P revised its credit rating outlook from negative to stable. Separately, on August 24, 2015, S&P revised its credit rating outlook from stable to negative following the announcement of the Merger.
Financing Activities
In March 2015, Georgia Power entered into a $250 million aggregate principal amount three-month floating rate bank loan bearing interest based on one-month LIBOR. The proceeds were used for working capital and other general corporate purposes and the loan was repaid at maturity.
In April 2015, Georgia Power purchased and held $65January 2016, $4.085 million aggregate principal amount of Savannah Economic Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia(Savannah Electric and Power Company Plant Vogtle Project), Second Series 2008. Georgia Power reoffered these bonds to the public in May 2015.
In April 2015, Georgia Power redeemed $125 million aggregate principal amount of its Series Y 5.80% Senior Notes due April 15, 2035.
In May 2015, Georgia Power reoffered to the public $104.6 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 2013, which had been previously purchased and held since 2013.1993 matured.
In June 2015,March 2016, Georgia Power made additional borrowings under the FFB Credit Facility in an aggregate principal amount of $600 million. The interest rate applicable to the $600 million principal amount is 3.283% for an interest period that extends to the final maturity date of February 20, 2044. The proceeds were used to reimburse Georgia Power for Eligible Project Costs relating to the construction of Plant Vogtle Units 3 and 4. Georgia Power settled $350 million of interest rate swaps related to this borrowing for a payment of approximately $6 million, which will be amortized to interest expense over 10 years.
In July 2015, $97.925 million aggregate principal amount of the Development Authority of Putnam County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Branch Project), First Series 1996, First Series 1997, Second Series 1997, and First Series 1998 were redeemed.
GEORGIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In August 2015, Georgia Power's $400issued $325 million aggregate principal amount of Series 2012C 0.75%2016A 3.25% Senior Notes matured.
Also in August 2015, in connection with optional tenders, Georgia Power repurchaseddue April 1, 2026 and reoffered to the public $94.6$325 million aggregate principal amount of Development AuthoritySeries 2016B 2.40% Senior Notes due April 1, 2021. An amount equal to the proceeds from the Series 2016A 3.25% Senior Notes due April 1, 2026 will be allocated to eligible green expenditures, including financing of Bartow County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Bowen Project), Firstor investments in solar power generation facilities or electric vehicle charging infrastructure, or payments under PPAs served by solar power or wind generation facilities. The proceeds from the Series 2009 and $102016B 2.40% Senior Notes due April 1, 2021 were used to repay at maturity $250 million aggregate principal amount of Development AuthorityGeorgia Power's Series 2013B Floating Rate Senior Notes due March 15, 2016, to repay a portion of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 2013.Georgia Power's short-term indebtedness, and for general corporate purposes, including Georgia Power's continuous construction program.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Georgia Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.
GULF POWER COMPANY
GULF POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
| | | | For the Three Months
Ended September 30, | | For the Nine Months
Ended September 30, | For the Three Months
Ended March 31, |
| | 2015 |
| 2014 | | 2015 | | 2014 | 2016 | | 2015 |
| | (in millions) | | (in millions) | (in millions) |
| Operating Revenues: | | | | | | | | | | |
| Retail revenues | $ | 363 |
| | $ | 366 |
| | $ | 983 |
| | $ | 979 |
| $ | 283 |
| | $ | 293 |
|
| Wholesale revenues, non-affiliates | 30 |
| | 34 |
| | 82 |
| | 104 |
| 16 |
| | 25 |
|
| Wholesale revenues, affiliates | 17 |
| | 21 |
| | 52 |
| | 97 |
| 21 |
| | 22 |
|
| Other revenues | 19 |
| | 17 |
| | 53 |
| | 49 |
| 15 |
| | 17 |
|
| Total operating revenues | 429 |
| | 438 |
| | 1,170 |
| | 1,229 |
| 335 |
| | 357 |
|
| Operating Expenses: | | | | | | | | | | |
| Fuel | 143 |
| | 164 |
| | 375 |
| | 478 |
| 94 |
| | 110 |
|
| Purchased power, non-affiliates | 26 |
| | 27 |
| | 76 |
| | 57 |
| 30 |
| | 25 |
|
| Purchased power, affiliates | 4 |
| | 4 |
| | 22 |
| | 19 |
| 2 |
| | 9 |
|
| Other operations and maintenance | 90 |
| | 85 |
| | 274 |
| | 251 |
| 77 |
| | 93 |
|
| Depreciation and amortization | 40 |
| | 38 |
| | 100 |
| | 109 |
| 38 |
| | 20 |
|
| Taxes other than income taxes | 35 |
| | 31 |
| | 91 |
| | 84 |
| 29 |
| | 28 |
|
| Total operating expenses | 338 |
| | 349 |
| | 938 |
| | 998 |
| 270 |
| | 285 |
|
| Operating Income | 91 |
| | 89 |
| | 232 |
| | 231 |
| 65 |
| | 72 |
|
| Other Income and (Expense): | | | | | | | | | | |
| Allowance for equity funds used during construction | 3 |
| | 3 |
| | 11 |
| | 8 |
| — |
| | 4 |
|
| Interest expense, net of amounts capitalized | (12 | ) | | (13 | ) | | (38 | ) | | (39 | ) | (13 | ) | | (13 | ) |
| Other income (expense), net | (1 | ) | | (1 | ) | | (3 | ) | | (2 | ) | (1 | ) | | (1 | ) |
| Total other income and (expense) | (10 | ) | | (11 | ) | | (30 | ) | | (33 | ) | (14 | ) | | (10 | ) |
| Earnings Before Income Taxes | 81 |
| | 78 |
| | 202 |
| | 198 |
| 51 |
| | 62 |
|
| Income taxes | 31 |
| | 29 |
| | 75 |
| | 74 |
| 20 |
| | 23 |
|
| Net Income | 50 |
| | 49 |
| | 127 |
| | 124 |
| 31 |
| | 39 |
|
| Dividends on Preference Stock | 2 |
| | 2 |
| | 7 |
| | 7 |
| 2 |
| | 2 |
|
| Net Income After Dividends on Preference Stock | $ | 48 |
| | $ | 47 |
| | $ | 120 |
| | $ | 117 |
| $ | 29 |
| | $ | 37 |
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | | | | | | | | | |
| | For the Three Months
Ended September 30, | | For the Nine Months
Ended September 30, |
| | 2015 | | 2014 | | 2015 | | 2014 |
| | (in millions) | | (in millions) |
| Net Income | $ | 50 |
| | $ | 49 |
| | $ | 127 |
| | $ | 124 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
|
| Comprehensive Income | $ | 50 |
| | $ | 49 |
| | $ | 127 |
| | $ | 124 |
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
GULF POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
| | | | | | | |
| | For the Nine Months
Ended September 30, |
| | 2015 | | 2014 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 127 |
| | $ | 124 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 105 |
| | 115 |
|
| Deferred income taxes | 58 |
| | 29 |
|
| Allowance for equity funds used during construction | (11 | ) | | (8 | ) |
| Other, net | 16 |
| | 5 |
|
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 18 |
| | (46 | ) |
| -Fossil fuel stock | 18 |
| | 44 |
|
| -Prepaid income taxes | 31 |
| | 9 |
|
| -Other current assets | 1 |
| | 3 |
|
| -Accounts payable | (13 | ) | | 10 |
|
| -Accrued taxes | 46 |
| | 22 |
|
| -Accrued compensation | (3 | ) | | 5 |
|
| -Over recovered regulatory clause revenues | 10 |
| | 7 |
|
| -Other current liabilities | 8 |
| | 5 |
|
| Net cash provided from operating activities | 411 |
| | 324 |
|
| Investing Activities: | | | |
| Property additions | (189 | ) | | (254 | ) |
| Cost of removal, net of salvage | (9 | ) | | (9 | ) |
| Change in construction payables | (29 | ) | | 2 |
|
| Other investing activities | (6 | ) | | (7 | ) |
| Net cash used for investing activities | (233 | ) | | (268 | ) |
| Financing Activities: | | | |
| Decrease in notes payable, net | (34 | ) | | (44 | ) |
| Proceeds — | | | |
| Common stock issued to parent | 20 |
| | 50 |
|
| Pollution control revenue bonds | 13 |
| | 42 |
|
| Senior notes | — |
| | 200 |
|
Redemptions and repurchases —
| | | |
| Pollution control revenue bonds | (13 | ) | | (29 | ) |
| Senior notes | (60 | ) | | — |
|
| Payment of preference stock dividends | (7 | ) | | (7 | ) |
| Payment of common stock dividends | (98 | ) | | (92 | ) |
| Other financing activities | 3 |
| | (1 | ) |
| Net cash provided from (used for) financing activities | (176 | ) | | 119 |
|
| Net Change in Cash and Cash Equivalents | 2 |
| | 175 |
|
| Cash and Cash Equivalents at Beginning of Period | 39 |
| | 22 |
|
| Cash and Cash Equivalents at End of Period | $ | 41 |
| | $ | 197 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid (received) during the period for — | | | |
| Interest (net of $5 and $4 capitalized for 2015 and 2014, respectively) | $ | 27 |
| | $ | 29 |
|
| Income taxes, net | (37 | ) | | 36 |
|
| Noncash transactions — Accrued property additions at end of period | 17 |
| | 35 |
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Assets | | At September 30,
2015 | | At December 31,
2014 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 41 |
| | $ | 39 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 100 |
| | 73 |
|
| Unbilled revenues | | 68 |
| | 58 |
|
| Under recovered regulatory clause revenues | | 17 |
| | 57 |
|
| Other accounts and notes receivable | | 9 |
| | 8 |
|
| Affiliated companies | | 4 |
| | 10 |
|
| Accumulated provision for uncollectible accounts | | (2 | ) | | (2 | ) |
| Fossil fuel stock, at average cost | | 84 |
| | 101 |
|
| Materials and supplies, at average cost | | 57 |
| | 56 |
|
| Other regulatory assets, current | | 81 |
| | 74 |
|
| Prepaid expenses | | 13 |
| | 40 |
|
| Other current assets | | 1 |
| | 2 |
|
| Total current assets | | 473 |
| | 516 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 4,640 |
| | 4,495 |
|
| Less accumulated provision for depreciation | | 1,273 |
| | 1,296 |
|
| Plant in service, net of depreciation | | 3,367 |
| | 3,199 |
|
| Other utility plant, net | | 64 |
| | — |
|
| Construction work in progress | | 407 |
| | 465 |
|
| Total property, plant, and equipment | | 3,838 |
| | 3,664 |
|
| Other Property and Investments | | 15 |
| | 15 |
|
| Deferred Charges and Other Assets: | | | | |
| Deferred charges related to income taxes | | 61 |
| | 56 |
|
| Other regulatory assets, deferred | | 430 |
| | 416 |
|
| Other deferred charges and assets | | 44 |
| | 41 |
|
| Total deferred charges and other assets | | 535 |
| | 513 |
|
| Total Assets | | $ | 4,861 |
| | $ | 4,708 |
|
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2016 | | 2015 |
| | (in millions) |
| Net Income | $ | 31 |
| | $ | 39 |
|
| Other comprehensive income (loss): | | | |
| Qualifying hedges: | | | |
| Changes in fair value, net of tax of $(2) and $-, respectively | (3 | ) | | — |
|
| Total other comprehensive income (loss) | (3 | ) | | — |
|
| Comprehensive Income | $ | 28 |
| | $ | 39 |
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
GULF POWER COMPANY
CONDENSED BALANCE SHEETSSTATEMENTS OF CASH FLOWS (UNAUDITED)
|
| | | | | | | | |
| Liabilities and Stockholder's Equity | | At September 30,
2015 | | At December 31,
2014 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Notes payable | | $ | 76 |
| | $ | 110 |
|
| Accounts payable — | | | | |
| Affiliated | | 65 |
| | 87 |
|
| Other | | 40 |
| | 56 |
|
| Customer deposits | | 36 |
| | 35 |
|
| Accrued taxes — | | | | |
| Accrued income taxes | | 22 |
| | — |
|
| Other accrued taxes | | 33 |
| | 9 |
|
| Accrued interest | | 20 |
| | 11 |
|
| Accrued compensation | | 20 |
| | 23 |
|
| Deferred capacity expense, current | | 22 |
| | 22 |
|
| Liabilities from risk management activities | | 41 |
| | 37 |
|
| Other current liabilities | | 44 |
| | 23 |
|
| Total current liabilities | | 419 |
| | 413 |
|
| Long-term Debt | | 1,310 |
| | 1,370 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 870 |
| | 800 |
|
| Employee benefit obligations | | 120 |
| | 121 |
|
| Other cost of removal obligations | | 226 |
| | 235 |
|
| Other regulatory liabilities, deferred | | 49 |
| | 49 |
|
| Deferred capacity expense | | 147 |
| | 163 |
|
| Other deferred credits and liabilities | | 216 |
| | 101 |
|
| Total deferred credits and other liabilities | | 1,628 |
| | 1,469 |
|
| Total Liabilities | | 3,357 |
| | 3,252 |
|
| Preference Stock | | 147 |
| | 147 |
|
| Common Stockholder's Equity: | | | | |
| Common stock, without par value — | | | | |
| Authorized — 20,000,000 shares | | | | |
| Outstanding — September 30, 2015: 5,642,717 shares | | | | |
| — December 31, 2014: 5,442,717 shares | | 503 |
| | 483 |
|
| Paid-in capital | | 564 |
| | 560 |
|
| Retained earnings | | 290 |
| | 267 |
|
| Accumulated other comprehensive loss | | — |
| | (1 | ) |
| Total common stockholder's equity | | 1,357 |
| | 1,309 |
|
| Total Liabilities and Stockholder's Equity | | $ | 4,861 |
| | $ | 4,708 |
|
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2016 | | 2015 |
| | (in millions) |
| Operating Activities: | | | |
| Net income | $ | 31 |
| | $ | 39 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | |
| Depreciation and amortization, total | 40 |
| | 22 |
|
| Deferred income taxes | 9 |
| | 27 |
|
| Allowance for equity funds used during construction | — |
| | (4 | ) |
| Other, net | (2 | ) | | 11 |
|
| Changes in certain current assets and liabilities — | | | |
| -Receivables | 35 |
| | 12 |
|
| -Fossil fuel stock | 15 |
| | (2 | ) |
| -Other current assets | 2 |
| | 5 |
|
| -Accounts payable | (6 | ) | | (28 | ) |
| -Accrued taxes | 13 |
| | 5 |
|
| -Accrued compensation | (18 | ) | | (16 | ) |
| -Other current liabilities | 13 |
| | 10 |
|
| Net cash provided from operating activities | 132 |
| | 81 |
|
| Investing Activities: | | | |
| Property additions | (32 | ) | | (84 | ) |
| Cost of removal, net of salvage | (2 | ) | | (5 | ) |
| Change in construction payables | (6 | ) | | (1 | ) |
| Other investing activities | (2 | ) | | (2 | ) |
| Net cash used for investing activities | (42 | ) | | (92 | ) |
| Financing Activities: | | | |
| Increase (decrease) in notes payable, net | (85 | ) | | 40 |
|
| Proceeds — Common stock issued to parent | — |
| | 20 |
|
| Payment of common stock dividends | (30 | ) | | (33 | ) |
| Other financing activities | (1 | ) | | — |
|
| Net cash provided from (used for) financing activities | (116 | ) | | 27 |
|
| Net Change in Cash and Cash Equivalents | (26 | ) | | 16 |
|
| Cash and Cash Equivalents at Beginning of Period | 74 |
| | 39 |
|
| Cash and Cash Equivalents at End of Period | $ | 48 |
| | $ | 55 |
|
| Supplemental Cash Flow Information: | | | |
| Cash paid (received) during the period for -- | | | |
| Interest (net of $- and $2 capitalized for 2016 and 2015, respectively) | $ | 3 |
| | $ | 3 |
|
| Income taxes, net | (25 | ) | | (8 | ) |
| Noncash transactions — Accrued property additions at end of period | 15 |
| | 41 |
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Assets | | At March 31,
2016 | | At December 31,
2015 |
| | | (in millions) |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 48 |
| | $ | 74 |
|
| Receivables — | | | | |
| Customer accounts receivable | | 64 |
| | 76 |
|
| Unbilled revenues | | 52 |
| | 54 |
|
| Under recovered regulatory clause revenues | | 21 |
| | 20 |
|
| Income taxes receivable, current | | — |
| | 27 |
|
| Other accounts and notes receivable | | 5 |
| | 9 |
|
| Affiliated companies | | 8 |
| | 1 |
|
| Accumulated provision for uncollectible accounts | | (1 | ) | | (1 | ) |
| Fossil fuel stock, at average cost | | 93 |
| | 108 |
|
| Materials and supplies, at average cost | | 58 |
| | 56 |
|
| Other regulatory assets, current | | 90 |
| | 90 |
|
| Other current assets | | 18 |
| | 22 |
|
| Total current assets | | 456 |
| | 536 |
|
| Property, Plant, and Equipment: | | | | |
| In service | | 5,058 |
| | 5,045 |
|
| Less accumulated provision for depreciation | | 1,324 |
| | 1,296 |
|
| Plant in service, net of depreciation | | 3,734 |
| | 3,749 |
|
| Other utility plant, net | | 60 |
| | 62 |
|
| Construction work in progress | | 57 |
| | 48 |
|
| Total property, plant, and equipment | | 3,851 |
| | 3,859 |
|
| Other Property and Investments | | 4 |
| | 4 |
|
| Deferred Charges and Other Assets: | | | | |
| Deferred charges related to income taxes | | 60 |
| | 61 |
|
| Other regulatory assets, deferred | | 420 |
| | 427 |
|
| Other deferred charges and assets | | 37 |
| | 33 |
|
| Total deferred charges and other assets | | 517 |
| | 521 |
|
| Total Assets | | $ | 4,828 |
| | $ | 4,920 |
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
GULF POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | |
| Liabilities and Stockholder's Equity | | At March 31,
2016 | | At December 31,
2015 |
| | | (in millions) |
| Current Liabilities: | | | | |
| Securities due within one year | | $ | 110 |
| | $ | 110 |
|
| Notes payable | | 56 |
| | 142 |
|
| Accounts payable — | | | | |
| Affiliated | | 46 |
| | 55 |
|
| Other | | 42 |
| | 44 |
|
| Customer deposits | | 36 |
| | 36 |
|
| Accrued taxes — | | | | |
| Accrued income taxes | | 10 |
| | 4 |
|
| Other accrued taxes | | 16 |
| | 9 |
|
| Accrued interest | | 20 |
| | 9 |
|
| Accrued compensation | | 8 |
| | 25 |
|
| Deferred capacity expense, current | | 22 |
| | 22 |
|
| Other regulatory liabilities, current | | 22 |
| | 22 |
|
| Liabilities from risk management activities | | 54 |
| | 49 |
|
| Other current liabilities | | 38 |
| | 40 |
|
| Total current liabilities | | 480 |
| | 567 |
|
| Long-term Debt | | 1,193 |
| | 1,193 |
|
| Deferred Credits and Other Liabilities: | | | | |
| Accumulated deferred income taxes | | 899 |
| | 893 |
|
| Employee benefit obligations | | 128 |
| | 129 |
|
| Deferred capacity expense | | 136 |
| | 141 |
|
| Asset retirement obligations | | 114 |
| | 113 |
|
| Other cost of removal obligations | | 233 |
| | 233 |
|
| Other regulatory liabilities, deferred | | 45 |
| | 47 |
|
| Other deferred credits and liabilities | | 100 |
| | 102 |
|
| Total deferred credits and other liabilities | | 1,655 |
| | 1,658 |
|
| Total Liabilities | | 3,328 |
| | 3,418 |
|
| Preference Stock | | 147 |
| | 147 |
|
| Common Stockholder's Equity: | | | | |
| Common stock, without par value — | | | | |
| Authorized - 20,000,000 shares | | | | |
| Outstanding - March 31, 2016: 5,642,717 shares | | | | |
| - December 31, 2015: 5,642,717 shares | | 503 |
| | 503 |
|
| Paid-in capital | | 569 |
| | 567 |
|
| Retained earnings | | 284 |
| | 285 |
|
| Accumulated other comprehensive loss | | (3 | ) | | — |
|
| Total common stockholder's equity | | 1,353 |
| | 1,355 |
|
| Total Liabilities and Stockholder's Equity | | $ | 4,828 |
| | $ | 4,920 |
|
The accompanying notes as they relate to Gulf Power are an integral part of these condensed financial statements.
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRDFIRST QUARTER 20152016 vs. THIRDFIRST QUARTER 2014
AND
YEAR-TO-DATE 2015 vs. YEAR-TO-DATE 2014
OVERVIEW
Gulf Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service territory located in northwest Florida and to wholesale customers in the Southeast.
Many factors affect the opportunities, challenges, and risks of Gulf Power's business of selling electricity. These factors include the ability to maintain a constructive regulatory environment, to maintain and grow energy sales, 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, reliability, restoration following major storms, and fuel. AppropriatelyEffectively operating pursuant to these regulatory mechanisms and appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Gulf Power for the foreseeable future. Capacity
Through 2015, capacity revenues representfrom long-term non-affiliate sales out of Gulf Power's ownership of Plant Scherer Unit 3 (205 MWs) represented the majority of Gulf Power's wholesale earnings. Gulf Power currently has long-term sales agreements forThe capacity revenues associated with these contracts covering 100% of Gulf Power's co-ownership of Plant Scherer Unit 3 (205 MWs) through 2015 and 41% through 2019. These capacity revenuesownership represented 82% of total wholesale capacity revenues for 2014. Gulf Power is actively evaluating strategic alternatives relatedin 2015. Due to this asset, including replacement wholesale contracts, but the expiration of currenta wholesale contract at the end of 2015 and another wholesale contract at the end of May 2016, Gulf Power's remaining contracted sales from the unit from June 2016 through 2019 will cover approximately 24% of the unit. The expiration of the contract in 2015 and the scheduled future expiration of the remaining contracts couldwill have a material negative impact on Gulf Power's earnings.earnings in 2016 and may continue to have a material negative impact in future years until Gulf Power is able to find a suitable alternative related to this asset. The alternatives Gulf Power is actively evaluating include, without limitation, rededication of the asset to serve retail customers for whom it was originally planned and built, replacement long-term wholesale contracts or other sales into the wholesale market, or an asset sale. On May 5, 2016, Gulf Power delivered a letter to the Florida PSC requesting recognition of Gulf Power's ownership in Plant Scherer Unit 3 as being in service to retail customers when and as the contracts expire. The ultimate outcome of this matter cannot be determined at this time.
In 2013, the Florida PSC voted to approve the settlement agreement (Rate Case Settlement Agreement) among Gulf Power and all of the intervenors to Gulf Power's retail base rate case. Under the terms of the Rate Case Settlement Agreement, Gulf Power (1) increased base rates approximately $35 million annually effective January 2014 and subsequently increased base rates approximately $20 million annually effective January 2015; (2) continued its current authorized retail ROE midpoint (10.25%) and range (9.25% – 11.25%); (3) may reduce depreciation and record a regulatory asset that will be included as an offset to the other cost of removal regulatory liability in an aggregate amount up to $62.5 million between January 2014 and June 2017, of which $34.1 million had been recorded as of March 31, 2016; and (4) is accruing a return similar to AFUDC on certain transmission system upgrades placed into service after January 2014 until the next base rate adjustment date or January 1, 2017, whichever comes first. See FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Retail Base Rate Case" herein for additional details of the Rate Case Settlement Agreement.
Gulf Power continues to focus on several key performance indicators. These indicators include customer satisfaction, plant availability, system reliability, and net income after dividends on preference stock. For additional information on these indicators, see MANAGEMENT'S DISCUSSION AND ANALYSIS – OVERVIEW – "Key Performance Indicators" of Gulf Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $1 | | 2.1 | | $3 | | 2.6 |
Gulf Power's net income after dividends on preference stock for the third quarter 2015 was $48 million compared to $47 million for the corresponding period in 2014. The increase was primarily due to higher retail revenues related to a base rate increase, partially offset by higher operations and maintenance expenses.
Gulf Power's net income after dividends on preference stock for year-to-date 2015 was $120 million compared to $117 million for the corresponding period in 2014. The increase was primarily due to higher retail revenues related to a base rate increase and a reduction in depreciation, as authorized by the Florida PSC, partially offset by higher operations and maintenance expenses.
Retail Revenues
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $(3) | | (0.8) | | $4 | | 0.4 |
In the third quarter 2015, retail revenues were $363 million compared to $366 million for the corresponding period in 2014. For year-to-date 2015, retail revenues were $983 million compared to $979 million for the corresponding period in 2014.
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Income
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(8) | | (21.6) |
Gulf Power's net income after dividends on preference stock for the first quarter 2016 was $29 million compared to $37 million for the corresponding period in 2015. The decrease was primarily due to an increase in depreciation and a decrease in non-affiliated wholesale capacity revenues, partially offset by lower operations and maintenance expenses.
Retail Revenues
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(10) | | (3.4) |
In the first quarter 2016, retail revenues were $283 million compared to $293 million for the corresponding period in 2015.
Details of the changes in retail revenues were as follows:
| | | | | Third Quarter
2015 | | Year-to-Date 2015 | | First Quarter 2016 |
| | | (in millions) | | (% change) | | (in millions) | | (% change) | | (in millions) | | (% change) |
| Retail – prior year | | $ | 366 |
| | | | $ | 979 |
| | | | $ | 293 |
| | |
| Estimated change resulting from – | | | | | | | | | | | | |
| Rates and pricing | | 8 |
| | 2.1 |
| | 18 |
| | 1.8 |
| | 7 |
| | 2.4 |
|
| Sales decline | | (1 | ) | | (0.3 | ) | | (1 | ) | | (0.1 | ) | |
| Sales growth | | | 2 |
| | 0.7 |
|
| Weather | | 4 |
| | 1.1 |
| | 8 |
| | 0.8 |
| | (4 | ) | | (1.4 | ) |
| Fuel and other cost recovery | | (14 | ) | | (3.7 | ) | | (21 | ) | | (2.1 | ) | | (15 | ) | | (5.1 | ) |
| Retail – current year | | $ | 363 |
| | (0.8 | )% | | $ | 983 |
| | 0.4 | % | | $ | 283 |
| | (3.4 | )% |
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters" of Gulf Power in Item 7 and Note 1 to the financial statements of Gulf Power under "Revenues" and Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters" in Item 8 of the Form 10-K for additional information regarding Gulf Power's retail base rate case and cost recovery clauses, including Gulf Power's fuel cost recovery, purchased power capacity recovery, environmental cost recovery, and energy conservation cost recovery clauses.
Revenues associated with changes in rates and pricing increased in the thirdfirst quarter and year-to-date 20152016 when compared to the corresponding periodsperiod in 20142015 primarily due to an increase in retail base rates, as authorized in a settlement agreement for Gulf Power's 2013 base rate case, as well as an increase in the environmental andcost recovery clause rate, partially offset by a decrease in the energy conservation cost recovery clause rates,rate, both effective in January 2015.2016.
Revenues attributable to changes in sales decreased slightlyincreased in the thirdfirst quarter and year-to-date 20152016 when compared to the corresponding periodsperiod in 2014.2015. For the thirdfirst quarter and year-to-date 2015,2016, weather-adjusted KWH energy sales decreased 2.0% and 1.4%, respectively, to residential customers increased 2.8% due to customer growth and decreased 0.6% and 0.3%, respectively,higher customer usage. Weather-adjusted KWH energy sales to commercial customers increased 0.1% due to customer growth, mostly offset by lower customer usage, partially offset by customer growth.usage. KWH energy sales to industrial customers decreased 2.9% and 2.8%increased 7.1% for the thirdfirst quarter and year-to-date 2015, respectively,2016 primarily due to increaseddecreased customer co-generation.co-generation, partially offset by changes in customers' operations.
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and other cost recovery revenues decreased in the thirdfirst quarter and year-to-date 20152016 when compared to the corresponding periodsperiod in 20142015 primarily due to lower revenues associated witha decrease in the fuel cost recovery rate effective in January 2016 and a decrease in fuel costs as the result of decreased generation and lower purchased power energy costs. For year-to-date 2015, the decrease was partially offset by higher revenues associated with purchased power capacity costs when compared to the corresponding period in 2014.
Fuel and other cost recovery provisions include fuel expenses, the energy component of purchased power costs, purchased power capacity costs, and the difference between projected and actual costs and revenues related to energy conservation and environmental compliance. See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Cost Recovery Clauses – Retail Fuel Cost Recovery" in Item 8 of the Form 10-K for additional information.
Wholesale Revenues – Non-Affiliates
| | | Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 | |
| First Quarter 2016 vs. First Quarter 2015 | | First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) | | (% change) |
$(4)(9) | | (11.8) | | $(22) | | (21.2) | | (36.0) |
Wholesale revenues from sales to non-affiliates consist of long-term sales agreements to other utilities in Florida and Georgia and short-term opportunity sales. Capacity revenues from long-term sales agreements represent the greatest contribution to wholesale earnings. Energynet income. The energy is generally sold at variable cost and does not have a significant impact on wholesale earnings.cost. Short-term opportunity sales are made at market-based rates that generally provide a
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
margin above Gulf Power's variable cost of energy. Wholesale energy revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Gulf Power's and the Southern Company system's generation, demand for energy within the Southern Company system's service territory, and the availability of the Southern Company system's generation.
In the thirdfirst quarter 2015,2016, wholesale revenues from sales to non-affiliates were $30$16 million compared to $34$25 million for the corresponding period in 2014.2015. The decrease was primarily due to a 20.2%42.2% decrease in capacity revenues resulting from the expiration of a Plant Scherer Unit 3 sales agreement and a 23.9% decrease in KWH sales resulting from lower sales under the remaining Plant Scherer Unit 3 long-term sales agreements due to lower natural gas prices that led to increased generation from customer-owned units.
For year-to-date 2015, wholesale revenues from sales to non-affiliates were $82 million compared to $104 million for the corresponding period in 2014. The decrease was primarily due to a 41.4% decrease in KWH sales resulting from lower sales under the Plant Scherer Unit 3 long-term sales agreements due to a planned outage and lower natural gas prices that led to increased generation from customer-owned units.
Wholesale Revenues – Affiliates
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $(4) | | (19.0) | | $(45) | | (46.4) |
Wholesale revenues from sales to affiliated companies will vary depending on demand and the availability and cost of generating resources at each company. These affiliate sales are made in accordance with the IIC, as approved by the FERC. These transactions do not have a significant impact on earnings since the revenue related to these energy sales generally offsets the cost of energy sold.
In the third quarter 2015, wholesale revenues from sales to affiliates were $17 million compared to $21 million for the corresponding period in 2014. The decrease was primarily due to a 17.7% decrease in the price of energy sold to affiliates due to lower power pool interchange rates resulting from lower natural gas prices.
For year-to-date 2015, wholesale revenues from sales to affiliates were $52 million compared to $97 million for the corresponding period in 2014. The decrease was primarily due to a 29.1% decrease in KWH sales that resulted from planned outages for Gulf Power generation resources through the second quarter 2015 and a 24.4% decrease in the price of energy sold to affiliates due to lower power pool interchange rates resulting from lower natural gas prices.
Fuel and Purchased Power Expenses
| | | | | Third Quarter 2015
vs.
Third Quarter 2014 | | Year-to-Date 2015
vs.
Year-to-Date 2014 | | First Quarter 2016
vs.
First Quarter 2015 |
| | | (change in millions) | | (% change) | | (change in millions) | | (% change) | | (change in millions) | | (% change) |
| Fuel | | $ | (21 | ) | | (12.8 | ) | | $ | (103 | ) | | (21.5 | ) | | $ | (16 | ) | | (14.5 | ) |
| Purchased power – non-affiliates | | (1 | ) | | (3.7 | ) | | 19 |
| | 33.3 |
| | 5 |
| | 20.0 |
|
| Purchased power – affiliates | | — |
| | — |
| | 3 |
| | 15.8 |
| | (7 | ) | | (77.8 | ) |
| Total fuel and purchased power expenses | | $ | (22 | ) | | | | $ | (81 | ) | | | | $ | (18 | ) | | |
In the thirdfirst quarter 2015,2016, total fuel and purchased power expenses were $173$126 million compared to $195$144 million for the corresponding period in 2014.2015. The decrease was primarily the result of a $20$23 million decrease due to the lower average cost of fuel and purchased power andas a $10 million decrease related to the volume of KWHs generated, partially offset by an $8 million increase in the volume of KWHs purchased.
For year-to-date 2015, total fuel and purchased power expenses were $473 million compared to $554 million for the corresponding period in 2014. The decrease was primarily the result of a $52 million decrease related to the volume
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of KWHs generated and a $31 million decrease due to the lower average cost of fuel and purchased power,generation from Gulf Power's coal-fired resources, partially offset by a $2$5 million increase related to the volume of KWHs purchased.generated due to higher generation from Gulf Power's gas-fired resources.
Fuel and purchased power transactions do not have a significant impact on earnings since energy and capacity expenses are generally offset by energy and capacity revenues through Gulf Power's fuel cost and purchased power capacity cost recovery clauses.clauses and long-term wholesale contracts. See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Cost Recovery Clauses – Retail Fuel Cost Recovery" and " – Purchased Power Capacity Recovery" in Item 8 of the Form 10-K for additional information.
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Details of Gulf Power's generation and purchased power were as follows:
| | | | | Third Quarter
2015 | | Third Quarter
2014 | | Year-to-Date 2015 | | Year-to-Date 2014 | | First Quarter 2016 | | First Quarter 2015 |
Total generation (millions of KWHs) | | 2,839 | | 3,085 | | 7,435 | | 8,717 | | 1,816 | | 2,236 |
Total purchased power (millions of KWHs) | | 1,637 | | 1,479 | | 4,231 | | 4,190 | | 1,760 | | 1,259 |
Sources of generation (percent) – | | |
| Coal | | 64 | | 66 | | 61 | | 69 | | 42 | | 59 |
| Gas | | 36 | | 34 | | 39 | | 31 | | 58 | | 41 |
Cost of fuel, generated (cents per net KWH) – | | |
| Coal | | 3.67 | | 3.83 | | 3.88 | | 4.08 | | 3.92 | | 3.98 |
| Gas | | 4.32 | | 4.16 | | 4.22 | | 3.95 | | 3.75 | | 3.95 |
Average cost of fuel, generated (cents per net KWH) | | 3.90 | | 3.94 | | 4.01 | | 4.04 | | 3.82 | | 3.97 |
Average cost of purchased power (cents per net KWH)(*) | | 3.83 | | 4.96 | | 4.12 | | 4.83 | | 3.22 | | 4.36 |
| |
| (*) | Average cost of purchased power includes fuel purchased by Gulf Power for tolling agreements where power is generated by the provider. |
Fuel
In the thirdfirst quarter 2015,2016, fuel expense was $143$94 million compared to $164$110 million for the corresponding period in 2014.2015. The decrease was primarily due to an 8.0%a 41.1% decrease in the volume of KWHs generated by Gulf Power's coal-fired generation resources and a 1.0%3.8% decrease in the average cost of fuel, due to lower coal prices per KWH generated.
For year-to-date 2015, fuel expense was $375 million compared to $478 million for the corresponding period in 2014. The decrease was primarily due topartially offset by a 14.7% decrease12.7% increase in the volume of KWHs generated due to planned outages forby Gulf Power's gas-fired generation and a resource contracted under a PPA and a 1.0% decrease in the average cost of fuel due to lower coal prices per KWH generated.resources.
Purchased Power – Non-Affiliates
In the thirdfirst quarter 2015,2016, purchased power expense from non-affiliates was $26$30 million compared to $27$25 million for the corresponding period in 2014.2015. The decreaseincrease was primarily due to a 22.2%73.8% increase in the volume of KWHs purchased due to the availability of lower cost energy, partially offset by a 32.2% decrease in the average cost per KWH purchased due to lower natural gas prices, partially offset by a 7.7% increase in the volume of KWHs purchased.
For year-to-date 2015, purchased power expenseenergy costs from non-affiliates was $76 million compared to $57 million for the corresponding period in 2014. The increase was primarily due to a $26 million increase in capacity costs associated with a scheduled rate increase for an existing PPA, partially offset by the expiration of another PPA in mid-2014. The increase was partially offset by an 8.2% decrease in the volume of KWHs purchased due to a planned outage for a resource contracted under a PPA.gas-fired market resources.
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.
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Purchased Power – Affiliates
In the thirdfirst quarter 2015 and the corresponding period in 2014,2016, purchased power expense from affiliates was $4 million.$2 million compared to $9 million for the corresponding period in 2015. The decrease was primarily due to a 62.4% decrease in the volume of KWHs purchased increased 37.9% due to decreased generationlower territorial loads resulting from Gulf Power resources. The increase was offset bymilder weather and a 13.0%39.4% decrease in the average cost per KWH purchased due to lower power pool interchange rates.
For year-to-date 2015, purchased power expense from affiliates was $22 million compared to $19 million for the corresponding period in 2014. The increase was primarily due torates as a 60.5% increase in the volumeresult of KWHs purchased due to planned outages for Gulf Power's generationlower natural gas prices and a resource contracted under a PPA, offset by a 31.5% decrease in the average cost per KWH purchased due to lower power pool interchange rates.off-peak energy prices of renewable market resources.
Energy purchases from affiliates will vary depending on demand and the availability and cost of generating resources at each company within the Southern Company system. These purchases are made in accordance with the IIC or other contractual agreements, all as approved by the FERC.
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Other Operations and Maintenance Expenses
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $5 | | 5.9 | | $23 | | 9.2 |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(16) | | (17.2) |
In the thirdfirst quarter 2015,2016, other operations and maintenance expenses were $90$77 million compared to $85$93 million for the corresponding period in 2014.2015. The decrease was primarily due to a decrease of $11 million in scheduled generation outage expenses.
Depreciation and Amortization
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $18 | | 90.0 |
In the first quarter 2016, depreciation and amortization was $38 million compared to $20 million for the corresponding period in 2015. The increase was primarily due to increases$14 million less of $3 million in employee compensation and benefits including pension costs, $1 million in customer service expenses, and $1 million in marketing programs.
For year-to-date 2015, other operations and maintenance expenses were $274 million compared to $251 million for the corresponding period in 2014. The increase was primarily due to increases of $9 million in routine and planned maintenance expenses at generation facilities, $5 million in employee compensation and benefits including pension costs, $2 million in customer service expenses, $2 million in marketing programs, and $2 million in energy services expenses.
Expenses from marketing programs did not have a significant impact on earnings since they were offset by energy conservation revenues through Gulf Power's energy conservation cost recovery clause. Expenses from energy services did not have a significant impact on earnings since they were generally offset by associated revenues. See Note (F) to the Condensed Financial Statements herein for additional information related to pension costs.
Depreciation and Amortization
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $2 | | 5.3 | | $(9) | | (8.3) |
For year-to-date 2015, depreciation and amortization was $100 million compared to $109 million for the corresponding period in 2014. As authorized by the Florida PSC in a settlement agreement, Gulf Power recorded a $20.5 million reduction in depreciation in the first ninethree months of 2015 as2016 compared to $5.4 million in the corresponding period in 2014. The decrease was partially offset by increases of $6 million primarily attributable to2015, as authorized in the Rate Case Settlement Agreement, and property additions at generation, transmission, and distribution facilities.
See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Retail Base Rate Case" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Retail Regulatory Matters – Gulf Power – Retail Base Rate Case" herein for additional information.
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Taxes Other Than Income Taxes
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $4 | | 12.9 | | $7 | | 8.3 |
In the third quarter 2015, taxes other than income taxes were $35 million compared to $31 million for the corresponding period in 2014. For year-to-date 2015, taxes other than income taxes were $91 million compared to $84 million for the corresponding period in 2014. The increases were primarily due to increases in property taxes, franchise fees, and gross receipts taxes. Franchise fees and gross receipts taxes have no impact on net income.
Allowance for Equity Funds Used During Construction
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $— | | — | | $3 | | 37.5 |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $(4) | | (100.0) |
For year-to-date 2015,In the first quarter 2016, AFUDC equity was $11 millionimmaterial compared to $8$4 million for the corresponding period in 2014.2015. The increasedecrease was primarily due to increased construction related to environmental control projects at generation facilities.facilities and transmission projects being placed in service in 2015.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Gulf Power's future earnings potential. The level of Gulf Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Gulf Power's business of selling electricity. These factors include Gulf 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 and growing sales which are subject to a number of factors. These factors include weather, competition, energy conservation practiced by customers, the use of alternative energy sources by customers, the price of electricity, the price elasticity of demand, the rate of economic growth or decline in Gulf Power's service territory, and the successful remarketing of wholesale capacity as current contracts expire. Demand for electricity for Gulf Power is partiallyprimarily driven by economic growth. The pace of economic growth and electricity demand may be affected by changes in regional and global economic conditions, which 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 Gulf Power in Item 7 of the Form 10-K.
Gulf Power's wholesale business consists of two types of agreements. The first type, referred to as requirements service, provides that Gulf Power serves the customer's capacity and energy requirements from Gulf Power resources. The second type, referred to as a unit sale, is a wholesale customer purchase from a dedicated generating plant unit where a portion of that unit is reserved for the customer. These agreements are associated with Gulf Power's co-ownership of Plant Scherer Unit 3 (205 MWs) and consist of both capacity and energy sales. Capacity revenues represent the majority of Gulf Power's wholesale earnings. Gulf Power currently has long-term sales agreements for 100% of Gulf Power's co-ownership of that unit through 2015 and 41% through 2019. These capacity revenues represented 82% of total wholesale capacity revenues for 2014. Gulf Power is actively evaluating strategic alternatives related to this asset, including replacement wholesale contracts, but the expiration of current contracts could have a material negative impact on Gulf Power's earnings. In the event some portion of Gulf Power's ownership in Plant Scherer is not subject to a replacement long-term wholesale contract, the proportionate amount of the unit may be sold into the power pool or into the wholesale market.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
plant unit where a portion of that unit is reserved for the customer. These agreements are associated with Gulf Power's ownership of Plant Scherer Unit 3 (205 MWs) and consist of both capacity and energy sales. Through 2015, capacity revenues from long-term non-affiliate sales out of Gulf Power's ownership of the unit represented the majority of Gulf Power's wholesale earnings. The capacity revenues associated with these contracts covering 100% of Gulf Power's ownership represented 82% of wholesale capacity revenues in 2015. Due to the expiration of a wholesale contract at the end of 2015 and another wholesale contract at the end of May 2016, Gulf Power's remaining contracted sales from the unit from June 2016 through 2019 will cover approximately 24% of the unit. The expiration of the contract in 2015 and the scheduled future expiration of the remaining contracts will have a material negative impact on Gulf Power's earnings in 2016 and may continue to have a material negative impact in future years until Gulf Power is able to find a suitable alternative related to this asset. The alternatives Gulf Power is actively evaluating include, without limitation, rededication of the asset to serve retail customers for whom it was originally planned and built, replacement long-term wholesale contracts or other sales into the wholesale market, or an asset sale. On May 5, 2016, Gulf Power delivered a letter to the Florida PSC requesting recognition of Gulf Power's ownership in Plant Scherer Unit 3 as being in service to retail customers when and as the contracts expire. The ultimate outcome of this matter cannot be determined at this time.
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 retail rates or through long-term wholesale agreements on a timely basis or through market-based contracts. The State of Florida has statutory provisions that allow a utility to petition the Florida PSC for recovery of prudent environmental compliance costs that are not being recovered through base rates or any other recovery mechanism. Gulf Power's current long-term wholesale agreements contain provisions that permit charging the customer with costs incurred as a result of changes in environmental laws and regulations. The full impact of any such regulatory or legislative changes cannot be determined at this time. 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.modified, as compliance plans are revised or updated, and as legal challenges to rules are completed. Further, higher costs that are recovered through regulated rates or long-term wholesale agreements could contribute to reduced demand for electricity as well as impact the cost competitiveness of wholesale capacity, which could negatively affect results of operations, cash flows, and financial condition. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" andMatters," "Retail Regulatory Matters – Cost Recovery Clauses – Environmental Cost Recovery"Recovery," and "Other Matters" of Gulf Power in Item 7 and Note 3 to the financial statements of Gulf Power under "Environmental Matters" in Item 8 of the Form 10-K for additional information.
Environmental Statutes and Regulations
Air Quality
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters –Environmental Statutes and Regulations – Air Quality" of Gulf Power in Item 7 of the Form 10-K for additional information regarding the EPA's proposed regulations governing emissions during startup, shutdown, or malfunction (SSM), the final MATS rule the Cross State Air Pollution Rule (CSAPR), and the eight-hour National Ambient Air Quality Standard (NAAQS) for ozone.regional haze regulations.
On April 25, 2016, in response to a June 12, 2015 U.S. Supreme Court opinion, the EPA published a finalits supplemental finding regarding consideration of costs in support of the MATS rule. This finding does not impact MATS rule requiring affected states (including Florida, Georgia,compliance requirements, costs, or deadlines, and Mississippi)all Gulf Power units that are subject to revise or remove state implementation plan (SIP) provisions regarding excess emissions that occur during periods of SSMthe MATS rule have completed the measures necessary to achieve compliance with the MATS rule by no later than November 22, 2016.the applicable deadlines.
Also on April 25, 2016, the EPA issued proposed revisions to the regional haze regulations. The ultimate impact of the final ruleproposed revisions will depend on the outcome oftheir ultimate adoption, implementation, and any legal challenges and the development and approval of SIPs by the affected states and cannot be determined at this time.
On June 29, 2015, the U.S. Supreme Court issued a decision finding that the EPA had failed to properly consider costs in its decision to regulate hazardous air pollutant emissions from electric generating units under the MATS rule and remanded the case to the U.S. Court of Appeals for the District of Columbia Circuit for further proceedings. The MATS rule remains in effect while the U.S. Court of Appeals for the District of Columbia Circuit and the EPA respond to the decision. The ultimate impact of this decision cannot be determined at this time.
On July 28, 2015, the U.S. Court of Appeals for the District of Columbia Circuit issued an opinion invalidating certain emissions budgets under the CSAPR Phase II emissions trading program for a number of states, including Florida and Georgia. The court's decision leaves the emissions trading program in place and remands the rule to the EPA for further action consistent with the court's decision. The court rejected all other pending challenges to the rule. The ultimate impact of this decision will depend on additional rulemaking and cannot be determined at this time.
On October 26, 2015, the EPA published a more stringent eight-hour NAAQS for ozone. This new standard could potentially require additional emission controls, improvements in control efficiency, and operational fuel changes and could affect the siting of new generating facilities. The ultimate impact of this matter will depend on any legal challenges and implementation of the final rule and cannot be determined at this time.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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Water Quality
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental Statutes and Regulations – Water Quality" of Gulf Power in Item 7 of the Form 10-K for additional information regarding the EPA's and the U.S. Army Corps of Engineers' rule revising the definition of waters of the U.S. under the Clean Water Act (CWA) and the EPA's revisions to effluent guidelines.
On June 29, 2015, the EPA and the U.S. Army Corps of Engineers jointly published a final rule revising the regulatory definition of waters of the U.S. for all CWA programs. The final rule significantly expands the scope of federal jurisdiction under the CWA and could have significant impacts on economic development projects which could affect customer demand growth. In addition, this rule could significantly increase permitting and regulatory requirements and costs associated with the siting of new facilities and the installation, expansion, and maintenance of transmission and distribution lines. The rule became effective August 28, 2015, but on October 9, 2015, the U.S. Court of Appeals for the Sixth Circuit issued an order staying implementation of the final rule. The ultimate impact of the final rule will depend on the outcome of this and other pending legal challenges and the EPA's and the U.S. Army Corps of Engineers' field-level implementation of the rule and cannot be determined at this time.
On November 3, 2015, the EPA published final revisions to technology-based limits for certain wastestreams from steam electric power plants. These revisions impose stringent steam effluent guidelines and technology requirements for wastewater discharges at affected units. Compliance with these revisions could result in significant additional capital expenditures and could affect future unit retirement and replacement decisions. The ultimate impact of these revisions will depend on any legal challenges and implementation of the final revisions and cannot be determined at this time.
Coal Combustion Residuals
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Coal Combustion Residuals" of Gulf Power in Item 7 of the Form 10-K for additional information regarding the EPA's regulation of CCR.
On April 17, 2015, the EPA published the Disposal of Coal Combustion Residuals from Electric Utilities final rule (CCR Rule) in the Federal Register, which became effective on October 19, 2015. Based on initial cost estimates for closure in place and groundwater monitoring of ash ponds pursuant to the CCR Rule, during the second quarter 2015, Gulf Power recorded incremental asset retirement obligations (ARO) of approximately $75 million related to the CCR Rule. As further analysis is performed, including evaluation of the expected method of compliance, refinement of assumptions underlying the cost estimates, such as the quantities of CCR at each site, and the determination of timing, including the potential for closing ash ponds prior to the end of their currently anticipated useful life, Gulf Power expects to continue to periodically update these estimates. The ultimate impact of the CCR Rule cannot be determined at this timeand will depend on Gulf Power's ongoing review of the CCR Rule, the results of initial and ongoing minimum criteria assessments, and the outcome of legal challenges. See Note (A) to the Condensed Financial Statements herein for additional information regarding Gulf Power's AROs as of September 30, 2015.
Global Climate Issues
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Global Climate Issues" of Gulf Power in Item 7 of the Form 10-K for additional information regarding the EPA's proposed regulation of CO2 from fossil-fuel-fired electric generating units.
On October 23, 2015, two final actions by the EPA that would limit CO2 emissions from fossil fuel-fired electric generating units were published in the Federal Register. One of the final actions contains specific emission standards governing CO2 emissions from new, modified, and reconstructed units. The other final action establishes guidelines for states to develop plans to meet EPA-mandated CO2 emission rates for existing units. The EPA's final guidelines require state plans to meet interim CO2 performance rates between 2022 and 2029 and final rates in 2030 and thereafter. At the same time, a proposed federal plan and proposed model rule were published that states can
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
adopt or that would be put in place if, in response to the final guidelines, a state either does not submit a state plan or its plan is not approved by the EPA.
These guidelines and standards could result in operational restrictions and material compliance costs, including capital expenditures, which could affect future unit retirement and replacement decisions. Gulf Power's results of operations, cash flows, and financial condition could be significantly impacted if such costs are not recovered through regulated rates or through market-based contracts. However, the ultimate financial and operational impact of the final rules on Gulf Power cannot be determined at this time and will depend on numerous factors including the Southern Company system's ongoing review of the final rules; the outcome of any legal challenges, including legal challenges filed by Gulf Power; individual state implementation of the EPA's final guidelines, including the potential that state plans impose different standards; additional rulemaking activities in response to legal challenges and related court decisions; the impact of future changes in generation and emissions-related technology and costs; the impact of future decisions regarding unit retirement and replacement, including the type and amount of any such replacement capacity; and the time periods over which compliance will be required.
FERC Matters
Gulf Power has authority from the FERC to sell electricity at market-based rates. Since 2008, that authority, for certain balancing authority areas, has been conditioned on compliance with the requirements of an energy auction, which the FERC found to be tailored mitigation that addresses potential market power concerns. In accordance with FERC regulations governing such authority, the traditional operating companies (including Gulf Power) and Southern Power filed a triennial market power analysis on June 30, 2014, which included continued reliance on the energy auction as tailored mitigation. On April 27, 2015, the FERC issued an order finding that the traditional operating companies' (including Gulf Power's) and Southern Power's existing tailored mitigation may not effectively mitigate the potential to exert market power in certain areas served by the traditional operating companies and in some adjacent areas. To retain market-based rate authority, the FERC directed the traditional operating companies (including Gulf Power) and Southern Power to show why market-based rate authority should not be revoked in these areas or to provide a mitigation plan to further address market power concerns. The traditional operating companies (including Gulf Power) and Southern Power filed a request for rehearing on May 27, 2015 and on June 26, 2015 filed their response with the FERC. The ultimate outcome of this matter cannot be determined at this time.
Retail Regulatory Matters
Gulf Power's rates and charges for service to retail customers are subject to the regulatory oversight of the Florida PSC. Gulf Power's rates are a combination of base rates and several separate cost recovery clauses for specific categories of costs. These separate cost recovery clauses address such items as fuel and purchased energy costs, purchased power capacity costs, energy conservation and demand side management programs, and the costs of compliance with environmental laws and regulations. Costs not addressed through one of the specific cost recovery clauses are recovered through base rates. See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Retail Base Rate Case" in Item 8 of the Form 10-K for additional information.
Retail Base Rate Case
In December 2013, the Florida PSC approved a settlement agreementthe Rate Case Settlement Agreement providing that provides Gulf Power may reduce depreciation expense and record a regulatory asset up to $62.5 million between January 2014 and June 2017. In any given month, such depreciation expense reduction may not exceed the amount necessary for the retail ROE, as reported to the Florida PSC monthly, to reach the midpoint of the authorized retail ROE range then in effect. For 2014, 2015, and the first ninethree months of 2015,2016, Gulf Power recognized reductions in depreciation expense of $8.4 million, $20.1 million, and $20.5$5.6 million, respectively.
Cost Recovery Clauses
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Retail Regulatory Matters – Cost Recovery Clauses" of Gulf Power in Item 7 and Note 3 to the financial statements of
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Gulf Power under "Retail Regulatory Matters – Cost Recovery Clauses" in Item 8 of the Form 10-K for additional information regarding Gulf Power's recovery of retail costs through various regulatory clauses and accounting orders. Gulf Power has four regulatory clauses which are approved by the Florida PSC. See Note (B) to the Condensed Financial Statements herein for additional information.
On NovemberRenewables
The Florida PSC issued a final approval order on Gulf Power's Community Solar Pilot Program on April 15, 2016. The program will offer all Gulf Power customers an opportunity to voluntarily contribute to the construction and operation of a solar photovoltaic facility with electric generating capacity of up to 1 MW through annual subscriptions. The energy generated from the solar facility is expected to provide power to all of Gulf Power's customers.
Other Matters
As a result of the cost to comply with environmental regulations imposed by the EPA, Gulf Power retired its coal-fired generation at Plant Smith Units 1 and 2 2015,(357 MWs) on March 31, 2016. In connection with this retirement announcement, Gulf Power reclassified the net carrying value of these units from plant in service, net of depreciation, to other utility plant, net. The net book value of these units at March 31, 2016 was approximately $60 million. Gulf Power has filed a petition with the Florida PSC approvedrequesting permission to create a regulatory asset for the remaining net book value of Plant Smith Units 1 and 2 and the remaining inventory associated with these units as of the retirement date. The retirement of these units is not expected to have a material impact on Gulf Power's annualfinancial statements as Gulf Power expects to recover these amounts through its rates; however, the ultimate outcome depends on future rate clause request for its fuel, purchased power capacity, environmental, and energy conservation cost recovery factors for 2016. The net effect of the approved changes is a $49 million decrease in annual revenue for 2016. The decreased revenues will not have a significant impact on net income since most of the revenues will be offset by lower expenses.
Renewables
On April 16, 2015,proceedings with the Florida PSC approved three energy purchase agreements totaling 120 MWs of utility-scale solar generation locatedand cannot be determined at three military installations in northwest Florida. On May 5, 2015, the Florida PSC approved an energy purchase agreement for up to 178 MWs of wind generation in central Oklahoma. Purchases under these agreements will be for energy only and will be recovered through Gulf Power's fuel cost recovery mechanism.this time.
Other Matters
Gulf Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Gulf Power is subject to certain claims and legal actions arising in the ordinary course of business. Gulf 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 occurred throughout the
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U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
The ultimate outcome of such pending or potential litigation against Gulf Power cannot be predicted at this time; however, for current proceedings not specifically reported in Note (B) to the Condensed Financial Statements herein or in Note 3 to the financial statements of Gulf Power in Item 8 of the Form 10-K, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Gulf Power's financial statements. See Note (B) 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.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Gulf Power prepares its financial statements in accordance with GAAP. Significant accounting policies are described in Note 1 to the financial statements of Gulf Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Gulf 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 Gulf Power in Item 7 of the Form 10-K for a complete discussion of Gulf Power's critical accounting policies and estimates related to Electric Utility Regulation, ContingentAsset Retirement Obligations, and Pension and Other Postretirement Benefits.
Asset Retirement Obligations
AROs are computed as the fair value of the ultimate costs for an asset's future retirementBenefits, and are recorded in the period in which the liability is incurred. The costs are capitalized as part of the related long-lived asset and depreciated over the asset's useful life. In the absence of quoted market prices, AROs are estimated using present value techniques in which estimates of future cash outlays associated with the asset retirements are discounted using
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a credit-adjusted risk-free rate. Estimates of the timing and amounts of future cash outlays are based on projections of when and how the assets will be retired and the cost of future removal activities.
The liability for AROs primarily relates to Gulf Power's facilities that are subject to the CCR Rule and to the closure of an ash pond at Plant Scholz. In addition, Gulf Power has retirement obligations related to various landfill sites, a barge unloading dock, asbestos removal, disposal of polychlorinated biphenyls in certain transformers, and combustion turbines at its Pea Ridge facility. Gulf Power also has identified retirement obligations related to certain transmission and distribution facilities, certain wireless communication towers, and certain structures authorized by the U.S. Army Corps of Engineers. However, liabilities for the removal of these assets have not been recorded because the settlement timing for the retirement obligations related to these assets is indeterminable and, therefore, the fair value of the retirement obligations cannot be reasonably estimated. A liability for these AROs will be recognized when sufficient information becomes available to support a reasonable estimation of the ARO.
As a result of the final CCR Rule discussed above, Gulf Power recorded new AROs for facilities that are subject to the CCR Rule. The cost estimates are based on information using various assumptions related to closure and post-closure costs, timing of future cash outlays, inflation and discount rates, and the potential methods for complying with the CCR Rule requirements for closure in place. As further analysis is performed, including evaluation of the expected method of compliance, refinement of assumptions underlying the cost estimates, such as the quantities of CCR at each site, and the determination of timing, including the potential for closing ash ponds prior to the end of their currently anticipated useful life, Gulf Power expects to continue to periodically update these estimates.
Given the significant judgment involved in estimating AROs, Gulf Power considers the liabilities for AROs to be critical accounting estimates.
See Note 1 to the financial statements of Gulf Power under "Asset Retirement Obligations and Other Costs of Removal" in Item 8 of the Form 10-K and Note (A) to the Condensed Financial Statements under "Asset Retirement Obligations" herein for additional information.Contingent Obligations.
Recently Issued Accounting Standards
The Financial Accounting Standards Board's (FASB) ASC 606, Revenue from Contracts with Customers, revises the accounting for revenue recognition effective for fiscal years beginning after December 15, 2017. Gulf Power continues to evaluate the requirements of ASC 606. The ultimate impact of the new standard has not yet been determined.
On April 7, 2015,February 25, 2016, the FASB issued Accounting Standards Update (ASU)ASU No. 2015-03,2016-02, Interest – Imputation of Interest (Subtopic 835-30):Leases Simplifying the Presentation of Debt Issuance Costs(Topic 842) (ASU 2016-02). The ASU 2016-02 requires that debt issuance costs relatedlessees to a recognized debt liability be presented inrecognize on the balance sheet as a direct deduction from the carrying amount of that debtlease liability and a right-of-use asset for all leases. ASU 2016-02 also changes the recognition, measurement, and presentation of expense associated with leases and provides clarification regarding the identification of certain components of contracts that would represent a lease. The accounting required by lessors is relatively unchanged. ASU 2016-02 is effective for fiscal years beginning after December 15, 2015. Early2018, with early adoption is permitted andpermitted. Gulf Power intendsis currently evaluating the new standard and has not yet determined its ultimate impact; however, adoption of ASU 2016-02 is expected to adopthave a significant impact on Gulf Power's balance sheet.
On March 30, 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation(Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 changes the accounting for income taxes and the cash flow presentation for share-based payment award transactions. Most significantly, entities are required to recognize all excess tax benefits and deficiencies related to the exercise or vesting of stock compensation as income tax expense or benefit in the fourth quarter 2015. The ASU is required to be applied retrospectively to all periods presented beginning in the year of adoption.income statement. Gulf Power currently reflects unamortized debt issuance costsrecognizes any excess tax benefits and deficiencies related to the exercise and vesting of stock compensation in other deferred chargesadditional paid-in capital. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. Gulf Power is currently evaluating the new standard and assets onhas not yet determined its balance sheet. Upon adoption, the reclassification will not have a material impact on the results of operations, financial position, or cash flows of Gulf Power.ultimate impact.
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Gulf Power in Item 7 of the Form 10-K for additional information. Gulf Power's financial condition remained stable at September 30, 2015.March 31, 2016. Gulf Power intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements to meet future capital and liquidity needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing Activities" herein for additional information.
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash provided from operating activities totaled $411$132 million for the first ninethree months of 20152016 compared to $324$81 million for the corresponding period in 2014.2015. The $87$51 million increase in net cash was primarily due to increased revenue collection related to cost recovery clausesa federal income tax refund and the timing of income tax payments and refunds associated with bonus depreciation, partially offset by the timing of payments for accounts payable and fossil fuel stock purchases.vendor payments. Net cash used for investing activities totaled $233$42 million in the first ninethree months of 20152016 primarily due to property additions to utility plant. Net cash used for financing activities totaled $176$116 million for the first ninethree months of 20152016 primarily due to payments forrelated to notes payable and common stock dividends and redemptions of long-term debt and notes payable, partially offset by cash received for the issuance of common stock to Southern Company.dividends. Fluctuations in cash flow from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.
Significant balance sheet changes for the first ninethree months of 2015 include increases of $174 million in net property, plant, and equipment, $115 million in other deferred credits and liabilities primarily related to AROs, and $70 million in accumulated deferred income tax liabilities primarily related to bonus depreciation. Other significant changes2016 include decreases of $60 million in long-term debt, $40 million in under recovered regulatory clause revenues, and $34$86 million in notes payable.payable, $27 million of income tax receivables following the receipt of a federal income tax refund, and $26 million in cash and cash equivalents.
Capital Requirements and Contractual Obligations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Gulf Power in Item 7 of the Form 10-K for a description of Gulf Power's capital requirements for its construction program, including estimated capital expenditures to comply with existing environmental statutes and regulations, scheduled maturities of long-term debt, as well as related interest, leases, derivative obligations, preference stock dividends, purchase commitments, and trust funding requirements, and unrecognized tax benefits. There are no scheduled maturitiesrequirements. Approximately $235 million will be required through March 31, 2017 to fund a maturity of long-term debt through September 30, 2016.and an announced redemption of long-term debt. See "Financing Activities" herein for additional information.
The construction program is subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; storm impacts; changes in environmental statutes and regulations; 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 regulatory requirements; changes in the expected environmental compliance programs; changes in FERC rules and regulations; Florida PSC approvals; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; and the cost of capital. In addition, there can be no assurance that costs related to capital expenditures will be fully recovered.
Sources of Capital
Gulf Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, short-term debt, external security issuances, term loans, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings, if needed, will depend upon regulatory approval, prevailing market conditions, and other factors. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Sources of Capital" of Gulf Power in Item 7 of the Form 10-K for additional information.
Gulf Power's current liabilities frequently exceed current assets because of the continued use of short-term debt as a funding source to meet scheduled maturities of long-term debt, as well as cash needs, which can fluctuate significantly due to the seasonality of the business. Gulf Power has substantial cash flow from operating activities and access to the capital markets and financial institutions to meet short-term liquidity needs, including its commercial paper program which is supported by bank credit facilities.
At March 31, 2016, Gulf Power had approximately $48 million of cash and cash equivalents. Committed credit arrangements with banks at March 31, 2016 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expires | | | | | | Executable Term Loans | | Due Within One Year |
| 2016 | | 2017 | | 2018 | | Total | | Unused | | One Year | | Two Years | | Term Out | | No Term Out |
| | | | | (in millions) | | (in millions) | | (in millions) |
| $ | 75 |
| | $ | 40 |
| | $ | 165 |
| | $ | 280 |
| | $ | 280 |
| | $ | 45 |
| | $ | — |
| | $ | 45 |
| | $ | 40 |
|
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At September 30, 2015, Gulf Power had approximately $41 million of cash and cash equivalents. Committed credit arrangements with banks at September 30, 2015 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expires | | | | | | Executable Term Loans | | Due Within One Year |
| 2015 | | 2016 | | 2017 | | Total | | Unused | | One Year | | Two Years | | Term Out | | No Term Out |
| (in millions) | | (in millions) | | (in millions) | | (in millions) |
| $ | 20 |
| | $ | 225 |
| | $ | 30 |
| | $ | 275 |
| | $ | 275 |
| | $ | 50 |
| | $ | — |
| | $ | 50 |
| | $ | 195 |
|
See Note 6 to the financial statements of Gulf Power under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.
Most of the unused credit arrangements with banks are allocated to provide liquidity support to Gulf Power's variable rate pollution control revenue bonds and commercial paper program. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of September 30, 2015 was approximately $82 million. In addition, at September 30, 2015, Gulf Power had approximately $33 million of fixed rate pollution control revenue bonds outstanding that were required to be reoffered within the next 12 months.
Most of these bank credit arrangements contain covenants that limit debt levels and contain cross defaultacceleration provisions to other indebtedness (including guarantee obligations) that are restricted only to the indebtedness of Gulf Power. Such cross defaultacceleration provisions to other indebtedness would trigger an event of default if Gulf Power defaulted on indebtedness, or guarantee obligations over a specified threshold.the payment of which was then accelerated. Gulf Power is currently in compliance with all such covenants. None of the bank credit arrangements contain material adverse change clauses at the time of borrowings.
Subject to applicable market conditions, Gulf Power expects to renew or replace its bank credit arrangements, as needed, prior to expiration. In connection therewith, Gulf Power may extend the maturity dates and/or increase or decrease the lending commitments thereunder.
Most of the unused credit arrangements with banks are allocated to provide liquidity support to Gulf Power's pollution control revenue bonds and commercial paper program. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of March 31, 2016 was approximately $82 million. In addition, at March 31, 2016, Gulf Power had approximately $33 million of fixed rate pollution control revenue bonds outstanding that were required to be remarketed within the next 12 months.
Gulf Power may also meet short-term cash needs through a Southern Company subsidiary organized to issue and sell commercial paper at the request and for the benefit of Gulf Power and the other traditional operating companies. Proceeds from such issuances for the benefit of Gulf Power are loaned directly to Gulf Power. The obligations of each company under these arrangements are several and there is no cross-affiliate credit support.
Details of short-term borrowings were as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | Short-term Debt at September 30, 2015 | | Short-term Debt During the Period(*) |
| | | Amount Outstanding | | Weighted Average Interest Rate | | Average Amount Outstanding | | Weighted Average Interest Rate | | Maximum Amount Outstanding |
| | | (in millions) | | | | (in millions) | | | | (in millions) |
| Commercial paper | | $ | 76 |
| | 0.4 | % | | $ | 91 |
| | 0.4 | % | | $ | 125 |
|
| Short-term bank debt | | — |
| | — | % | | 30 |
| | 0.7 | % | | 40 |
|
| Total | | $ | 76 |
| | 0.4 | % | | $ | 121 |
| | 0.4 | % | | |
|
| | | | | | | | | | | | | | | | | | |
| | | Short-term Debt at March 31, 2016 | | Short-term Debt During the Period(*) |
| | | Amount Outstanding | | Weighted Average Interest Rate | | Average Amount Outstanding | | Weighted Average Interest Rate | | Maximum Amount Outstanding |
| | | (in millions) | | | | (in millions) | | | | (in millions) |
| Commercial paper | | $ | 56 |
| | 0.9 | % | | $ | 77 |
| | 0.8 | % | | $ | 148 |
|
| |
| (*) | Average and maximum amounts are based upon daily balances during the three-month period ended September 30, 2015.March 31, 2016. |
Gulf Power believes the need for working capital can be adequately met by utilizing the commercial paper program, lines of credit, short-term bank loans, and operating cash flows.
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Credit Rating Risk
Gulf Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.
There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB- and/or Baa3 or below. These contracts are for physical electricity purchases and sales, fuel transportation and storage, transmission, and energy price risk management.
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The maximum potential collateral requirements under these contracts at September 30, 2015March 31, 2016 were as follows:
| | | Credit Ratings | Maximum Potential Collateral Requirements | Maximum Potential Collateral Requirements |
| | (in millions) | (in millions) |
| At BBB- and/or Baa3 | $ | 91 |
| $ | 78 |
|
| Below BBB- and/or Baa3 | 485 |
| $ | 428 |
|
Included in these amounts are certain agreements that could require collateral in the event that one or more Southern Company system power pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of Gulf Power to access capital markets and would be likely to impact the cost at which it does so.
On August 17, 2015, S&P downgraded the consolidated long-term issuer rating of Southern Company (including Gulf Power) to A- from A and revised its credit rating outlook from negative to stable. Separately, on August 24, 2015, S&P revised its credit rating outlook from stable to negative following the announcement of the Merger.
Market Price Risk
Gulf Power's market risk exposure relative to interest rate changes for the thirdfirst quarter and year-to-date 20152016 has not changed materially compared to the December 31, 20142015 reporting period. Gulf Power's exposure to market volatility in commodity fuel prices and prices of electricity with respect to its wholesale generating capacity is limited because its long-term sales agreements shift substantially all fuel cost responsibility to the purchaser. However, Gulf Power could become exposed to market volatility in energy-related commodity prices to the extent any wholesale generating capacity is uncontracted.
Through 2015, capacity revenues from long-term non-affiliate sales out of Gulf Power currently has long-term sales agreements forPower's ownership of Plant Scherer Unit 3 (205 MWs) represented the majority of Gulf Power's wholesale earnings. The capacity revenues associated with these contracts covering 100% of its wholesale capacity through 2015 and 41% through 2019. These capacity revenuesGulf Power's ownership represented 82% of total wholesale capacity revenues for 2014. Gulf Power is actively pursuing replacement wholesale contracts butin 2015. Due to the expiration of currenta wholesale contract at the end of 2015 and another wholesale contract at the end of May 2016, Gulf Power's remaining contracted sales from the unit from June 2016 through 2019 will cover approximately 24% of the unit. The expiration of the contract in 2015 and the scheduled future expiration of the remaining contracts couldwill have a material negative impact on Gulf Power's earnings. Inearnings in 2016 and may continue to have a material negative impact in future years until Gulf Power is able to find a suitable alternative related to this asset. The alternatives Gulf Power is actively evaluating include, without limitation, rededication of the event some portionasset to serve retail customers for whom it was originally planned and built, replacement long-term wholesale contracts or other sales into the wholesale market, or an asset sale. On May 5, 2016, Gulf Power delivered a letter to the Florida PSC requesting recognition of Gulf Power's ownership in Plant Scherer is not subjectUnit 3 as being in service to a replacement long-term wholesale contract,retail customers when and as the proportionate amountcontracts expire. The ultimate outcome of the unit maythis matter cannot be sold into the power pool or into the wholesale market.determined at this time. For an in-depth discussion of Gulf Power's market risks, see MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Market Price Risk" of Gulf Power in Item 7 of the Form 10-K.
Financing Activities
In January 2015, Gulf Power issued 200,000 shares of common stock to Southern Company and realized proceeds of $20 million. The proceeds were used to repay a portion of Gulf Power's short-term debt and for other general corporate purposes, including Gulf Power's continuous construction program.
In June 2015, Gulf Power entered into a $40 million aggregate principal amount three-month floating rate bank loan bearing interest based on one-month LIBOR. The proceeds were used for credit support, working capital, and other general corporate purposes. The loan was repaid at maturity.
GULF POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In July 2015, Gulf Power purchased and held $13 million aggregate principal amount of Mississippi Business Finance Corporation Solid Waste Disposal Facilities Revenue Refunding Bonds (Gulf Power Company Project), Series 2012. Gulf Power reoffered these bonds on July 16, 2015.
In September 2015, Gulf Power redeemed $60 million aggregate principal amount of its Series L 5.65% Senior Notes due September 1, 2035.
Subsequent to September 30, 2015, Gulf Power entered into forward-starting interest rate swaps to hedge exposure to interest rate changes related to an anticipated debt issuance. The notional amount of the swaps totaled $80 million.
In addition to any financings that may be necessary to meet capital requirements, contractual obligations, and storm recovery, Gulf Power plans to continue, when economically feasible, a program to retire higher-cost securities and replace these obligations with lower-cost capital if market conditions permit.
Subsequent to March 31, 2016, Gulf Power announced the redemption in May 2016 of $125 million aggregate principal amount of its Series 2011A 5.75% Senior Notes due June 1, 2051.
MISSISSIPPI POWER COMPANY
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF OPERATIONSINCOME (UNAUDITED)
| | | | For the Three Months
Ended September 30, | | For the Nine Months
Ended September 30, | For the Three Months
Ended March 31, |
| | 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
| | (in millions) | | (in millions) | (in millions) |
| Operating Revenues: | | | | | | | | | | |
| Retail revenues | $ | 244 |
| | $ | 228 |
| | $ | 601 |
| | $ | 647 |
| $ | 183 |
| | $ | 167 |
|
| Wholesale revenues, non-affiliates | 76 |
| | 83 |
| | 216 |
| | 255 |
| 60 |
| | 77 |
|
| Wholesale revenues, affiliates | 18 |
| | 39 |
| | 63 |
| | 82 |
| 9 |
| | 27 |
|
| Other revenues | 3 |
| | 5 |
| | 13 |
| | 13 |
| 5 |
| | 5 |
|
| Total operating revenues | 341 |
| | 355 |
| | 893 |
| | 997 |
| 257 |
| | 276 |
|
| Operating Expenses: | | | | | | | | | | |
| Fuel | 130 |
| | 169 |
| | 359 |
| | 459 |
| 76 |
| | 114 |
|
| Purchased power, non-affiliates | 1 |
| | 3 |
| | 5 |
| | 16 |
| — |
| | 2 |
|
| Purchased power, affiliates | 1 |
| | 2 |
| | 6 |
| | 17 |
| 5 |
| | 2 |
|
| Other operations and maintenance | 63 |
| | 67 |
| | 206 |
| | 192 |
| 69 |
| | 73 |
|
| Depreciation and amortization | 38 |
| | 23 |
| | 95 |
| | 70 |
| 38 |
| | 27 |
|
| Taxes other than income taxes | 24 |
| | 22 |
| | 71 |
| | 63 |
| 26 |
| | 25 |
|
| Estimated loss on Kemper IGCC | 150 |
| | 418 |
| | 182 |
| | 798 |
| 53 |
| | 9 |
|
| Total operating expenses | 407 |
| | 704 |
| | 924 |
| | 1,615 |
| 267 |
| | 252 |
|
| Operating Income (Loss) | (66 | ) | | (349 | ) | | (31 | ) | | (618 | ) | (10 | ) | | 24 |
|
| Other Income and (Expense): | | | | | | | | | | |
| Allowance for equity funds used during construction | 29 |
| | 32 |
| | 82 |
| | 108 |
| 29 |
| | 28 |
|
| Interest expense, net of amounts capitalized | (13 | ) | | (9 | ) | | 6 |
| | (34 | ) | (16 | ) | | (11 | ) |
| Other income (expense), net | (2 | ) | | (8 | ) | | (5 | ) | | (12 | ) | (2 | ) | | (2 | ) |
| Total other income and (expense) | 14 |
| | 15 |
| | 83 |
| | 62 |
| 11 |
| | 15 |
|
| Earnings (Loss) Before Income Taxes | (52 | ) | | (334 | ) | | 52 |
| | (556 | ) | |
| Earnings Before Income Taxes | | 1 |
| | 39 |
|
| Income taxes (benefit) | (31 | ) | | (139 | ) | | (11 | ) | | (253 | ) | (10 | ) | | 4 |
|
| Net Income (Loss) | (21 | ) | | (195 | ) | | 63 |
| | (303 | ) | |
| Net Income | | 11 |
| | 35 |
|
| Dividends on Preferred Stock | — |
| | — |
| | 1 |
| | 2 |
| — |
| | — |
|
| Net Income (Loss) After Dividends on Preferred Stock | $ | (21 | ) | | $ | (195 | ) | | $ | 62 |
| | $ | (305 | ) | |
| Net Income After Dividends on Preferred Stock | | $ | 11 |
| | $ | 35 |
|
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
|
| | | | | | | | | | | | | | | |
| | For the Three Months
Ended September 30, | | For the Nine Months
Ended September 30, |
| | 2015 | | 2014 | | 2015 | | 2014 |
| | (in millions) | | (in millions) |
| Net Income (Loss) | $ | (21 | ) | | $ | (195 | ) | | $ | 63 |
| | $ | (303 | ) |
| Other comprehensive income (loss): | | | | | | | |
| Qualifying hedges: | | | | | | | |
Reclassification adjustment for amounts included in net income, net of tax of $-, $-, $- and $-, respectively | — |
| | — |
| | 1 |
| | — |
|
| Total other comprehensive income (loss) | — |
| | — |
| | 1 |
| | — |
|
| Comprehensive Income (Loss) | $ | (21 | ) | | $ | (195 | ) | | $ | 64 |
| | $ | (303 | ) |
|
| | | | | | | |
| | For the Three Months
Ended March 31, |
| | 2016 | | 2015 |
| | (in millions) |
| Net Income | $ | 11 |
| | $ | 35 |
|
| Other comprehensive income (loss): | — |
| | — |
|
| Comprehensive Income | $ | 11 |
| | $ | 35 |
|
MISSISSIPPI POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) | | | | For the Nine Months
Ended September 30, | For the Three Months
Ended March 31, |
| | 2015 | | 2014 | 2016 | | 2015 |
| | (in millions) | (in millions) |
| Operating Activities: | | | | | | |
| Net income (loss) | $ | 63 |
| | $ | (303 | ) | |
| Adjustments to reconcile net income (loss) to net cash provided from operating activities — | | | | |
| Net income | | $ | 11 |
| | $ | 35 |
|
Adjustments to reconcile net income to net cash provided from (used for) operating activities — | | | | |
| Depreciation and amortization, total | 94 |
| | 78 |
| 39 |
| | 26 |
|
| Deferred income taxes | 518 |
| | 159 |
| (4 | ) | | 141 |
|
| Investment tax credits | 25 |
| | (108 | ) | |
| Allowance for equity funds used during construction | (82 | ) | | (108 | ) | (29 | ) | | (28 | ) |
| Regulatory assets associated with Kemper IGCC | (56 | ) | | (52 | ) | (6 | ) | | (27 | ) |
| Estimated loss on Kemper IGCC | 182 |
| | 798 |
| 53 |
| | 9 |
|
| Income taxes receivable, non-current | (544 | ) | | — |
| |
| Other, net | 7 |
| | 10 |
| 1 |
| | 11 |
|
| Changes in certain current assets and liabilities — | | | | | | |
| -Receivables | 7 |
| | (48 | ) | 45 |
| | 17 |
|
| -Fossil fuel stock | 5 |
| | 36 |
| 6 |
| | 4 |
|
| -Prepaid income taxes | (1 | ) | | (90 | ) | (3 | ) | | 44 |
|
| -Other current assets | (8 | ) | | (4 | ) | (5 | ) | | (3 | ) |
| -Accounts payable | (32 | ) | | 28 |
| (22 | ) | | (22 | ) |
| -Accrued taxes | 24 |
| | (17 | ) | (61 | ) | | (54 | ) |
| -Accrued interest | (6 | ) | | 24 |
| 2 |
| | 9 |
|
| -Accrued compensation | (8 | ) | | 8 |
| (16 | ) | | (20 | ) |
| -Over recovered regulatory clause revenues | 59 |
| | (18 | ) | 9 |
| | 22 |
|
| -Mirror CWIP | 99 |
| | 112 |
| — |
| | 40 |
|
| -Customer liability associated with Kemper refunds | | (51 | ) | | — |
|
| -Other current liabilities | 3 |
| | — |
| 6 |
| | — |
|
| Net cash provided from operating activities | 349 |
| | 505 |
| |
| Net cash provided from (used for) operating activities | | (25 | ) | | 204 |
|
| Investing Activities: | | | | | | |
| Property additions | (626 | ) | | (986 | ) | (197 | ) | | (213 | ) |
| Construction payables | (31 | ) | | (40 | ) | (7 | ) | | (14 | ) |
| Investment in restricted cash | — |
| | (11 | ) | |
| Distribution of restricted cash | — |
| | 9 |
| |
| Other investing activities | (29 | ) | | (22 | ) | (10 | ) | | (6 | ) |
| Net cash used for investing activities | (686 | ) | | (1,050 | ) | (214 | ) | | (233 | ) |
| Financing Activities: | | | | | | |
| Increase in notes payable, net | 475 |
| | — |
| |
| Proceeds — | | | | | | |
| Capital contributions from parent company | 153 |
| | 311 |
| 1 |
| | 76 |
|
| Bonds — Other | — |
| | 23 |
| |
| Interest-bearing refundable deposit | — |
| | 75 |
| |
| Long-term debt issuance to parent company | — |
| | 220 |
| 200 |
| | — |
|
| Other long-term debt issuances | — |
| | 250 |
| 900 |
| | — |
|
| Short-term borrowings | 30 |
| | — |
| — |
| | 30 |
|
| Redemptions — | | | | | | |
| Long-term debt to parent company | — |
| | (220 | ) | |
| Short-term borrowings | | (475 | ) | | — |
|
| Other long-term debt | (350 | ) | | — |
| (425 | ) | | (75 | ) |
| Payment of preferred stock dividends | (1 | ) | | (1 | ) | |
| Return of capital | — |
| | (165 | ) | |
| Other financing activities | (7 | ) | | (3 | ) | (2 | ) | | (1 | ) |
| Net cash provided from financing activities | 300 |
| | 490 |
| 199 |
| | 30 |
|
| Net Change in Cash and Cash Equivalents | (37 | ) | | (55 | ) | (40 | ) | | 1 |
|
| Cash and Cash Equivalents at Beginning of Period | 133 |
| | 145 |
| 98 |
| | 133 |
|
| Cash and Cash Equivalents at End of Period | $ | 96 |
| | $ | 90 |
| $ | 58 |
| | $ | 134 |
|
| Supplemental Cash Flow Information: | | | | | | |
| Cash paid (received) during the period for — | | | | |
| Interest (paid $58 and $55, net of $52 and $50 capitalized for 2015 and 2014, respectively) | $ | 6 |
| | $ | 5 |
| |
| Cash paid (received) during the period for -- | | | | |
Interest (paid $22 and $17, net of $10 and $18 capitalized for 2016
and 2015, respectively) | | $ | 12 |
| | $ | (1 | ) |
| Income taxes, net | (55 | ) | | (210 | ) | (24 | ) | | (180 | ) |
| Noncash transactions — | | | | |
| Accrued property additions at end of period | 83 |
| | 124 |
| |
Issuance of promissory note to parent related to repayment of interest-bearing refundable deposits and accrued interest | 301 |
| | — |
| |
| Noncash transactions — Accrued property additions at end of period | | 97 |
| | 100 |
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
| | | Assets | | At September 30,
2015 | | At December 31,
2014 | | At March 31,
2016 | | At December 31,
2015 |
| | | (in millions) | | (in millions) |
| Current Assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 96 |
| | $ | 133 |
| | $ | 58 |
| | $ | 98 |
|
| Receivables — | | | | | | | | |
| Customer accounts receivable | | 51 |
| | 43 |
| | 23 |
| | 26 |
|
| Unbilled revenues | | 42 |
| | 35 |
| | 32 |
| | 36 |
|
| Income taxes receivable, current | | | — |
| | 20 |
|
| Other accounts and notes receivable | | 11 |
| | 11 |
| | 6 |
| | 10 |
|
| Affiliated companies | | 31 |
| | 51 |
| | 7 |
| | 20 |
|
| Accumulated provision for uncollectible accounts | | (1 | ) | | (1 | ) | |
| Fossil fuel stock, at average cost | | 95 |
| | 100 |
| | 99 |
| | 104 |
|
| Materials and supplies, at average cost | | 72 |
| | 62 |
| | 76 |
| | 75 |
|
| Other regulatory assets, current | | 119 |
| | 73 |
| | 101 |
| | 95 |
|
| Prepaid income taxes | | 183 |
| | 191 |
| | 42 |
| | 39 |
|
| Other current assets | | 10 |
| | 6 |
| | 5 |
| | 8 |
|
| Total current assets | | 709 |
| | 704 |
| | 449 |
| | 531 |
|
| Property, Plant, and Equipment: | | | | | | | | |
| In service | | 4,475 |
| | 4,378 |
| | 4,905 |
| | 4,886 |
|
| Less accumulated provision for depreciation | | 1,215 |
| | 1,173 |
| | 1,287 |
| | 1,262 |
|
| Plant in service, net of depreciation | | 3,260 |
| | 3,205 |
| | 3,618 |
| | 3,624 |
|
| Construction work in progress | | 2,596 |
| | 2,161 |
| | 2,400 |
| | 2,254 |
|
| Total property, plant, and equipment | | 5,856 |
| | 5,366 |
| | 6,018 |
| | 5,878 |
|
| Other Property and Investments | | 6 |
| | 5 |
| | 11 |
| | 11 |
|
| Deferred Charges and Other Assets: | | | | | | | | |
| Deferred charges related to income taxes | | 278 |
| | 226 |
| | 303 |
| | 290 |
|
| Other regulatory assets, deferred | | 460 |
| | 385 |
| | 520 |
| | 525 |
|
| Income taxes receivable, non-current | | 544 |
| | — |
| | 544 |
| | 544 |
|
| Other deferred charges and assets | | 60 |
| | 71 |
| | 71 |
| | 61 |
|
| Total deferred charges and other assets | | 1,342 |
| | 682 |
| | 1,438 |
| | 1,420 |
|
| Total Assets | | $ | 7,913 |
| | $ | 6,757 |
| | $ | 7,916 |
| | $ | 7,840 |
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
MISSISSIPPI POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
| | | Liabilities and Stockholder's Equity | | At September 30,
2015 | | At December 31,
2014 | | At March 31,
2016 | | At December 31,
2015 |
| | | (in millions) | | (in millions) |
| Current Liabilities: | | | | | | | | |
| Securities due within one year | | $ | 429 |
| | $ | 778 |
| | $ | 303 |
| | $ | 728 |
|
| Notes payable | | 500 |
| | — |
| | 25 |
| | 500 |
|
| Interest-bearing refundable deposits | | — |
| | 275 |
| |
| Accounts payable — | | | | | | | | |
| Affiliated | | 91 |
| | 86 |
| | 82 |
| | 85 |
|
| Other | | 109 |
| | 178 |
| | 108 |
| | 135 |
|
| Accrued taxes — | | | | | |
| Accrued income taxes | | 288 |
| | 142 |
| |
| Other accrued taxes | | 67 |
| | 84 |
| |
| Customer deposits | | | 16 |
| | 16 |
|
| Accrued taxes | | | 25 |
| | 85 |
|
| Accrued interest | | 15 |
| | 76 |
| | 21 |
| | 18 |
|
| Accrued compensation | | 18 |
| | 26 |
| | 10 |
| | 26 |
|
| Asset retirement obligations, current | | | 39 |
| | 22 |
|
| Over recovered regulatory clause liabilities | | 60 |
| | 1 |
| | 106 |
| | 96 |
|
| Mirror CWIP | | 369 |
| | 271 |
| |
| Customer liability associated with Kemper refunds | | | 22 |
| | 73 |
|
| Other current liabilities | | 87 |
| | 61 |
| | 55 |
| | 52 |
|
| Total current liabilities | | 2,033 |
| | 1,978 |
| | 812 |
| | 1,836 |
|
| Long-term Debt: | | | | | | | | |
| Long-term debt, affiliated | | 301 |
| | — |
| | 776 |
| | 576 |
|
| Long-term debt, non-affiliated | | 1,621 |
| | 1,630 |
| | 2,206 |
| | 1,310 |
|
| Total Long-term Debt | | 1,922 |
| | 1,630 |
| | 2,982 |
| | 1,886 |
|
| Deferred Credits and Other Liabilities: | | | | | | | | |
| Accumulated deferred income taxes | | 674 |
| | 285 |
| | 771 |
| | 762 |
|
| Deferred credits related to income taxes | | | 8 |
| | 8 |
|
| Accumulated deferred investment tax credits | | 5 |
| | 283 |
| | 5 |
| | 5 |
|
| Employee benefit obligations | | 147 |
| | 148 |
| | 149 |
| | 153 |
|
| Asset retirement obligations | | 150 |
| | 48 |
| |
| Asset retirement obligations, deferred | | | 136 |
| | 154 |
|
| Unrecognized tax benefits | | 361 |
| | 2 |
| | 368 |
| | 368 |
|
| Other cost of removal obligations | | 171 |
| | 166 |
| | 167 |
| | 165 |
|
| Other regulatory liabilities, deferred | | 66 |
| | 64 |
| | 71 |
| | 71 |
|
| Other deferred credits and liabilities | | 48 |
| | 36 |
| | 41 |
| | 40 |
|
| Total deferred credits and other liabilities | | 1,622 |
| | 1,032 |
| | 1,716 |
| | 1,726 |
|
| Total Liabilities | | 5,577 |
| | 4,640 |
| | 5,510 |
| | 5,448 |
|
| Redeemable Preferred Stock | | 33 |
| | 33 |
| | 33 |
| | 33 |
|
| Common Stockholder's Equity: | | | | | | | | |
| Common stock, without par value — | | | | | | | | |
| Authorized — 1,130,000 shares | | | | | | | | |
| Outstanding — 1,121,000 shares | | 38 |
| | 38 |
| | 38 |
| | 38 |
|
| Paid-in capital | | 2,767 |
| | 2,612 |
| | 2,896 |
| | 2,893 |
|
| Accumulated deficit | | (496 | ) | | (559 | ) | | (555 | ) | | (566 | ) |
| Accumulated other comprehensive loss | | (6 | ) | | (7 | ) | | (6 | ) | | (6 | ) |
| Total common stockholder's equity | | 2,303 |
| | 2,084 |
| | 2,373 |
| | 2,359 |
|
| Total Liabilities and Stockholder's Equity | | $ | 7,913 |
| | $ | 6,757 |
| | $ | 7,916 |
| | $ | 7,840 |
|
The accompanying notes as they relate to Mississippi Power are an integral part of these condensed financial statements.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRDFIRST QUARTER 20152016 vs. THIRDFIRST QUARTER 20142015
AND
YEAR-TO-DATE 2015 vs. YEAR-TO-DATE 2014
OVERVIEW
Mississippi Power operates as a vertically integrated utility providing electricity to retail customers within its traditional service territory located within the State of Mississippi and to wholesale customers in the Southeast.
Many factors affect the opportunities, challenges, and risks of Mississippi Power's business of selling electricity. These factors include Mississippi Power's ability to maintain and grow energy sales and to operate in a constructive regulatory environment that provides timely recovery of prudently-incurred costs. These costs include those related to the completion and operation of major construction projects, primarily the Kemper IGCC and the Plant Daniel scrubber project, projected long-term demand growth, reliability, fuel, and increasingly stringent environmental standards, as well as ongoing capital expenditures required for maintenance. Appropriately balancing required costs and capital expenditures with customer prices will continue to challenge Mississippi Power for the foreseeable future.
In 2010, the Mississippi PSC issued a CPCN authorizing the acquisition, construction, and operation of the Kemper IGCC. The certificated cost estimate of the Kemper IGCC established by the Mississippi PSC was $2.4 billion with a construction cost cap of $2.88 billion, net of $245 million of grants awarded to the project by the DOE under the Clean Coal Power Initiative Round 2 (DOE(Initial DOE Grants) and excluding the cost of the lignite mine and equipment, the cost of the CO2 pipeline facilities, AFUDC, and certain general exceptions, including change of law, force majeure, and beneficial capital (which exists when Mississippi Power demonstrates that the purpose and effect of the construction cost increase is to produce efficiencies that will result in a neutral or favorable effect on customers relative to the original proposal for the CPCN) (Cost Cap Exceptions). On April 8, 2016, Mississippi Power received approximately $137 million in additional grants from the DOE for the Kemper IGCC (Additional DOE Grants), which are expected to be used to reduce future rate impacts for customers.
Mississippi Power placed the combined cycle and the associated common facilities portion of the Kemper IGCC in-service in August 2014 and continues to focus on completing the remainder of the Kemper IGCC, including the gasifier and the gas clean-up facilities. The in-service date for the remainder of the Kemper IGCC is currently expected to occur in the third quarter 2016.
Mississippi Power's current cost estimate for the Kemper IGCC in total is approximately $6.43$6.58 billion, which includes approximately $5.11$5.35 billion of costs subject to the construction cost cap.cap and is net of the Additional DOE Grants. Mississippi Power does not intend to seek any rate recovery for any related costs that exceed the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions. Mississippi Power recorded pre-tax charges to income for revisions to the cost estimate above the cost cap of $150$53 million ($9333 million after tax) in the thirdfirst quarter 2015 and a total of $182 million ($112 million after tax) for the nine months ended September 30, 2015.2016. Since 2012, in the aggregate, Mississippi Power has incurred charges of $2.23$2.47 billion ($1.41.52 billion after tax) as a result of changes in the cost estimate above the cost cap for the Kemper IGCC through March 31, 2016. The current cost estimate includes costs through September 30, 2015.2016.
In December 2015, the Mississippi PSC issued an order (In-Service Asset Rate Order), based on a stipulation (the 2015 Stipulation) between Mississippi Power placed the combined cycle and the associated common facilities portionMississippi Public Utilities Staff (MPUS), authorizing rates that provide for the recovery of approximately $126 million annually related to Kemper IGCC assets previously placed in service. On February 25, 2016, Greenleaf CO2 Solutions, LLC filed a notice of appeal of the In-Service Asset Rate Order with the Mississippi Supreme Court (Court). On May 5, 2016, the Court dismissed the appeal. Further proceedings related to cost recovery for the Kemper IGCC project in service in August 2014 and continues to focus on completing the remainder of the Kemper IGCC, including the gasifier and the gas clean-up facilities. While theare expected in-service date forafter the remainder of the Kemper IGCC is placed in service, which is currently expected to occur in the first halfthird quarter 2016. The ultimate outcome of 2016, Mississippi Power now anticipates the in-service date to occur subsequent to April 19, 2016, which would result in Mississippi Power being required to recapture the investment tax credits that were allocated to the Kemper IGCC under Section 48A (Phase II) of the Internal Revenue Code. The current cost estimate includes costs through June 30, 2016. As a result of the additional factors that have the potential to impact start-up and operational readiness activities forthese matters cannot be determined at this first-of-a-kind technology as described herein, the risk of further schedule extensions and/or cost increases, which could be material, remains.time.
For additional information on the Kemper IGCC, see Note 3 to the financial statements of Mississippi Power under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein.FUTURE EARNINGS
On February 12, 2015, the Mississippi Supreme Court (Court) reversed the Mississippi PSC's March 2013 order that authorized collection of $156 million annually (2013 MPSC Rate Order) to be recorded as Mirror CWIP and directed the Mississippi PSC to enter an order requiring Mississippi Power to refund the Mirror CWIP amounts
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
collected. Following the Court's rejection of both Mississippi Power's and the Mississippi PSC's motions for rehearing, the Mississippi PSC ordered that the Mirror CWIP rate be terminated effective July 20, 2015. Refunds of the $342 million collected by Mississippi Power through July 2015 billings, plus carrying costs, will begin in early November 2015. See FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle – Rate Recovery of Kemper IGCC Costs – 2015 Mississippi Supreme Court Decision" herein for additional information.
Prior to the Court's final decision, Mississippi Power filed a rate case on May 15, 2015 (2015 Rate Case) that presented the Mississippi PSC with three alternative rate proposals: (i) a traditional rate case, (ii) a rate mitigation plan fixing rates through 2017 (RMP 2017), and (iii) a rate mitigation plan fixing rates through 2019 (RMP 2019).
On May 20, 2015, SMEPA notified Mississippi Power of its termination of the asset purchase agreement (APA) between Mississippi Power and SMEPA whereby SMEPA previously agreed to purchase a 15% undivided interest in the Kemper IGCC. In connection with the termination of the APA, on June 3, 2015, Southern Company, pursuant to its guarantee obligation, returned approximately $301 million ($275 million in deposits plus interest) to SMEPA. Subsequently, Mississippi Power issued an 18-month promissory note in the aggregate principal amount of approximately $301 million to Southern Company. See FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle – Termination of Proposed Sale of Undivided Interest to SMEPA" herein for additional information.
The return of approximately $301 million to SMEPA in June 2015 in connection with the termination of the APA, the required refund of the approximately $369 million of Mirror CWIP rate collections, including associated carrying costs through September 30, 2015, the termination of the Mirror CWIP rates, and the likely repayment of approximately $235 million of unrecognized tax benefits associated with the Phase II tax credits to the IRS if the in-service date of the Kemper IGCC extends beyond April 19, 2016 have adversely impacted Mississippi Power's financial condition.
As a result of the Court's decision and these financial impacts, on July 10, 2015, Mississippi Power submitted a supplemental filing with the Mississippi PSC that included a request for interim rates (Supplemental Notice) until such time as the Mississippi PSC renders a final decision on an additional alternative rate proposal (In-Service Asset Proposal). The In-Service Asset Proposal is based upon the test period of June 2015 to May 2016 and is designed to recover Mississippi Power's costs associated with the Kemper IGCC assets that are commercially operational and currently providing service to customers (the transmission facilities, combined cycle, natural gas pipeline, and water pipeline) and other related costs, and is designed to collect approximately $159 million annually. On August 13, 2015, the Mississippi PSC approved the implementation of interim rates that became effective with the first billing cycle in September (on August 19), subject to refund and certain other conditions. In addition, the Mississippi PSC reserved the right to modify or terminate the interim rates based upon a material change in circumstances. The Mississippi PSC is scheduled to issue a final order on or before December 8, 2015 related to permanent rates for the In-Service Asset Proposal. See FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle – Rate Recovery of Kemper IGCC Costs – 2015 Rate Case" herein for additional information.
As of September 30, 2015, Mississippi Power's current liabilities exceeded current assets by approximately $1.3 billion primarily due to $900 million of bank term loans scheduled to mature on April 1, 2016, the required refund of approximately $369 million in Mirror CWIP, which includes associated carrying costs through September 30, 2015, and the likely repayment of the Phase II tax credits of $235 million as of September 30, 2015. See FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle – Rate Recovery of Kemper IGCC Costs – 2015 Mississippi Supreme Court Decision"Cycle" and Note (G)(B) to the Condensed Financial Statements under "Unrecognized Tax Benefits – Investment Tax Credits" herein for additional information."Integrated Coal Gasification Combined Cycle" herein.
On March 8, 2016, Mississippi Power is primarily dependent upon Southern Companyentered into an unsecured term loan agreement for an aggregate amount of $1.2 billion to meet its financing needs.repay existing indebtedness and for other general corporate purposes. Mississippi Power intendsborrowed $900 million under the term loan agreement and has the right to utilize operating cash flowsborrow the remaining $300 million on or before October 15, 2016. Mississippi Power used the initial proceeds to repay $900 million in maturing bank loans on March 8, 2016 and lines of credit (toexpects the extent available) as well as loansremaining $300 million to be used to repay senior notes maturing in October 2016. The term loan pursuant to this agreement matures on April 1, 2018 and under certain circumstances, equity contributions from Southern Company to fund Mississippi Power's short-term capital needs.bears interest based on one-month LIBOR.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Mississippi Power continues to focus on several key performance indicators, including the construction, start-up, and rate recovery of the Kemper IGCC. In recognition that Mississippi Power's long-term financial success is dependent upon how well it satisfies its customers' needs, Mississippi Power's retail base rate mechanism, PEP, includes performance indicators that directly tie customer service indicators to Mississippi Power's allowed return. In addition to the PEP performance indicators, Mississippi Power focuses on other performance measures, including broader measures of customer satisfaction, plant availability, system reliability, and net income after dividends on preferred stock. For additional information on these indicators, see MANAGEMENT'S DISCUSSION AND ANALYSIS – OVERVIEW – "Key Performance Indicators" of Mississippi Power in Item 7 of the Form 10-K. See FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle" and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for information regarding revisions to the cost estimate for the Kemper IGCC and the Court's decision that have negatively impacted
RESULTS OF OPERATIONS
Net Income
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) |
| $(24) | | (68.6) |
Mississippi Power's actual performance on net income after dividends on preferred stock one of its key performance indicators, for 2015, as compared to the target.
RESULTS OF OPERATIONS
Net Income (Loss)
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) |
| (% change) | | (change in millions) | | (% change) |
| $174 | | 89.2 | | $367 | | N/M |
N/M – Not meaningful
Mississippi Power's net loss after dividends on preferred stock for the thirdfirst quarter 20152016 was $21$11 million compared to $195$35 million for the corresponding period in 2014.2015. The changedecrease was primarily related to lowerhigher pre-tax charges of $150$53 million ($9333 million after tax) in the thirdfirst quarter 20152016 compared to $418pre-tax charges of $9 million ($2586 million after tax) in the thirdfirst quarter 20142015 for revisions of the estimated costs expected to be incurred on Mississippi Power's construction of the Kemper IGCC above the $2.88 billion cost cap established by the Mississippi PSC, net of the Initial DOE Grants and excluding the Cost Cap Exceptions. The increasedecrease in net income was also related to a decrease in wholesale revenues and an increase in depreciation and amortization, partially offset by an increase in retail revenue due to the implementation of interim rates that became effective with the first billing cycle in September (on August 19), partially offset by revenues associated with thefor certain Kemper IGCC cost recovery recognized in 2014, prior to the 2015 Mississippi Supreme Court decision. The change in net income was also related to a decrease in non-fuel operations and maintenance expenses, decrease in other income and deductions, a decrease in AFUDC, an increase in depreciation and amortization, and an increase in interest expense.
For year-to-date 2015, net income after dividends on preferred stock was $62 million compared to a net loss of $305 million for the corresponding period in 2014. The increase was primarily related to $182 million in pre-tax charges ($112 million after tax) in 2015 compared to $798 million in pre-tax charges ($493 million after tax) in 2014 for revisions of estimated costs expected to be incurred on Mississippi Power's construction of the Kemper IGCC above the $2.88 billion cost cap established by the Mississippi PSC, net of the DOE Grants and excluding the Cost Cap Exceptions. The increase in net income was also related to an increase in retail revenue due to the implementation of interim rates that became effective with the first billing cycle in September (on August 19) and a decrease in interest expense primarily due to the SMEPA termination, partially offset by a decrease in Kemper revenues primarily resulting from the termination of the Mirror CWIP rate, a decrease in AFUDC equity, increases in non-fuel operations and maintenance expenses, and an increase in depreciation and amortization.in-service assets.
See Note 3 to the financial statements of Mississippi Power under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information. Also see "Interest Expense, Net
Retail Revenues
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) |
| $16 | | 9.6 |
In the first quarter 2016, retail revenues were $183 million compared to $167 million for the corresponding period in 2015. Details of Amounts Capitalized" herein for additional information.the changes in retail revenues were as follows:
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Retail Revenues
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) |
| (% change) | | (change in millions) | | (% change) |
| $16 | | 7.0 | | $(46) | | (7.1) |
In the third quarter 2015, retail revenues were $244 million compared to $228 million for the corresponding period in 2014. For year-to-date 2015, retail revenues were $601 million compared to $647 million for the corresponding period in 2014.
Details of the changes in retail revenues were as follows:
| | | | | Third Quarter
2015 | | Year-to-Date 2015 | | First Quarter 2016 |
| | | (in millions) |
| (% change) | | (in millions) | | (% change) | | (in millions) |
| (% change) |
| Retail – prior year | | $ | 228 |
| | | | $ | 647 |
| | | | $ | 167 |
| | |
| Estimated change resulting from – | | | | | | | | | | | | |
| Rates and pricing | | 24 |
| | 10.5 |
| | 15 |
| | 2.3 |
| | 26 |
| | 15.6 |
|
| Sales growth (decline) | | 1 |
| | 0.4 |
| | (4 | ) | | (0.6 | ) | |
| Sales growth | | | 4 |
| | 2.4 |
|
| Weather | | — |
| | — |
| | 1 |
| | 0.2 |
| | (3 | ) | | (1.8 | ) |
| Fuel and other cost recovery | | (9 | ) | | (3.9 | ) | | (58 | ) | | (9.0 | ) | | (11 | ) | | (6.6 | ) |
| Retail – current year | | $ | 244 |
| | 7.0 | % | | $ | 601 |
| | (7.1 | )% | | $ | 183 |
| | 9.6 | % |
Revenues associated with changes in rates and pricing increased in the thirdfirst quarter 20152016 when compared to the corresponding period in 2014,2015, primarily due to $28 million for the implementation of interim rates associated with thefor certain Kemper IGCC that became effective with the first billing cycle in September (on August 19), partially offset by $5 million associated with the Kemper IGCC cost recovery recognized in the third quarter 2014, prior to the 2015 Mississippi Supreme Court decision.
Revenues associated with changes in rates and pricing increased year-to-date 2015 when compared to the corresponding period in 2014, primarily due to $28 million for the implementation of interim rates associated with the Kemper IGCC that became effective with the first billing cycle in September (on August 19) and $3 million of net revenues associated with the new energy efficiency cost recovery rate, which began in the fourth quarter 2014. These increases were partially offset by $16 million associated with the Kemper IGCC cost recovery recognized in 2014, prior to the 2015 Mississippi Supreme Court decision.in-service assets.
See Note 3 to the financial statements of Mississippi Power under "Integrated Coal Gasification Combined Cycle – Rate Recovery of Kemper IGCC Costs" and "Retail Regulatory Matters – Performance Evaluation Plan" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.
Revenues attributable to changes in sales increased in the thirdfirst quarter 20152016 when compared to the corresponding period in 2014. Weather-adjusted KWH sales to residential customers increased 0.4% in the third quarter 2015 due to an increase in customers and customer usage. Weather-adjusted KWH sales to commercial customers decreased 0.6% in the third quarter 2015 due to lower customer usage slightly offset by an increase in customers. KWH sales to industrial customers increased 0.8% in the third quarter 2015 due to increased usage by larger customers related to increased production.
Revenues attributable to changes in sales decreased year-to-date 2015 when compared to the corresponding period in 2014.2015. Weather-adjusted KWH energy sales to residential customers decreased 0.6%increased 2.0% in the first quarter 2016 due to lowerincreased use per customer usage, slightly offset by an increase in customers.and customer growth. Weather-adjusted KWH energy sales to commercial customers decreased 0.3%increased 0.5% in the first quarter 2016 due to lower customer usage, slightly offset by an increase in customers.growth. KWH energy sales to industrial customers increased 1.1% primarilydecreased 3.0% in the first quarter 2016 due to increaseddecreased usage by larger customers.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the first quarter 2015, Mississippi Power updated itsthe methodology to estimate the unbilled revenue allocation among customer classes. This change did not have a significant impact on net income. The KWH sales variances discussed above reflect an adjustment to the estimated allocation of Mississippi Power's unbilled thirdfirst quarter and year-to-date 20142015 KWH sales among customer classes that is consistent with the actual allocation in 2015.2016. Without these adjustments, thirdthis adjustment, first quarter 20152016 weather-adjusted residential KWH sales decreased 0.3%increased 8.5%, weather-adjusted commercial KWH sales increased 3.8%8.7%, and industrial KWH sales increaseddecreased 0.9% aswhen compared to the corresponding period in 2014. Also, without these adjustments, year-to-date 2015 weather-adjusted residential KWH sales decreased 2.1%, weather-adjusted commercial KWH sales decreased 1.8%, and industrial KWH sales increased 0.3% as compared to the corresponding period in 2014.2015.
Fuel and other cost recovery revenues decreased in the thirdfirst quarter and year-to-date 20152016 when compared to the corresponding periodsperiod in 2014,2015, primarily as a result of lower recoverable fuel costs. See "Fuel and Purchased Power Expenses" herein for additional information. Recoverable fuel costs include fuel and purchased power expenses reduced by the fuel portion of wholesale revenues from energy sold to customers outside Mississippi Power's service territory. Electric rates include provisions to adjust billings for fluctuations in fuel costs, including the energy component of purchased power costs. Under these provisions, fuel revenues generally equal fuel expenses, including the energy component of purchased power costs, and do not affect net income.
Wholesale Revenues – Non-Affiliates
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) |
| (% change) | | (change in millions) | | (% change) |
| $(7) | | (8.4) | | $(39) | | (15.3) |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) |
| $(17) | | (22.1) |
Wholesale revenues from sales to non-affiliates will vary depending on fuel prices, the market prices of wholesale energy compared to the cost of Mississippi Power's and the Southern Company system's generation, demand for energy within the Southern Company system's service territory, and the availability of the Southern Company system's generation. Increases and decreases in energy revenues that are driven by fuel prices are accompanied by an increase or decrease in fuel costs and do not have a significant impact on net income. In addition, Mississippi Power serves long-term contracts with rural electric cooperative associations and municipalities located in
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
southeastern Mississippi under cost-based electric tariffs which are subject to regulation by the FERC. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "FERC Matters" of Mississippi Power in Item 7 of the Form 10-K and – FUTURE EARNINGS POTENTIAL – "FERC Matters" herein for additional information.
In the thirdfirst quarter 2015,2016, wholesale revenues from sales to non-affiliates were $76$60 million compared to $83$77 million for the corresponding period in 2014. For year-to-date 2015, wholesale revenues from sales to non-affiliates were $216 million compared to $255 million for the corresponding period in 2014.2015. The decreases weredecrease was primarily due to a $9 million decrease in capacity revenues primarily resulting from milder weather and decreased usage and an $8 million decrease in energy revenues primarily resulting from lower fuel prices.
Wholesale Revenues – Affiliates
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) |
| (% change) | | (change in millions) | | (% change) |
| $(21) | | (53.8) | | $(19) | | (23.2) |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) |
| $(18) | | (66.7) |
Wholesale revenues from sales to affiliated companies 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.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the thirdfirst quarter 2015,2016, wholesale revenues from sales to affiliates were $18$9 million compared to $39$27 million for the corresponding period in 2014.2015. The decrease was due to a $16$14 million decrease in KWH sales resulting from a decrease in sales from coal generation and a $5$4 million decrease associated with lower natural gas prices.
For year-to-date 2015, wholesale revenues from sales to affiliates were $63 million compared to $82 million for the corresponding period in 2014. The decrease was due to a $20 million decrease associated with lower natural gas prices, partially offset by a $1 million increase in KWH sales due to an increase in generation partially as a result of the Kemper IGCC combined cycle being in service since August 2014.
Fuel and Purchased Power Expenses
| | | | | Third Quarter 2015
vs.
Third Quarter 2014 | | Year-to-Date 2015
vs.
Year-to-Date 2014 | | First Quarter 2016
vs.
First Quarter 2015 |
| | | (change in millions) |
| (% change) | | (change in millions) | | (% change) | | (change in millions) |
| (% change) |
| Fuel | | $ | (39 | ) | | (23.1) | | $ | (100 | ) | | (21.8 | ) | | $ | (38 | ) | | (33.0) |
| Purchased power – non-affiliates | | (2 | ) | | (66.7) | | (11 | ) | | (68.8 | ) | | (2 | ) | | (100.0) |
| Purchased power – affiliates | | (1 | ) | | (50.0) | | (11 | ) | | (64.7 | ) | | 3 |
| | 150.0 |
| Total fuel and purchased power expenses | | $ | (42 | ) | | $ | (122 | ) | | | | $ | (37 | ) | |
In the thirdfirst quarter 2015,2016, total fuel and purchased power expenses were $132$81 million compared to $174$118 million for the corresponding period in 2014.2015. The decrease was due to a $22$19 million decrease in the volume of KWHs generated and purchased and a $20an $18 million decrease in the average cost of fuel.
For year-to-date 2015, total fuel and purchased power expenses were $370 million compared to $492 million for the corresponding period in 2014. The decrease was due to an $89 million decrease in the average cost of fuel and purchased power and a $33 million decrease in the volume of KWHs generated and 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 Mississippi Power's fuel cost recovery clause.
Details of Mississippi Power's generation and purchased power were as follows:
|
| | | | | | | | |
| | | Third Quarter 2015 | | Third Quarter 2014 | | Year-to-Date 2015 | | Year-to-Date 2014 |
Total generation (millions of KWHs)(*) | | 4,681 | | 5,022 | | 13,136 | | 12,996 |
Total purchased power (millions of KWHs) | | 121 | | 125 | | 427 | | 591 |
Sources of generation (percent)(*) – | | | | | | | | |
| Coal | | 19 | | 43 | | 20 | | 45 |
| Gas | | 81 | | 57 | | 80 | | 55 |
Cost of fuel, generated (cents per net KWH) – | | | | | | | | |
| Coal | | 3.81 | | 3.97 | | 3.70 | | 4.12 |
Gas(*) | | 2.72 | | 3.20 | | 2.70 | | 3.45 |
Average cost of fuel, generated (cents per net KWH)(*) | | 2.93 | | 3.55 | | 2.91 | | 3.77 |
Average cost of purchased power (cents per net KWH)(*) | | 2.21 | | 4.36 | | 2.42 | | 5.55 |
| |
(*) | Includes energy produced during the test period for the Kemper IGCC which is accounted for in accordance with FERC guidance. |
Fuel
In the third quarter 2015, fuel expense was $130 million compared to $169 million for the corresponding period in 2014. The decrease was due to a 17.4% decrease in the average cost of fuel per KWH generated primarily due to
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
higher gas-firedDetails of Mississippi Power's generation includingand purchased power were as follows:
|
| | | | |
| | | First Quarter 2016 | | First Quarter 2015 |
Total generation (millions of KWHs) | | 3,588 | | 4,345 |
Total purchased power (millions of KWHs) | | 261 | | 114 |
Sources of generation (percent) – | | | | |
| Coal | | 11 | | 22 |
| Gas | | 89 | | 78 |
Cost of fuel, generated (cents per net KWH) – | | | | |
| Coal | | 3.55 | | 3.25 |
| Gas | | 2.15 | | 2.68 |
Average cost of fuel, generated (cents per net KWH) | | 2.32 | | 2.82 |
Average cost of purchased power (cents per net KWH) | | 2.17 | | 3.54 |
Fuel
In the Kemper IGCC combined cycle thatfirst quarter 2016, fuel expense was placed$76 million compared to $114 million for the corresponding period in service in August 2014, at lower natural gas prices and2015. The decrease was due to a 6.4%19% decrease in the volume of KWHs generated. The 6.4% decrease in volume includedgenerated, primarily as a decrease in coal-fired generationresult of 59.1%, partially offset bymilder weather, and an increase in gas-fired generation of 36.6%.
For year-to-date 2015, total fuel expense was $359 million compared to $459 million for the corresponding period in 2014. The decrease was due to a 22.8%18% decrease in the average cost of fuel per KWH generated primarily due to higher gas-fired generation, including the Kemper IGCC combined cycle that was placed in service in August 2014, at lower natural gas prices, partially offset by a 1.2% increase in the volume of KWHs generated resulting from the availability of lower cost Mississippi Power units.2014. The 1.2% increasedecrease in volume included an increase in gas-fired generation of 53.4%, partially offset by a decrease in coal-fired generation of 55.7%61% and a decrease in gas-fired generation of 5%.
Purchased Power - Non-Affiliates
In the third quarter 2015, purchased power expense from non-affiliates was $1 million compared to $3 million for the corresponding period in 2014. For year-to-date 2015, purchased power expense from non-affiliates was $5 million compared to $16 million for the corresponding period in 2014. The decreases were primarily the result of a decrease in the average cost per KWH purchased as a result of lower natural gas prices.
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
For year-to-date 2015, purchased power expense from affiliates was $6 million compared to $17 million for the corresponding period in 2014. The decrease was primarily due to a 45.2% decrease in the volume of KWHs purchased due to increased Mississippi Power generation partially as a result of the Kemper IGCC combined cycle being placed in service in August 2014, and a 38.4% decrease in the average cost per KWH purchased as a result of lower natural gas prices.
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, as approved by the FERC.
Other Operations and Maintenance Expenses
| | | Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 | |
| First Quarter 2016 vs. First Quarter 2015 | | First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) | | (% change) |
| $(4) | | (6.0) | | $14 | | 7.3 | | (5.5) |
In the thirdfirst quarter 2015,2016, other operations and maintenance expenses were $63$69 million compared to $67$73 million for the corresponding period in 2014.2015. The decrease was primarily due to a $2$9 million decrease in transmission and distribution expenses mainly related to overhead line maintenance and vegetation management and a $2 million decrease primarily related to uncollectible expenses and customer incentives.
For year-to-date 2015, other operations andgeneration maintenance expenses were $206 million compareddue to $192 million for the corresponding period in 2014. The increase was primarily due tolower outage costs, partially offset by a $7 million increase in generation maintenance expenses including scheduled outages, a $5 million increase in employee compensation and benefits including pension, and a $4 million increase related to uncollectible expensesthe combined cycle and customer incentives, partially offset by a $2 million decreasethe associated common facilities portion of the Kemper IGCC that Mississippi Power began expensing in transmissionthe third quarter 2015 in connection with the implementation of interim rates associated with the Kemper IGCC in-service assets. See FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle – Rate Recovery of Kemper IGCC Costs – 2015 Rate Case" and distribution expenses mainly related to overhead line maintenance" – Regulatory Assets and vegetation management.
Liabilities" herein for additional information. See Note (F) to the Condensed Financial Statements herein for additional information related to pension costs.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation and Amortization
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $15 | | 65.2 | | $25 | | 35.7 |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $11 | | 40.7 |
In the thirdfirst quarter 2015,2016, depreciation and amortization was $38 million compared to $23$27 million for the corresponding period in 2014.2015. The increase was primarily due to a $9 million increase inthe amortization of certain regulatory assets associated with the Kemper IGCC primarily as a result of interim rates that became effective with the first billing cycle in September (on August 19), and a $6 million increase in depreciation related to increases in generation, transmission and distribution plant in service.
For year-to-date 2015, depreciation and amortization was $95 million compared to $70 million for the corresponding period in 2014. The increase was primarily due to a $10 million increase in depreciation related to increases in generation, transmission and distribution plant in service, a $10 million increase in amortization of regulatory assets associated with the Kemper IGCC as a result of interim rates that became effective with the first billing cycle in September (on August 19), and a $2 million increase related to regulatory deferrals associated with Plant Daniel Units 3 and 4.IGCC.
See Note 1 to the financial statements of Mississippi Power under "Depreciation, Depletion, and Amortization" in Item 8 of the Form 10-K for additional information. Also, see Note 3 to the financial statements of Mississippi Power under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.
Taxes Other Than Income Taxes
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $2 | | 9.1 | | $8 | | 12.7 |
In the third quarter 2015, taxes other than income taxes were $24 million compared to $22 million for the corresponding period in 2014. For year-to-date 2015, taxes other than income taxes were $71 million compared to $63 million for the corresponding period in 2014. The increases were primarily due to increases in ad valorem taxes.
The retail portion of ad valorem taxes is recoverable under Mississippi Power's ad valorem tax cost recovery clause and, therefore, does not affect net income.
Estimated Loss on Kemper IGCC
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) |
| (% change) | | (change in millions) | | (% change) |
| $(268) | | (64.1) | | $(616) | | (77.2) |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) |
| $44 | | N/M |
N/M – Not meaningful
In the thirdfirst quarters of 20152016 and 2014,2015, estimated probable losses on the Kemper IGCC of $150$53 million and $418 million, respectively, were recorded at Mississippi Power. For year-to-date 2015 and year-to-date 2014, estimated probable losses on the Kemper IGCC of $182 million and $798$9 million, respectively, were recorded at Mississippi Power. These losses reflect revisions of estimated costs expected to be incurred on the construction of the Kemper IGCC in excess of the $2.88 billion cost cap established by the Mississippi PSC, net of the Initial DOE Grants and excluding the Cost Cap Exceptions.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See Note 3 to the financial statements of Mississippi Power under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.
Allowance for Equity Funds Used During Construction
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $(3) | | (9.4) | | $(26) | | (24.1) |
In the third quarter 2015, AFUDC equity was $29 million compared to $32 million for the corresponding period in 2014. For year-to-date 2015, AFUDC equity was $82 million compared to $108 million for the corresponding period in 2014. The decreases were driven by a reduction in the AFUDC rate and by placing the combined cycle and the associated common facilities portion of the Kemper IGCC in service in August 2014. See Note 3 to the financial statements of Mississippi Power under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information regarding the Kemper IGCC.
Interest Expense, Net of Amounts Capitalized
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $4 | | 44.4 | | $(40) | | N/M |
N/M – Not meaningful
In the third quarter 2015, interest expense, net of amounts capitalized was $13 million compared to $9 million for the corresponding period in 2014. The increase was primarily due to a decrease of $6 million in capitalized interest primarily resulting from placing the Kemper IGCC combined cycle in service in August 2014, a $3 million increase due to the issuances of new debt, and a $2 million increase related to the Mirror CWIP regulatory liability, partially offset by a $7 million decrease related to the termination of the APA between Mississippi Power and SMEPA which required the return of SMEPA's deposits at a lower rate of interest than accrued.
For year-to-date 2015, interest expense, net of amounts capitalized was $(6) million compared to $34 million for the corresponding period in 2014. The decrease was primarily due to a $50 million decrease related to the termination of the APA between Mississippi Power and SMEPA which also required the return of SMEPA's deposits at a lower rate of interest than accrued. Also contributing to the decrease was a $2 million increase in capitalized interest primarily resulting from carrying costs related to the Kemper IGCC, partially offset by increases of $7 million related to the Mirror CWIP regulatory liability and $5 million due to the issuances of new debt.
See Note 3 to the financial statements of Mississippi Power under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.
Other Income (Expense),Interest Expense, Net of Amounts Capitalized
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $6 | | 75.0 | | $7 | | 58.3 |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $5 | | 45.5 |
In the thirdfirst quarter 2015, other income (expense),2016, interest expense, net of amounts capitalized was $(2)$16 million compared to $(8)$11 million for the corresponding period in 2014. For year-to-date 2015, other income (expense), net2015. The increase was $(5) million compared to $(12) million for the corresponding period in 2014. These changes in expense were primarily due to a settlementdecrease of $8 million in capitalized interest and interest increases of $4 million related to long-term debt, $3 million on unrecognized tax benefits, and $2 million related to short-term debt. These increases were partially offset by an $8 million decrease related to interest on deposits resulting from the termination of an asset purchase agreement between Mississippi Power and SMEPA in May 2015 and a $4 million decrease related to the required refund of Mirror CWIP.
See Note 3 to the financial statements of Mississippi Power under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
with the Sierra Club in 2014. See MANAGEMENT’S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle – Sierra Club Settlement Agreement" of Mississippi Power in Item 8 of the Form 10-K for additional information.
Income Taxes (Benefit)
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) |
| (% change) | | (change in millions) | | (% change) |
| $108 | | 77.7 | | $242 | | 95.7 |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) |
| $(14) | | N/M |
N/M – Not meaningful
In the thirdfirst quarter 2015,2016, income tax benefits were $31benefit was $(10) million compared to $139an expense of $4 million for the corresponding period in 2014. For year-to-date 2015, income tax benefits were $11 million compared2015. The change was primarily due to $253 million for the corresponding period in 2014. The changes primarily reflect a reduction in tax benefitspre-tax earnings related to the estimated probable losses on construction of the Kemper IGCC and a decrease in non-taxable AFUDC equity related to placing the Kemper IGCC combined cycle in service in August 2014.IGCC.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Mississippi Power's future earnings potential. The level of Mississippi Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Mississippi Power's business of selling electricity. These factors include Mississippi Power's ability to recover its prudently-incurred costs in a timely manner during a time of increasing costs, its ability to recover costs in a timely manner,prevail against legal challenges associated with the Kemper IGCC, and the completion and subsequent operation of the Kemper IGCC andin accordance with any operational parameters that may be adopted by the Plant Daniel scrubber projectMississippi PSC, as well as other ongoing construction projects. Future earnings in the near term will depend, in part, upon maintaining and growing sales which are subject to a number of factors. These factors include weather, competition, developing new and maintaining existing energy contracts and associated load requirements with other utilities and other wholesale customers, energy conservation practiced by customers, the use of alternative energy sources by customers, the price of electricity, the price elasticity of demand, and the rate of economic growth or decline in Mississippi Power's service territory. Demand for electricity for Mississippi Power is partiallyprimarily driven by economic growth. The pace of economic growth and electricity demand may be affected by changes in regional and global economic conditions, which 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 Mississippi 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 or through market-based contracts. 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.modified, as compliance plans are revised or updated, and as legal challenges to rules are completed. 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 Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under "Environmental Matters" in Item 8 of the Form 10-K for additional information.
On April 16, 2015, the assets that supported coal generation at Plant Watson Units 4 and 5 were retired. The remaining net book value of these two units was approximately $32 million, excluding the reserve for cost of removal, and has been reclassified to other regulatory assets, deferred, in accordance with an accounting order from the Mississippi PSC. Mississippi Power expects to recover through its rates the remaining book value of the retired assets and certain costs, including unusable inventory, associated with the retirements; however, the ultimate method and timing of recovery will be considered by the Mississippi PSC in future rate proceedings. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Other Matters –
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sierra Club Settlement Agreement" of Mississippi Power in Item 7 and Note 3 to the financial statements of Mississippi Power under "Other Matters – Sierra Club Settlement Agreement" in Item 8 of the Form 10-K for additional information.
New Source Review Actions
See Note 3 to the financial statements of Mississippi Power under "Environmental Matters – New Source Review Actions" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements herein for additional information.
On August 24, 2015, the U.S. District Court for the Northern District of Alabama entered an order approving the joint stipulation among Alabama Power, the EPA, and the U.S. Department of Justice modifying the 2006 consent decree to resolve all remaining claims for relief alleged in the case. Under the modified consent decree, Alabama Power will, without admitting liability, operate certain units subject to emission rates and an annual emissions cap; use only natural gas at certain other units, including a unit co-owned by Mississippi Power; retire certain units at Plants Gorgas and Barry; pay a $100,000 civil penalty; and invest $1.5 million in electric transportation infrastructure projects over three years.
Environmental Statutes and Regulations
See Note 3 to the financial statements of Mississippi Power under "Other Matters – Sierra Club Settlement Agreement" in Item 8 of the Form 10-K for additional information.
Air Quality
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters –Environmental Statutes and Regulations – Air Quality" of Mississippi Power in Item 7 of the Form 10-K for additional information regarding the EPA's proposed regulations governing emissions during startup, shutdown, or malfunction (SSM), the final MATS rule the Cross State Air Pollution Rule (CSAPR), and the eight-hour National Ambient Air Quality Standard (NAAQS) for ozone.regional haze regulations.
On April 25, 2016, in response to a June 12, 2015 U.S. Supreme Court opinion, the EPA published a final rule requiring affected states (including Alabama and Mississippi) to revise or remove state implementation plan (SIP) provisionsits supplemental finding regarding excess emissions that occur during periodsconsideration of SSM by no later than November 22, 2016. The ultimate impactcosts in support of the final rule will depend on the outcome of any legal challenges and the development and approval of SIPs by the affected states and cannot be determined at this time.
On June 29, 2015, the U.S. Supreme Court issued a decisionMATS rule. This finding that the EPA had failed to properly consider costs in its decision to regulate hazardous air pollutant emissions from electric generating units under thedoes not impact MATS rule and remanded the case to the U.S. Court of Appeals for the District of Columbia Circuit for further proceedings. The MATS rule remains in effect while the U.S. Court of Appeals for the District of Columbia Circuit and the EPA respond to the decision. The ultimate impact of this decision cannot be determined at this time.
On July 28, 2015, the U.S. Court of Appeals for the District of Columbia Circuit issued an opinion invalidating certain emissions budgets under the CSAPR Phase II emissions trading program for a number of states, including Alabama. The court's decision leaves the emissions trading program in place and remands the rule to the EPA for further action consistent with the court's decision. The court rejected all other pending challenges to the rule. The ultimate impact of this decision will depend on additional rulemaking and cannot be determined at this time.
On October 26, 2015, the EPA published a more stringent eight-hour NAAQS for ozone. This new standard could potentially require additional emission controls, improvements in control efficiency, and operational fuel changes and could affect the siting of new generating facilities. The ultimate impact of this matter will depend on any legal challenges and implementation of the final rule and cannot be determined at this time.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Water Quality
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental Statutescompliance requirements, costs, or deadlines, and Regulations – Water Quality" ofall Mississippi Power in Item 7 ofunits that are subject to the Form 10-K for additional information regardingMATS rule have completed the EPA's andmeasures necessary to achieve compliance with the U.S. Army Corps of Engineers'MATS rule revisingby the definition of waters ofapplicable deadlines.
Also on April 25, 2016, the U.S. under the Clean Water Act (CWA) and the EPA'sEPA issued proposed revisions to effluent guidelines.
On June 29, 2015, the EPA and the U.S. Army Corps of Engineers jointly published a final rule revising the regulatory definition of waters of the U.S. for all CWA programs. The final rule significantly expands the scope of federal jurisdiction under the CWA and could have significant impacts on economic development projects which could affect customer demand growth. In addition, this rule could significantly increase permitting and regulatory requirements and costs associated with the siting of new facilities and the installation, expansion, and maintenance of transmission and distribution lines. The rule became effective August 28, 2015, but on October 9, 2015, the U.S. Court of Appeals for the Sixth Circuit issued an order staying implementation of the final rule.regional haze regulations. The ultimate impact of the final ruleproposed revisions will depend on the outcome of thistheir ultimate adoption, implementation, and other pendingany legal challenges and the EPA's and the U.S. Army Corps of Engineers' field-level implementation of the rule and cannot be determined at this time.
On November 3, 2015, the EPA published final revisions to technology-based limits for certain wastestreams from steam electric power plants. These revisions impose stringent steam effluent guidelines and technology requirements for wastewater discharges at affected units. Compliance with these revisions could result in significant additional capital expenditures and could affect future unit retirement and replacement decisions. The ultimate impact of these revisions will depend on any legal challenges and implementation of the final revisions and cannot be determined at this time.
Coal Combustion Residuals
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Coal Combustion Residuals" of Mississippi Power in Item 7 of the Form 10-K for additional information regarding the EPA's regulation of CCR.
On April 17, 2015, the EPA published the Disposal of Coal Combustion Residuals from Electric Utilities final rule (CCR Rule) in the Federal Register, which became effective on October 19, 2015. Based on initial cost estimates for closure in place and groundwater monitoring of ash ponds pursuant to the CCR Rule, during the second quarter 2015, Mississippi Power recorded incremental asset retirement obligations (ARO) of approximately $95 million related to the CCR Rule. As further analysis is performed, including evaluation of the expected method of compliance, refinement of assumptions underlying the cost estimates, such as the quantities of CCR at each site, and the determination of timing, including the potential for closing ash ponds prior to the end of their currently anticipated useful life, Mississippi Power expects to continue to periodically update these estimates. The ultimate impact of the CCR Rule cannot be determined at this timeand will depend on Mississippi Power's ongoing review of the CCR Rule, the results of initial and ongoing minimum criteria assessments, and the outcome of legal challenges. See Note (A) to the Condensed Financial Statements herein for additional information regarding Mississippi Power's AROs as of September 30, 2015.
Global Climate Issues
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Global Climate Issues" of Mississippi Power in Item 7 of the Form 10-K for additional information regarding the EPA's proposed regulation of CO2 from fossil-fuel-fired electric generating units.
On October 23, 2015, two final actions by the EPA that would limit CO2 emissions from fossil fuel-fired electric generating units were published in the Federal Register. One of the final actions contains specific emission standards governing CO2 emissions from new, modified, and reconstructed units. The other final action establishes guidelines for states to develop plans to meet EPA-mandated CO2 emission rates for existing units. The EPA's final guidelines require state plans to meet interim CO2 performance rates between 2022 and 2029 and final rates in
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2030 and thereafter. At the same time, a proposed federal plan and proposed model rule were published that states can adopt or that would be put in place if, in response to the final guidelines, a state either does not submit a state plan or its plan is not approved by the EPA.
These guidelines and standards could result in operational restrictions and material compliance costs, including capital expenditures, which could affect future unit retirement and replacement decisions. Mississippi Power's results of operations, cash flows, and financial condition could be significantly impacted if such costs are not recovered through regulated rates or through market-based contracts. However, the ultimate financial and operational impact of the final rules on Mississippi Power cannot be determined at this time and will depend on numerous factors including the Southern Company system's ongoing review of the final rules; the outcome of any legal challenges, including legal challenges filed by Mississippi Power; individual state implementation of the EPA's final guidelines, including the potential that state plans impose different standards; additional rulemaking activities in response to legal challenges and related court decisions; the impact of future changes in generation and emissions-related technology and costs; the impact of future decisions regarding unit retirement and replacement, including the type and amount of any such replacement capacity; and the time periods over which compliance will be required.
FERC Matters
Municipal and Rural Associations Tariff
See Note 3 to the financial statements of Mississippi Power under "FERC Matters" in Item 8 of the Form 10-K for additional information regarding a settlement agreement entered into by Mississippi Power regarding the establishment of a regulatory asset for Kemper IGCC-related costs. See Note 3 to the financial statements of Mississippi Power under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for information regarding Mississippi Power's construction of the Kemper IGCC.
UnderOn March 31, 2016, Mississippi Power filed a 2014request with the FERC for an increase in wholesale base revenues as agreed upon in the settlement agreement an adjustment to Mississippi Power's wholesale revenue requirement was allowed in the event the Kemper IGCC, or any substantial portion thereof, was placed in service before or after December 1, 2014. Therefore, Mississippi Power has recorded a regulatory asset as a result of a portion of the Kemper IGCC being placed in service prior to the projected date and is amortizing this regulatory asset over the nine months ending December 31, 2015.
On May 13, 2015, the FERC accepted a settlement agreement between Mississippi Power andreached with its wholesale customers to forgo aunder the Municipal and Rural Associations (MRA) cost-based electric tariff. The settlement agreement provides that base rates under the MRA cost-based electric tariff will increase by, amongapproximately $7 million annually, with revised rates effective for services rendered beginning May 1, 2016. The increase is primarily due to the Plant Daniel Units 1 and 2 scrubbers, which were placed in service in November 2015. Additionally, under the settlement agreement, the tariff customers agreed in principle to similar regulatory treatment for tariff ratemaking as the treatment approved for retail ratemaking under the In-Service Asset Rate Order. The Kemper IGCC regulatory treatment primarily includes (i) recovery of only the Kemper IGCC assets currently operational and providing service to customers and other things, increasingrelated costs and (ii) removing all of the Kemper IGCC CWIP with a corresponding increase in accrual of AFUDC and loweringeffective May 1, 2016. If approved by the portionFERC, the amount of CWIPbase rate revenues to be recognized in rate base, effective April 1, 2015.2016 is expected to be approximately $5 million. The additional resulting AFUDC is estimated to be approximately $13 million annually, of which $10 million relates to the Kemper IGCC.
Fuel Cost Recovery
Mississippi Power has a wholesale MRA and a Market Based (MB) fuel cost recovery factor and a wholesale MRA emissions cost recovery factor. At September 30, 2015, the amount of over-recovered wholesale MRA fuel costs included in the balance sheets was $14 million compared to $0.2 million at December 31, 2014. See Note 3 to the financial statements of Mississippi Power under "Retail Regulatory Matters – Fuel Cost Recovery" in Item 8 of the Form 10-K for additional information.
Market-Based Rate Authority
Mississippi Power has authority from the FERC to sell electricity at market-based rates. Since 2008, that authority, for certain balancing authority areas, has been conditioned on compliance with the requirements of an energy auction, which the FERC found to be tailored mitigation that addresses potential market power concerns. In accordance with FERC regulations governing such authority, the traditional operating companies (including Mississippi Power) and Southern Power filed a triennial market power analysis on June 30, 2014, which included
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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continued reliance on the energy auction as tailored mitigation. On April 27, 2015, the FERC issued an order finding that the traditional operating companies' (including Mississippi Power's) and Southern Power's existing tailored mitigation may not effectively mitigate the potential to exert market power in certain areas served by the traditional operating companies and in some adjacent areas. To retain market-based rate authority, the FERC directed the traditional operating companies (including Mississippi Power) and Southern Power to show why market-based rate authority should not be revoked in these areas or to provide a mitigation plan to further address market power concerns. The traditional operating companies (including Mississippi Power) and Southern Power filed a request for rehearing on May 27, 2015 and on June 26, 2015 filed their response with the FERC.$6 million. The ultimate outcome of this matter cannot be determined at this time.
Retail Regulatory Matters
Mississippi Power's rates and charges for service to retail customers are subject to the regulatory oversight of the Mississippi PSC. Mississippi Power's rates are a combination of base rates and several separate cost recovery clauses for specific categories of costs. These separate cost recovery clauses address such items as fuel and purchased power, energy efficiency programs, ad valorem taxes, property damage, and the costs of compliance with environmental laws and regulations. Costs not addressed through one of the specific cost recovery clauses are recovered through Mississippi Power's base rates. See Note 3 to the financial statements of Mississippi Power under "Retail Regulatory Matters" 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"Matters – Mississippi Power" and "Integrated Coal Gasification Combined Cycle" herein for additional information.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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Renewables
In April and MayNovember 2015, the Mississippi Power entered into separate PPAs forPSC issued orders approving three solar facilities for a combined total of approximately 105 MWs. Mississippi Power wouldwill purchase all of the energy produced by the solar facilities for the 25-year term under each of the contracts. If approved by the Mississippi PSC, thethree PPAs, two of which were finalized as of December 31, 2015 and one of which was finalized as of March 2, 2016. The projects are expected to be in service by the end of 2016 and the resulting energy purchases willare expected to be recovered through Mississippi Power's fuel cost recovery mechanism. The ultimate outcome of this matter cannot be determined at this time.
Performance Evaluation Plan
On March 17, 2015,April 1, 2016, Mississippi Power submitted its annual PEP lookback filing for 2014,2015, which indicated noreflected the need for a $5 million surcharge or refund. On March 26, 2015,to be recovered from customers. The filing has been suspended for review by the Mississippi PSC suspended the filing to allow it more time for review.PSC. The ultimate outcome of this matter cannot be determined at this time.
Fuel Cost Recovery
At September 30, 2015,March 31, 2016, the amount of over recoveredover-recovered retail fuel costs included on itsthe balance sheet was $44$80 million compared to under recoveredover-recovered retail fuel costs of $2$71 million at December 31, 2014.2015.
Ad Valorem Tax Adjustment
On SeptemberThe Mississippi PSC conditionally approved a decrease of $120 million annually in fuel cost recovery rates on January 5, 2016, effective with the first billing cycle of February. As required by the order, on February 1, 2015,2016, Mississippi Power submitted updated natural gas price forecasts and resulting fuel factors to the Mississippi PSC. If approved by the Mississippi PSC, approved Mississippi Power's annual ad valorem tax adjustment factor filing effective September 18, 2015, which requestedthe updated forecast would decrease fuel cost recovery rates by an annual rate decreaseadditional $36 million annually. The ultimate outcome of 0.35%, or $2 million in annual retail revenues, primarily due to a decrease in average millage rates.this matter cannot be determined at this time.
Integrated Coal Gasification Combined Cycle
See Note 3 to the financial statements of Mississippi Power under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K for information regarding Mississippi Power's construction of the Kemper IGCC.
Kemper IGCC Overview
Construction of Mississippi Power's Kemper IGCC is nearing completion and start-up activities will continue until the Kemper IGCC is placed in service. The Kemper IGCC will utilize an IGCC technology with an output capacity of 582 MWs. The Kemper IGCC will be fueled by locally mined lignite (an abundant, lower heating value coal)
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
from a mine owned by Mississippi Power and situated adjacent to the Kemper IGCC. The mine, operated by North American Coal Corporation, started commercial operation in 2013. In connection with the Kemper IGCC, Mississippi Power constructed and plans to operate approximately 61 miles of CO2 pipeline infrastructure for the planned transport of captured CO2 for use in enhanced oil recovery.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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Kemper IGCC Schedule and Cost Estimate
In 2012, the Mississippi PSC issued the 2012 MPSC CPCN Order, a detailed order confirming the CPCN originally approved by the Mississippi PSC in 2010 authorizing the acquisition, construction, and operation of the Kemper IGCC.
The certificated cost estimate of the Kemper IGCC included in the 2012 MPSC CPCN Order was $2.4 billion, net of $245 million of Initial DOE Grants and excluding the cost of the lignite mine and equipment, the cost of the CO2 pipeline facilities, and AFUDC related to the Kemper IGCC. The 2012 MPSC CPCN Order approved a construction cost cap of up to $2.88 billion, with recovery of prudently-incurred costs subject to approval by the Mississippi PSC. The Kemper IGCC was originally projected to be placed in service in May 2014. Mississippi Power placed the combined cycle and the associated common facilities portion of the Kemper IGCC in service using natural gas in August 2014 and continuescurrently expects to focus on completingplace the remainder of the Kemper IGCC, including the gasifier and the gas clean-up facilities, for whichin service during the in-service date is currently expected to occur in the first halfthird quarter 2016.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Recovery of the costs subject to the cost cap and the Cost Cap Exceptions remains subject to review and approval by the Mississippi PSC. Mississippi Power's Kemper IGCC 2010 project estimate, current cost estimate (which includes the impacts of the Court's decision)decision discussed herein under "Rate Recovery of Kemper IGCC Costs – 2013 MPSC Rate Order"), and actual costs incurred as of September 30, 2015, as adjusted for the Court's decision,March 31, 2016, are as follows:
| | | Cost Category | 2010 Project Estimate(f) | | Current Estimate(a) | | Actual Costs | 2010 Project Estimate(f) | | Current Cost Estimate(a) | | Actual Costs |
| | (in billions) | (in billions) |
Plant Subject to Cost Cap(b)(g) | $ | 2.40 |
| | $ | 5.11 |
| | $ | 4.66 |
| $ | 2.40 |
| | $ | 5.35 |
| | $ | 4.99 |
|
| Lignite Mine and Equipment | 0.21 | | 0.23 | | 0.23 | 0.21 |
| | 0.23 |
| | 0.23 |
|
CO2 Pipeline Facilities | 0.14 | | 0.11 | | 0.11 | 0.14 |
| | 0.11 |
| | 0.12 |
|
AFUDC(c) | 0.17 | | 0.66 | | 0.55 | 0.17 |
| | 0.71 |
| | 0.62 |
|
Combined Cycle and Related Assets Placed in Service – Incremental(d)(g) | — |
| | 0.02 |
| | — |
| — |
| | 0.02 |
| | 0.01 |
|
| General Exceptions | 0.05 | | 0.10 | | 0.08 | 0.05 |
| | 0.10 |
| | 0.09 |
|
Deferred Costs(e)(g) | — |
| | 0.20 | | 0.17 | — |
| | 0.20 |
| | 0.18 |
|
| Additional DOE Grants | | — |
| | (0.14 | ) | | — |
|
| Total Kemper IGCC | $ | 2.97 |
| | $ | 6.43 |
| | $ | 5.80 |
| $ | 2.97 |
| | $ | 6.58 |
| | $ | 6.24 |
|
| |
(a) | Amounts in the Current Cost Estimate reflect estimated costs through JuneSeptember 30, 2016. |
| |
| (b) | The 2012 MPSC CPCN Order approved a construction cost cap of up to $2.88 billion, net of the Initial DOE Grants and excluding the Cost Cap Exceptions. The Current Cost Estimate and the Actual Costs include non-incremental operating and maintenance costs related to the combined cycle and associated common facilities placed in service in August 2014 that are subject to the $2.88 billion cost cap and exclude post-in-service costs for the lignite mine. See "Rate Recovery of Kemper IGCC Costs – 2013 MPSC Rate Order" herein for additional information. The Current Cost Estimate and the Actual Costs reflect 100% of the costs of the Kemper IGCC. See note (g) for additional information. |
| |
| (c) | Mississippi Power's original estimate included recovery of financing costs during construction rather than the accrual of AFUDC. This approach was not approved by the Mississippi PSC in 2012 as described in "Rate Recovery of Kemper IGCC Costs." The current estimate reflects the impact of a settlement agreement with the wholesale customers for cost-based rates under FERC's jurisdiction. See "FERC Matters" herein for additional information. |
| |
| (d) | Incremental operating and maintenance costs related to the combined cycle and associated common facilities placed in service in August 2014, net of costs related to energy sales. See "Rate Recovery of Kemper IGCC Costs – 2013 MPSC Rate Order" herein for additional information. |
| |
| (e) | The 2012 MPSC CPCN Order approved deferral of non-capital Kemper IGCC-related costs during construction as described in "Rate Recovery of Kemper IGCC Costs – Regulatory Assets and Liabilities."Liabilities" herein. |
| |
| (f) | The 2010 Project Estimate is the certificated cost estimate adjusted to include the certificated estimate for the CO2 pipeline facilities which was approved in 2011 by the Mississippi PSC. |
| |
| (g) | Beginning in the third quarter 2015, certain costs, including debt carrying costs (associated with assets placed in service and other non-construction work in progressnon-CWIP accounts), that previously were deferred as regulatory assets are now being recognized through income; however, such costs continue to be included in the current cost estimateCurrent Cost Estimate and actual coststhe Actual Costs at September 30, 2015.March 31, 2016. |
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Of the total costs, including post-in-service costs for the lignite mine, incurred as of September 30, 2015, $3.45March 31, 2016, $3.61 billion was included in property, plant, and equipment (which is net of the Initial DOE Grants and estimated probable losses of $2.23$2.47 billion), $2$6 million in other property and investments, $62$75 million in fossil fuel stock, $43$45 million in materials and supplies, $50$22 million in other regulatory assets, current, $158$196 million in other regulatory assets, deferred, $1 million in other current assets, and $15$11 million in other deferred charges and assets in the balance sheet.
Mississippi Power does not intend to seek rate recovery for any costs related to the construction of the Kemper IGCC that exceed the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions. Mississippi Power recorded pre-tax charges to income for revisions to the cost estimate above the cost cap of $150$53 million ($93($33 million after tax) in the thirdfirst quarter 2015, and a total2016. Since 2012, in the aggregate, Mississippi Power has incurred charges of $182 million$2.47 billion ($112 million1.52 billion after tax) as a result of changes in the cost estimate above the cost
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
cap for the nine months ended September 30, 2015. These amounts are in addition to charges totaling $868 million ($536 million after tax), $1.10 billion ($681 million after tax), and $78 million ($48 million after tax) in 2014, 2013, and 2012, respectively.Kemper IGCC through March 31, 2016. The increasesincrease to the cost estimate in 2015the first quarter 2016 primarily reflectreflects costs for the extension of the Kemper IGCC's projected in-service date through September 30, 2016, and increased efforts related to equipment rework, scope modifications,operational readiness and the related additional labor costschallenges in support of start-up and operational readinesscommissioning activities as well as additional schedule costs through June 30, 2016. The current estimatewhich includes costs through June 30, 2016.the cost of repairs and modifications to the refractory lining inside the gasifiers. Any extension of the in-service date beyond JuneSeptember 30, 2016 is currently estimated to result in additional base costs of approximately $25 million to $30$35 million per month, which includes maintaining necessary levels of start-up labor, materials, and fuel, as well as operational resources required to execute start-up and commissioning activities. However, additional costs may be required for remediation of any further equipment and/or design issues identified. Any extension of the in-service date with respect to the Kemper IGCC beyond JuneSeptember 30, 2016 would also increase costs for the Cost Cap Exceptions, which are not subject to the $2.88 billion cost cap established by the Mississippi PSC. These costs include AFUDC, which is currently estimated to total approximately $12$14 million per month, as well as carrying costs and operating expenses on Kemper IGCC assets placed in service and consulting and legal fees. Beginning in the third quarter 2015, in connection with the implementationfees of interim rate recovery, certain of these ongoing project costs are being expensed, with the remainder being deferred as regulatory assets and are estimated to total approximately $6$2 million per month. For additional information, see "2015 Rate Case" herein.
Mississippi Power’sPower's analysis of the time needed to complete the start-up and commissioning activities for the Kemper IGCC will continue until the remaining Kemper IGCC assets are placed in service. Further cost increases and/or extensions of the in-service date with respect to the Kemper IGCC may result from factors including, but not limited to, labor costs and productivity, adverse weather conditions, shortages and inconsistent quality of equipment, materials, and labor, contractor or supplier delay, non-performance under constructionoperating or other agreements, operational readiness, including specialized operator training and required site safety programs, unforeseen engineering or design problems, start-up activities for this first-of-a-kind technology (including major equipment failure and system integration), and/or operational performance (including additional costs to satisfy any operational parameters ultimately adopted by the Mississippi PSC). In subsequent periods, any further changes in the estimated costs to complete construction and start-up of the Kemper IGCC subject to the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions, will be reflected in Mississippi Power's statements of operationsincome and these changes could be material.
Rate Recovery of Kemper IGCC Costs
See "FERC Matters" herein for additional information regarding Mississippi Power's MRA cost based tariff relating to recovery of a portion of the Kemper IGCC costs from Mississippi Power's wholesale customers. Rate recovery of the retail portion of the Kemper IGCC is subject to the jurisdiction of the Mississippi PSC. See Note (G) to the Condensed Financial Statements under "Unrecognized Tax Benefits – Section 174 Research and Experimental Deduction" herein for additional tax information related to the Kemper IGCC.
The ultimate outcome of the rate recovery matters discussed herein, including the resolution of legal challenges, determinations of prudency, and the specific manner of recovery of prudently-incurred costs, cannot be determined at this time, but could have a material impact on Mississippi Power's results of operations, financial condition, and liquidity.
2012 MPSC CPCN Order
The 2012 MPSC CPCN Order included provisions relating to both Mississippi Power's recovery of financing costs during the course of construction of the Kemper IGCC and Mississippi Power's recovery of costs following the date the Kemper IGCC is placed in service. With respect to recovery of costs following the in-service date of the
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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Kemper IGCC, the 2012 MPSC CPCN Order provided for the establishment of operational cost and revenue parameters based upon assumptions in Mississippi Power's petition for the CPCN. Mississippi Power expects the Mississippi PSC to apply operational parameters in connection with the evaluation of the 2015 Rate Case and any alternativefuture proceedings related to the operation of the Kemper IGCC. To the extent the Mississippi PSC determines the Kemper IGCC does not meet the operational parameters ultimately adopted by the Mississippi PSC or Mississippi Power incurs additional costs to satisfy such parameters, there could be a material adverse impact on Mississippi Power's financial statements.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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2013 Settlement AgreementMPSC Rate Order
In January 2013, Mississippi Power entered into a settlement agreement with the Mississippi PSC that among other things, establishedwas intended to establish the process for resolving matters regarding cost recovery related to the Kemper IGCC (2013 Settlement Agreement). Under the 2013 Settlement Agreement, Mississippi Power agreed to limit the portion of prudently-incurred Kemper IGCC costs to be included in retail rate base to the $2.4 billion certificated cost estimate, plus the Cost Cap Exceptions, but excluding AFUDC, and any other costs permitted or determined to be excluded from the $2.88 billion cost cap by the Mississippi PSC. The 2013 Settlement Agreement also allowed Mississippi Power to secure alternate financing for costs not otherwise recovered in any Mississippi PSC rate proceedings contemplated by the 2013 Settlement Agreement. The Court found the 2013 Settlement Agreement unenforceable due to a lack of public notice for the related proceedings. See "2015 Mississippi Supreme Court Decision" herein for additional information.
Legislation to authorize a multi-year rate plan and legislation to provide for alternate financing through securitization of up to $1.0 billion of prudently-incurred costs was enacted into law in 2013. Mississippi Power's intent under the 2013 Settlement Agreement was to securitize (1) prudently-incurred costs in excess of the certificated cost estimate and up to the $2.88 billion cost cap, net of the DOE Grants and excluding the Cost Cap Exceptions, (2) accrued AFUDC, and (3) other prudently-incurred costs, which include carrying costs from the estimated in-service date until securitization is finalized and other costs not included in Mississippi Power's 2013 revision to the proposed rate recovery plan filed with the Mississippi PSC for the Kemper IGCC for cost recovery through 2020 (2013 Rate Mitigation Plan) as approved by the Mississippi PSC. The Court's decision did not impact Mississippi Power's ability to utilize alternate financing through securitization, the 2012 MPSC CPCN Order, or the February 2013 legislation. See "2015 Mississippi Supreme Court Decision" herein for additional information.
2013 MPSC Rate Order
Consistent with the terms of the 2013 Settlement Agreement, inIn March 2013, the Mississippi PSC issued a rate order approving retail rate increases of 15% effective March 19, 2013 and 3% effective January 1, 2014, which collectively were designed to collect $156 million annually beginning in 2014 (2013 MPSC Rate Order) to be used to mitigate customer rate impacts after the Kemper IGCC is placed in service. service, based on a mirror CWIP methodology (Mirror CWIP rate).
Because the 2013 MPSC Rate Order did not provide for the inclusion of CWIP in rate base as permitted by the Baseload Act, Mississippi Power continues to record AFUDC on the Kemper IGCC through the in-service date.IGCC. Mississippi Power will not record AFUDC on any additional costs of the Kemper IGCC that exceed the $2.88 billion cost cap, except for Cost Cap Exception amounts. Mississippi Power will continue to record AFUDC through the in-service date until directed to do otherwise by the Mississippi PSC.
In August 2014, Mississippi Power provided an analysis of the costs and benefits of placing the combined cycle and the associated common facilities portion of the Kemper IGCC in service, including the expected accounting treatment for costs and revenues associated with the operation of the combined cycle. In addition, Mississippi Power requested confirmation of Mississippi Power's accounting treatment by the Mississippi PSC of the continued accrual of AFUDC through the in-service date of the remainder of the Kemper IGCC. See "Regulatory Assets and Liabilities" for additional information. Any action by the Mississippi PSC that is inconsistent with the treatment requested by Mississippi Power could have a material impact on the results of operations, financial condition, and liquidity of Mississippi Power.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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2015 Mississippi Supreme Court Decision
On February 12, 2015, the Court issued its decision in the legal challenge to the 2013 MPSC Rate Order. The Court reversed the 2013 MPSC Rate Order based on, among other things, its findings that (1) the Mirror CWIP rate treatment was not provided for under the Baseload Act and (2) the Mississippi PSC should have determined the prudence of Kemper IGCC costs before approving rate recovery through the 2013 MPSC Rate Order. The Court also found the 2013 Settlement Agreement unenforceable due to a lack of public notice for the related proceedings. Mississippi Power and the Mississippi PSC each filed motions for rehearing, both of which were denied on June 11, 2015. The Court's ruling remanded the matter to the Mississippi PSC to (1) fix by order the rates that were in existence prior to the 2013 MPSC Rate Order, (2) fix no rate increases until the Mississippi PSC is in compliance with the Court's ruling, and (3) enter an order refunding amounts collected under the 2013 MPSC Rate Order. On July 7, 2015, the Mississippi PSC ordered that the Mirror CWIP rate be terminated effective July 20, 2015. Through July 2015 billings, Mississippi Power had collectedand required the fourth quarter 2015 refund of the $342 million through ratescollected under the 2013 MPSC Rate Order, and had accrued $27 million inalong with associated carrying costs through September 30, 2015. Refunds will begin in early November 2015.of $29 million. The Court's decision did not impact the 2012 MPSC CPCN Order or the February 2013 legislation described below.
2015 Rate Case
As a result of the 2015 Mississippi Supreme Court decision, and the Mirror CWIP refund, the 2013 Rate Mitigation Plan is no longer viable. See "2015 Mississippi Supreme Court Decision" herein for additional information. On May 15, 2015, Mississippi Power filed the 2015 Rate Case with the Mississippi PSC. This filing included three alternative rate proposals requesting an increase in retail rates and charges in connection with the Kemper IGCC: (i) a traditional rate case, (ii) a rate mitigation plan fixing rates through 2017 (RMP 2017), and (iii) a rate mitigation plan fixing rates through 2019 (RMP 2019). In light of the Mississippi PSC's July 7, 2015 order, RMP 2019 is no longer viable as originally proposed by Mississippi Power.
Furthermore, on July 10, 2015, Mississippi Power filed a Supplemental Noticesupplemental filing including a request for interim rates (Supplemental Notice) with the Mississippi PSC in response to the July 7, 2015 order of the Mississippi PSC. The Supplemental Noticewhich presented an additional alternative rate proposal In-Service(In-Service Asset Proposal, for consideration by the Mississippi PSC. The In-Service Asset Proposal is based upon the test period of June 2015 to May 2016, isProposal) designed to recover Mississippi Power's costs associated with the Kemper IGCC assets that are commercially operational and currently providing service to customers (the transmission facilities, combined cycle, natural gas pipeline, and water pipeline) and other related costs, and iscosts. On August 13, 2015, the Mississippi PSC approved the implementation of the requested interim rates designed to collect approximately $159 million annually. The Supplemental Notice requested thatannually effective with the first billing cycle in September 2015, subject to refund and certain other conditions.
On December 3, 2015, the Mississippi PSC issued the In-Service Asset Proposal be implemented immediately as interim rates, subject to refund, until such time asRate Order adopting in full the 2015 Stipulation entered into between Mississippi PSC renders a final decision onPower and the MPUS regarding the In-Service Asset Proposal and requested that the Mississippi PSC establish a scheduling order for consideration of permanent rates under theProposal. The In-Service Asset Proposal.
Rate Order provided for retail rate recovery of an annual revenue requirement of approximately $126 million, based on Mississippi Power's actual average capital structure, with a maximum common equity percentage of 49.733%, a 9.225% return on common equity, and actual embedded interest costs. The revenue requirements set forthIn-Service Asset Rate Order also included a prudence finding of all costs in the alternative rate proposals excludestipulated revenue requirement calculation for the in-service assets. The stipulated revenue requirement excluded the costs of the Kemper IGCC related to the 15% undivided interest that was previously projected to be purchased by SMEPA. See "TerminationMississippi Power continues to evaluate its alternatives with respect to its investment and related costs associated with the 15% undivided interest.
With implementation of Proposed Salethe new rate on December 17, 2015, the interim rates were terminated and, in March 2016, Mississippi Power completed customer refunds of Undivided Interestapproximately $11 million for the difference between the interim rates collected and the permanent rates.
Pursuant to SMEPA" herein for additional information.
On August 13, 2015,the In-Service Asset Rate Order, Mississippi Power is required to file a subsequent rate request within 18 months. As part of the filing, Mississippi Power expects to request recovery of certain costs that the Mississippi PSC approvedhad excluded from the implementationrevenue requirement calculation.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On February 25, 2016, Greenleaf CO2 Solutions, LLC filed a material change in circumstances. Through September 30, 2015, Mississippi Power had recognized $28 million under the interim rates. The Mississippi PSC is scheduled to issue a final order on or before December 8, 2015 related to permanent rates fornotice of appeal of the In-Service Asset Proposal.Rate Order with the Court. On May 5, 2016, the Court dismissed the appeal.
Legislation to authorize a multi-year rate plan and legislation to provide for alternate financing through securitization of up to $1.0 billion of prudently-incurred costs was enacted into law in 2013. Mississippi Power expects to securitize prudently-incurred qualifying facility costs in excess of the certificated cost estimate of $2.4 billion. Qualifying facility costs include, but are not limited to, pre-construction costs, construction costs, regulatory costs, and accrued AFUDC. The Court's decision regarding the 2013 MPSC Rate Order did not impact Mississippi Power's ability to utilize alternate financing through securitization or the February 2013 legislation.
Mississippi Power expects to seek additional rate relief to address recovery of the remaining Kemper IGCC assets. In addition to current estimated costs at September 30, 2015March 31, 2016 of $6.43$6.58 billion, Mississippi Power anticipates that it will incur additional costs after the Kemper IGCC in-service date until the Kemper IGCC cost recovery approach is finalized. These costs include, but are not limited to, regulatory costs and additional carrying costs which could be material. Recovery of these costs would be subject to approval by the Mississippi PSC.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Prudence Reviews
The Mississippi PSC's review of Kemper IGCC costs is ongoing. In August 2014, the Mississippi PSC ordered that a consolidated prudence determination of all Kemper IGCC costs be completed after the entire project has been placed in service and has demonstrated availability for a reasonable period of time as determined by the Mississippi PSC and the Mississippi Public Utilities Staff (MPUS). The Mississippi PSC has encouraged the parties to work in good faith to settle contested issues and Mississippi Power is working to reach a mutually acceptable resolution. See "2015 Mississippi Supreme Court Decision" and "2015 Rate Case" herein for additional information.
Regulatory Assets and Liabilities
Consistent with the treatment of non-capital costs incurred during the pre-construction period, the Mississippi PSC issued an accounting order in 2011 granting Mississippi Power the authority to defer all non-capital Kemper IGCC-related costs to a regulatory asset through the in-service date, subject to review of such costs by the Mississippi PSC. Such costs include, but are not limited to, carrying costs on Kemper IGCC assets currently placed in service, costs associated with Mississippi PSC and MPUS consultants, prudence costs, legal fees, and operating expenses associated with assets placed in service.
In August 2014, Mississippi Power requested confirmation by the Mississippi PSC of Mississippi Power's authority to defer all operating expenses associated with the operation of the combined cycle subject to review of such costs by the Mississippi PSC. In addition, Mississippi Power is authorized to accrue carrying costs on the unamortized balance of such regulatory assets at a rate and in a manner to be determined by the Mississippi PSC in future cost recovery mechanism proceedings. Beginning in the third quarter 2015, in connection with the implementation of interim rates, Mississippi Power began expensing certain ongoing project costs and certain debt carrying costs (associated with assets placed in service and other non-construction work in progressnon-CWIP accounts) that previously were deferred as regulatory assets and began amortizing certain regulatory assets associated with assets placed in service and consulting and legal fees over a 24-month period.fees. The amortization periods for these regulatory assets vary from two years to 10 years as set forth in the In-Service Asset Rate Order. As of September 30, 2015,March 31, 2016, the balance associated with these regulatory assets was $117 million. The amortization period for these regulatory assets$120 million, of which $22 million is subject to the Mississippi PSC’s final orderincluded in the 2015 Rate Case.current assets. Other regulatory assets associated with the remainder of the Kemper IGCC totaled $91$98 million as of September 30, 2015.March 31, 2016. The amortization period for these assets is expected to be determined by the Mississippi PSC in future rate proceedings following completion of construction and start-up of the Kemper IGCC and related prudence reviews.
Also see "2015 Mississippi Supreme Court Decision"See "2013 MPSC Rate Order" herein for information related to the July 7, 2015 Mississippi PSC order terminating the Mirror CWIP rate and requiring refund of collections under Mirror CWIP.
See Note 1 to the financial statements of Mississippi Power under "Regulatory Assets and Liabilities" in Item 8 of the Form 10-K for additional information.
The In-Service Asset Rate Order requires Mississippi Power to submit an annual true-up calculation of its actual cost of capital, compared to the stipulated total cost of capital, with the first occurring as of May 31, 2016. As of March 31, 2016, Mississippi Power recorded a related regulatory liability of approximately $3 million. See "2015 Rate Case" herein for additional information.
Lignite Mine and CO2 Pipeline Facilities
In conjunction with the Kemper IGCC, Mississippi Power will own the lignite mine and equipment and has acquired and will continue to acquire mineral reserves located around the Kemper IGCC site. The mine started commercial operation in June 2013.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In 2010, Mississippi Power executed a 40-year management fee contract with Liberty Fuels Company, LLC (Liberty Fuels), a wholly-owned subsidiary of The North American Coal Corporation, which developed, constructed, and is operating and managing the mining operations. The contract with Liberty Fuels is effective through the end of the mine reclamation. As the mining permit holder, Liberty Fuels has a legal obligation to perform mine reclamation and Mississippi Power has a contractual obligation to fund all reclamation activities. In addition to the obligation to fund the reclamation activities, Mississippi Power currently provides working capital support to Liberty Fuels through cash advances for capital purchases, payroll, and other operating expenses. See Note 1 to the financial statements of Mississippi Power under "Asset Retirement Obligations and Other Costs of Removal" and "Variable Interest Entities" in Item 8 of the Form 10-K for additional information.
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In addition, Mississippi Power has constructed and will operate the CO2 pipeline for the planned transport of captured CO2 for use in enhanced oil recovery. Mississippi Power has entered into agreements with Denbury Onshore (Denbury), a subsidiary of Denbury Resources Inc., and Treetop Midstream Services, LLC (Treetop), an affiliate of Tellus Operating Group, LLC and a subsidiary of Tengrys, LLC, pursuant to which Denbury will purchase 70% of the CO2 captured from the Kemper IGCC and Treetop will purchase 30% of the CO2 captured from the Kemper IGCC. The agreements with Denbury and Treetop provide Denbury and Treetop with termination rights as Mississippi Power has not satisfied its contractual obligation to deliver captured CO2 by May 11, 2015. Since May 11, 2015, Mississippi Power has been engaged in ongoing discussions with its off-takers regarding the status of the CO2 delivery schedule as well as other issues related to the respectiveCO2 agreements. As a result of discussions with Treetop, on August 3, 2015, Mississippi Power agreed to amend certain provisions of their agreement that do not affect pricing or minimum purchase quantities. Potential requirements imposed on CO2 off-takers under the Clean Power Plan (if ultimately enacted in its current form, pending resolution of litigation) and the potential adverse financial impact of low oil prices on the off-takers increase the risk that the CO2 contracts may be terminated or materially modified. Any termination or material modification of these agreements could result in a material reduction in future chemical product salesMississippi Power's revenues and could have a material financial impact on Mississippi Power to the extent Mississippi Power is not able to enter into other similar contractual arrangements. Additionally, if the contracts remain in place, sustained oil price reductions could result in significantly lower revenues than Mississippi Power forecasted to be available to offset customer rate impacts, which could have a material impact on Mississippi Power's financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Global Climate Issues" of Mississippi Power in Item 7 of the Form 10-K for additional information regarding the Clean Power Plan and related litigation.
The ultimate outcome of these matters cannot be determined at this time.
Termination of Proposed Sale of Undivided Interest to SMEPACivil Lawsuit
In 2010 and as amended in 2012,On April 26, 2016, a complaint against Mississippi Power was filed in Harrison County Circuit Court by Biloxi Freezing & Processing Inc., Gulfside Casino Partnership, and SMEPA entered into an APA whereby SMEPA agreedJohn Carlton Dean. The plaintiffs allege that Mississippi Power violated the Mississippi Unfair Trade Practices Act and concealed, falsely represented, and failed to purchase a 15% undivided interest infully disclose important facts concerning the cost and schedule of the Kemper IGCC. On May 20, 2015, SMEPA notifiedIGCC and that Mississippi Power's alleged breaches interfered with and destroyed economically advantageous relationships between the plaintiffs and their current and prospective business associates. The plaintiffs seek unspecified actual damages and punitive damages as well as attorney's fees, costs, and interest. The plaintiffs also seek an injunction to prevent any Kemper IGCC costs from being charged to customers through electric rates. Mississippi Power believes this legal challenge has no merit; however, an adverse outcome in this proceeding could have a material impact on Mississippi Power's results of its termination of the APA betweenoperations, financial condition, and liquidity. Mississippi Power will vigorously defend the matter, and SMEPA. Mississippi Power previously received a totalthe final outcome of $275 million of deposits from SMEPA that were required tothis matter cannot be returned to SMEPA with interest in connection with the termination of the APA. On June 3, 2015, Southern Company, pursuant to its guarantee obligation, returned approximately $301 million to SMEPA. Subsequently, Mississippi Power issued an 18-month promissory note in the aggregate principal amount of approximately $301 million to Southern Company.determined at this time.
Income Tax Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS –- FUTURE EARNINGS POTENTIAL –- "Income Tax Matters" of Mississippi Power in Item 7 of the Form 10-K and Note (G) to the Condensed Financial Statements under "Section 174 Research and Experimental Deduction" herein for additional information.
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Investment Tax Credits
The IRS allocated $279 million (Phase II) of Internal Revenue Code Section 48A tax credits to Mississippi Power in connection with the Kemper IGCC. These tax credits are dependent upon meeting the IRS certification requirements, including an in-service date no later than April 19, 2016 and the capture and sequestration (via enhanced oil recovery) of at least 65% of the CO2 produced by the Kemper IGCC during operations in accordance with the Internal Revenue Code. Through September 30, 2015, Mississippi Power had recorded tax benefits totaling $276 million for the Phase II credits, of which approximately $235 million had been utilized. While the in-service date for the remainder of the Kemper IGCC is currently expected to occur in the first half of 2016, Mississippi Power now anticipates the in-service date to occur subsequent to April 19, 2016, but has not made a final determination to that effect. Due to this uncertainty, Mississippi Power has reflected these tax credits as unrecognized tax benefits and reclassified the Phase II credits to a current liability on its September 30, 2015 balance sheet, with no impact to net income. Repayment to the IRS would occur with the quarterly estimated tax payment following a final determination that the in-service date would occur subsequent to April 19, 2016. Any cash funding requirements necessary for Mississippi Power to make this repayment are expected to be provided by Southern Company. See Notes (B) and (G) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" and "Unrecognized Tax Benefits – Investment Tax Credits," respectively, herein for additional information. The ultimate outcome of this tax matter cannot be determined at this time.
Section 174 Research and Experimental Deduction
Southern Company, on behalf of Mississippi Power, reflected deductions for research and experimental (R&E) expenditures related to the Kemper IGCC in its federal income tax calculations for 2013, 2014, and 2015. In May 2015, Southern Company amended its 2008 through 2013 federal income tax returns to include deductions for Kemper IGCC-related R&E expenditures. Due to the uncertainty related to this tax position, Mississippi Power had unrecognized tax benefits associated with these R&E deductions totaling approximately $414 million as of September 30, 2015. See Note 5 to the financial statements of Mississippi Power under "Unrecognized Tax Benefits" in Item 8 of the Form 10-K and Notes (B) and (G) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" and "Unrecognized Tax Benefits – Section 174 Research and Experimental Deduction," respectively, herein for additional information. The ultimate outcome of this tax matter cannot be determined at this time.
Other Matters
Mississippi Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Mississippi Power is subject to certain claims and legal actions arising in the ordinary course of business. Mississippi 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 occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
The ultimate outcome of such pending or potential litigation against Mississippi Power cannot be predicted at this time; however, for current proceedings not specifically reported in Note (B) to the Condensed Financial Statements herein or in Note 3 to the financial statements of Mississippi Power in Item 8 of the Form 10-K, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Mississippi Power's financial statements. See Note (B) 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.
TableThe SEC is conducting a formal investigation of ContentsSouthern Company and Mississippi Power concerning the estimated costs and expected in-service date of the Kemper IGCC. Southern Company and Mississippi Power believe the investigation is focused primarily on periods subsequent to 2010 and on accounting matters, disclosure controls and procedures, and internal controls over financial reporting associated with the Kemper IGCC. See ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" herein for additional information on the Kemper IGCC estimated construction costs and expected in-service date. Southern Company and Mississippi Power are cooperating fully with the SEC. The ultimate outcome of this matter cannot be determined at this time; however, it is not expected to have a material impact on the financial statements of Mississippi Power.MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Mississippi Power prepares its financial statements in accordance with GAAP. Significant accounting policies are described in Note 1 to the financial statements of Mississippi Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Mississippi 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 Mississippi Power in Item 7 of the Form 10-K for a complete discussion of Mississippi Power's critical accounting policies and estimates related to Electric Utility Regulation, Asset Retirement Obligations, Contingent Obligations, Unbilled Revenues, Pension and Other Postretirement Benefits, and AFUDC.
Kemper IGCC Estimated Construction Costs, Project Completion Date, and Rate Recovery
During 2015,2016, Mississippi Power further revised its cost estimate to complete construction and start-up of the Kemper IGCC to an amount that exceeds the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions. Mississippi Power does not intend to seek any rate recovery for any costs related to the construction of the Kemper IGCC that exceed the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions.
As a result of the revisions to the cost estimate, Mississippi Power recorded total pre-tax charges to income for the estimated probable losses on the Kemper IGCC of $53 million ($33 million after tax) in the first quarter 2016, $183 million ($113 million after tax) in the fourth quarter 2015, $150 million ($93 million after tax) in the third
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quarter 2015, $23 million ($14 million after tax) in the second quarter 2015, $9 million ($6 million after tax) in the first quarter 2015, $70 million ($43 million after tax) in the fourth quarter 2014, $418 million ($258 million after tax) in the third quarter 2014, $380 million ($235 million after tax) in the first quarter 2014, $40 million ($25 million after tax) in the fourth quarter 2013, $150 million ($93 million after tax) in the third quarter 2013, $450 million ($278 million after tax) in the second quarter 2013, $462 million ($285 million after tax) in the first quarter 2013, and $78 million ($48 million after tax) in the fourth quarter 2012. In the aggregate, Mississippi Power has incurred charges of $2.23$2.47 billion ($1.41.52 billion after tax) as a result of changes in the cost estimate above the cost cap for the Kemper IGCC through September 30, 2015.March 31, 2016.
Mississippi Power has experienced, and may continue to experience, material changes in the cost estimate for the Kemper IGCC. In subsequent periods, any further changes in the estimated costs to complete construction and start-up of the Kemper IGCC subject to the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions, will be reflected in Mississippi Power's statements of operationsincome and these changes could be material. Any further cost increases and/or extensions of the in-service date with respect to the Kemper IGCC may result from factors including, but not limited to, labor costs and productivity, adverse weather conditions, shortages and inconsistent quality of equipment, materials, and labor, contractor or supplier delay, non-performance under constructionoperating or other agreements, operational readiness, including specialized operator training and required site safety programs, unforeseen engineering or design problems, start-up activities for this first-of-a-kind technology (including, but not limited to, major equipment failure and system integration), and/or operational performance (including, but not limited to, additional costs to satisfy any operational parameters ultimately adopted by the Mississippi PSC).
Mississippi Power's revised cost estimate includes costs through JuneSeptember 30, 2016. Any extension of the in-service date beyond JuneSeptember 30, 2016 is currently estimated to result in additional base costs of approximately $25 million to $30$35 million per month, which includes maintaining necessary levels of start-up labor, materials, and fuel, as well as operational resources required to execute start-up and commissioning activities. However, additional costs may be required for remediation of any further equipment and/or design issues identified. Any extension of the in-service date with respect to the Kemper IGCC beyond JuneSeptember 30, 2016 would also increase costs for the Cost Cap Exceptions, which are not subject to the $2.88 billion cost cap established by the Mississippi PSC. These costs include AFUDC, which is currently estimated to total approximately $12$14 million per month, as well as carrying costs and operating expenses on Kemper IGCC assets placed in service and consulting fees and legal fees a
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portion of which are being deferred as regulatory assets and are estimated to total approximately $6$2 million per month.
Given the significant judgment involved in estimating the future costs to complete construction and start-up, the project completion date, the ultimate rate recovery for the Kemper IGCC, and the potential impact on Mississippi Power's results of operations, Mississippi Power considers these items to be critical accounting estimates. See Note 3 to the financial statements of Mississippi Power under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information.
Asset Retirement Obligations
AROs are computed as the fair value of the ultimate costs for an asset's future retirement and are recorded in the period in which the liability is incurred. The costs are capitalized as part of the related long-lived asset and depreciated over the asset's useful life. In the absence of quoted market prices, AROs are estimated using present value techniques in which estimates of future cash outlays associated with the asset retirements are discounted using a credit-adjusted risk-free rate. Estimates of the timing and amounts of future cash outlays are based on projections of when and how the assets will be retired and the cost of future removal activities.
The liability for AROs primarily relates to facilities that are subject to the CCR Rule, primarily ash ponds. In addition, Mississippi Power has retirement obligations related to various landfill sites, underground storage tanks, deep injection wells, water wells, substation removal, mine reclamation, and asbestos removal. Mississippi Power also has identified retirement obligations related to certain transmission and distribution facilities, and certain wireless communication towers. However, liabilities for the removal of these assets have not been recorded because the settlement timing for the retirement obligations related to these assets is indeterminable and, therefore, the fair value of the retirement obligations cannot be reasonably estimated. A liability for these AROs will be recognized when sufficient information becomes available to support a reasonable estimation of the ARO.
As a result of the final CCR Rule discussed above, Mississippi Power recorded new AROs for facilities that are subject to the CCR Rule. The cost estimates are based on information using various assumptions related to closure and post-closure costs, timing of future cash outlays, inflation and discount rates, and the potential methods for complying with the CCR Rule requirements for closure in place. As further analysis is performed, including evaluation of the expected method of compliance, refinement of assumptions underlying the cost estimates, such as the quantities of CCR at each site, and the determination of timing, including the potential for closing ash ponds prior to the end of their currently anticipated useful life, Mississippi Power expects to continue to periodically update these estimates.
Given the significant judgment involved in estimating AROs, Mississippi Power considers the liabilities for AROs to be critical accounting estimates.
See Note 1 to the financial statements of Mississippi Power under "Asset Retirement Obligations and Other Costs of Removal" in Item 8 of the Form 10-K and Note (A) to the Condensed Financial Statements under "Asset Retirement Obligations" herein for additional information.
Recently Issued Accounting Standards
The Financial Accounting Standards Board's (FASB) ASC 606, Revenue from Contracts with Customers, revises the accounting for revenue recognition effective for fiscal years beginning after December 15, 2017. Mississippi Power continues to evaluate the requirements of ASC 606. The ultimate impact of the new standard has not yet been determined.
On April 7, 2015,February 25, 2016, the FASB issued Accounting Standards Update (ASU)ASU No. 2015-03,2016-02, Interest – Imputation of Interest (Subtopic 835-30):Leases Simplifying the Presentation of Debt Issuance Costs(Topic 842) (ASU 2016-02). The ASU 2016-02 requires that debt issuance costs relatedlessees to a recognized debt liability be presented inrecognize on the balance sheet as a direct deduction from the carrying amount of that debtlease liability and a right-of-use asset for all leases. ASU 2016-02 also changes the recognition, measurement, and presentation of expense associated with leases and provides clarification regarding the identification of certain components of contracts that would represent a lease. The accounting required by lessors is relatively unchanged. ASU 2016-02 is effective for fiscal years beginning after December 15, 2015. Early2018, with early adoption is permitted andpermitted. Mississippi Power intendsis currently evaluating the new standard and has not yet determined its ultimate impact; however, adoption of ASU 2016-02 is expected to adopthave a significant impact on Mississippi Power's balance sheet.
On March 30, 2016, the FASB issued ASU inNo. 2016-09, Compensation-Stock Compensation(Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 changes the fourth quarter 2015. The ASU isaccounting for income taxes and the cash flow presentation for share-based payment award transactions. Most
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significantly, entities are required to be applied retrospectivelyrecognize all excess tax benefits and deficiencies related to all periods presented beginningthe exercise or vesting of stock compensation as income tax expense or benefit in the year of adoption.income statement. Mississippi Power currently reflects unamortized debt issuance costsrecognizes any excess tax benefits and deficiencies related to the exercise and vesting of stock compensation in other deferred chargesadditional paid-in capital. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. Mississippi Power is currently evaluating the new standard and assets onhas not yet determined its balance sheet. Upon adoption, the reclassification will not have a material impact on the results of operations, financial position, or cash flows of Mississippi Power.ultimate impact.
FINANCIAL CONDITION AND LIQUIDITY
Overview
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Overview" of Mississippi Power in Item 7 of the Form 10-K and FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle" herein for additional information. Mississippi Power's financial condition and its ability to obtain financing needed for normal business operations and completion of construction and start-up of the Kemper IGCC were adversely affected by the return of approximately $301 million of interest bearing refundable deposits to SMEPA in June 2015 in connection with the termination of the APA, the required refund of Mirror CWIP rate collections beginning in early November 2015 of approximately $369 million, including associated carrying costs, the termination of the Mirror CWIP rate and the likely repayment of the Phase II tax credits of $235 million as of September 30, 2015. Earnings for the ninethree months ended September 30, 2015March 31, 2016 were negatively affected by revisions to the cost estimate for the Kemper IGCC and the Court's decision to reverse the 2013 MPSC Rate Order. See FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle – Termination of Proposed Sale of Undivided Interest to SMEPA," –"Rate Recovery of Kemper IGCC Costs – 2013 MPSC Rate Order,"" – 2015 Mississippi Supreme Court Decision," "– 2015 Rate Case," and – "Income Tax Matters – Investment Tax Credits" herein for additional information.IGCC.
Through September 30, 2015,March 31, 2016, Mississippi Power has incurred non-recoverable cash expenditures of $1.8$2.11 billion and is expected to incur approximately $0.4$0.36 billion in additional non-recoverable cash expenditures through completion of the construction and start-up of the Kemper IGCC.
In addition to funding normal business operations and projected capital expenditures, Mississippi Power's cash requirements primarily consist of $900 million of bank term loans scheduled to mature on April 1, 2016, $25 million of short-term debt, and the required refund of approximately $369 million in Mirror CWIP, which includes associated carrying costs. For the three-year period from 20152016 through 2017,2018, Mississippi Power's capital expenditures and debt maturities are expected to materially exceed operating cash flows. In addition to the Kemper IGCC, projected capital expenditures in that period include investments to maintain existing generation facilities, to add environmental equipment formodifications to existing generating units, to add or change fuel sources for certain existing units, and to expand and improve transmission and distribution facilities.
On January 28, 2016, Mississippi Power is primarily dependent uponissued a promissory note for up to $275 million to Southern Company, which matures in December 2017, bearing interest based on one-month LIBOR. During the first three months of 2016, Mississippi Power borrowed $100 million under this promissory note. In addition, on January 19, 2016, Mississippi Power borrowed an additional $100 million from Southern Company pursuant to meet its financing needs.a promissory note issued in November 2015. On March 8, 2016, Mississippi Power entered into an unsecured term loan agreement for an aggregate amount of $1.2 billion to repay existing indebtedness and for other general corporate purposes. Mississippi Power borrowed $900 million under the term loan agreement and has the right to borrow the remaining $300 million on or before October 15, 2016.
As of March 31, 2016, Mississippi Power's current liabilities exceeded current assets by approximately $363 million primarily due to $300 million in senior notes scheduled to mature on October 15, 2016 and $25 million in short-term debt. Mississippi Power intends to utilize operating cash flows and lines of credit (to the extent available) as well as loans and, under certain circumstances, equity contributions from Southern Company to fund Mississippi Power's short-termthe remainder of its capital needs. See "Capital Requirements and Contractual Obligations," "Sources of Capital," and "Financing ActivitiesActivities" herein for additional information.
During the first nine months of 2015, Mississippi Power received $150 million in equity contributions from Southern Company and issued an 18-month promissory note for $301 million to Southern Company. In April 2015, Mississippi Power entered into two floating rate bank loans with a maturity date of April 1, 2016, in an aggregate principal amount of $475 million, bearing interest based on one-month LIBOR. The proceeds of these loans wereNet cash used for the repayment of term loans in an aggregate principal amount of $275 million, working capital, and other general corporate purposes. Mississippi Power also amended three outstanding floating rate bank loans for an aggregate principal amount of $425 million which, among other things, extended the maturity dates from various dates in 2015 to April 1, 2016.
Net cash provided from operating activities totaled $349$25 million for the first ninethree months of 2015,2016, a decrease of $156$229 million as compared to the corresponding period in 2014.2015. The decrease in cash provided from operating activities is primarily due to lower R&Eresearch and experimental tax deductions, and lower incremental benefit of ITCs froma reduction in the customer liability associated with Kemper IGCC refunds due to offsetting service provided, a decrease in prepaid income taxes, and timing of payments of accounts payable,a decrease in Mirror CWIP regulatory liability due to the Mirror CWIP refund, partially offset by an increase in fuel recovery, and a decrease
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in receivables. See Notes (B) and Note (G) to the Condensed Financial Statements herein for additional information. Net cash used for investing activities totaled $686$214 million for the first ninethree months of 20152016 primarily due to gross property additions related to the Kemper IGCC and the Plant Daniel scrubber project.IGCC. Net cash provided from financing activities totaled $300$199 million for the first ninethree months of 20152016 primarily due to short-term bank loans, capital contributions from Southern Company, and short-term borrowings,long-term debt issuances, partially offset by redemptions of long-term debt and short termshort-term borrowings. Fluctuations in cash flow from financing activities vary from period to period based on capital needs and the maturity or redemption of securities.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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Significant balance sheet changes for the first ninethree months of 20152016 include an increase in long-term debt of $1.1 billion. A portion of this debt was used to repay securities and notes payable resulting in a $425 million decrease in securities due within one year of $349and a $475 million primarily due to refinancing or replacing maturing long-term debt with short-term loans. Additionally, long-term debt increased $292 million and interest-bearing refundable deposits decreased $275 million, due to an intercompany loan for the repayment of the SMEPA deposits and interest. See "Sources of Capital" herein for additional information.decrease in notes payable. Total property, plant, and equipment increased $490 million and the Mirror CWIP regulatory liability increased $98 million primarily associated with construction and collections related to the Kemper IGCC. See FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle" herein for additional information. Income taxes receivable, non-current increased $544 million, unrecognized tax benefits increased $359 million, and accumulated deferred income taxes increased $389 million primarily due to R&E tax deductions and the related reserve. Accumulated deferred ITCs decreased $278$140 million primarily due to the likely repayment of unrecognized tax benefits associated with the Phase II tax credits related toconstruction and startup activities for the Kemper IGCC. See FUTURE EARNINGS POTENTIAL – "Income Tax Matters – Investment Tax Credits" herein for additional information. Total common stockholder's equity increased $219 million primarily due to the receipt of $150 million in capital contributions from Southern Company and net income during the nine months ended September 30, 2015.The customer liability associated with Kemper IGCC refunds decreased $51 million.
Capital Requirements and Contractual Obligations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Mississippi Power in Item 7 of the Form 10-K for a description of Mississippi Power's capital requirements for its construction program, including estimated capital expenditures for new generating resources and to comply with existing environmental statutes and regulations, scheduled maturities of long-term debt, as well as related interest, leases, purchase commitments, derivative obligations, preferred stock dividends, trust funding requirements, and unrecognized tax benefits. Approximately $900$300 million will be required through September 30, 2016March 31, 2017 to fund maturities of bank term loans scheduled to mature on April 1, 2016long-term debt, and $25 million in short-term debt. In addition, Mississippi Power will be required to refund its Mirror CWIP rate collectionsfund maturities of approximately $369 million, including associated carrying costs, beginning in November 2015.short-term debt. See "Sources of Capital" herein for additional information.
The construction program of Mississippi Power is currently estimated to be $1.0 billion in 2015, $477 million in 2016, and $221$841 million for 2016, $216 million for 2017, and $264 million for 2018, which includes expenditures related to the construction of the Kemper IGCC of $834 million in 2015 and $281$665 million in 2016.
The construction program is subject to periodic review and revision, and actual construction costs may vary from these estimates because of numerous factors. These factors include: changes in business conditions; changes in load projections; storm impacts; changes in environmental statutes and regulations; 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 regulatory requirements; changes in FERC rules and regulations; Mississippi PSC approvals; changes in the expected environmental compliance program; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; and the cost of capital. See Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle – Kemper IGCC Schedule and Cost Estimate" herein for additional information and further risks related to the estimated schedule and costs and rate recovery for the Kemper IGCC.
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Sources of Capital
Except as described herein, Mississippi Power plans to obtain the funds required for construction and other purposes from operating cash flows and lines of credit (to the extent available) as well as loans and, under certain circumstances, equity contributions from Southern Company. Mississippi Power's financial condition and its ability to obtain funds needed for normal business operations and completion of the construction and start-up of the Kemper IGCC were adversely affected by the return of approximately $301 million of interest bearing refundable deposits to SMEPA in June 2015 in connection with the termination of the APA, the required refund of Mirror CWIP rate collections beginning in early November 2015 of approximately $369 million, including associated carrying costs, the termination of the Mirror CWIP rate, and the likely repayment of unrecognized tax benefits associated with the Phase II tax credits of $235 million. On August 13,In December 2015, the Mississippi PSC approved the implementation of interim rates that became effective with the first billing cycle in September (on August 19), subject to refund and certain other conditions, and is scheduled to issue a final order on or before December 8, 2015 related to permanent rates for the In-Service Asset Proposal.Rate Order, which among other things, provided for retail rate recovery of an annual revenue requirement of approximately $126 million effective December 17, 2015. The amount, type, and timing of future financings will depend upon regulatory approval, prevailing market conditions, and other factors, which includes resolution of Kemper IGCC cost recovery. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" and – FUTURE EARNINGS POTENTIAL – "Integrated Coal Gasification Combined Cycle – Rate Recovery of Kemper IGCC Costs – 2013 MPSC Rate Order," " – 2015 Mississippi Supreme Court Decision,"Order" and " – 2015 Rate Case" of Mississippi Power in Item 7 of the Form 10-K and hereinfor additional information. Also see MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Income Tax Matters – Bonus Depreciation" of Mississippi Power in Item 7 of the Form 10-K for additional information.
Mississippi Power received $245 million of Initial DOE Grants in prior years that were used for the construction of the Kemper IGCC. An additional $25 million of grants from the DOE Grants is expected to be received for commercial operation of the Kemper IGCC. On April 8, 2016, Mississippi Power received approximately $137 million in Additional DOE Grants for the Kemper IGCC, which are expected to be used to reduce future rate impacts for customers. In addition, see Note 3 to the financial statements of Mississippi Power under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K for information regarding legislation related to the securitization of certain costs of the Kemper IGCC.
In April 2015,
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On January 28, 2016, Mississippi Power entered into two floating rate bank loans withissued a maturity date of April 1, 2016,promissory note for up to $275 million to Southern Company, which matures in an aggregate principal amount of $475 million,December 2017, bearing interest based on one-month LIBOR. The proceedsDuring the first three months of these loans were used2016, Mississippi Power borrowed $100 million from Southern Company pursuant to the $275 million promissory note with a $50 million draw occurring on each of January 29, 2016 and March 14, 2016. In addition, on January 19, 2016, Mississippi Power borrowed $100 million from Southern Company pursuant to a promissory note issued in November 2015. On March 8, 2016, Mississippi Power entered into an unsecured term loan agreement for the repayment of term loans in an aggregate principal amount of $275 million, working capital,$1.2 billion to repay existing indebtedness and for other general corporate purposes. Mississippi Power also amended three outstanding floating rateborrowed $900 million under the term loan agreement and has the right to borrow the remaining $300 million on or before October 15, 2016. Mississippi Power used the initial proceeds to repay $900 million in maturing bank loans for an aggregate principal amount of $425 million which, among other things, extended the maturity dates from various dates in 2015 to April 1, 2016. In addition, Mississippi Power issued an 18-month promissory note to Southern Company in the aggregate principal amount of approximately $301 million related to the refund to SMEPAon March 8, 2016 and expects the remaining $300 million to issue a similar promissory note to Southern Company to fund the Mirror CWIP refund. Any cash funding requirements necessary for Mississippi Powerbe used to repay the Phase II tax creditssenior notes maturing in October 2016. The term loan pursuant to the IRS are also expected to be provided by Southern Company. As of September 30, 2015, Mississippi Power's current liabilities exceeded current assets by approximately $1.3 billion primarily due to $900 million of bank term loans scheduled to maturethis agreement matures on April 1, 2016, $25 million of short-term debt, the required refund of approximately $369 million in Mirror CWIP2018 and associated carrying costs, and the likely repayment of unrecognized tax benefits associated with the Phase II tax credits of $235 million. bears interest based on one-month LIBOR.
Mississippi Power intends to utilize operating cash flows and lines of credit (to the extent available) as well as loans and, under certain circumstances, equity contributions from Southern Company to fund Mississippi Power's short-term capital needs.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At September 30, 2015,March 31, 2016, Mississippi Power had approximately $96$58 million of cash and cash equivalents. Committed credit arrangements with banks at September 30, 2015March 31, 2016 were as follows:
| | | Expires | Expires | | | | Executable Term Loans | | Due Within One Year | Expires | | | | Executable Term Loans | | Due Within One Year |
2015(*) | | 2016 | | Total | | Unused | | One Year | | Two Years | | Term Out | | No Term Out | |
| (in millions) | | (in millions) | | (in millions) | | (in millions) | |
| 2016 | | 2016 | | Total | | Unused | | One Year | | Two Years | | Term Out | | No Term Out |
| | | | | (in millions) | | (in millions) | | (in millions) |
| $ | 15 |
| | $ | 220 |
| | $ | 235 |
| | $ | 210 |
| | $ | 30 |
| | $ | 30 |
| | $ | 60 |
| | $ | 175 |
| 205 |
| | $ | 205 |
| | $ | 180 |
| | $ | 30 |
| | $ | 15 |
| | $ | 45 |
| | $ | 160 |
|
| |
(*) | Subsequent to September 30, 2015, this $15 million bank credit arrangement expired pursuant to its terms. |
See Note 6 to the financial statements of Mississippi Power under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.
A portion of the $210 million unused credit arrangements with banks is allocated to provide liquidity support to Mississippi Power's variable rate pollution control revenue bonds and commercial paper borrowings. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of September 30, 2015 was approximately $40 million.
Most of these bank credit arrangements, as well as Mississippi Power's term loan arrangements, contain covenants that limit debt levels and typically contain cross acceleration or cross default provisions to other indebtedness (including guarantee obligations) of Mississippi Power. Such cross default provisions to other indebtedness would trigger an event of default if Mississippi Power defaulted on indebtedness or guarantee obligations over a specifiedspecific threshold. Such cross acceleration provisions to other indebtedness would trigger an event of default if Mississippi Power defaulted on indebtedness, the payment of which was then accelerated. Mississippi Power is currently in compliance with all such covenants. None of the bank credit arrangements contain material adverse change clauses at the time of borrowing.
Subject to applicable market conditions, Mississippi Power expects to seek to renew or replace its credit arrangements, as needed.needed prior to expiration. In connection therewith, Mississippi Power may seek to extend the maturity dates and/or increase or decrease the lending commitments thereunder.
A portion of the $180 million unused credit arrangements with banks is allocated to provide liquidity support to Mississippi Power's pollution control revenue bonds and commercial paper borrowings. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of March 31, 2016 was approximately $40 million.
MISSISSIPPI 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 September 30, 2015 | | Short-term Debt During the Period(*) |
| | | Amount Outstanding | | Weighted Average Interest Rate | | Average Amount Outstanding | | Weighted Average Interest Rate | | Maximum Amount Outstanding |
| | | (in millions) | | | | (in millions) | | | | (in millions) |
| Short-term bank debt | | $ | 500 |
| | 1.4% | | $ | 513 |
| | 1.3% | | $ | 515 |
|
|
| | | | | | | | | | | | | | | | |
| | | Short-term Debt at March 31, 2016 | | Short-term Debt During the Period(*) |
| | | Amount Outstanding | | Weighted Average Interest Rate | | Average Amount Outstanding | | Weighted Average Interest Rate | | Maximum Amount Outstanding |
| | | (in millions) | | | | (in millions) | | | | (in millions) |
| Short-term bank debt | | $ | 25 |
| | 2.1% | | $ | 375 |
| | 2.0% | | $ | 500 |
|
| |
| (*) | Average and maximum amounts are based upon daily balances during the three-month period ended September 30, 2015.March 31, 2016. |
Credit Rating Risk
Mississippi Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.
There are certain contracts that have required or could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and/or Baa2 or below. These contracts are for physical electricity purchases and sales, fuel transportation and storage, energy price risk management, and transmission. At September 30, 2015,March 31, 2016, the maximum potential collateral requirements under these contracts at a rating of BBB and/or Baa2 or BBB- and/or Baa3 was not material. The maximum potential collateral requirements at a rating below BBB- and/or Baa3 equaled approximately $286$266 million.
Included in these amounts are certain agreements that could require collateral in the event that one or more Southern Company system power pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash.
MISSISSIPPI POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Additionally, a credit rating downgrade has impacted and may continue tocould impact the ability of Mississippi Power to access capital markets, and would be likely to impact the cost at which it does so.
On June 5, 2015, Fitch downgraded the long-term issuer default rating of Mississippi Power to BBB+ from A-. Fitch maintained the negative ratings outlook for Mississippi Power.
On August 14, 2015, Moody's downgraded the senior unsecured debt rating of Mississippi Power to Baa2 from Baa1. Moody's maintained the negative ratings outlook for Mississippi Power.
On August 17, 2015, S&P downgraded the issuer rating of Mississippi Power to BBB+ from A. S&P revised its credit rating outlook from negative to stable. Separately, on August 24, 2015, S&P revised its consolidated credit rating outlook of Southern Company (including Mississippi Power) from stable to negative following the announcement of the Merger.
Financing Activities
In March 2015, Mississippi Power repaid at maturity a $75 million bank term loan.
In April 2015, Mississippi Power entered into two short-term floating rate bank loans with a maturity date of April 1,January 2016, in an aggregate principal amount of $475 million, bearing interest based on one-month LIBOR. The proceeds of these loans were used for the repayment of term loans in an aggregate principal amount of $275 million, working capital, and other general corporate purposes, including Mississippi Power's ongoing construction program. Mississippi Power also amended three outstanding floating rate bank loans for an aggregate principal amount of $425 million which, among other things, extended the maturity dates from various dates in 2015 to April 1, 2016.
In June 2015, Mississippi Power issued an 18-montha floating rate promissory note to Southern Company in an aggregate principal amount of up to $275 million, which matures on December 1, 2017, bearing interest based on one-month LIBOR. ThisAs of March 31, 2016, Mississippi Power had borrowed $100 million under this promissory note waswith a $50 million draw occurring on each of January 29, 2016 and March 14, 2016. In addition, on January 19, 2016, Mississippi Power borrowed $100 million from Southern Company pursuant to a promissory note issued in November 2015.
On March 8, 2016, Mississippi Power entered into an unsecured term loan agreement for an aggregate principal amount of approximately $301$1.2 billion to repay existing indebtedness and for other general corporate purposes. Mississippi Power borrowed $900 million under the amount paid by Southern Companyterm loan agreement and has the right to SMEPAborrow the remaining $300 million on or before October 15, 2016, upon satisfaction of certain customary conditions. Mississippi Power used the initial proceeds to repay $900 million in maturing bank notes on March 8, 2016 and expects the remaining $300 million to be used to repay senior notes maturing in October 2016. The term loan pursuant to Southern Company's guarantee of the return of SMEPA's depositsthis agreement matures on April 1, 2018 and bears interest based on one-month LIBOR.
Also in connection with the termination of the APA. See Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle – Termination of Proposed Sale of Undivided Interest to SMEPA" herein for additional information.March 2016, Mississippi Power renewed a $10 million short-term note, which matures on June 30, 2016, bearing interest based on three-month LIBOR.
SOUTHERN POWER COMPANY
AND SUBSIDIARY COMPANIES
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| | | | For the Three Months
Ended September 30, | | For the Nine Months
Ended September 30, | For the Three Months
Ended March 31, |
| | 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
| | (in millions) | | (in millions) | (in millions) |
| Operating Revenues: | | | | | | | | | | |
| Wholesale revenues, non-affiliates | $ | 295 |
| | $ | 332 |
| | $ | 776 |
| | $ | 870 |
| $ | 215 |
| | $ | 232 |
|
| Wholesale revenues, affiliates | 104 |
| | 103 |
| | 303 |
| | 243 |
| 97 |
| | 114 |
|
| Other revenues | 2 |
| | — |
| | 7 |
| | 2 |
| 3 |
| | 2 |
|
| Total operating revenues | 401 |
| | 435 |
| | 1,086 |
| | 1,115 |
| 315 |
| | 348 |
|
| Operating Expenses: | | | | | | | | | | |
| Fuel | 118 |
| | 178 |
| | 361 |
| | 421 |
| 91 |
| | 138 |
|
| Purchased power, non-affiliates | 17 |
| | 28 |
| | 52 |
| | 73 |
| 13 |
| | 16 |
|
| Purchased power, affiliates | 5 |
| | 13 |
| | 18 |
| | 58 |
| 6 |
| | 10 |
|
| Other operations and maintenance | 62 |
| | 46 |
| | 184 |
| | 168 |
| 79 |
| | 52 |
|
| Depreciation and amortization | 64 |
| | 60 |
| | 183 |
| | 163 |
| 73 |
| | 59 |
|
| Taxes other than income taxes | 6 |
| | 5 |
| | 17 |
| | 17 |
| 6 |
| | 6 |
|
| Total operating expenses | 272 |
|
| 330 |
| | 815 |
| | 900 |
| 268 |
| | 281 |
|
| Operating Income | 129 |
| | 105 |
| | 271 |
| | 215 |
| 47 |
| | 67 |
|
| Other Income and (Expense): | | | | | | | | | | |
| Interest expense, net of amounts capitalized | (18 | ) | | (23 | ) | | (62 | ) | | (67 | ) | (21 | ) | | (22 | ) |
| Other income (expense), net | 1 |
| | 5 |
| | 1 |
| | 6 |
| 2 |
| | — |
|
| Total other income and (expense) | (17 | ) | | (18 | ) | | (61 | ) | | (61 | ) | (19 | ) | | (22 | ) |
| Earnings Before Income Taxes | 112 |
| | 87 |
| | 210 |
| | 154 |
| 28 |
| | 45 |
|
| Income taxes | 1 |
| | 22 |
| | 14 |
| | 22 |
| |
| Income taxes (benefit) | | (23 | ) | | 12 |
|
| Net Income | 111 |
| | 65 |
| | 196 |
| | 132 |
| 51 |
| | 33 |
|
| Less: Net income attributable to noncontrolling interests | 9 |
| | 1 |
| | 15 |
| | 4 |
| 1 |
| | — |
|
| Net Income Attributable to Southern Power Company | $ | 102 |
| | $ | 64 |
| | $ | 181 |
| | $ | 128 |
| |
| Net Income Attributable to Southern Power | | $ | 50 |
| | $ | 33 |
|
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| | | | For the Three Months
Ended September 30, | | For the Nine Months
Ended September 30, | For the Three Months
Ended March 31, |
| | 2015 | | 2014 | | 2015 | | 2014 | 2016 | | 2015 |
| | (in millions) | | (in millions) | (in millions) |
| Net Income | $ | 111 |
| | $ | 65 |
| | $ | 196 |
| | $ | 132 |
| $ | 51 |
| | $ | 33 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| |
| Other comprehensive income (loss): | | | | |
| Qualifying hedges: | | | | |
Reclassification adjustment for amounts included in net
income, net of tax of $-, and $-, respectively | | 1 |
| | — |
|
| Total other comprehensive income (loss) | | 1 |
| | — |
|
| Less: Comprehensive income attributable to noncontrolling interests | 9 |
| | 1 |
| | 15 |
| | 4 |
| 1 |
| | — |
|
| Comprehensive Income Attributable to Southern Power Company | $ | 102 |
| | $ | 64 |
| | $ | 181 |
| | $ | 128 |
| |
| Comprehensive Income Attributable to Southern Power | | $ | 51 |
| | $ | 33 |
|
The accompanying notes as they relate to Southern Power are an integral part of these consolidated financial statements.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | | For the Nine Months
Ended September 30, | For the Three Months
Ended March 31, |
| | 2015 | | 2014 | 2016 | | 2015 |
| | (in millions) | (in millions) |
| Operating Activities: | | | | | | |
| Net income | $ | 196 |
| | $ | 132 |
| $ | 51 |
| | $ | 33 |
|
| Adjustments to reconcile net income to net cash provided from operating activities — | | | | |
| Adjustments to reconcile net income to net cash used for operating activities — | | | | |
| Depreciation and amortization, total | 187 |
| | 166 |
| 75 |
| | 60 |
|
| Deferred income taxes | 222 |
| | (6 | ) | (132 | ) | | (54 | ) |
| Investment tax credits | 294 |
| | 38 |
| |
| Amortization of investment tax credits | (14 | ) | | (8 | ) | (7 | ) | | (4 | ) |
| Deferred revenues | 15 |
| | (2 | ) | (26 | ) | | (20 | ) |
| Accrued income taxes, non-current | 100 |
| | — |
| |
| Other, net | 10 |
| | 3 |
| 9 |
| | 3 |
|
| Changes in certain current assets and liabilities — | | | | | | |
| -Receivables | (28 | ) | | (63 | ) | (3 | ) | | 2 |
|
| -Fossil fuel stock | 6 |
| | (2 | ) | 1 |
| | 6 |
|
| -Prepaid income taxes | (116 | ) | | 39 |
| (31 | ) | | (2 | ) |
| -Other current assets | (5 | ) | | (4 | ) | |
| -Accounts payable | 1 |
| | 27 |
| (12 | ) | | (25 | ) |
| -Accrued taxes | (247 | ) | | 62 |
| (37 | ) | | (4 | ) |
| -Accrued interest | | 2 |
| | (15 | ) |
| -Other current liabilities | (12 | ) | | (11 | ) | — |
| | 1 |
|
| Net cash provided from operating activities | 609 |
| | 371 |
| |
| Net cash used for operating activities | | (110 | ) | | (19 | ) |
| Investing Activities: | | | | | | |
| Plant acquisitions | (1,128 | ) | | (218 | ) | (114 | ) | | (6 | ) |
| Property additions | (348 | ) | | (15 | ) | (767 | ) | | (33 | ) |
| Change in construction payables | 88 |
| | (3 | ) | 31 |
| | 17 |
|
| Payments pursuant to long-term service agreements | (65 | ) | | (42 | ) | (25 | ) | | (16 | ) |
| Investment in restricted cash | | (289 | ) | | — |
|
| Distribution of restricted cash | | 292 |
| | — |
|
| Other investing activities | (1 | ) | | (10 | ) | (1 | ) | | — |
|
| Net cash used for investing activities | (1,454 | ) | | (288 | ) | (873 | ) | | (38 | ) |
| Financing Activities: | | | | | | |
| Increase in notes payable, net | 18 |
| | 20 |
| 276 |
| | 38 |
|
| Proceeds — | | | | |
| Senior notes | 650 |
| | — |
| |
| Capital contributions | 226 |
| | (4 | ) | |
| Other long-term debt | 400 |
| | 10 |
| |
| Redemptions — Senior notes | (525 | ) | | — |
| |
| Distributions to noncontrolling interests | (6 | ) | | — |
| (4 | ) | | — |
|
| Contributions from noncontrolling interests | 274 |
| | 7 |
| |
| Capital contributions from noncontrolling interests | | 131 |
| | — |
|
| Purchase of membership interests from noncontrolling interests | | (129 | ) | | — |
|
| Payment of common stock dividends | (98 | ) | | (98 | ) | (68 | ) | | (33 | ) |
| Other financing activities | (8 | ) | | — |
| |
| Net cash provided from (used for) financing activities | 931 |
| | (65 | ) | |
| Net cash provided from financing activities | | 206 |
| | 5 |
|
| Net Change in Cash and Cash Equivalents | 86 |
| | 18 |
| (777 | ) | | (52 | ) |
| Cash and Cash Equivalents at Beginning of Period | 75 |
| | 69 |
| 830 |
| | 75 |
|
| Cash and Cash Equivalents at End of Period | $ | 161 |
| | $ | 87 |
| $ | 53 |
| | $ | 23 |
|
| Supplemental Cash Flow Information: | | | | | | |
| Cash paid (received) during the period for — | | | | |
| Interest (net of $4 and $- capitalized for 2015 and 2014, respectively) | $ | 69 |
| | $ | 78 |
| |
| Cash paid (received) during the period for -- | | | | |
| Interest (net of $10 and $- capitalized for 2016 and 2015, respectively) | | $ | 15 |
| | $ | 36 |
|
| Income taxes, net | (215 | ) | | (91 | ) | 188 |
| | 79 |
|
| Noncash transactions — Accrued property additions at end of period | 120 |
| | 1 |
| 262 |
| | 16 |
|
The accompanying notes as they relate to Southern Power are an integral part of these consolidated financial statements.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | | Assets | | At September 30,
2015 | | At December 31,
2014 | | At March 31,
2016 | | At December 31,
2015 |
| | | (in millions) | | (in millions) |
| Current Assets: | | | | | | | | |
| Cash and cash equivalents | | $ | 161 |
| | $ | 75 |
| | $ | 53 |
| | $ | 830 |
|
| Receivables — | | | | | | | | |
| Customer accounts receivable | | 100 |
| | 77 |
| | 76 |
| | 75 |
|
| Other accounts receivable | | 35 |
| | 15 |
| | 23 |
| | 19 |
|
| Affiliated companies | | 50 |
| | 34 |
| | 31 |
| | 30 |
|
| Fossil fuel stock, at average cost | | 16 |
| | 22 |
| | 14 |
| | 16 |
|
| Materials and supplies, at average cost | | 60 |
| | 58 |
| | 63 |
| | 63 |
|
| Prepaid income taxes | | 136 |
| | 19 |
| | 77 |
| | 45 |
|
| Deferred income taxes, current | | — |
| | 306 |
| |
| Other current assets | | 19 |
| | 21 |
| |
| Other prepaid expenses | | | 23 |
| | 23 |
|
| Assets from risk management activities | | | 6 |
| | 7 |
|
| Total current assets | | 577 |
| | 627 |
| | 366 |
| | 1,108 |
|
| Property, Plant, and Equipment: | | | | | | | | |
| In service | | 6,049 |
| | 5,657 |
| | 7,738 |
| | 7,275 |
|
| Less accumulated provision for depreciation | | 1,189 |
| | 1,035 |
| | 1,299 |
| | 1,248 |
|
| Plant in service, net of depreciation | | 4,860 |
| | 4,622 |
| | 6,439 |
| | 6,027 |
|
| Construction work in progress | | 977 |
| | 11 |
| | 1,535 |
| | 1,137 |
|
| Total property, plant, and equipment | | 5,837 |
| | 4,633 |
| | 7,974 |
| | 7,164 |
|
| Other Property and Investments: | | | | | | | | |
| Goodwill | | 2 |
| | 2 |
| | 2 |
| | 2 |
|
Other intangible assets, net of amortization of $11 and $8
at September 30, 2015 and December 31, 2014, respectively | | 318 |
| | 47 |
| |
Other intangible assets, net of amortization of $13 and $12
at March 31, 2016 and December 31, 2015, respectively | | | 316 |
| | 317 |
|
| Total other property and investments | | 320 |
| | 49 |
| | 318 |
| | 319 |
|
| Deferred Charges and Other Assets: | | | | | | | | |
| Prepaid long-term service agreements | | 157 |
| | 124 |
| | 184 |
| | 166 |
|
| Other deferred charges and assets — affiliated | | 3 |
| | 5 |
| | 20 |
| | 9 |
|
| Other deferred charges and assets — non-affiliated | | 146 |
| | 112 |
| | 137 |
| | 139 |
|
| Total deferred charges and other assets | | 306 |
| | 241 |
| | 341 |
| | 314 |
|
| Total Assets | | $ | 7,040 |
| | $ | 5,550 |
| | $ | 8,999 |
| | $ | 8,905 |
|
The accompanying notes as they relate to Southern Power are an integral part of these consolidated financial statements.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | | Liabilities and Stockholders' Equity | | At September 30,
2015 | | At December 31,
2014 | | At March 31,
2016 | | At December 31,
2015 |
| | | (in millions) | | (in millions) |
| Current Liabilities: | | | | | | | | |
| Securities due within one year | | $ | 400 |
| | $ | 525 |
| | $ | 401 |
| | $ | 403 |
|
| Notes payable | | 213 |
| | 195 |
| | 413 |
| | 137 |
|
| Accounts payable — | | | | | | | | |
| Affiliated | | 69 |
| | 78 |
| | 62 |
| | 66 |
|
| Other | | 161 |
| | 30 |
| | 347 |
| | 327 |
|
| Accrued taxes — | | | | | |
| Accrued income taxes | | 3 |
| | 72 |
| | 9 |
| | 198 |
|
| Other accrued taxes | | | 16 |
| | 5 |
|
| Accrued interest | | 14 |
| | 30 |
| | 25 |
| | 23 |
|
| Contingent consideration | | | 21 |
| | 36 |
|
| Other current liabilities | | 56 |
| | 17 |
| | 49 |
| | 44 |
|
| Total current liabilities | | 916 |
| | 947 |
| | 1,343 |
| | 1,239 |
|
| Long-term Debt | | 1,742 |
| | 1,095 |
| | 2,722 |
| | 2,719 |
|
| Deferred Credits and Other Liabilities: | | | | | | | | |
| Accumulated deferred income taxes | | 779 |
| | 863 |
| | 470 |
| | 601 |
|
| Accumulated deferred investment tax credits | | 688 |
| | 601 |
| | 1,025 |
| | 889 |
|
| Accrued income taxes, non-current | | 100 |
| | — |
| | 109 |
| | 109 |
|
| Asset retirement obligations | | | 25 |
| | 21 |
|
| Deferred capacity revenues — affiliated | | 39 |
| | 15 |
| | 6 |
| | 17 |
|
| Other deferred credits and liabilities — affiliated | | — |
| | 1 |
| |
| Other deferred credits and liabilities — non-affiliated | | 25 |
| | 18 |
| |
| Other deferred credits and liabilities | | | 11 |
| | 3 |
|
| Total deferred credits and other liabilities | | 1,631 |
| | 1,498 |
| | 1,646 |
| | 1,640 |
|
| Total Liabilities | | 4,289 |
| | 3,540 |
| | 5,711 |
| | 5,598 |
|
| Redeemable Noncontrolling Interest | | 41 |
| | 39 |
| |
| Redeemable Noncontrolling Interests | | | 44 |
| | 43 |
|
| Common Stockholder's Equity: | | | | | | | | |
| Common stock, par value $.01 per share — | | | | | |
| Authorized — 1,000,000 shares | | | | | |
| Outstanding — 1,000 shares | | — |
| | — |
| |
| Common stock, par value $.01 per share -- | | | | | |
| Authorized - 1,000,000 shares | | | | | |
| Outstanding - 1,000 shares | | | — |
| | — |
|
| Paid-in capital | | 1,401 |
| | 1,176 |
| | 1,821 |
| | 1,822 |
|
| Retained earnings | | 657 |
| | 573 |
| | 640 |
| | 657 |
|
| Accumulated other comprehensive income | | 3 |
| | 3 |
| | 5 |
| | 4 |
|
| Total common stockholder's equity | | 2,061 |
| | 1,752 |
| | 2,466 |
| | 2,483 |
|
| Noncontrolling Interest | | 649 |
| | 219 |
| |
| Noncontrolling Interests | | | 778 |
| | 781 |
|
| Total Stockholders' Equity | | 2,710 |
| | 1,971 |
| | 3,244 |
| | 3,264 |
|
| Total Liabilities and Stockholders' Equity | | $ | 7,040 |
| | $ | 5,550 |
| | $ | 8,999 |
| | $ | 8,905 |
|
The accompanying notes as they relate to Southern Power are an integral part of these consolidated financial statements.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIRDFIRST QUARTER 20152016 vs. THIRDFIRST QUARTER 2014
AND
YEAR-TO-DATE 2015 vs. YEAR-TO-DATE 2014
OVERVIEW
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 Power continually seeks opportunities to execute its strategy to create value through various transactions including acquisitions and sales of assets, construction of new power plants, and entry into PPAs primarily with investor-owned utilities, independent power producers, municipalities, and electric cooperatives. In general, Southern Power has constructed or acquired new generating capacity only after entering into long-term PPAs for the new facilities.
During the ninethree months ended September 30, 2015,March 31, 2016, Southern Power acquired or commenced construction of approximately 857140 MWs of additional solar facilities including five Georgia construction projects located in Taylor and Decatur Counties, as well as four solar projects located in California.facilities. Southern Power has also entered into agreementsan agreement to acquire an approximately 450 MWs of40-MW wind facilities,facility located in Oklahoma, contingent upon certain construction and project milestones.Maine. Subsequent to September 30, 2015,March 31, 2016, Southern Power acquired an additional 15-MW solarapproximately 151-MW wind facility located in California.Oklahoma. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Acquisitions" and "Construction Projects" herein for additional information.
At March 31, 2016, Southern Power had an average investment coverage ratio of 91% for the next five years (through 2020) and 90% for the next 10 years (through 2025) with an average remaining contract duration of approximately 18 years. This includes the PPAs and capacity associated with solar facilities currently under construction and acquisitions discussed herein. See FUTURE EARNINGS POTENTIAL – "Power Sales Agreements" herein for additional information.
Southern Power continues to focus on several key performance indicators. These indicators include peak season equivalent forced outage rate, contract availability, and net income. For additional information on these indicators, see MANAGEMENT'S DISCUSSION AND ANALYSIS – OVERVIEW – "Key Performance Indicators" of Southern Power in Item 7 of the Form 10-K.
RESULTS OF OPERATIONS
Net Income
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $38 | | 59.4 | | $53 | | 41.4 |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $17 | | 51.5 |
Net income attributable to Southern Power for the thirdfirst quarter 20152016 was $102$50 million compared to $64$33 million for the corresponding period in 2014.2015. The increase was primarily due to increased revenuestax benefits from PPAs, includingsolar ITCs and wind PTCs and increased renewable energy sales arising from new solar and lower income taxes primarily related to ITCs,wind facilities, partially offset by increased otherincreases in depreciation and operations and maintenance expenses due to new solar facilities.expenses.
Net income attributable to Southern Power for year-to-date 2015 was $181 million compared to $128 million for the corresponding period in 2014. The increase was primarily due to increased revenues from new PPAs, including solar, and lower income taxes primarily related to ITCs, partially offset by increased depreciation and other operations and maintenance expenses primarily due to new solar facilities.
WholesaleOperating Revenues–Non-Affiliates
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) |
| (% change) | | (change in millions) | | (% change) |
| $(37) | | (11.1) | | $(94) | | (10.8) |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) |
| $(33) | | (9.5) |
WholesaleOperating revenues include PPA capacity revenues which are derived primarily from long-term contracts involving natural gas and biomass generating facilities, and PPA energy revenues which include sales to non-affiliates will vary depending onfrom natural gas, biomass, solar, and wind facilities. To the energy demand of those customers and their generationextent Southern Power has unused capacity, as well asit may sell power into the wholesale market prices of wholesale energy compared toor into the cost of Southern Power'spower pool.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
| | | | | |
| | First Quarter 2016
vs.
First Quarter 2015 |
| | (change in millions) | | (% change) |
| PPA capacity revenues | $ | (3 | ) | | (2.1) |
| PPA energy revenues | — |
| | N/M |
| Total PPA revenues | (3 | ) | | (1.1) |
| Revenue not covered by PPA | (31 | ) | | (30.0) |
| Other revenues | 1 |
| | 50.0 |
| Total operating revenues | $ | (33 | ) | | (9.5)% |
N/M – Not meaningful
In the first quarter 2016, operating revenues were $315 million compared to $348 million for the corresponding period in 2015. The $33 million decrease in operating revenues was primarily due to the following:
PPA capacity revenues decreased $3 million as a result of a $15 million decrease in non-affiliate capacity revenues, partially offset by a $12 million increase in affiliate capacity revenues primarily due to PPA remarketing.
PPA energy revenuesremained flat; however, a $20 million increase in renewable energy sales, arising from new solar and wind facilities, was offset by a decrease of $20 million in fuel revenues related to natural gas PPAs.
Revenues not covered by PPA decreased $31 million primarily due to a 23% decrease in non-PPA KWH sales associated with increased scheduled outages and a reduction in demand driven by milder weather in 2016 as compared to 2015.
Wholesale revenues will vary depending on the energy demand of Southern Power's customers and their generation capacity, as well as the market prices of wholesale energy compared to the cost of Southern Power's energy. Increases and decreases in revenues under PPAs 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.
WholesaleCapacity revenues from non-affiliates for the third quarter 2015 were $295 million compared to $332 million for the corresponding period in 2014. The decrease was due to a $27 million decrease in energy sales, primarily as a resultare an integral component of decreased fuel costs passed through in PPA revenues due to lowerSouthern Power's natural gas prices, partially offset by new solar PPAs. The decrease in energy revenues reflects a 7% decrease inand biomass PPAs and generally represent the average price of energy and a 6% decrease in KWH sales. In addition, capacity revenues decreased $10 million primarily duegreatest contribution to PPA expirations.
Wholesale revenues from non-affiliates for year-to-date 2015 were $776 million compared to $870 million for the corresponding period in 2014. The decrease was due to a $71 million decrease in energy sales, primarily as a result of decreased fuel costs passed through in PPA revenues due to lower natural gas prices, partially offset by new solar PPAs. The decrease in energy revenues reflects a 13% decrease in the average price of energy. In addition, capacity revenues decreased $23 million primarily due to PPA expirations.
Wholesale Revenues–Affiliates
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) |
| (% change) | | (change in millions) | | (% change) |
| $1 | | 1.0 | | $60 | | 24.7 |
Wholesale revenues from sales to affiliate companies will vary depending on demand and the availability and cost of generating resources at each company. Sales to affiliate companies that are not covered by PPAs are made in accordance with the IIC, as approved by the FERC.
Wholesale revenues from affiliates for the third quarter 2015 were $104 million compared to $103 million for the corresponding period in 2014. The increase was the result of a $20 million increase in capacity revenues, partially offset by a $19 million decrease in energy revenues. The increase in capacity revenues was primarily the result of new PPAs. The decrease in energy revenues was primarily the result of a 42% decrease in the average price of energy partially offset by a 28% increase in KWH sales primarily from new PPAs.
Wholesale revenues from affiliates for year-to-date 2015 were $303 million compared to $243 million for the corresponding period in 2014. The increase was the result of a $31 million increase in energy revenues and a $29 million increase in capacity revenues. The increase in energy revenues was primarily the result of increased sales volumenet income. Energy under the IIC as a result of lower naturalPPAs is generally sold at variable cost or is indexed to published gas prices, which increased demandindices. Energy revenues also include fees for Southern Power Company's resources, as well as new PPAs. The increase in energy revenues reflects a 71% increase in KWH sales, partially offset by a 29% decrease in the average price of energy. The increase in capacity revenues was primarily the result of new PPAs.
Fuelsupport services, fuel storage, and Purchased Power Expenses
|
| | | | | | | | | | | | |
| | | Third Quarter 2015
vs.
Third Quarter 2014 | | Year-to-Date 2015
vs.
Year-to-Date 2014 |
| | | (change in millions) |
| (% change) | | (change in millions) | | (% change) |
| Fuel | | $ | (60 | ) | | (33.7) | | $ | (60 | ) | | (14.3) |
| Purchased power – non-affiliates | | (11 | ) | | (39.3) | | (21 | ) | | (28.8) |
| Purchased power – affiliates | | (8 | ) | | (61.5) | | (40 | ) | | (69.0) |
| Total fuel and purchased power expenses | | $ | (79 | ) | | | | $ | (121 | ) | | |
Southern Power's electricity sales from solar and wind generating facilities are also through long-term PPAs, for natural gas-fired generation generally provide thatbut do not have a capacity charge. Instead, the purchasers are responsible for either procuring the fuel (tolling agreements), or reimbursing Southern Power for substantially all of the cost of fuel relating to allcustomers purchase the energy delivered under such PPAs. Consequently, any increase or decrease in such fuel costoutput of a dedicated renewable facility through an energy charge. As a result, Southern Power's ability to recover fixed and variable operations and maintenance expenses is generally accompanieddependent upon the level of energy generated from these facilities, which can be impacted by an increase or decrease in related fuel revenues under the PPAsweather conditions, equipment performance, and does not have aother factors.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fuel and Purchased Power Expenses
Fuel costs constitute the single largest expense for Southern Power. Additionally, Southern Power purchases a portion of its electricity needs from the wholesale market. Details of Southern Power's generation and purchased power were as follows:
|
| | |
| | First Quarter 2016 | First Quarter 2015 |
Generation (in billions of KWHs) | 7.7 | 7.9 |
Purchased power (in billions of KWHs) | 0.6 | 0.5 |
| Total generation and purchased power | 8.3 | 8.4 |
| Total generation and purchased power (excluding solar, wind and tolling) | 5.3 | 5.9 |
Southern Power's PPAs for natural gas and biomass generation generally provide that the purchasers are responsible for either procuring the fuel (tolling agreements) or reimbursing Southern Power for substantially all of the cost of fuel relating to the energy delivered under such PPAs. Consequently, any increase or decrease in such fuel costs is generally accompanied by an increase or decrease in related fuel revenues under the PPAs and does not have a significant impact on net income. Southern Power is responsible for the cost of fuel for generating units that are not covered under PPAs. Power from these generating units is sold into the wholesale market or sold to affiliates underinto the IIC.power pool, for capacity owned directly by Southern Power (excluding its subsidiaries).
Purchased power expenses will vary depending on demand and the availability and cost of generating resources throughout the Southern Company system and other contract resources. Load requirements are submitted to the power pool on an hourly basis and are fulfilled with the lowest cost alternative, whether that is generation owned by Southern Power, Company, affiliate companies, or external parties.
|
| | | | | | |
| | | First Quarter 2016
vs.
First Quarter 2015 |
| | | (change in millions) |
| (% change) |
| Fuel | | $ | (47 | ) | | (34.1) |
| Purchased power | | (7 | ) | | (26.9) |
| Total fuel and purchased power expenses | | $ | (54 | ) | | |
In the thirdfirst quarter 2015,2016, total fuel and purchased power expenses were $140$110 million compared to $219$164 million for the corresponding period in 2014.2015. The decrease was the result of a $46 million decrease in the average cost of fuel and purchased power primarily due to lower natural gas prices and a $33the following:
Fuel expense decreased $47 million decrease in the total volume of KWHs generated and purchased; however, total KWHs generated increased 5% when taking into account generation for tolling and solar PPAs.
For year-to-date 2015, total fuel and purchased power expenses were $431 million compared to $552 million for the corresponding period in 2014. The decrease was a result of a $185 million decrease in the average cost of fuel and purchased power primarily due to lower natural gas prices, partially offset by a $64$28 million net increase in the total volume of KWHs generated and purchased primarily due to increased demand resulting from lower natural gas prices. Total KWHs generated increased 22% when taking into account generation for tolling and solar PPAs.
Fuel
In the third quarter 2015, fuel expense was $118 million compared to $178 million for the corresponding period in 2014. The decrease was due to a 27% decrease associated with the average cost of natural gas per KWH generated and a 10%$19 million decrease associated with the volume of KWHs generated, which excludes tolling and solar PPAs.generated.
For year-to-date 2015, fuelPurchased power expense was $361decreased $7 millioncompared to $421 million for the corresponding period in 2014. The decrease was due to a 34%$12 million decrease associated within the average cost of natural gas per KWH generated,purchased power and a $4 million decrease associated with a PPA expiration, partially offset by a 30%$9 million increase associated with the volume of KWHs generated, primarily as a result of increased demand resulting from lower natural gas prices, which excludes tolling and solar PPAs.
Purchased Power – Non-Affiliates and Affiliates
In the third quarter 2015, purchased power expense was $22 million compared to $41 million for the corresponding period in 2014. For year-to-date 2015, purchased power expense was $70 million compared to $131 million for the corresponding period in 2014. The decreases were primarily the result of 38% and 43% decreases in the volume of KWHs purchased in the third quarter 2015 and year-to-date 2015, respectively, primarily due to lower natural gas prices.purchased.
Other Operations and Maintenance Expenses
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) | | (% change) | | (change in millions) | | (% change) |
| $16 | | 34.8 | | $16 | | 9.5 |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) | | (% change) |
| $27 | | 51.9 |
In the thirdfirst quarter 2015,2016, other operations and maintenance expenses were $62$79 million compared to $46$52 million for the corresponding period in 2014. The increase was primarily due to an increase in expenses associated with business development and support services, new plants placed in service in 2014 and 2015, and generation maintenance.
For year-to-date 2015, other operations and maintenance expenses were $184 million compared to $168 million for the corresponding period in 2014.2015. The increase was primarily due to a $31$14 million increase in expenses associated with business development and support services, new plants placed in service in 2014 and 2015, transmission costs, and generation maintenance, partially offset by a $15 million decrease in outage expense.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
scheduled outage and maintenance expenses, a $6 million increase in business support services expenses, and a $5 million increase in expenses associated with new solar and wind facilities placed in service in 2015 and 2016.
Depreciation and Amortization
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) |
| (% change) | | (change in millions) | | (% change) |
| $4 | | 6.7 | | $20 | | 12.3 |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) |
| $14 | | 23.7 |
In the thirdfirst quarter 2015,2016, depreciation and amortization was $64$73 million compared to $60$59 million for the corresponding period in 2014.2015. The increase was primarily due to additional depreciation related to new solar and wind facilities placed in service in 20142015 and 2015, partially offset by rate changes related to component depreciation.2016.
For year-to-date 2015, depreciation and amortization was $183 million compared to $163 million for the corresponding period in 2014. The increase was primarily due to additional depreciation related to solar facilities placed in service in 2014 and 2015.
Income TaxesInterest Expense, net of Amounts Capitalized
|
| | | | | | |
| Third Quarter 2015 vs. Third Quarter 2014 | | Year-to-Date 2015 vs. Year-to-Date 2014 |
| (change in millions) |
| (% change) | | (change in millions) | | (% change) |
| $(21) | | (95.5) | | $(8) | | (36.4) |
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) |
| $(1) | | (4.5) |
In the thirdfirst quarter 2015, income taxes were $12016, interest expense, net of amounts capitalized was $21 million compared to $22 million for the corresponding period in 2014.2015. The decrease was primarily due to increased federala $9 million increase in capitalized interest associated with the construction of solar facilities, largely offset by an increase of $8 million in interest expense related to additional debt issued primarily to fund Southern Power's growth strategy and continuous construction program.
Income Taxes (Benefit)
|
| | |
| First Quarter 2016 vs. First Quarter 2015 |
| (change in millions) |
| (% change) |
| $(35) | | N/M |
N/M – Not meaningful
In the first quarter 2016, income tax benefits related to ITCs in 2015, partially offset by higher pre-tax earnings in 2015.
For year-to-date 2015, income taxes were $14benefit was $(23) million compared to $22an expense of $12 million for the corresponding period in 2014.2015. The decreasechange was primarily due to increaseda $28 million increase in federal income tax benefits from solar ITCs and wind PTCs in 2016 and a $7 million decrease in tax expense related to ITCs in 2015, partially offset by higherlower pre-tax earnings in 2015 and beneficial state income tax changes in 2014.2016.
See Note (G) to the Condensed Financial Statements herein for additional information.
FUTURE EARNINGS POTENTIAL
The results of operations discussed above are not necessarily indicative of Southern Power's future earnings potential. The level of Southern Power's future earnings depends on numerous factors that affect the opportunities, challenges, and risks of Southern Power's competitive wholesale business. These factors includeinclude: Southern Power's ability to achieve sales growth while containing costs; regulatory matters; creditworthiness of customers; total generating capacity available in Southern Power's market areas; the successful remarketing of capacity as current contracts expire; and Southern Power's ability to execute its acquisition and value creationgrowth strategy, including successfully expandingsuccessful additional investments in renewable and other energy projects, and to construct generating facilities, including the impact of federal ITCs. Demand for electricity is primarily driven by economic growth. The pace of economic growth and electricity demand may be affected by changes in regional and global economic conditions, which may impact future earnings.
Other factors that could influence future earnings include weather, demand, cost of generatinggeneration from units within the power pool, and operational limitations. For additional information relating to these issues, see RISK FACTORS in
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Power in Item 7 of the Form 10-K.
Power Sales Agreements
See BUSINESS – "The Southern Company System – Southern Power" in Item 1 of the Form 10-K for additional information regarding Southern Power's PPAs with investor-owned utilities, independent power purchasers, municipalities, electric cooperatives, and other load-serving entities.
At December 31, 2015, Southern Power's generation contract coverage ratio, which compares contracted capacity (MW) to available demonstrated capacity (MW), was an average of 75% for the next five years (through 2020) and 70% for the next 10 years (through 2025), with an average remaining contract duration of approximately 10 years.
Southern Power believes an investment contract ratio better identifies the value of assets covered since it represents the ratio of investment under contract to total investment using the respective generation facilities' net book value (or expected in-service value for facilities under construction or being acquired) as the investment amount. At March 31, 2016, the investment coverage ratio was 91% for the next five years (through 2020) and 90% for the next 10 years (through 2025), with an average remaining contract duration of approximately 18 years. At December 31, 2015, the investment coverage ratio would have been 91% for the next five years (through 2020) and 90% for the next 10 years (through 2025), with an average remaining contract duration of approximately 18 years.
Environmental Matters
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters" of Southern Power in Item 7 of the Form 10-K for information on the development by federal and state environmental regulatory agencies of additional control strategies for emissions of air pollution from industrial sources, including electric generating facilities. Compliance with possible additional federal or state legislation or regulations related to global climate change, air quality, water quality, or other environmental and health concerns could also significantly affect Southern Power. While Southern Power's PPAs generally contain provisions that
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
permit charging the counterparty with some of the new costs incurred as a result of changes in environmental laws and regulations, the full impact of any such regulatory or legislative changes cannot be determined at this time.
Air QualityAcquisitions
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Environmental Matters – Environmental Statutes and Regulations – Air Quality" ofDuring 2016, in accordance with its overall growth strategy, Southern Power acquired or contracted to acquire through its wholly-owned subsidiaries, Southern Renewable Partnerships, LLC or Southern Renewable Energy, Inc., the projects set forth in Item 7the following table. Acquisition-related costs were expensed as incurred and were not material. See Note (I) to the Condensed Financial Statements under "Southern Power" herein for additional information.
|
| | | | | | | |
| Project Facility | Approx. Nameplate Capacity | Location | Percentage Ownership | | Expected/Actual COD | PPA Contract Period |
| | (MW) | | | | | |
| SOLAR |
Calipatria(a) | 20 | Imperial County, CA | 90 | % | | February 11, 2016 | 20 years |
East Pecos(b) | 120 | Pecos County, TX | 100 | % | | Fourth quarter 2016 | 15 years |
| WIND |
Grant Wind(c) | 151 | Grant County, OK | 100 | % | | April 8, 2016 | 20 years |
Passadumkeag(d) | 40 | Penobscot County, ME | 100 | % | | Second quarter 2016 | 15 years |
(a) Calipatria - On February 11, 2016, Southern Power, together with the minority owner, Turner Renewable Energy, LLC (TRE), which owns 10%, acquired all of the Form 10-K for additional information regarding the EPA's proposed regulations governing emissions during startup, shutdown, or malfunction (SSM) and the Cross State Air Pollution Rule (CSAPR).outstanding membership interests of Calipatria Solar, LLC.
On June 12, 2015, the EPA published a final rule requiring affected states (including Alabama, Florida, Georgia, North Carolina, and Texas) to revise or remove state implementation plan (SIP) provisions regarding excess emissions that occur during periods of SSM by no later than November 22, 2016. The ultimate impact of the final rule will depend on the outcome of any legal challenges and the development and approval of SIPs by the affected states and cannot be determined at this time.
On July 28, 2015, the U.S. Court of Appeals for the District of Columbia Circuit issued an opinion invalidating certain emissions budgets under the CSAPR Phase II emissions trading program for a number of states, including Alabama, Florida, Georgia, North Carolina, and Texas. The court's decision leaves the emissions trading program in place and remands the rule to the EPA for further action consistent with the court's decision. The court rejected all other pending challenges to the rule. The ultimate impact of this decision will depend on additional rulemaking and 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 Southern Power in Item 7 of the Form 10-K for additional information regarding the EPA's revisions to effluent guidelines.
On November 3, 2015, the EPA published final revisions to technology-based limits for certain wastestreams from steam electric power plants. These revisions impose stringent steam effluent guidelines and technology requirements for wastewater discharges at affected units. Compliance with these revisions could result in significant additional capital expenditures and could affect future unit retirement and replacement decisions. The ultimate impact of these revisions will depend on any legal challenges and implementation of the final revisions and 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 Power in Item 7 of the Form 10-K for additional information regarding the EPA's proposed regulation of CO2 from fossil-fuel-fired electric generating units.
On October 23, 2015, two final actions by the EPA that would limit CO2 emissions from fossil fuel-fired electric generating units were published in the Federal Register. One of the final actions contains specific emission standards governing CO2 emissions from new, modified, and reconstructed units. The other final action establishes guidelines for states to develop plans to meet EPA-mandated CO2 emission rates for existing units. The EPA's final guidelines require state plans to meet interim CO2 performance rates between 2022 and 2029 and final rates in 2030 and thereafter. At the same time, a proposed federal plan and proposed model rule were published that states can adopt or that would be put in place if, in response to the final guidelines, a state either does not submit a state plan or its plan is not approved by the EPA.
These guidelines and standards could result in operational restrictions and material compliance costs, including capital expenditures, which could affect future unit retirement and replacement decisions. Southern Power's results of operations, cash flows, and financial condition could be significantly impacted if such costs are not recovered through existing PPAs. However, the ultimate financial and operational impact of the final rules on Southern Power cannot be determined at this time and will depend on numerous factors including the Southern Company system's
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ongoing review of the final rules; the outcome of any legal challenges; individual state implementation of the EPA's final guidelines, including the potential that state plans impose different standards; additional rulemaking activities in response to legal challenges and related court decisions; the impact of future changes in generation and emissions-related technology and costs; the impact of future decisions regarding unit retirement and replacement, including the type and amount of any such replacement capacity; and the time periods over which compliance will be required.
Acquisitions
During 2015,(b) East Pecos - On March 4, 2016, Southern Power Company acquired or contracted to acquire through its wholly-owned subsidiaries, Southern Renewable Partnerships, LLC or Southern Renewable Energy, Inc. (SRE),all the following projects in accordance with its overall growth strategy, which are included in its capital program estimates for 2015. Acquisition-related costs were expensed as incurred and were not material. The acquisitions do not include any contingent consideration unless specifically noted.
|
| | | | | | | | | | | | | |
| Project Entity | Seller; Acquisition Date | Approx. Nameplate Capacity | Location | Southern Power Percentage Ownership | | Expected/Actual Commercial Operation Date | PPA
Counterparties for Entire Plant Output | PPA Contract Period | Approx. Purchase Price | |
| | | (MW) | | | | | | | (in millions) | |
| WIND |
| Kay Wind, LLC | Apex Clean Energy Holdings, LLC
| 299 | Kay County, Oklahoma | 100 | % | | Fourth quarter 2015 | Westar Energy, Inc. and Grant River Dam Authority | 20 years | $ | 492 |
| (a) |
| | | | | | | | | | | |
| Grant Wind, LLC | Apex Clean Energy Holdings, LLC
| 151 | Grant County, Oklahoma | 100 | % | | First quarter 2016 | Western Farmers, East Texas, and Northeast Texas Electric Cooperative | 20 years | $ | 264 |
| (a) |
| SOLAR |
| Lost Hills Blackwell Holdings, LLC (Lost Hills Blackwell) | First Solar, Inc. (First Solar)
April 15, 2015 | 35 | Kern County, California | 51 | % | (b) | April 17, 2015 | City of Roseville, California/Pacific Gas and Electric Company | 29 years | $ | 74 |
| (c) |
| | | | | | | | | | | |
| NS Solar Holdings, LLC (North Star) | First Solar
April 30, 2015 | 61 | Fresno County, California | 51 | % | (b) | June 20, 2015 | Pacific Gas and Electric Company | 20 years | $ | 211 |
| (d) |
| | | | | | | | | | | |
| Tranquillity | Recurrent Energy, LLC
August 28, 2015 | 204 | Fresno County, California | 51 | % | (b) | Fourth quarter 2016 | Shell Energy North America (US), LP/Southern California Edison Company | 18 years | $ | 100 |
| (e) |
| | | | | | | | | | | |
| Desert Stateline Holdings, LLC (Desert Stateline) | First Solar
August 31, 2015 | 300 | San Bernardino County, California | 51 | % | (b) | 8 Phases from December 2015 to Third quarter 2016 | Southern California Edison Company | 20 years | $ | 439 |
| (f) |
| | | | | | | | | | | |
| GASNA 31P, LLC (Morelos) | Solar Frontier Americas Holding, LLC
October 22, 2015 | 15 | Kern County, California | 90 | % | | Fourth quarter 2015 | Pacific Gas and Electric Company | 20 years | $ | 45 |
| (g) |
(a) On February 24, 2015 and September 4, 2015, Southern Power entered into agreements to acquire Kay Wind, LLC and Grant Wind, LLC, respectively. The completion of each acquisition is subject to the seller achieving certain construction and project milestones, as well as various other customary conditions to closing. Each acquisition is expected to close at or near the expected commercial operation date. In
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
addition, the final purchase price may be adjusted based on performance testing as specified in the applicable purchase agreement. The Grant Wind, LLC purchase price includes contingent consideration. The ultimate outcome of this matter cannot be determined at this time.
(b) Southern Power owns 100% of the class A membership interests and a wholly-owned subsidiary of the seller owns 100% of the class B membership interests. Southern Power and the class B member are entitled to 51% and 49%, respectively, of all cash distributions from the respective project. In addition, Southern Power is entitled to substantially all of the federal tax benefits with respect to the respective transaction.
(c) Concurrently, a wholly-owned subsidiary of First Solar acquired 100% of the class B membership interests for approximately $33 million. The fair values of the assets acquired through the business combination were recorded as follows: $98 million as property, plant, and equipment and $9 million as a receivable related to transmission interconnection costs; however, the allocation of the purchase price to individual assets has not been finalized.
(d) Concurrently, a wholly-owned subsidiary of First Solar acquired 100% of the class B membership interests for approximately $100 million. The fair values of the assets acquired through the business combination were recorded as follows: $266 million as property, plant, and equipment, $24 million as an intangible asset, and $21 million as a receivable related to transmission interconnection costs; however, the allocation of the purchase price to individual assets has not been finalized.
(e) Concurrently, a wholly-owned subsidiary of Recurrent Energy, LLC converted all its membership interests to 100% of the class Boutstanding membership interests of Tranquillity after contributing approximately $157 million of assets and receiving an initial distribution of $100 million. The fair values of the assets acquired were recorded as follows: $170 million as CWIP, $24 million as other receivables, and $37 million as payables; however, the allocation of the purchase price to individual assets has not been finalized. Subsequent toEast Pecos Solar, LLC. Total construction costs, which include the acquisition Southern Power and Recurrent Energy, LLCprice allocated to CWIP, are expected to make additional construction payments ofbe approximately $215 million and $106 million, respectively. The ultimate outcome of this matter cannot be determined at this time.
(f) Concurrently, a wholly-owned subsidiary of First Solar acquired 100% of the class B membership interests for approximately $223 million. As of September 30, 2015, the fair values of the assets acquired, which includes Southern Power's and First Solar's initial payments due under the related construction agreement, were recorded as follows: $413 million as CWIP and $249 million as an intangible asset; however, the allocation of the purchase price to individual assets has not been finalized. The intangible asset consists of an acquired PPA that will be amortized over its 20-year term. The estimated amortization for future periods is approximately $6.2 million in 2016, $12.5 million per year for 2017 through 2020, and $192.8 million thereafter. Southern Power's and First Solar's remaining combined future payments, including construction payments, are estimated to be between $827$200 million to $844$220 million. The ultimate outcome of this matter cannot be determined at this time.
(g)(c) Grant Wind - Subsequent to March 31, 2016, Southern Power acquired all the outstanding membership interests of Grant Wind, LLC.
(d) Passadumkeag - On October 22, 2015, SRE and Turner Renewable Energy, LLC (TRE), throughMarch 11, 2016, Southern Turner Renewable Energy, LLC, a jointly-owned subsidiary owned 90% by SRE, acquiredPower entered into an agreement to acquire all of the outstanding membership interests of Morelos.Quantum Wind Acquisition I, LLC, which is expected to close in the second quarter 2016. The total purchase price, including TRE's 10% ownership, is approximately $50 million.ultimate outcome of this matter cannot be determined at this time.
Construction Projects
In December 2014,See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Acquisitions" and "Construction Projects" of Southern Power Company announced plans to build a solar photovoltaic facility, and during 2015, Southern Power Company acquired allin Item 7 of the outstanding membership interests of five separate solar project development entities. The construction projects areForm 10-K for additional information.
During the first quarter 2016, in accordance with Southern Power'sits overall growth strategy, Southern Power completed construction of and includedplaced in its capital program estimates for 2015. Theservice the Butler Solar Farm and Pawpaw solar facilities. In addition, Southern Power continued construction of the projects set forth in the table below. Through March 31, 2016, total costcosts of construction incurred for thesethe projects through September 30, 2015 was $299 million.below were $2.2 billion, of which $1.5 billion remains in CWIP. The ultimate outcome of these matters cannot be determined at this time.
|
| | | | | | | | | | |
| Solar Facility | Approx. Nameplate Capacity | Location | Expected/Actual COD | PPA
Contract Period | Estimated Construction Costs | |
| | (MW) | | | | (in millions) | |
| Butler | 103 | Taylor County, GA | Fourth quarter 2016 | 30 years | $ | 220 |
| - | 230 | (a) |
| Desert Stateline | 299(b) | San Bernardino County, CA | Through third quarter 2016 | 20 years | $ | 1,200 |
| - | 1,300 | (c) |
Garland and
Garland A(d) | 205 | Kern County, CA | Fourth quarter 2016 Third quarter 2016 | 15 years
and 20 years | $ | 532 |
| - | 552 | (e) |
Roserock(d) | 160 | Pecos County, TX | Fourth quarter 2016 | 20 years | $ | 333 |
| - | 353 | (e) |
| Sandhills | 146 | Taylor County, GA | Fourth quarter 2016 | 25 years | $ | 260 |
| - | 280 | |
Tranquillity(d) | 205 | Fresno County, CA | Third quarter 2016 | 18 years | $ | 473 |
| - | 493 | (f) |
| |
| (a) | Butler - Total estimated construction costs include the acquisition price of all outstanding membership interests of the related entity. |
(b) Desert Stateline - The facility has a total of 299 MWs, of which 110 MWs were placed in service in the fourth quarter 2015 and 76 MWs were placed in service in the first quarter 2016. Subsequent to March 31, 2016, 38 MWs were placed in service. The remaining 75 MWs are expected to be placed in service by the end of the third quarter 2016.
| |
| (c) | Desert Stateline - On March 29, 2016, Southern Power acquired an additional 15% interest in Desert Stateline. As a result, Southern Power and the class B member are entitled to 66% and 34%, respectively, of all cash distributions from Desert Stateline. In addition, Southern Power will continue to be entitled to substantially all of the federal tax benefits with respect to the transaction. Total estimated construction costs include the acquisition price allocated to CWIP; however, the allocation of the purchase price to individual assets has not been finalized. |
| |
| (d) | Southern Power owns 100% of the class A membership interests and a wholly-owned subsidiary of the seller owns 100% of the class B membership interests. Southern Power and the class B member are entitled to 51% and 49%, respectively, of all cash distributions from the project. |
| |
| (e) | Total estimated construction costs include the acquisition price allocated to CWIP. During the first quarter 2016, the allocation of the purchase price to individual assets was finalized with no changes. |
| |
| (f) | Total estimated construction costs include the acquisition price allocated to CWIP; however, the allocation of the purchase price to individual assets has not been finalized. |
See FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" herein for additional information.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southern Power Company's construction projects, excluding the Tranquillity and Desert Stateline construction projects discussed above, are detailed in the table below:
|
| | | | | | | | | | | | |
| Solar Project | Seller | Approx. Nameplate Capacity | County Location in Georgia | Expected Commercial Operation Date | PPA Counterparties
for Entire Plant Output | PPA Contract Period | Estimated Construction Cost | |
| | | (MW) | | | | | (in millions) | |
| Taylor County | N/A | 146 | Taylor | Fourth quarter 2016 | Cobb, Flint, and Sawnee Electric Membership Corporations | 25 years | $ | 260 |
| - | $280 | |
| Decatur Parkway | TradeWind Energy, Inc. | 84 | Decatur | December 2015 | Georgia Power(a) | 25 years | $ | 170 |
| - | $173 | (c) |
| Decatur County | TradeWind Energy, Inc. | 20 | Decatur | December 2015 | Georgia Power(b) | 20 years | $ | 45 |
| - | $47 | (c) |
| Butler | CERSM, LLC and Community Energy, Inc. | 103 | Taylor | December 2016 | Georgia Power(b) | 30 years | $ | 220 |
| - | $230 | (c) |
| Pawpaw | Longview Solar, LLC | 30 | Taylor | December 2015 | Georgia Power(a) | 30 years | $ | 70 |
| - | $80 | (c) |
| Butler Solar Farm | Strata Solar Development, LLC | 20 | Taylor | December 2015 | Georgia Power(b) | 20 years | $ | 42 |
| - | $48 | (c) |
| |
(a) | Approved by the FERC subsequent to September 30, 2015. |
| |
(b) | Subject to FERC approval. |
| |
(c) | Includes the acquisition price of all outstanding membership interests. |
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" herein for additional information.
Power Sales Agreements
See BUSINESS – "The Southern Company System – Southern Power" in Item 1 of the Form 10-K for additional information regarding Southern Power's PPAs with investor-owned utilities, independent power purchasers, municipalities, and electric cooperatives.
Taking into account the PPAs and capacity from the acquisitions and construction projects discussed herein, together with various new PPAs relating to Southern Power's existing fleet, the coverage ratio of its available capacity for the next five years and the next 10 years has not changed materially as of September 30, 2015 from the period ended December 31, 2014.
FERC Matters
Southern Power has authority from the FERC to sell electricity at market-based rates. Since 2008, that authority, for certain balancing authority areas, has been conditioned on compliance with the requirements of an energy auction, which the FERC found to be tailored mitigation that addresses potential market power concerns. In accordance with FERC regulations governing such authority, the traditional operating companies and Southern Power filed a triennial market power analysis on June 30, 2014, which included continued reliance on the energy auction as tailored mitigation. On April 27, 2015, the FERC issued an order finding that the traditional operating companies' and Southern Power's existing tailored mitigation may not effectively mitigate the potential to exert market power in certain areas served by the traditional operating companies and in some adjacent areas. To retain market-based rate authority, the FERC directed the traditional operating companies and Southern Power to show why market-based rate authority should not be revoked in these areas or to provide a mitigation plan to further address market power
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
concerns. The traditional operating companies and Southern Power filed a request for rehearing on May 27, 2015 and on June 26, 2015 filed their response with the FERC. The ultimate outcome of this matter cannot be determined at this time.
Other Matters
Southern Power is involved in various other matters being litigated and regulatory matters that could affect future earnings. In addition, Southern Power is subject to certain claims and legal actions arising in the ordinary course of business. Southern 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 occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
The ultimate outcome of such pending or potential litigation against Southern Power cannot be predicted at this time; however, for current proceedings not specifically reported in Note (B) to the Condensed Financial Statements herein or in Note 3 to the financial statements of Southern Power in Item 8 of the Form 10-K, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on Southern Power's financial statements.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Power prepares its consolidated financial statements in accordance with GAAP. Significant accounting policies are described in Note 1 to the financial statements of Southern Power in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern 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 Southern Power in Item 7 of the Form 10-K for a complete discussion of Southern Power's critical accounting policies and estimates related to Revenue Recognition, Impairment of Long LivedLong-Lived Assets and Intangibles, Acquisition Accounting, Depreciation, and ITCs.
Recently Issued Accounting Standards
The Financial Accounting Standards Board's (FASB) ASC 606, Revenue from Contracts with Customers, revises the accounting for revenue recognition effective for fiscal years beginning after December 15, 2017. Southern Power continues to evaluate the requirements of ASC 606. The ultimate impact of the new standard has not yet been determined.
On February 18, 2015,25, 2016, the FASB issued Accounting Standards Update (ASU) 2015-02,ASU No. 2016-02, AmendmentsLeases(Topic 842) (ASU 2016-02). ASU 2016-02 requires lessees to recognize on the Consolidation Analysis, which makes certainbalance sheet a lease liability and a right-of-use asset for all leases. ASU 2016-02 also changes to both the variable interest modelrecognition, measurement, and the voting model, including changes topresentation of expense associated with leases and provides clarification regarding the identification of variable interests, the variable interest entity characteristics forcertain components of contracts that would represent a limited partnership or similar entity, and the primary beneficiary determination. Thislease. The accounting required by lessors is relatively unchanged. ASU 2016-02 is effective for fiscal years beginning after December 15, 2015.2018, with early adoption permitted. Southern Power continues to evaluate these requirements. The ultimate impact of this ASUis currently evaluating the new standard and has not yet been determined.
On April 7, 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability and is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted and Southern Power intends to adopt the ASU in the fourth quarter 2015. The ASU is required to be applied retrospectively to all periods presented beginning in the year of adoption. Southern Power currently reflects
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
unamortized debt issuance costs in other deferred charges and assets – non-affiliated ondetermined its balance sheet. Upon adoption, the reclassification will not have a material impact on the results of operations, financial position, or cash flows of Southern Power.ultimate impact.
FINANCIAL CONDITION AND LIQUIDITY
Overview
Southern Power's financial condition remained stable at September 30, 2015.March 31, 2016. Southern Power intends to continue to monitor its access to short-term and long-term capital markets as well as bank credit agreements as needed to meet future capital and liquidity needs. See "Sources of Capital" herein for additional information on lines of credit.
Net cash provided fromused for operating activities totaled $609$110 million for the first ninethree months of 2015,2016, compared to $371$19 million for the first ninethree months of 2014.2015. The increase in cash provided fromused for operating activities was primarily due to an increase in income tax benefits received and increased revenues from new PPAs, including solar.taxes paid. Net cash used for investing activities totaled $1.45 billion$873 million for the first ninethree months of 20152016 primarily due to the Lost Hills Blackwell, North Star, Tranquillity, and Desert Stateline acquisitions and expenditures related to the construction of new solarrenewable facilities. Net cash provided from financing activities totaled $931$206 million for the first ninethree months of 20152016 primarily due to the issuance of additional senioran increase in notes in May 2015, and a 13-month bank loan in August 2015.payable. Fluctuations in cash flow from financing activities vary from period to period based on capital needs and
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the maturity or redemption of securities.
Significant balance sheet changes for the first ninethree months of 20152016 include a $966$398 million increase in CWIP due to continued construction of new solar facilities and a $238$412 million increase in plant in service, and a $271 million increase in other intangible assets, primarily due to the acquisition and construction of new solar facilities.facilities being placed in service. Other significant changes include ana $777 million decrease in cash and cash equivalents and a $276 million increase in long-term debt of $647 million primarily as a result of the issuance of senior notes in May 2015 and an increase in noncontrolling interests of $430 million primarilypayable due to contributions made by the class B members for their sharesfunding of the related acquisitions.acquisitions and construction projects, and income taxes. See MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL – "Acquisitions" herein for additional information.
Capital Requirements and Contractual Obligations
See MANAGEMENT'S DISCUSSION AND ANALYSIS – FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" of Southern Power in Item 7 of the Form 10-K for a description of Southern Power's capital requirements for its construction program, scheduled maturities of long-term debt, as well as the related interest, leases, derivative obligations, purchase commitments, and unrecognized tax benefits.benefits, and other purchase commitments. Approximately $400 million will be required to repay long-term debt due September 28, 2016. There are no other scheduled maturities of long-term debt through September 30, 2016.March 31, 2017. In addition, during the first quarter 2016, Southern Power entered into four new long-term service agreements (LTSA), which begin in 2020 and result in additional future commitments totaling approximately $627 million.
The capitalconstruction program is subject to periodic review and revision. These amounts include estimates for potential plant acquisitions and new construction. In addition, the construction as well as ongoingprogram includes capital improvements and work to be performed under long-term service agreements.LTSAs. Planned expenditures for plant acquisitions may vary materially due to market opportunities and Southern Power's ability to execute its growth strategy. Capital expenditures of Southern Power are currently estimated to be approximately $2.3 billion for 2015, which includes approximately $2.2 billion for acquisitions and/or construction of new generating facilities. See Note (I) to the Condensed Financial Statements herein for additional information. Actual capital costs may vary from these estimates because of numerous factors such as: changes in factors such as business conditions; changes in the expected environmental compliance program; changes in environmental statutes and regulations; the outcome of any legal challenges to the environmental rules; changes in FERC rules and regulations; changes in load projections; changes in legislation; the cost and efficiency of construction labor, equipment, and materials; project scope and design changes; and the cost of capital. See Note (I) to the Condensed Financial Statements herein for additional information.
Sources of Capital
Southern Power plans to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from operating cash flows, short-term debt, securities issuances, term loans, and equity contributions from Southern Company. However, the amount, type, and timing of any future financings,
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Power in Item 7 of the Form 10-K for additional information.
As of March 31, 2016, Southern Power's current liabilities sometimes exceedexceeded current assets by $977 million due to long-term debt maturing in 2016, the use of short-term debt as a funding source, and construction payables, as well as cash needs, which can fluctuate significantly due to the seasonality of the business.business and the stage of its acquisitions and construction projects. In 2015,2016, Southern Power has utilized the capital markets and banks to issue additional senior notes and bank term loans, respectively, and expects to utilize the capital markets, bank term loans, and commercial paper markets as the source of funds for the majority of its maturities and to meet short-term liquidity needs, including funding acquisition and construction costs.maturities.
To meet liquidity and capital resource requirements,As of March 31, 2016, Southern Power had at September 30, 2015 cash and cash equivalents of approximately $161$53 million. In August 2015,
Other than borrowings pursuant to the Project Credit Facilities (defined below), Southern Power had no short-term borrowings during the first quarter 2016.
Company amended and restated itsFacility
At March 31, 2016, Southern Power had a committed credit facility (Facility), which, among other things, extended the maturity date from 2018 to 2020. Southern Power Company increased its borrowing ability under this Facility to of $600 million from $500 million. Asexpiring in 2020, of September 30, 2015, $567which $560 million was unused. Southern Power's subsidiaries are not borrowers under the Facility.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Facility, as well as Southern Power's term loan agreement, contains a covenant that limits the ratio of debt to capitalization (each as(as defined in the Facility) to a maximum of 65% and contains a cross default provision that is restricted only to the indebtedness of Southern Power. For purposes of this definition, debt excludes any project debt incurred by certain subsidiaries of Southern Power Companyto the extent such debt is non-recourse to Southern Power , and capitalization excludes the capital stock or other equity attributable to such subsidiary. Southern Power is currently in compliance with all covenants in the Facility.
Proceeds from thisthe Facility may be used for working capital and general corporate purposes as well as liquidity support for Southern Power Company'sPower's commercial paper program. Subject to applicable market conditions, Southern Power Company expects to renew or replace the Facility, as needed, prior to expiration. In connection therewith, Southern Power Company may extend the maturity date and/or increase or decrease the lending commitment thereunder. See Note 6 to the financial statements of Southern Power under "Bank Credit Arrangements" in Item 8 of the Form 10-K and Note (E) to the Condensed Financial Statements under "Bank Credit Arrangements" herein for additional information.
In connection with the construction by Tranquillity of a solar facility in California, RE Tranquillity LLC, an indirect subsidiary of Southern Power Company, entered into the Tranquillity Credit Agreement which is non-recourse to Southern Power Company. The Tranquillity Credit Agreement provides (a) a senior secured construction loan credit facility of up to $86 million, (b) a senior secured bridge loan facility of up to $172 million, and (c) a senior secured letter of credit facility to issue up to $77 million under one or more letters of credit. All three facilities are secured by the membership interests of the project companies held by Tranquillity and are expected to mature on the earlier of the commercial operation date or December 31, 2016. Proceeds from the Tranquillity Credit Agreement are being used to finance project costs related to Tranquillity's solar facility currently under construction. As of September 30, 2015, the entire amount of the Tranquillity Credit Agreement was unused.
Southern Power Company'sPower's commercial paper program is used to finance acquisition and construction costs related to electric generating facilities and for general corporate purposes, including maturing debt. CommercialSouthern Power's subsidiaries are not borrowers under the commercial paper wasprogram.
Subsidiary Facilities
In connection with the construction of solar facilities by RE Tranquillity LLC, RE Roserock LLC, and RE Garland Holdings LLC, indirect subsidiaries of Southern Power, each subsidiary entered into separate credit agreements (Project Credit Facilities), which are non-recourse to Southern Power (other than the subsidiary party to the agreement). Each Project Credit Facility provides (a) a senior secured construction loan credit facility, (b) a senior secured bridge loan facility, and (c) a senior secured letter of credit facility that is secured by the membership interests of the respective project company. Proceeds from the Project Credit Facilities are being used to partially fundfinance project costs related to the maturityrespective solar facilities currently under construction. Each Project Credit Facility is secured by the assets of long-term debt in July 2015.
Detailsthe applicable project subsidiary and membership interests of short-term borrowings werethe applicable project subsidiary. The table below summarizes each Project Credit Facility as follows:of March 31, 2016.
|
| | | | | | | | | | | | | | | | | | |
| | | Commercial Paper at the End of the Period | | Commercial Paper During the Period(*) |
| | | Amount Outstanding | | Weighted Average Interest Rate | | Average Amount Outstanding | | Weighted Average Interest Rate | | Maximum Amount Outstanding |
| | | (in millions) | | | | (in millions) | | | | (in millions) |
| September 30, 2015: | | $ | 213 |
| | 0.5 | % | | $ | 281 |
| | 0.5 | % | | $ | 385 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Project | | Maturity Date | | Construction Loan Facility | | Bridge Loan Facility | | Total | | Total Undrawn | | Letter of Credit Facility | | Total Undrawn |
| | | | | (in millions) |
| Tranquillity | | Earlier of COD or December 31, 2016 | | $ | 86 |
| | $ | 172 |
| | $ | 258 |
| | $ | 52 |
| | $ | 77 |
| | $ | 26 |
|
| Roserock | | Earlier of COD or November 30, 2016 | | 63 |
| | 180 |
| | 243 |
| | 121 |
| | 23 |
| | 16 |
|
| Garland | | Earlier of COD or November 30, 2016 | | 86 |
| | 308 |
| | 394 |
| | 309 |
| | 49 |
| | 32 |
|
| Total | | | | $ | 235 |
| | $ | 660 |
| | $ | 895 |
| | $ | 482 |
| | $ | 149 |
| | $ | 74 |
|
| |
(*) | Average and maximum amounts are based upon daily balances during the three-month period ended September 30, 2015. |
The Project Credit Facilities had total amounts outstanding as of March 31, 2016 of $413 million at a weighted average interest rate of 1.99%. For the three months ended March 31, 2016, these credit agreements had a maximum amount outstanding of $413 million, and an average amount outstanding of $260 million at a weighted average interest rate of 1.99%.
Southern Power believes the need for working capital can be adequately met by utilizing the commercial paper program, the Facility, bank term loans, and operating cash flows.
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southern Power believes the need for working capital can be adequately met by utilizing the commercial paper program, the Facility, and operating cash flows.
Credit Rating Risk
Southern Power does not have any credit arrangements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade.
There are certain contracts that could require collateral, but not accelerated payment, in the event of a credit rating change to BBB and/or Baa2, or below. These contracts are for physical electricity purchases and sales, fuel transportation and storage, energy price risk management, and transmission.
The maximum potential collateral requirements under these contracts at September 30, 2015March 31, 2016 were as follows:
| | | Credit Ratings | Maximum Potential
Collateral
Requirements | Maximum Potential
Collateral
Requirements |
| | (in millions) | (in millions) |
| At BBB and/or Baa2 | $ | 11 |
| $ | 11 |
|
| At BBB- and/or Baa3 | 334 |
| $ | 350 |
|
| Below BBB- and/or Baa3 | 1,077 |
| $ | 1,063 |
|
Included in these amounts are certain agreements that could require collateral in the event that one or more power pool participants has a credit rating change to below investment grade. Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, a credit rating downgrade could impact the ability of Southern Power to access capital markets and would be likely to impact the cost at which it does so.
In addition, Southern Power has a PPA that could require collateral, but not accelerated payment, in the event of a downgrade of Southern Power Company'sPower's credit. The PPA requires credit assurances without stating a specific credit rating. The amount of collateral required would depend upon actual losses, if any, resulting from a credit downgrade.
Financing Activities
In May 2015, Southern Power Company issued $350 million aggregate principal amount of Series 2015A 1.500% Senior Notes due June 1, 2018 and $300 million aggregate principal amount of Series 2015B 2.375% Senior Notes due June 1, 2020. The proceeds were used to repay a portion of its outstanding short-term indebtedness, for other general corporate purposes, includingDuring the three months ended March 31, 2016, Southern Power's growth strategy and continuous construction program, and for a portion of the repayment at maturity of $525 million aggregate principal amount of Southern Power Company's 4.875% Senior Notes on July 15, 2015.
In August 2015, Southern Power Company entered into a $400 million aggregate principal amount 13-month floating rate bank loan bearing interest based on one-month LIBOR. The proceeds were used for working capital and other general corporate purposes, including Southern Power's growth strategy and continuous construction program.
During the nine months ended September 30, 2015, Southern Power prepaid $2.6subsidiary repaid $3 million of long-term debt payable to TRE and borrowed $2 million due February 28, 2036 under promissory notes payable to TRE.
Subsequent to September 30, 2015, RE Tranquillity LLCDuring the three months ended March 31, 2016, Southern Power's subsidiaries borrowed approximately $37$276 million of construction loans pursuant to the TranquillityProject Credit AgreementFacilities at a floatingweighted average interest rate based on one-month LIBOR.of 1.99%. In addition, RE Tranquillity LLCSouthern Power's subsidiaries issued $51$8 million ofin letters of credit.
Subsequent to March 31, 2016, Southern Power's subsidiaries borrowed $187 million pursuant to the Project Credit Facilities at a weighted average interest rate of 1.93%.
In addition to any financings that may be necessary to meet capital requirements and contractual obligations, Southern Power Company 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.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
FOR
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
(UNAUDITED)
INDEX TO THE NOTES TO THE CONDENSED FINANCIAL STATEMENTS
|
| | |
| Note | | Page Number |
| A | | |
| B | | |
| C | | |
| D | | |
| E | | |
| F | | |
| G | | |
| H | | |
| I | | |
| J | | |
INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT
The following unaudited notes to the condensed financial statements are a combined presentation. The list below indicates the registrants to which each footnote applies.
|
| |
| Registrant | Applicable Notes |
| Southern Company | A, B, C, D, E, F, G, H, I, J |
| Alabama Power | A, B, C, E, F, G, H |
| Georgia Power | A, B, C, E, F, G, H |
| Gulf Power | A, B, C, E, F, G, H |
| Mississippi Power | A, B, C, E, F, G, H |
| Southern Power | A, B, C, D, E, G, H, I |
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
ALABAMA POWER COMPANY
GEORGIA POWER COMPANY
GULF POWER COMPANY
MISSISSIPPI POWER COMPANY
SOUTHERN POWER COMPANY AND SUBSIDIARY COMPANIES
NOTES TO THE CONDENSED FINANCIAL STATEMENTS:
(UNAUDITED)
The condensed quarterly financial statements of each registrant included herein have been prepared by such registrant, without audit, pursuant to the rules and regulations of the SEC. The Condensed Balance Sheets as of December 31, 20142015 have been derived from the audited financial statements of each registrant. In the opinion of each registrant's management, the information regarding such registrant furnished herein reflects all adjustments, which, except as otherwise disclosed, are of a normal recurring nature, necessary to present fairly the results of operations for the periods ended September 30, 2015March 31, 2016 and 2014.2015. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. Disclosures which would substantially duplicate the disclosures in the Form 10-K and details which have not changed significantly in amount or composition since the filing of the Form 10-K are generally omitted from this Quarterly Report on Form 10-Q unless specifically required by GAAP. Therefore, these Condensed Financial Statements should be read in conjunction with the financial statements and the notes thereto included in the Form 10-K. Due to the seasonal variations in the demand for energy, operating results for the periods presented are not necessarily indicative of the operating results to be expected for the full year.
Certain prior year data presented in the financial statements have been reclassified to conform to the current year presentation. These reclassifications had no impact on the results of operations, financial position, or cash flows of any registrant.
On February 6, 2015, Gulf Power announced plans to retire its coal-fired generation at Plant Smith Units 1 and 2 (357 MWs) by March 31, 2016. In connection with this retirement, Gulf Power reclassified the net carrying value of these units from plant in service, net of depreciation, to other utility plant, net. Gulf Power expects to recover through its rates the remaining book value of the retired units and certain costs associated with the retirements; however, recovery will be considered by the Florida PSC in future rate proceedings.
In June 2015, Georgia Power identified an error affecting the billing to a small number of large commercial and industrial customers under a rate plan allowing for variable demand-driven pricing from January 1, 2013 to June 30, 2015. In the second quarter 2015, Georgia Power recorded an out of period adjustment of approximately $75 million to decrease retail revenues, resulting in a decrease to net income of approximately $47 million. Georgia Power evaluated the effects of this error on the interim and annual periods that included the billing error, as well as the current period. Based on an analysis of qualitative and quantitative factors, Georgia Power determined the error was not material to any affected period and, therefore, an amendment of previously filed financial statements was not required.
Recently Issued Accounting Standards
On February 25, 2016, the FASB issued ASU No. 2016-02, Leases(Topic 842) (ASU 2016-02). ASU 2016-02 requires lessees to recognize on the balance sheet a lease liability and a right-of-use asset for all leases. ASU 2016-02 also changes the recognition, measurement, and presentation of expense associated with leases and provides clarification regarding the identification of certain components of contracts that would represent a lease. The Financial Accounting Standards Board's (FASB) ASC 606, Revenue from Contracts with Customers, revisesaccounting required by lessors is relatively unchanged and there is no change to the accounting for revenue recognitionexisting leveraged leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2017.2018, with early adoption permitted. The registrants are currently evaluating the new standard and have not yet determined its ultimate impact; however, adoption of ASU 2016-02 is expected to have a significant impact on Southern Company and the traditional operating companies' balance sheets.
On March 30, 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation(Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 changes the accounting for income taxes and the cash flow presentation for share-based payment award transactions. Most significantly, entities are required to recognize all excess tax benefits and deficiencies related to the exercise or vesting of stock compensation as income tax expense or benefit in the income statement. Southern Company and the traditional operating companies currently recognize any excess tax benefits and deficiencies related to the exercise and vesting of stock compensation in additional paid-in capital. ASU 2016-09 is effective for fiscal years
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
continue to evaluate the requirements of ASC 606. The ultimate impact of the new standard has not yet been determined.
On February 18, 2015, the FASB issued Accounting Standards Update (ASU) 2015-02, Amendments to the Consolidation Analysis, which makes certain changes to both the variable interest model and the voting model, including changes to the identification of variable interests, the variable interest entity characteristics for a limited partnership or similar entity, and the primary beneficiary determination. This ASU is effective for fiscal years beginning after December 15, 2015. Southern Power continues to evaluate these requirements. The ultimate impact of this ASU on Southern Power has not yet been determined.
On April 7, 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30):Simplifying the Presentation of Debt Issuance Costs. The ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability and is effective for fiscal years beginning after December 15, 2015. Early2016, with early adoption is permitted and each registrant intends to adopt the ASU in the fourth quarter 2015. The ASU is required to be applied retrospectively to all periods presented beginning in the year of adoption.permitted. Southern Company currently reflects unamortized debt issuance costs in unamortized debt issuance expense on its balance sheet. The traditional operating companies and Southern Power currently reflect unamortized debt issuance costs in other deferred charges and assets on their balance sheets. Upon adoption, the reclassification will not have a material impact on the results of operations, financial position, or cash flows of any registrant.
Asset Retirement Obligations
See Note 1 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power under "Asset Retirement Obligations and Other Costs of Removal" in Item 8 of the Form 10-K for additional information regarding the EPA's regulation of CCR.
On April 17, 2015, the EPA published the Disposal of Coal Combustion Residuals from Electric Utilities final rule (CCR Rule) in the Federal Register, which became effective on October 19, 2015. Therefore, Alabama Power, Gulf Power, and Mississippi Power recorded new asset retirement obligations (ARO) for facilities that are subject to the CCR Rule. Georgia Power had previously recorded AROs as a result of state requirements in Georgia which closely align with the requirements of the CCR Rule.
The cost estimates below are based on information as of September 30, 2015 using various assumptions related to closure and post-closure costs, timing of future cash outlays, inflation and discount rates, and the potential methods for complying with the CCR Rule requirements for closure in place. As further analysis is performed, including evaluation of the expected method of compliance, refinement of assumptions underlying the cost estimates, such as the quantities of CCR at each site, and the determination of timing, including the potential for closing ash ponds prior to the end of their currently anticipated useful life, the traditional operating companies expect to continue to periodically update these estimates.are currently evaluating the new standard and have not yet determined its ultimate impact.
As of September 30, 2015, details of the AROs, including those related to the CCR Rule, included in Southern Company's and the traditional operating companies' Condensed Balance Sheets herein were as follows:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power |
| | (in millions) |
| Balance at beginning of year | $ | 2,201 | | | $ | 829 | | | $ | 1,255 | | | $ | 17 | | | $ | 48 | |
| Liabilities incurred | 644 | | | 402 | | | — | | | 101 | | | 97 | |
| Liabilities settled | (19 | ) | | (1 | ) | | (18 | ) | | — | | | — | |
| Accretion | 83 | | | 38 | | | 42 | | | 1 | | | 2 | |
| Cash flow revisions | 214 | | | 20 | | | 193 | | | 3 | | | 25 | |
| Balance at end of period | $ | 3,123 | | | $ | 1,288 | | | $ | 1,472 | | | $ | 122 | | | $ | 172 | |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
The increases in liabilities incurred and cash flow revisions for the nine months ended September 30, 2015 primarily relate to an increase in AROs associated with facilities impacted by the CCR Rule.
In connection with permitting activity in the third quarter 2015 related to the coal ash pond at the retired Plant Scholz facility, Gulf Power recorded additional AROs of $30 million.
| |
| (B) | CONTINGENCIES AND REGULATORY MATTERS |
See Note 3 to the financial statements of the registrants in Item 8 of the Form 10-K for information relating to various lawsuits, other contingencies, and regulatory matters.
General Litigation Matters
Each registrant is subject to certain claims and legal actions arising in the ordinary course of business. In addition, 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 occurred throughout the U.S. This litigation has included claims for damages alleged to have been caused by CO2 and other emissions, CCR, and alleged exposure to hazardous materials, and/or requests for injunctive relief in connection with such matters.
The ultimate outcome of such pending or potential litigation against each registrant and any subsidiaries cannot be predicted at this time; however, for current proceedings not specifically reported herein or in Note 3 to the financial statements of each registrant 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 such registrant's financial statements.
AGL Resources Merger Litigation
AGL Resources and each member of the AGL Resources board of directors have been named as defendants in four purported shareholder class action lawsuits filed in the United States District Court for the Northern District of Georgia in September and October 2015. These actions were filed on behalf of named plaintiffs and other AGL Resources shareholders challenging the Merger and seeking, among other things, preliminary and permanent injunctive relief enjoining the Merger, and, in certain circumstances, damages. Southern Company and Merger Sub were also named as defendants in two of these lawsuits. Southern Company intends to vigorously defend these suits. Southern Company does not believe these suits will impact the completion of the Merger, and they are not expected to have a material impact on Southern Company's financial statements. However, the ultimate outcome of these matters cannot be determined at this time. See Note (I) under "Southern Company – Proposed Merger with AGL Resources" herein for additional information regarding the Merger.
Environmental Matters
New Source Review Actions
As part of a nationwide enforcement initiative against the electric utility industry which began in 1999, the EPA brought civil enforcement actions in federal district court against Alabama Power and Georgia Power alleging violations of the New Source Review (NSR) provisions of the Clean Air Act at certain coal-fired electric generating units, including units co-owned by Gulf Power and Mississippi Power. The case against Georgia Power (including claims related to a unit co-owned by Gulf Power) has been administratively closed in the U.S. District Court for the Northern District of Georgia since 2001. The case against Alabama Power (including claims involving a unit co-owned by Mississippi Power) was partially settled in 2006 through a consent decree with the EPA. On August 24, 2015, the U.S. District Court for the Northern District of Alabama entered an order approving the joint stipulation among Alabama Power, the EPA, and the U.S. Department of Justice modifying the 2006 consent decree to resolve all remaining claims in the case against Alabama Power. Under the modified consent decree, Alabama Power will, without admitting liability, operate certain units subject to emission rates and an annual emissions cap; use only
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
natural gas at certain other units, including a unit co-owned by Mississippi Power; retire certain units at Plants Gorgas and Barry; pay a $100,000 civil penalty; and invest $1.5 million in electric transportation infrastructure projects over three years.
Environmental Remediation
The Southern Company system must comply with environmental laws and regulations that cover the handling and disposal of waste and releases of hazardous substances. Under these various laws and regulations, the Southern Company system could incur substantial costs to clean up properties.affected sites. The traditional operating companies have each received authority from their respective state PSCs to recover approved environmental compliance costs through regulatory mechanisms. These rates are adjusted annually or as necessary within limits approved by the state PSCs.
Georgia Power's environmental remediation liability as of September 30, 2015March 31, 2016 was $29$28 million. Georgia Power has been designated or identified as a potentially responsible party (PRP) at sites governed by the Georgia Hazardous Site Response Act and/or by the federal Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), including a site in Brunswick, Georgia on the CERCLA National Priorities List. The PRPs at the Brunswick site have completed a removal action as ordered by the EPA. Additional response actions at this site are anticipated. In September 2015, Georgia Power entered into an allocation agreement with another PRP, under which that PRP will be responsible (as between Georgia Power and that PRP) for paying and performing certain investigation, assessment, remediation, and other incidental activities at the Brunswick site. Assessment and potential cleanup of other sites are anticipated.
Georgia PowerThe ultimate outcome of these matters will depend upon the success of defenses asserted, the ultimate number of PRPs participating in the cleanup, and numerous other entities have been designated by the EPA as PRPsfactors and cannot be determined at the Ward Transformer Superfund site located in Raleigh, North Carolina. In 2011, the EPA issued a Unilateral Administrative Order (UAO) to Georgia Power and 22 other parties, ordering specific remedial action of certain areas at the site. Later in 2011, Georgia Power filed a response with the EPA stating it has sufficient cause to believe it is not a liable party under CERCLA. The EPA notified Georgia Power in 2011 that it is considering enforcement options against Georgia Power and other non-complying UAO recipients. If the EPA pursues enforcement actions and the court determines that a respondent failed to comply with the UAO without sufficient cause, the EPA may also seek civil penalties of up to $37,500 per day for the violation and punitive damages of up to three times the costs incurred by the EPAthis time; however, as a result of the party's failure to comply with the UAO.
In addition to the EPA's action at this site, Georgia Power, along with many other parties, was sued in a private action by several existing PRPs for cost recovery related to the removal action. In 2013, the U.S. District Court for the Eastern District of North Carolina Western Division ruled that Georgia Power has no liability in the private action and, on March 20, 2015, the U.S. Court of Appeals for the Fourth Circuit affirmed the lower court's ruling. Therefore, the private action is now concluded. While the EPA has not withdrawn the UAO, Georgia Power believes it is unlikely that the EPA would pursue any claims against Georgia Power for this matter given the conclusion of this private action.
See Note 1 to the financial statements of Georgia Power under "Environmental Remediation Recovery" in Item 8 of the Form 10-K for additional information regarding thePower's regulatory treatment for environmental remediation expenditures.expenses, these matters are not expected to have a material impact on Southern Company's or Georgia Power's financial statements.
Gulf Power's environmental remediation liability includes estimated costs of environmental remediation projects of approximately $46 million as of September 30, 2015.March 31, 2016. These estimated costs primarily relate to site closure criteria by the Florida Department of Environmental Protection (FDEP) for potential impacts to soil and groundwater from herbicide applications at Gulf Power substations. The schedule for completion of the remediation projects is subject to FDEP approval. The projects have been approved by the Florida PSC for recovery through Gulf Power's environmental cost recovery clause; therefore, these liabilities have no impact on net income.
In 2003, Mississippi Power and numerous other entities were designated by the Texas Commission on Environmental Quality (TCEQ) as PRPs at a site that was owned by an electric transformer company that handled Mississippi Power's transformers. The TCEQ approved the final site remediation plan in 2013 and, in March 2014, the impacted utilities, including Mississippi Power, agreed to commence remediation actions on the site. Mississippi
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Power's environmental remediation liability was $0.3 million as of September 30, 2015 and is expected to be recovered through the ECO Plan.
The final outcome of these matters cannot be determined at this time. However, based on the currently known conditions at these sites and the nature and extent of activities relating to these sites, management of Southern Company Georgia Power,and Gulf Power, and Mississippi Power does not believe that additional liabilities, if any, at these sites would be material to their respective financial statements.
Nuclear Fuel Disposal Cost Litigation
Acting through the DOE and pursuant to the Nuclear Waste Policy Act of 1982, the U.S. government entered into contracts with Alabama Power and Georgia Power that require the DOE to dispose of spent nuclear fuel and high level radioactive waste generated at Plants Hatch and Farley and Plant Vogtle Units 1 and 2 beginning no later than January 31, 1998. The DOE has yet to commence the performance of its contractual and statutory obligation to dispose of spent nuclear fuel. Consequently, Alabama Power and Georgia Power pursued and continue to pursue legal remedies against the U.S. government for its partial breach of contract.
In December 2014, the Court of Federal Claims entered a judgment in favor of Georgia Power and Alabama Power in the second spent nuclear fuel lawsuit seeking damages for the period from January 1, 2005 through December 31, 2010. On March 19, 2015, Georgia Power recovered approximately $18 million, based on its ownership interests, and Alabama Power recovered approximately $26 million. In March 2015, Georgia Power credited the award to accounts where the original costs were charged and reduced rate base, fuel, and cost of service for the benefit of customers. Alabama Power expects its portion of the damage amounts collected to be used for the benefit of customers.
In March 2014, Alabama Power and Georgia Power filed additional lawsuits against the U.S. government for the costs of continuing to store spent nuclear fuel at Plants Farley and Hatch and Plant Vogtle Units 1 and 2 for the period from January 1, 2011 through December 31, 2013. The damage period was subsequently extended to December 31, 2014. Damages will continue to accumulate until the issue is resolved or storage is provided. No amounts have been recognized in the financial statements as of September 30, 2015 for any potential recoveries from the additional lawsuits.
The final outcome of these matters cannot be determined at this time; however, no material impact on Southern Company's, Alabama Power's, or Georgia Power's net income is expected.
FERC Matters
Municipal and Rural Associations Tariff
See Note 3 to the financial statements of Mississippi Power under "FERC Matters" in Item 8 of the Form 10-K for additional information regarding a settlement agreement entered into by Mississippi Power regarding the establishment of a regulatory asset for Kemper IGCC-related costs. See Note 3 to the financial statements of Southern Company and Mississippi Power under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K and "Integrated Coal Gasification Combined Cycle" herein for information regarding Mississippi Power's construction of the Kemper IGCC.
UnderOn March 31, 2016, Mississippi Power filed a 2014request with the FERC for an increase in wholesale base revenues as agreed upon in the settlement agreement an adjustment to Mississippi Power's wholesale revenue requirement was allowed in the event the Kemper IGCC, or any substantial portion thereof, was placed in service before or after December 1, 2014. Therefore, Mississippi Power has recorded a regulatory asset as a result of a portion of the Kemper IGCC being placed in service prior to the projected date and is amortizing this regulatory asset over the nine months ending December 31, 2015.
On May 13, 2015, the FERC accepted a settlement agreement between Mississippi Power andreached with its wholesale customers to forgo aunder the Municipal and Rural Associations (MRA) cost-based electric tariff. The settlement agreement provides that base rates under the MRA cost-based electric tariff will increase by, amongapproximately $7 million annually, with revised rates effective for services rendered beginning May 1, 2016. The increase is primarily due to the Plant Daniel Units 1 and 2 scrubbers, which were placed in service in November 2015. Additionally, under the settlement agreement, the tariff customers agreed in principle to similar regulatory treatment for tariff ratemaking as the treatment approved for retail ratemaking under the Mississippi PSC order (In-Service Asset Rate Order). The Kemper IGCC regulatory treatment primarily includes (i) recovery of only the Kemper IGCC assets currently operational and providing service to customers and other things, increasingrelated costs and (ii) removing all of the Kemper IGCC CWIP with a corresponding increase in accrual of AFUDC and loweringeffective May 1, 2016. If approved by the portionFERC, the amount of CWIPbase rate revenues to be recognized in rate base, effective April 1, 2015.2016 is expected to be approximately $5 million. The
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
additional resulting AFUDC is estimated to be approximately $13 million annually,$6 million. The ultimate outcome of which $10 million relates to the Kemper IGCC.this matter cannot be determined at this time.
Fuel Cost Recovery
Mississippi Power has a wholesale MRA and a Market Based (MB) fuel cost recovery factor and a wholesale MRA emissions cost recovery factor. At September 30, 2015,March 31, 2016, the amount of over-recovered wholesale MRA fuel costs included in the balance sheets was $14$25 million compared to $0.2$24 million at December 31, 2014.2015. See Note 3 to the financial statements of Mississippi Power under "Retail Regulatory"FERC Matters – Fuel Cost Recovery" in Item 8 of the Form 10-K for additional information.
Market-Based Rate Authority
The traditional operating companies and Southern Power have authority from the FERC to sell electricity at market-based rates. Since 2008, that authority, for certain balancing authority areas, has been conditioned on compliance with the requirements of an energy auction, which the FERC found to be tailored mitigation that addresses potential market power concerns. In accordance with FERC regulations governing such authority, the traditional operating companies and Southern Power filed a triennial market power analysis on June 30,in 2014, which included continued reliance on the energy auction as tailored mitigation. OnIn April 27, 2015, the FERC issued an order finding that the traditional operating companies' and Southern Power's existing tailored mitigation may not effectively mitigate the potential to exert market power in certain areas served by the traditional operating companies and in some adjacent areas. To retain market-based rate authority, theThe FERC directed the traditional operating companies and Southern Power to show why market-based rate authority should not be revoked in these areas or to provide a mitigation plan to further address market power concerns. The traditional operating companies and Southern Power filed a request for rehearing onin May 27, 2015 and onin June 26, 2015 filed their response with the FERC. The ultimate outcome of this matter cannot be determined at this time.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Retail Regulatory Matters
Alabama Power
See Note 3 to the financial statements of Southern Company and Alabama Power under "Retail Regulatory Matters – Alabama Power" and "Retail Regulatory Matters," respectively, in Item 8 of the Form 10-K for additional information regarding Alabama Power's recovery of retail costs through various regulatory clauses and accounting orders. The recovery balance of each regulatory clause recovery on the balance sheet follows:
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| | | | | | | | | |
| Regulatory Clause |
| Balance Sheet Line Item | September 30, 2015 |
| December 31, 2014 |
|
|
| (in millions) |
Rate CNP Compliance* – Under |
| Deferred under recovered regulatory clause revenues | $ | — |
|
| $ | 2 |
|
| | | Under recovered regulatory clause revenues, current | 38 |
| | 47 |
|
| Rate CNP PPA – Under |
| Deferred under recovered regulatory clause revenues | 66 |
|
| 29 |
|
| | | Under recovered regulatory clause revenues, current | 30 |
| | 27 |
|
| Retail Energy Cost Recovery – Over |
| Deferred over recovered regulatory clause revenues | 128 |
|
| 47 |
|
| Natural Disaster Reserve |
| Other regulatory liabilities, deferred | 76 |
|
| 84 |
|
| |
* | Formerly Known As Rate CNP Environmental |
Rate CNP
See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Alabama Power – Rate CNP" and " – Non-Environmental Federal Mandated Costs Accounting Order" and of Alabama Power under "Retail Regulatory Matters – Rate CNP" and " – Non-Environmental Federal Mandated Costs Accounting Order" in
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Item 8 of the Form 10-K for additional information regarding Alabama Power's development of a revised cost recovery mechanism and the NPNS exception for wind PPAs.
On March 3, 2015, the Alabama PSC approved a modification to Rate CNP Environmental to include compliance costs for both environmental and non-environmental mandates. The recoverable non-environmental compliance costs result from laws, regulations, and other mandates directed at the utility industry involving the security, reliability, safety, sustainability, or similar considerations impacting Alabama Power's facilities or operations. This modification to Rate CNP Environmental was effective March 20, 2015 with the revised rate now defined as Rate CNP Compliance. Alabama Power incurred $50 million of non-environmental compliance costs during the first nine months of 2015 and will be limited to recovery of $50 million for the year. Customer rates will not be impacted before January 2016; therefore, the modification will increase the under recovered position for Rate CNP Compliance during 2015.
On August 14, 2015, the FASB issued ASU 2015-13, allowing the NPNS exception for physical forward transactions in nodal energy markets, consistent with the manner in which Alabama Power currently accounts for its two wind PPAs. The new accounting guidance will have no impact on Southern Company's or Alabama Power's financial statements.
Environmental Accounting Order
In April 2015, as part of its environmental compliance strategy, Alabama Power retired Plant Gorgas Units 6 and 7. These units represented 200 MWs of Alabama Power's approximately 12,200 MWs of generating capacity. Additionally, in April 2015, Alabama Power ceased using coal at Plant Barry Units 1 and 2 (250 MWs), but such units will remain available on a limited basis with natural gas as the fuel source. No later than April 2016, Alabama Power expects to cease using coal at Plant Greene County Units 1 and 2 (300 MWs) and begin operating those units solely on natural gas. On August 24, 2015, the U.S. District Court for the Northern District of Alabama entered an order approving the NSR joint stipulation. In accordance with the joint stipulation, Alabama Power retired Plant Barry Unit 3 (225 MWs) and it is no longer available for generation. See "Environmental Matters – New Source Review Actions" herein for additional information regarding the NSR actions.
In accordance with an accounting order from the Alabama PSC, Alabama Power transferred the unrecovered plant asset balances to a regulatory asset at their respective retirement dates. The regulatory asset will be amortized over the remaining useful lives, as established prior to the decision for retirement, and recovered through Rate CNP. As a result, these decisions will not have a significant impact on Southern Company's or Alabama Power's financial statements. |
| | | | | | | | | |
| Regulatory Clause |
| Balance Sheet Line Item | March 31, 2016 |
| December 31, 2015 |
|
|
| (in millions) |
| Rate CNP Compliance | | Under recovered regulatory clause revenues, current | $ | 22 |
| | $ | 43 |
|
| Rate CNP PPA |
| Deferred under recovered regulatory clause revenues | 105 |
|
| 99 |
|
| Retail Energy Cost Recovery |
| Other regulatory liabilities, current | 173 |
|
| 238 |
|
|
| Deferred over recovered regulatory clause revenues | 64 |
|
| — |
|
| Natural Disaster Reserve |
| Other regulatory liabilities, deferred | 74 |
|
| 75 |
|
Georgia Power
Rate Plans
See Note 3 to the financial statements of Southern Company and Georgia Power under "Retail Regulatory Matters – Georgia Power – Rate Plans" and "Retail Regulatory Matters – Rate Plans," respectively, in Item 8 of the Form 10-K for additional information.
In accordance withGeorgia Power's revenues from regulated retail operations are collected through various rate mechanisms subject to the termsoversight of the Georgia PSC. Georgia Power currently recovers its costs from the regulated retail business through the 2013 ARP, on October 2, 2015, Georgia Power filed the following tariff adjustments with the Georgia PSC to become effective January 1, 2016 pending its approval:
increase inwhich includes traditional base tariff rates, Demand-Side Management tariffs, by approximately $49 million;
increase inEnvironmental Compliance Cost Recovery tariffs, and Municipal Franchise Fee tariffs. In addition, financing costs related to the environmental complianceconstruction of Plant Vogtle Units 3 and 4 are being collected through the NCCR tariff and fuel costs are collected through separate fuel cost recovery tariff by approximately $75 million;
increase in the demand-side management tariffs by approximately $7 million;tariffs. See "Fuel Cost Recovery" below and
increase in the municipal franchise fee tariff by approximately $13 million.
The ultimate outcome of this matter cannot be determined at this time.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Integrated Resource Plan
See Note 3 to the financial statements of Georgia Power under "Retail Regulatory Matters – Nuclear Construction" and Southern Company and Georgia Power under "Retail Regulatory Matters – Georgia Power – Integrated Resource Plans"Fuel Cost Recovery" and "Retail Regulatory Matters" – Integrated Resource Plans," respectively,Nuclear Construction" in Item 8 of the Form 10-K for additional information.information regarding fuel cost recovery and the NCCR tariff, respectively.
To comply withPursuant to the April 16, 2015 effective dateterms and conditions of a settlement agreement related to Southern Company's proposed acquisition of AGL Resources approved by the MATS rule, Plant Branch Units 1, 3, and 4 (1,266 MWs), Plant Yates Units 1 through 5 (579 MWs), and Plant McManus Units 1 and 2 (122 MWs) were retiredGeorgia PSC on April 15, 2015. In addition, operations were discontinued at Plant Mitchell Unit 3 (155 MWs)14, 2016, Georgia Power's 2013 ARP will continue in effect until December 31, 2019, and its decertificationGeorgia Power will be requestedrequired to file its next base rate case by July 1, 2019. Furthermore, through December 31, 2019, Georgia Power and Atlanta Gas Light Company (collectively, Utilities) will retain the merger savings, net of transition costs, as defined in connection with the triennial Integrated Resource Plan in 2016. The switch to natural gas as the primary fuel is complete at Plant Yates Units 7 and 6settlement agreement; through December 31, 2022, net merger savings will be shared on a 60/40 basis between customers and the units were returned to service on May 4, 2015 and June 27, 2015, respectively. On October 13, 2015, Plant Kraft Units 1 through 4 (316 MWs) were retired.Utilities; thereafter, all merger savings will be retained by customers. See Note (I) under "Southern Company – Proposed Merger with AGL Resources" for additional information regarding the Merger.
Fuel Cost Recovery
See Note 3 to the financial statements of Southern Company and Georgia Power under "Retail Regulatory Matters – Georgia Power – Fuel Cost Recovery" and "Retail Regulatory Matters – Fuel Cost Recovery," respectively, in Item 8 of the Form 10-K for additional information.
As of September 30, 2015March 31, 2016 and December 31, 2014,2015, Georgia Power's underover recovered fuel balance totaled $41$177 million and $199$116 million, respectively. For September 30, 2015respectively, and December 31, 2014, the balance is included in current assets and current assetsliabilities and other deferred charges and assets, respectively,liabilities on Southern Company's and Georgia Power's Condensed Balance Sheets herein. On September 18, 2015,April 14, 2016, Georgia Power filed a rate
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
request with the Georgia PSC to lower totaldecrease fuel rates by 15% effective June 1, 2016, which is expected to reduce annual billings by approximately $268 million effective January 1, 2016. The$313 million. Georgia PSCPower is currently scheduled to vote on this matter on December 15, 2015.file its next fuel case by February 28, 2017. The ultimate outcome of this matter cannot be determined at this time.
Fuel cost recovery revenues are adjusted for differences in actual recoverable fuel costs and amounts billed in current regulated rates. Accordingly, changes in the billing factor will not have a significant effect on Southern Company's or Georgia Power's revenues or net income, but will affect cash flow.
Nuclear Construction
See Note 3 to the financial statements of Southern Company and Georgia Power under "Retail Regulatory Matters – Georgia Power – Nuclear Construction" and "Retail Regulatory Matters – Nuclear Construction," respectively, in Item 8 of the Form 10-K for additional information regarding Georgia Power's construction of Plant Vogtle Units 3 and 4, Vogtle Construction Monitoring (VCM) reports, the NCCR tariff, the Vogtle Construction Litigation (as defined below), and pending litigation.the Contractor Settlement Agreement (as defined below).
In 2008, Georgia Power, acting for itself and as agent for the Vogtle Owners, entered into an agreement (Vogtle 3 and 4 Agreement) with the Contractor, pursuant to which the Contractor agreed to design, engineer, procure, construct, and test Plant Vogtle Units 3 and 4. Current anticipated in-service dates for Plant Vogtle Units4 (Vogtle 3 and 4 are the second quarter 2019 and the second quarter 2020, respectively.Agreement).
Under the terms of the Vogtle 3 and 4 Agreement, the Vogtle Owners agreed to pay a purchase price that is subject to certain price escalations and adjustments, including fixed escalation amounts and index-based adjustments, as well as adjustments for change orders, and performance bonuses for early completion and unit performance. The Vogtle 3 and 4 Agreement also provides for liquidated damages upon the Contractor's failure to fulfill the schedule and performance guarantees, subject to a cap. In addition, the Vogtle 3 and 4 Agreement provides for limited cost sharing by the Vogtle Owners for Contractor costs under certain conditions (which have not occurred), with maximum additional capital costs under this provision attributable to Georgia Power (based on Georgia Power's ownership interest) of approximately $114 million. Each Vogtle Owner is severally (and not jointly) liable for its proportionate share, based on its ownership interest, of all amounts owed to the Contractor under the Vogtle 3 and 4 Agreement. Georgia Power's proportionate share is 45.7%.
On December 31, 2015, Westinghouse acquired Stone & Webster, Inc. from Chicago Bridge & Iron Company, N.V. (CB&I) and changed the name of Stone & Webster, Inc. to WECTEC Global Project Services Inc. (WECTEC). Certain payment obligations of Westinghouse and CB&I Stone & Webster, Inc. (S&W) (formerly known as Stone & Webster, Inc.)WECTEC under the Vogtle 3 and 4 Agreement arewere originally guaranteed by Toshiba Corporation (Toshiba)(Westinghouse's parent company) and The Shaw
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Group Inc. (Shaw Group) (a(which is now a subsidiary of Chicago Bridge & Iron Company, N.V. (CBCB&I)), respectively. On March 9, 2016, in connection with Westinghouse's acquisition of WECTEC and pursuant to the settlement agreement described below, the guarantee of The Shaw Group Inc. was terminated. The guarantee of Toshiba Corporation remains in place. In the event of certain credit rating downgrades of any Vogtle Owner, such Vogtle Owner will be required to provide a letter of credit or other credit enhancement. Additionally, as a result of credit rating downgrades of Toshiba Corporation, Westinghouse provided the Vogtle Owners with letters of credit in an aggregate amount of $920 million in accordance with, and subject to adjustment under, the terms of the Vogtle 3 and 4 Agreement.
The Vogtle Owners may terminate the Vogtle 3 and 4 Agreement at any time for their convenience, provided that the Vogtle Owners will be required to pay certain termination costs. The Contractor may terminate the Vogtle 3 and 4 Agreement under certain circumstances, including certain Vogtle Owner suspension or delays of work, action by a governmental authority to permanently stop work, certain breaches of the Vogtle 3 and 4 Agreement by the Vogtle Owners, Vogtle Owner insolvency, and certain other events.
In 2009, the NRC issued an Early Site Permit and Limited Work Authorization which allowed limited workGeorgia PSC voted to begin on Plant Vogtle Units 3 and 4. The NRC certified the Westinghouse Design Control Document, as amended (DCD), for the AP1000 nuclear reactor design, in late 2011, and issued combined construction and operating licenses (COLs) in early 2012. Receipt of the COLs allowed full construction to begin. There have been technical and procedural challenges to the construction and licensing of Plant Vogtle Units 3 and 4, at the federal and state level, and additional challenges may arise as construction proceeds.
In 2012, the Vogtle Owners and the Contractor began negotiations regarding the costs associated with design changes to the DCD and the delays in the timing of approval of the DCD and issuance of the COLs, including the assertion by the Contractor that the Vogtle Owners are responsible for these costs under the terms of the Vogtle 3 and 4 Agreement. Also in 2012, Georgia Power and the other Vogtle Owners filed suit against the Contractor in the U.S. District Court for the Southern District of Georgia seeking a declaratory judgment that the Vogtle Owners are not responsible for these costs. In 2012, the Contractor also filed suit against Georgia Power and the other Vogtle Owners in the U.S. District Court for the District of Columbia alleging the Vogtle Owners are responsible for these costs. The Contractor also asserted it is entitled to extensions of the guaranteed substantial completion dates of April 2016 and April 2017 for Plant Vogtle Units 3 and 4, respectively. In May 2014, the Contractor filed an amended counterclaim to the suit pending in the U.S. District Court for the Southern District of Georgia alleging that (i) the design changes to the DCD imposed by the NRC delayed module production and the impacts to the Contractor are recoverable by the Contractor under the Vogtle 3 and 4 Agreement and (ii) the changes to the basemat rebar design required by the NRC caused additional costs and delays recoverable by the Contractor under the Vogtle 3 and 4 Agreement. On March 10, 2015, the U.S. Court of Appeals for the District of Columbia Circuit affirmed the decision of the U.S. District Court for the District of Columbia, which had dismissed the Contractor's suit, ruling that the proper venue is the U.S. District Court for the Southern District of Georgia. The case is pending in the U.S. District Court for the Southern District of Georgia (Vogtle Construction Litigation). The portion of additional costs claimed by the Contractor in its initial complaint that would be attributable to Georgia Power (based on Georgia Power's ownership interest) is approximately $425 million in 2008 dollars (approximately $591 million in 2015 dollars).The Contractor did not specify in its amended counterclaim the amounts relating to these new allegations; however, the Contractor subsequently asserted estimated minimum damages related to the amended counterclaim (based on Georgia Power's ownership interest) of approximately $113 million in 2014 dollars (approximately $118 million in 2015 dollars).In June 2015, the Contractor updated its estimated damages under the initial complaint and the amended counterclaim to an aggregate (based on Georgia Power's ownership interest) of approximately $714 million (in 2015 dollars).
On October 27, 2015, Westinghouse and CB&I announced an agreement under which Westinghouse or one of its affiliates will acquire S&W from CB&I, subject to satisfaction of certain conditions to closing. In addition, on October 27, 2015, Westinghouse and the Vogtle Owners entered into a term sheet (Term Sheet) setting forth the terms of a settlement agreement to resolve disputes between the Vogtle Owners and the Contractor under the Vogtle 3 and 4 Agreement, including the Vogtle Construction Litigation.
In accordance with the Term Sheet: (i) the Vogtle Owners and the Contractor will enter into mutual releases of all open claims which have been asserted, including any potential extension of such open claims, as well as future claims based on events occurring prior to the effective date of the release that potentially could have been asserted under the original terms of the Vogtle 3 and 4 Agreement, including the Vogtle Construction Litigation, which will be dismissed with prejudice; (ii) the Vogtle 3 and 4 Agreement will be amended to restrict the Contractor's ability to seek further increases in the contract price by clarifying and limiting the circumstances that constitute nuclear
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
regulatory changes in law; (iii) enhanced dispute resolution procedures will be implemented; (iv) the guaranteed substantial completion dates under the Vogtle 3 and 4 Agreement will be revised to match the current estimated in-service dates of June 30, 2019 for Unit 3 and June 30, 2020 for Unit 4 (as discussed below); (v) delay liquidated damages will now commence from the current estimated nuclear fuel loading date for each unit, which is December 31, 2018 for Unit 3 and December 31, 2019 for Unit 4, rather than the original guaranteed substantial completion dates under the Vogtle 3 and 4 Agreement; and (vi) Georgia Power, based on its ownership interest, will pay to the Contractor and capitalize to the project cost approximately $350 million, of which approximately $120 million has been paid previously under the dispute resolution procedures of the Vogtle 3 and 4 Agreement. In addition, the Vogtle Owners and the Contractor resolved other open existing items relating to the scope of the project under the Vogtle 3 and 4 Agreement, including cyber security, for which costs were reflected in Georgia Power's previously disclosed in-service cost estimate. Further, as part of the proposed settlement and in connection with Westinghouse's proposed acquisition of S&W: (i) the Vogtle Owners will terminate the parent guarantee of Shaw Group with respect to certain obligations of S&W, subject to obtaining the consent of the DOE under loan guarantee agreements relating to Plant Vogtle Units 3 and 4, while the parent guarantee of Toshiba with respect to certain obligations of Westinghouse will remain in place; (ii) Westinghouse will make provisions to engage Fluor Enterprises, Inc., a subsidiary of Fluor Corporation, as a new construction subcontractor; and (iii) the Vogtle Owners, CB&I, and Shaw Group also will enter into mutual releases of any and all claims against each other arising out of thecertify construction of Plant Vogtle Units 3 and 4.
The settlement of the pending disputes between the Vogtle Owners and the Contractor, including the Vogtle Construction Litigation, is subject to consummation of Westinghouse's proposed acquisition of S&W. If this proposed acquisition is not completed, the Vogtle Construction Litigation will continue and the Contractor may from time to time continue to assert that it is entitled to additional payments with respect to its allegations, any of which could be substantial.
Georgia Power will submit the ultimate settlement agreement terms and the related amendments to the Vogtle 3 and 4 Agreement to the Georgia PSC for its review.
Georgia Power is required to file semi-annual VCM reports with the Georgia PSC by February 28 and August 31 each year. If the projected certified construction capital costs to be borne by Georgia Power increase by 5% above the certified cost or the projected in-service dates are significantly extended, Georgia Power is required to seek an amendment to the Plant Vogtle Units 3 and 4 certificate from the Georgia PSC. In February 2013, Georgia Power requested an amendment to the certificate to increase the estimated in-service capital cost of Plant Vogtle Units 3 and 4 from $4.4 billion to $4.8
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
billion and to extend the estimated in-service dates to the fourth quarter 2017 (from April 2016) and the fourth quarter 2018 (from April 2017) for Plant Vogtle Units 3 and 4, respectively. In October 2013, the Georgia PSC approved a stipulation (2013 Stipulation) entered into bybetween Georgia Power and the Georgia PSC staffStaff (Staff) to waive the requirement to amend the Plant Vogtle Units 3 and 4 certificate until the completion of Plant Vogtle Unit 3 or earlier if deemed appropriate by the Georgia PSC and Georgia Power.
On April 15, 2015, the Georgia PSC issued a procedural order in connection with the twelfth VCM report, which included a requested amendment (Requested Amendment) to the Plant Vogtle Units 3 and 4 certificate to reflect the Contractor's revised forecast for completion of Plant Vogtle Units 3 and 4 (second quarter of 2019 and second quarter of 2020, respectively) as well as additional estimated owner-relatedVogtle Owner's costs, which includeof approximately $10 million per month, including property taxes, oversight costs, compliance costs, and other operational readiness costs to include the estimated owner'sVogtle Owner's costs associated with the proposed 18-month Contractor delay and to increase the estimated total in-service capital cost of Plant Vogtle Units 3 and 4 to $5.0 billion. Pursuant to thisthe Georgia PSC's procedural order, the Georgia PSC deemed the Requested Amendment unnecessary and withdrawn until the completion of construction of Plant Vogtle Unit 3 consistent with the 2013 Stipulation. The Georgia PSC recognized that the certified cost and the 2013 Stipulation do not constitute a cost recovery cap. In accordance with the Georgia Integrated Resource Planning Act, any costs incurred by Georgia Power in excess of the certified amount will be included in rate base, provided Georgia Power shows the costs to be reasonable and prudent. Financing costs up to the certified amount will be collected through the NCCR tariff until the units are placed in service and contemplated in a general base rate case, while financing costs on any construction-related costs in excess of the $4.4 billion certified amount are expected to be recovered through AFUDC.
On December 31, 2015, Westinghouse and the Vogtle Owners entered into a definitive settlement agreement (Contractor Settlement Agreement) to resolve disputes between the Vogtle Owners and the Contractor under the Vogtle 3 and 4 Agreement, including litigation that was pending in the U.S. District Court for the Southern District of Georgia (Vogtle Construction Litigation). Effective December 31, 2015, Georgia Power, acting for itself and as agent for the other Vogtle Owners, and the Contractor entered into an amendment to the Vogtle 3 and 4 Agreement to implement the Contractor Settlement Agreement. The Contractor Settlement Agreement and the related amendment to the Vogtle 3 and 4 Agreement (i) restrict the Contractor's ability to seek further increases in the contract price by clarifying and limiting the circumstances that constitute nuclear regulatory changes in law; (ii) provide for enhanced dispute resolution procedures; (iii) revise the guaranteed substantial completion dates to match the current estimated in-service dates of June 30, 2019 for Unit 3 and June 30, 2020 for Unit 4; (iv) provide that delay liquidated damages will commence from the current estimated nuclear fuel loading date for each unit, which is December 31, 2018 for Unit 3 and December 31, 2019 for Unit 4; and (v) provide that Georgia Power, based on its ownership interest, will pay to the Contractor and capitalize to the project cost approximately $350 million, of which approximately $241 million had been paid as of March 31, 2016. In addition, the Contractor Settlement Agreement provides for the resolution of other open existing items relating to the scope of the project under the Vogtle 3 and 4 Agreement, including cyber security, for which costs were reflected in Georgia Power's previously disclosed in-service cost estimate. Further, as part of the settlement and Westinghouse's acquisition of WECTEC: (i) Westinghouse engaged Fluor Enterprises, Inc., a subsidiary of Fluor Corporation, as a new construction subcontractor; and (ii) the Vogtle Owners, CB&I, and The Shaw Group Inc. entered into mutual releases of any and all claims arising out of events or circumstances in connection with the construction of Plant Vogtle Units 3 and 4 that occurred on or before the date of the Contractor Settlement Agreement. On January 5, 2016, the Vogtle Construction Litigation was dismissed with prejudice.
On January 21, 2016, Georgia Power submitted the Contractor Settlement Agreement and the related amendment to the Vogtle 3 and 4 Agreement to the Georgia PSC for its review. In accordance with the Georgia PSC's subsequent order, on April 5, 2016, Georgia Power filed supplemental information in support of the Contractor Settlement Agreement and Georgia Power's position that all construction costs to date have been prudently incurred and that the current estimated in-service capital cost and schedule are reasonable. The Staff will conduct a review of all costs incurred related to Plant Vogtle Units 3 and 4, the schedule for completion of Plant Vogtle Units 3 and 4, and the
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Contractor Settlement Agreement and the Staff is authorized to engage in related settlement discussions with Georgia Power and any intervenors.
The order provides that the Staff is required to report to the Georgia PSC by October 19, 2016 with respect to the status of its review and any settlement-related negotiations. If a settlement with the Staff is reached with respect to costs of Plant Vogtle Units 3 and 4, the Georgia PSC will then conduct a hearing to consider whether to approve that settlement. If a settlement with the Staff is not reached, the Georgia PSC will determine how to proceed, including (i) modifying the 2013 Stipulation, (ii) directing Georgia Power to file a request for an amendment to the certificate for Plant Vogtle Units 3 and 4, (iii) issuing a scheduling order to address remaining disputed issues, or (iv) taking any other option within its authority.
The Georgia PSC has approved twelvethirteen VCM reports covering the periods through December 31, 2014,June 30, 2015, including construction capital costs incurred, which through that date totaled $3.0$3.1 billion. On August 28, 2015,February 26, 2016, Georgia Power filed its thirteenthfourteenth VCM report with the Georgia PSC covering the period from JanuaryJuly 1 through June 30, 2015, whichDecember 31, 2015. The fourteenth VCM report does not include a requested amendment to the certified cost of Plant Vogtle Units 3 and 4. Georgia Power is requesting approval for an additional $148of $160 million of construction capital costs incurred during that period and reflected estimated financing costs during the construction period to total approximately $2.4 billion.period. Georgia Power will continueanticipates to incur average financing costs of approximately $30$27 million per month from January 2016 until Plant Vogtle Units 3 and 4 are placed in service. The updated in-service capital cost forecast is $5.44 billion and includes costs related to the Contractor Settlement Agreement. Estimated financing costs during the construction period total approximately $2.4 billion. Georgia Power's CWIP balance for Plant Vogtle Units 3 and 4 was approximately $3.7 billion as of March 31, 2016.
On October 30, 2015, Georgia Power filedThere have been technical and procedural challenges to increase the NCCR tariff by approximately $19 million, effective January 1, 2016, pending Georgia PSC approval.
construction and licensing of Plant Vogtle Units 3 and 4, at the federal and state level, and additional challenges may arise as construction proceeds. Processes are in place that are designed to assure compliance with the requirements specified in the DCDWestinghouse Design Control Document and the COLs,combined construction and operating licenses, including inspections by Southern Nuclear and the NRC that occur throughout construction. As a result of such compliance processes, certain license amendment requests have been filed and approved or are pending before the NRC. Various design and other licensing-based compliance issues may arise as construction proceeds, which may result in additional license amendments or require other resolution. If any license amendment requests or other licensing-based compliance issues are not resolved in a timely manner, there may be delays in the project schedule that could result in increased costs either to the Vogtle Owners or the Contractor or to both.
As construction continues, the risk remains that ongoing challenges with Contractor performance including additional challenges in its fabrication, assembly, delivery, and installation of the shield building and structural modules, delays in the receipt of the remaining permits necessary for the operation of Plant Vogtle Units 3 and 4, or other issues could arise and may further impact project schedule and cost. In addition, the IRS allocated production tax credits to each of Plant Vogtle Units 3 and 4, which require the applicable unit to be placed in service before 2021.
Future claims by the Contractor or Georgia Power (on behalf of the Vogtle Owners) could arise throughout construction. These claims may be resolved through formal and informal dispute resolution procedures under the Vogtle 3 and 4 Agreement but alsoand, under the enhanced dispute resolution procedures, may be resolved through litigation.litigation after the completion of nuclear fuel load for both units.
The ultimate outcome of these matters cannot be determined at this time.
Gulf Power
Retail Base Rate Case
See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Retail Base Rate Case" in Item 8 of the Form 10-K for additional information.
In December 2013, the Florida PSC approved a settlement agreement providing that provides Gulf Power may reduce depreciation expense and record a regulatory asset up to $62.5 million between January 2014 and June 2017. In any given month, such depreciation expense reduction may not exceed the amount necessary for the retail ROE, as reported to the Florida PSC monthly, to reach the midpoint of the authorized retail ROE range then in effect. For 2014 and the first nine months of 2015, Gulf Power recognized reductions in depreciation expense of $8.4 million and $20.5 million, respectively.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
monthly, to reach the midpoint of the authorized retail ROE range then in effect. For 2014, 2015, and the first three months of 2016, Gulf Power recognized reductions in depreciation of $8.4 million, $20.1 million, and $5.6 million, respectively.
Cost Recovery Clauses
See Note 3 to the financial statements of Gulf Power under "Retail Regulatory Matters – Cost Recovery Clauses" in Item 8 of the Form 10-K for additional information regarding Gulf Power's recovery of retail costs through various regulatory clauses and accounting orders. Gulf Power has four regulatory clauses which are approved by the Florida PSC. The recovery balance of each regulatory clause recovery on the balance sheet follows:
|
| | | | | | | | | | |
| Recovery Clause |
| Balance Sheet Location |
| September 30, 2015 |
| December 31, 2014 |
|
|
|
| (in millions) |
| Fuel Cost Recovery – Under |
| Under recovered regulatory clause revenues |
| $ | 2 |
|
| $ | 40 |
|
| Purchased Power Capacity Recovery – Over |
| Other regulatory liabilities, current |
| 3 |
|
| — |
|
| Environmental Cost Recovery - Over | | Other regulatory liabilities, current | | 5 |
| | — |
|
| Environmental Cost Recovery – Under |
| Under recovered regulatory clause revenues |
| — |
|
| 10 |
|
| Energy Conservation Cost Recovery – Over | | Other regulatory liabilities, current | | 3 |
| | — |
|
| Energy Conservation Cost Recovery – Under |
| Under recovered regulatory clause revenues |
| — |
|
| 3 |
|
On November 2, 2015, the Florida PSC approved Gulf Power's annual rate clause request for its fuel, purchased power capacity, environmental, and energy conservation cost recovery factors for 2016. The net effect of the approved changes is a $49 million decrease in annual revenue for 2016. The decreased revenues will not have a significant impact on net income since most of the revenues will be offset by lower expenses. |
| | | | | | | | | | |
| Regulatory Clause |
| Balance Sheet Location |
| March 31, 2016 |
| December 31, 2015 |
|
|
|
| (in millions) |
| Fuel Cost Recovery |
| Other regulatory liabilities, current |
| $ | 20 |
|
| $ | 18 |
|
| Purchased Power Capacity Recovery |
| Under recovered regulatory clause revenues |
| 4 |
|
| 1 |
|
| Environmental Cost Recovery | | Under recovered regulatory clause revenues | | 17 |
| | 19 |
|
| Energy Conservation Cost Recovery | | Other regulatory liabilities, current | | 2 |
| | 4 |
|
Mississippi Power
2015 Rate Case
On May 15, 2015 and July 10, 2015, Mississippi Power filed alternative rate proposals related to recovery of Kemper IGCC-related costs with the Mississippi PSC. On August 13, 2015, the Mississippi PSC approved the implementation of interim rates designed to collect approximately $159 million annually. See "Integrated Coal Gasification Combined Cycle – Rate Recovery of Kemper IGCC Costs – 2015 Rate Case" herein for additional information.
Performance Evaluation Plan
See Note 3 to the financial statements of Mississippi Power under "Retail Regulatory Matters – Performance Evaluation Plan" in Item 8 of the Form 10-K for additional information regarding Mississippi Power's base rates.
On March 17, 2015,April 1, 2016, Mississippi Power submitted its annual PEP lookback filing for 2014,2015, which indicated noreflected the need for a $5 million surcharge or refund. On March 26, 2015,to be recovered from customers. The filing has been suspended for review by the Mississippi PSC suspended the filing to allow it more time for review.PSC. The ultimate outcome of this matter cannot be determined at this time.
System Restoration Rider
See Note 1 to the financial statements of Mississippi Power under "Provision for Property Damage" in Item 8 of the Form 10-K for additional information.
On October 6, 2015, the Mississippi PSC approved Mississippi Power's request to continue a zero System Restoration Rider (SRR) rate for 2015 and to accrue approximately $3 million to the property damage reserve in 2015.
Environmental Compliance Overview Plan
See Note 3 to the financial statements of Mississippi Power under "Retail Regulatory Matters – Environmental Compliance Overview Plan" and "Other Matters – Sierra Club Settlement Agreement" in Item 8 of the Form 10-K for information on Mississippi Power's annual environmental filing with the Mississippi PSC and information on Plant Watson Units 4 and 5.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
In 2012, the Mississippi PSC approved Mississippi Power's request for a CPCN to construct scrubbers on Plant Daniel Units 1 and 2, which are scheduled to be placed in service in the fourth quarter 2015. These units are jointly owned by Mississippi Power and Gulf Power, with 50% ownership each. The estimated total cost of the project is approximately $660 million, with Mississippi Power's portion being $330 million, excluding AFUDC. Mississippi Power's portion of the cost is expected to be recovered through the ECO Plan following the scheduled completion of the project. As of September 30, 2015, total project expenditures were $626 million, of which Mississippi Power's portion was $320 million, excluding AFUDC of $32 million.
On February 25, 2015, Mississippi Power submitted its annual ECO filing for 2015, which indicated an annual increase in revenues of approximately $8 million. On February 27, 2015, the Mississippi PSC suspended the filing to allow it more time to review. The ultimate outcome of this matter cannot be determined at this time.
On April 16, 2015, the assets that supported coal generation at Plant Watson Units 4 and 5 were retired. The remaining net book value of these two units was approximately $32 million, excluding the reserve for cost of removal, and has been reclassified to other regulatory assets, deferred, on Mississippi Power's Condensed Balance Sheet herein in accordance with an accounting order from the Mississippi PSC. Mississippi Power expects to recover through its rates the remaining book value of the retired assets and certain costs, including unusable inventory, associated with the retirements; however, the ultimate method and timing of recovery will be considered by the Mississippi PSC in future rate proceedings.
Fuel Cost Recovery
See Note 3 to the financial statements of Mississippi Power under "Retail Regulatory Matters – Fuel Cost Recovery" in Item 8 of the Form 10-K for information regarding Mississippi Power's retail fuel cost recovery.
At September 30, 2015,March 31, 2016, the amount of over recoveredover-recovered retail fuel costs included on Mississippi Power's Condensed Balance Sheet herein was $44$80 million compared to under recoveredover-recovered retail fuel costs of $2$71 million at December 31, 2014.2015.
Ad Valorem Tax Adjustment
See Note 3The Mississippi PSC conditionally approved a decrease of $120 million annually in fuel cost recovery rates on January 5, 2016, effective with the first billing cycle of February. As required by the order, on February 1, 2016, Mississippi Power submitted updated natural gas price forecasts and resulting fuel factors to the financial statements of Mississippi Power under "Retail Regulatory Matters – Ad Valorem Tax Adjustment" in Item 8 of the Form 10-K for additional information.
On September 1, 2015,PSC. If approved by the Mississippi PSC, approved Mississippi Power's annual ad valorem tax adjustment factor filing effective September 18, 2015, which requestedthe updated forecast would decrease fuel cost recovery rates by an annual rate decreaseadditional $36 million annually. The ultimate outcome of 0.35%, or $2 million in annual retail revenues, primarily due to a decrease in average millage rates.this matter cannot be determined at this time.
Integrated Coal Gasification Combined Cycle
See Note 3 to the financial statements of Southern Company and Mississippi Power under "Integrated Coal Gasification Combined Cycle" in Item 8 of the Form 10-K for information regarding Mississippi Power's construction of the Kemper IGCC.
Kemper IGCC Overview
Construction of Mississippi Power's Kemper IGCC is nearing completion and start-up activities will continue until the Kemper IGCC is placed in service. The Kemper IGCC will utilize an IGCC technology with an output capacity
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
of 582 MWs. The Kemper IGCC will be fueled by locally mined lignite (an abundant, lower heating value coal) from a mine owned by Mississippi Power and situated adjacent to the Kemper IGCC. The mine, operated by North American Coal Corporation, started commercial operation in 2013. In connection with the Kemper IGCC, Mississippi Power constructed and plans to operate approximately 61 miles of CO2 pipeline infrastructure for the planned transport of captured CO2 for use in enhanced oil recovery.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Kemper IGCC Schedule and Cost Estimate
In 2012, the Mississippi PSC issued the 2012 MPSC CPCN Order, a detailed order confirming the CPCN originally approved by the Mississippi PSC in 2010 authorizing the acquisition, construction, and operation of the Kemper IGCC.
The certificated cost estimate of the Kemper IGCC included in the 2012 MPSC CPCN Order was $2.4 billion, net of $245 million of grants awarded to the Kemper IGCC project by the DOE under the Clean Coal Power Initiative Round 2 (DOE(Initial DOE Grants) and excluding the cost of the lignite mine and equipment, the cost of the CO2 pipeline facilities, and AFUDC related to the Kemper IGCC. The 2012 MPSC CPCN Order approved a construction cost cap of up to $2.88 billion, with recovery of prudently-incurred costs subject to approval by the Mississippi PSC. The Kemper IGCC was originally projected to be placed in service in May 2014. Mississippi Power placed the combined cycle and the associated common facilities portion of the Kemper IGCC in service using natural gas in August 2014 and continuescurrently expects to focus on completingplace the remainder of the Kemper IGCC, including the gasifier and the gas clean-up facilities, for whichin service during the in-service date is currently expected to occur in the first halfthird quarter 2016.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Recovery of the Kemper IGCC costs subject to the cost cap and the cost of the lignite mine and equipment, the cost of the CO2 pipeline facilities, AFUDC, and certain general exceptions, including change of law, force majeure, and beneficial capital (which exists when Mississippi Power demonstrates that the purpose and effect of the construction cost increase is to produce efficiencies that will result in a neutral or favorable effect on customers relative to the original proposal for the CPCN) (Cost Cap Exceptions) remains subject to review and approval by the Mississippi PSC. Mississippi Power's Kemper IGCC 2010 project estimate, current cost estimate (which includes the impacts of the Mississippi Supreme Court's (Court) decision)decision discussed herein under "Rate Recovery of Kemper IGCC Costs – 2013 MPSC Rate Order"), and actual costs incurred as of September 30, 2015, as adjusted for the Court's decision,March 31, 2016, are as follows:
| | | Cost Category | 2010 Project Estimate(f) | | Current Estimate(a) | | Actual Costs | 2010 Project Estimate(f) | | Current Cost Estimate(a) | | Actual Costs |
| | (in billions) | (in billions) |
Plant Subject to Cost Cap(b)(g) | $ | 2.40 |
| | $ | 5.11 |
| | $ | 4.66 |
| $ | 2.40 |
| | $ | 5.35 |
| | $ | 4.99 |
|
| Lignite Mine and Equipment | 0.21 | | 0.23 | | 0.23 | 0.21 |
| | 0.23 |
| | 0.23 |
|
CO2 Pipeline Facilities | 0.14 | | 0.11 | | 0.11 | 0.14 |
| | 0.11 |
| | 0.12 |
|
AFUDC(c) | 0.17 | | 0.66 | | 0.55 | 0.17 |
| | 0.71 |
| | 0.62 |
|
Combined Cycle and Related Assets Placed in
Service – Incremental(d)(g) | — |
| | 0.02 |
| | — |
| — |
| | 0.02 |
| | 0.01 |
|
| General Exceptions | 0.05 | | 0.10 | | 0.08 | 0.05 |
| | 0.10 |
| | 0.09 |
|
Deferred Costs(e)(g) | — |
| | 0.20 | | 0.17 | — |
| | 0.20 |
| | 0.18 |
|
Additional DOE Grants(h) | | — |
| | (0.14 | ) | | — |
|
| Total Kemper IGCC | $ | 2.97 |
| | $ | 6.43 |
| | $ | 5.80 |
| $ | 2.97 |
| | $ | 6.58 |
| | $ | 6.24 |
|
| |
| (a) | Amounts in the Current Cost Estimate reflect estimated costs through JuneSeptember 30, 2016. |
| |
| (b) | The 2012 MPSC CPCN Order approved a construction cost cap of up to $2.88 billion, net of the Initial DOE Grants and excluding the Cost Cap Exceptions. The Current Cost Estimate and the Actual Costs include non-incremental operating and maintenance costs related to the combined cycle and associated common facilities placed in service in August 2014 that are subject to the $2.88 billion cost cap and exclude post-in-service costs for the lignite mine. See "Rate Recovery of Kemper IGCC Costs – 2013 MPSC Rate Order" herein for additional information. The Current Cost Estimate and the Actual Costs reflect 100% of the costs of the Kemper IGCC. See note (g) for additional information. |
| |
| (c) | Mississippi Power's original estimate included recovery of financing costs during construction rather than the accrual of AFUDC. This approach was not approved by the Mississippi PSC in 2012 as described in "Rate Recovery of Kemper IGCC Costs." The current estimate reflects the impact of a settlement agreement with the wholesale customers for cost-based rates under FERC's jurisdiction. See "FERC Matters" herein for additional information. |
| |
| (d) | Incremental operating and maintenance costs related to the combined cycle and associated common facilities placed in service in August 2014, net of costs related to energy sales. See "Rate Recovery of Kemper IGCC Costs – 2013 MPSC Rate Order" herein for additional information. |
| |
| (e) | The 2012 MPSC CPCN Order approved deferral of non-capital Kemper IGCC-related costs during construction as described in "Rate Recovery of Kemper IGCC Costs – Regulatory Assets and Liabilities."Liabilities" herein. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| |
| (f) | The 2010 Project Estimate is the certificated cost estimate adjusted to include the certificated estimate for the CO2 pipeline facilities which was approved in 2011 by the Mississippi PSC. |
| |
| (g) | Beginning in the third quarter 2015, certain costs, including debt carrying costs (associated with assets placed in service and other non-construction work in progressnon-CWIP accounts), that previously were deferred as regulatory assets are now being recognized through income; however, such costs continue to be included in the current cost estimateCurrent Cost Estimate and actual coststhe Actual Costs at September 30, 2015.March 31, 2016. |
| |
| (h) | On April 8, 2016, Mississippi Power received approximately $137 million in additional grants from the DOE for the Kemper IGCC, which are expected to be used to reduce future rate impacts for customers. |
Of the total costs, including post-in-service costs for the lignite mine, incurred as of September 30, 2015, $3.45March 31, 2016, $3.61 billion was included in property, plant, and equipment (which is net of the Initial DOE Grants and estimated probable losses of $2.23$2.47 billion), $2$6 million in other property and investments, $62$75 million in fossil fuel stock, $43$45 million in materials and supplies, $50$22 million in other regulatory assets, current, $158$196 million in other regulatory assets, deferred, $1 million in other current assets, and $15$11 million in other deferred charges and assets in the balance sheet.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Mississippi Power does not intend to seek rate recovery for any costs related to the construction of the Kemper IGCC that exceed the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions. Mississippi Power recorded pre-tax charges to income for revisions to the cost estimate above the cost cap of $150$53 million ($9333 million after tax) in the thirdfirst quarter 2015 and a total2016. Since 2012, in the aggregate, Mississippi Power has incurred charges of $182 million$2.47 billion ($112 million1.52 billion after tax) for the nine months ended September 30, 2015. These amounts areas a result of changes in addition to charges totaling $868 million ($536 million after tax), $1.10 billion ($681 million after tax), and $78 million ($48 million after tax) in 2014, 2013, and 2012, respectively. Southern Company recorded pre-tax charges to income for revisions to the cost estimate of $868 million ($536 million after tax) and $1.2 billion ($729 million after tax) in 2014 and 2013, respectively.above the cost cap for the Kemper IGCC through March 31, 2016. The increasesincrease to the cost estimate in 2015the first quarter 2016 primarily reflectreflects costs for the extension of the Kemper IGCC's projected in-service date through September 30, 2016, and increased efforts related to equipment rework, scope modifications,operational readiness and the related additional labor costschallenges in support of start-up and operational readinesscommissioning activities as well as additional schedule costs through June 30, 2016. The current estimatewhich includes costs through June 30, 2016.the cost of repairs and modifications to the refractory lining inside the gasifiers. Any extension of the in-service date beyond JuneSeptember 30, 2016 is currently estimated to result in additional base costs of approximately $25 million to $30$35 million per month, which includes maintaining necessary levels of start-up labor, materials, and fuel, as well as operational resources required to execute start-up and commissioning activities. However, additional costs may be required for remediation of any further equipment and/or design issues identified. Any extension of the in-service date with respect to the Kemper IGCC beyond JuneSeptember 30, 2016 would also increase costs for the Cost Cap Exceptions, which are not subject to the $2.88 billion cost cap established by the Mississippi PSC. These costs include AFUDC, which is currently estimated to total approximately $12$14 million per month, as well as carrying costs and operating expenses on Kemper IGCC assets placed in service and consulting and legal fees. Beginning in the third quarter 2015, in connection with the implementationfees of interim rate recovery, certain of these ongoing project costs are being expensed, with the remainder being deferred as regulatory assets and are estimated to total approximately $6$2 million per month. For additional information, see "2015 Rate Case" herein.
Mississippi Power’sPower's analysis of the time needed to complete the start-up and commissioning activities for the Kemper IGCC will continue until the remaining Kemper IGCC assets are placed in service. Further cost increases and/or extensions of the in-service date with respect to the Kemper IGCC may result from factors including, but not limited to, labor costs and productivity, adverse weather conditions, shortages and inconsistent quality of equipment, materials, and labor, contractor or supplier delay, non-performance under constructionoperating or other agreements, operational readiness, including specialized operator training and required site safety programs, unforeseen engineering or design problems, start-up activities for this first-of-a-kind technology (including major equipment failure and system integration), and/or operational performance (including additional costs to satisfy any operational parameters ultimately adopted by the Mississippi PSC). In subsequent periods, any further changes in the estimated costs to complete construction and start-up of the Kemper IGCC subject to the $2.88 billion cost cap, net of the Initial DOE Grants and excluding the Cost Cap Exceptions, will be reflected in Southern Company's statements of income and Mississippi Power's statements of operationsincome and these changes could be material.
Rate Recovery of Kemper IGCC Costs
See "FERC Matters" herein for additional information regarding Mississippi Power's MRA cost based tariff relating to recovery of a portion of the Kemper IGCC costs from Mississippi Power's wholesale customers. Rate recovery of the retail portion of the Kemper IGCC is subject to the jurisdiction of the Mississippi PSC. See Note (G) under "Unrecognized Tax Benefits – Section 174 Research and Experimental Deduction" for additional tax information related to the Kemper IGCC.
The ultimate outcome of the rate recovery matters discussed herein, including the resolution of legal challenges, determinations of prudency, and the specific manner of recovery of prudently-incurred costs, cannot be determined at this time, but could have a material impact on Southern Company's and Mississippi Power's results of operations, financial condition, and liquidity.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
2012 MPSC CPCN Order
The 2012 MPSC CPCN Order included provisions relating to both Mississippi Power's recovery of financing costs during the course of construction of the Kemper IGCC and Mississippi Power's recovery of costs following the date the Kemper IGCC is placed in service. With respect to recovery of costs following the in-service date of the Kemper IGCC, the 2012 MPSC CPCN Order provided for the establishment of operational cost and revenue parameters based upon assumptions in Mississippi Power's petition for the CPCN. Mississippi Power expects the Mississippi PSC to apply operational parameters in connection with the evaluation of the 2015 Rate Case (as defined below) and any alternativefuture proceedings related to the operation of the Kemper
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
IGCC. To the extent the Mississippi PSC determines the Kemper IGCC does not meet the operational parameters ultimately adopted by the Mississippi PSC or Mississippi Power incurs additional costs to satisfy such parameters, there could be a material adverse impact on Southern Company's or Mississippi Power's financial statements.
2013 Settlement AgreementMPSC Rate Order
In January 2013, Mississippi Power entered into a settlement agreement with the Mississippi PSC that among other things, establishedwas intended to establish the process for resolving matters regarding cost recovery related to the Kemper IGCC (2013 Settlement Agreement). Under the 2013 Settlement Agreement, Mississippi Power agreed to limit the portion of prudently-incurred Kemper IGCC costs to be included in retail rate base to the $2.4 billion certificated cost estimate, plus the Cost Cap Exceptions, but excluding AFUDC, and any other costs permitted or determined to be excluded from the $2.88 billion cost cap by the Mississippi PSC. The 2013 Settlement Agreement also allowed Mississippi Power to secure alternate financing for costs not otherwise recovered in any Mississippi PSC rate proceedings contemplated by the 2013 Settlement Agreement. The Court found the 2013 Settlement Agreement unenforceable due to a lack of public notice for the related proceedings. See "2015 Mississippi Supreme Court Decision" herein for additional information.
Legislation to authorize a multi-year rate plan and legislation to provide for alternate financing through securitization of up to $1.0 billion of prudently-incurred costs was enacted into law in 2013. Mississippi Power's intent under the 2013 Settlement Agreement was to securitize (1) prudently-incurred costs in excess of the certificated cost estimate and up to the $2.88 billion cost cap, net of the DOE Grants and excluding the Cost Cap Exceptions, (2) accrued AFUDC, and (3) other prudently-incurred costs, which include carrying costs from the estimated in-service date until securitization is finalized and other costs not included in Mississippi Power's 2013 revision to the proposed rate recovery plan filed with the Mississippi PSC for the Kemper IGCC for cost recovery through 2020 (2013 Rate Mitigation Plan) as approved by the Mississippi PSC. The Court's decision did not impact Mississippi Power's ability to utilize alternate financing through securitization, the 2012 MPSC CPCN Order, or the February 2013 legislation. See "2015 Mississippi Supreme Court Decision" herein for additional information.
2013 MPSC Rate Order
Consistent with the terms of the 2013 Settlement Agreement, inIn March 2013, the Mississippi PSC issued a rate order approving retail rate increases of 15% effective March 19, 2013 and 3% effective January 1, 2014, which collectively were designed to collect $156 million annually beginning in 2014 (2013 MPSC Rate Order) to be used to mitigate customer rate impacts after the Kemper IGCC is placed in service. service, based on a mirror CWIP methodology (Mirror CWIP rate).
Because the 2013 MPSC Rate Order did not provide for the inclusion of CWIP in rate base as permitted by the Baseload Act, Mississippi Power continues to record AFUDC on the Kemper IGCC through the in-service date.IGCC. Mississippi Power will not record AFUDC on any additional costs of the Kemper IGCC that exceed the $2.88 billion cost cap, except for Cost Cap Exception amounts. Mississippi Power will continue to record AFUDC through the in-service date until directed to do otherwise by the Mississippi PSC.
In August 2014, Mississippi Power provided an analysis of the costs and benefits of placing the combined cycle and the associated common facilities portion of the Kemper IGCC in service, including the expected accounting treatment for costs and revenues associated with the operation of the combined cycle. In addition, Mississippi Power requested confirmation of Mississippi Power's accounting treatment by the Mississippi PSC of the continued accrual of AFUDC through the in-service date of the remainder of the Kemper IGCC. See "Regulatory Assets and
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Liabilities" for additional information. Any action by the Mississippi PSC that is inconsistent with the treatment requested by Mississippi Power could have a material impact on the results of operations, financial condition, and liquidity of Southern Company and Mississippi Power.
2015 Mississippi Supreme Court Decision
On February 12, 2015, the Court issued its decision in the legal challenge to the 2013 MPSC Rate Order. The Court reversed the 2013 MPSC Rate Order based on, among other things, its findings that (1) the Mirror CWIP rate treatment was not provided for under the Baseload Act and (2) the Mississippi PSC should have determined the prudence of Kemper IGCC costs before approving rate recovery through the 2013 MPSC Rate Order. The Court also found the 2013 Settlement Agreement unenforceable due to a lack of public notice for the related proceedings. Mississippi Power and the Mississippi PSC each filed motions for rehearing, both of which were denied on June 11, 2015. The Court's ruling remanded the matter to the Mississippi PSC to (1) fix by order the rates that were in existence prior to the 2013 MPSC Rate Order, (2) fix no rate increases until the Mississippi PSC is in compliance with the Court's ruling, and (3) enter an order refunding amounts collected under the 2013 MPSC Rate Order. On July 7, 2015, the Mississippi PSC ordered that the Mirror CWIP rate be terminated effective July 20, 2015. Through July 2015 billings, Mississippi Power had collectedand required the fourth quarter 2015 refund of the $342 million through ratescollected under the 2013 MPSC Rate Order, and had accrued $27 million inalong with associated carrying costs through September 30, 2015. Refunds will begin in early November 2015.of $29 million. The Court's decision did not impact the 2012 MPSC CPCN Order or the February 2013 legislation described below.
2015 Rate Case
As a result of the 2015 Mississippi Supreme Court decision, and the Mirror CWIP refund, the 2013 Rate Mitigation Plan is no longer viable. See "2015 Mississippi Supreme Court Decision" herein for additional information. On May 15, 2015, Mississippi Power sought alternate rate recovery and filed a rate case (2015 Rate Case) with the Mississippi PSC. This filing included three alternative rate proposals requesting an increase in retail rates and charges in connection with the Kemper IGCC: (i) a traditional rate case, (ii) a rate mitigation plan fixing rates through 2017 (RMP 2017), and (iii) a rate mitigation plan fixing rates through 2019 (RMP 2019). In light of the Mississippi PSC's July 7, 2015 order, RMP 2019 is no longer viable as originally proposed by Mississippi Power.
Furthermore, on July 10, 2015, Mississippi Power filed a supplemental filing including a request for interim rates (Supplemental Notice) with the Mississippi PSC in response to the July 7, 2015 order of the Mississippi PSC. The Supplemental Noticewhich presented an additional alternative rate proposal (In-Service Asset Proposal) for consideration by the Mississippi PSC. The In-Service Asset Proposal is based upon the test period of June 2015 to May 2016, is designed to recover Mississippi Power's costs associated with the Kemper IGCC assets that are commercially operational and currently providing service to customers (the transmission facilities, combined cycle, natural gas pipeline, and water pipeline) and other related costs, and iscosts. On August 13, 2015, the Mississippi PSC approved the implementation of the requested interim rates designed to collect approximately $159 million annually. The Supplemental Notice requested thatannually effective with the first billing cycle in September 2015, subject to refund and certain other conditions.
On December 3, 2015, the Mississippi PSC issued the In-Service Asset Proposal be implemented immediately as interim rates, subject to refund, until such time asRate Order adopting in full a stipulation entered into between Mississippi Power and the Mississippi PSC renders a final decision onPublic Utilities Staff (MPUS) regarding the In-Service Asset Proposal and requested that the Mississippi PSC establish a scheduling order for consideration of permanent rates under theProposal. The In-Service Asset Proposal.
Rate Order provided for retail rate recovery of an annual revenue requirement of approximately $126 million, based on Mississippi Power's actual average capital structure, with a maximum common equity percentage of 49.733%, a 9.225% return on common equity, and actual embedded interest costs. The revenue requirements set forthIn-Service Asset Rate Order also included a prudence finding of all costs in the alternative rate proposals excludestipulated revenue requirement calculation for the in-service assets. The stipulated revenue requirement excluded the costs of the Kemper IGCC related to the 15% undivided interest that was previously projected to be purchased by SMEPA. See "Termination of Proposed Sale of Undivided InterestMississippi Power continues to SMEPA" herein for additional information.
On August 13, 2015, the Mississippi PSC approved the implementation of interim rates that became effectiveevaluate its alternatives with respect to its investment and related costs associated with the first billing cycle in September (on August 19), subject to refund and certain other conditions. In addition, the Mississippi PSC reserved the right to modify or terminate the interim rates based upon a material change in circumstances. Through September 30, 2015, Mississippi Power had recognized $28 million under the interim rates. The Mississippi PSC is scheduled to issue a final order on or before December 8, 2015 related to permanent rates for the In-Service Asset Proposal.15% undivided interest.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
With implementation of the new rate on December 17, 2015, the interim rates were terminated and, in March 2016, Mississippi Power completed customer refunds of approximately $11 million for the difference between the interim rates collected and the permanent rates.
Pursuant to the In-Service Asset Rate Order, Mississippi Power is required to file a subsequent rate request within 18 months. As part of the filing, Mississippi Power expects to request recovery of certain costs that the Mississippi PSC had excluded from the revenue requirement calculation.
On February 25, 2016, Greenleaf CO2 Solutions, LLC filed a notice of appeal of the In-Service Asset Rate Order with the Court. On May 5, 2016, the Court dismissed the appeal.
Legislation to authorize a multi-year rate plan and legislation to provide for alternate financing through securitization of up to $1.0 billion of prudently-incurred costs was enacted into law in 2013. Mississippi Power expects to securitize prudently-incurred qualifying facility costs in excess of the certificated cost estimate of $2.4 billion. Qualifying facility costs include, but are not limited to, pre-construction costs, construction costs, regulatory costs, and accrued AFUDC. The Court's decision regarding the 2013 MPSC Rate Order did not impact Mississippi Power's ability to utilize alternate financing through securitization or the February 2013 legislation.
Mississippi Power expects to seek additional rate relief to address recovery of the remaining Kemper IGCC assets. In addition to current estimated costs at September 30, 2015March 31, 2016 of $6.43$6.58 billion, Mississippi Power anticipates that it will incur additional costs after the Kemper IGCC in-service date until the Kemper IGCC cost recovery approach is finalized. These costs include, but are not limited to, regulatory costs and additional carrying costs which could be material. Recovery of these costs would be subject to approval by the Mississippi PSC.
Prudence Reviews
The Mississippi PSC's review of Kemper IGCC costs is ongoing. In August 2014, the Mississippi PSC ordered that a consolidated prudence determination of all Kemper IGCC costs be completed after the entire project has been placed in service and has demonstrated availability for a reasonable period of time as determined by the Mississippi PSC and the Mississippi Public Utilities Staff (MPUS). The Mississippi PSC has encouraged the parties to work in good faith to settle contested issues and Mississippi Power is working to reach a mutually acceptable resolution. See "2015 Mississippi Supreme Court Decision" and "2015 Rate Case" herein for additional information.
Regulatory Assets and Liabilities
Consistent with the treatment of non-capital costs incurred during the pre-construction period, the Mississippi PSC issued an accounting order in 2011 granting Mississippi Power the authority to defer all non-capital Kemper IGCC-related costs to a regulatory asset through the in-service date, subject to review of such costs by the Mississippi PSC. Such costs include, but are not limited to, carrying costs on Kemper IGCC assets currently placed in service, costs associated with Mississippi PSC and MPUS consultants, prudence costs, legal fees, and operating expenses associated with assets placed in service.
In August 2014, Mississippi Power requested confirmation by the Mississippi PSC of Mississippi Power's authority to defer all operating expenses associated with the operation of the combined cycle subject to review of such costs by the Mississippi PSC. In addition, Mississippi Power is authorized to accrue carrying costs on the unamortized balance of such regulatory assets at a rate and in a manner to be determined by the Mississippi PSC in future cost recovery mechanism proceedings. Beginning in the third quarter 2015, in connection with the implementation of interim rates, Mississippi Power began expensing certain ongoing project costs and certain debt carrying costs (associated with assets placed in service and other non-construction work in progressnon-CWIP accounts) that previously were deferred as regulatory assets and began amortizing certain regulatory assets associated with assets placed in service and consulting and legal fees over a 24-month period.fees. The amortization periods for these regulatory assets vary from two years to 10 years as set forth in the In-Service Asset Rate Order. As of September 30, 2015,March 31, 2016, the balance associated with these regulatory assets was $117 million. The amortization period for these regulatory assets$120 million, of which $22 million is subject to the Mississippi PSC’s final orderincluded in the 2015 Rate Case.current assets. Other regulatory assets associated with the remainder of the Kemper IGCC totaled $91$98 million as of September 30, 2015.March 31, 2016. The amortization period for these assets is expected to be determined by the Mississippi PSC in future rate proceedings following completion of construction and start-up of the Kemper IGCC and related prudence reviews.
Also see "2015 Mississippi Supreme Court Decision"See "2013 MPSC Rate Order" herein for information related to the July 7, 2015 Mississippi PSC order terminating the Mirror CWIP rate and requiring refund of collections under Mirror CWIP.
See Note 1 to the financial statements of Southern Company and Mississippi Power under "Regulatory Assets and Liabilities" in Item 8 of the Form 10-K for additional information.
The In-Service Asset Rate Order requires Mississippi Power to submit an annual true-up calculation of its actual cost of capital, compared to the stipulated total cost of capital, with the first occurring as of May 31, 2016. As of
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
March 31, 2016, Mississippi Power recorded a related regulatory liability of approximately $3 million. See "2015 Rate Case" herein for additional information.
Lignite Mine and CO2 Pipeline Facilities
In conjunction with the Kemper IGCC, Mississippi Power will own the lignite mine and equipment and has acquired and will continue to acquire mineral reserves located around the Kemper IGCC site. The mine started commercial operation in June 2013.
In 2010, Mississippi Power executed a 40-year management fee contract with Liberty Fuels Company, LLC (Liberty Fuels), a wholly-owned subsidiary of The North American Coal Corporation, which developed, constructed, and is operating and managing the mining operations. The contract with Liberty Fuels is effective through the end of the mine reclamation. As the mining permit holder, Liberty Fuels has a legal obligation to
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
perform mine reclamation and Mississippi Power has a contractual obligation to fund all reclamation activities. In addition to the obligation to fund the reclamation activities, Mississippi Power currently provides working capital support to Liberty Fuels through cash advances for capital purchases, payroll, and other operating expenses. See Note 1 to the financial statements of Mississippi Power under "Asset Retirement Obligations and Other Costs of Removal" and "Variable Interest Entities" in Item 8 of the Form 10-K for additional information.
In addition, Mississippi Power has constructed and will operate the CO2 pipeline for the planned transport of captured CO2 for use in enhanced oil recovery. Mississippi Power has entered into agreements with Denbury Onshore (Denbury), a subsidiary of Denbury Resources Inc., and Treetop Midstream Services, LLC (Treetop), an affiliate of Tellus Operating Group, LLC and a subsidiary of Tengrys, LLC, pursuant to which Denbury will purchase 70% of the CO2 captured from the Kemper IGCC and Treetop will purchase 30% of the CO2 captured from the Kemper IGCC. The agreements with Denbury and Treetop provide Denbury and Treetop with termination rights as Mississippi Power has not satisfied its contractual obligation to deliver captured CO2 by May 11, 2015. Since May 11, 2015, Mississippi Power has been engaged in ongoing discussions with its off-takers regarding the status of the CO2 delivery schedule as well as other issues related to the respectiveCO2 agreements. As a result of discussions with Treetop, on August 3, 2015, Mississippi Power agreed to amend certain provisions of their agreement that do not affect pricing or minimum purchase quantities. Potential requirements imposed on CO2 off-takers under the Clean Power Plan (if ultimately enacted in its current form, pending resolution of litigation) and the potential adverse financial impact of low oil prices on the off-takers increase the risk that the CO2 contracts may be terminated or materially modified. Any termination or material modification of these agreements could result in a material reduction in future chemical product salesMississippi Power's revenues and could have a material financial impact on Mississippi Power to the extent Mississippi Power is not able to enter into other similar contractual arrangements. Additionally, if the contracts remain in place, sustained oil price reductions could result in significantly lower revenues than Mississippi Power forecasted to be available to offset customer rate impacts, which could have a material impact on Mississippi Power's financial statements.
The ultimate outcome of these matters cannot be determined at this time.
Termination of Proposed Sale of Undivided Interest to SMEPACivil Lawsuit
In 2010 and as amended in 2012,On April 26, 2016, a complaint against Mississippi Power was filed in Harrison County Circuit Court by Biloxi Freezing & Processing Inc., Gulfside Casino Partnership, and SMEPA entered into an asset purchase agreement (APA) whereby SMEPA agreed to purchase a 15% undivided interest in the Kemper IGCC. On May 20, 2015, SMEPA notifiedJohn Carlton Dean. The plaintiffs allege that Mississippi Power of its termination ofviolated the APA between Mississippi PowerUnfair Trade Practices Act and SMEPA. Mississippi Power previously received a total of $275 million of deposits from SMEPA that were requiredconcealed, falsely represented, and failed to be returned to SMEPA with interest in connection withfully disclose important facts concerning the termination of the APA. On June 3, 2015, Southern Company, pursuant to its guarantee obligation, returned approximately $301 million to SMEPA. Subsequently, Mississippi Power issued an 18-month promissory note in the aggregate principal amount of approximately $301 million to Southern Company.
Investment Tax Credits
The IRS allocated $279 million (Phase II) of Internal Revenue Code Section 48A tax credits to Mississippi Power in connection with the Kemper IGCC. These tax credits are dependent upon meeting the IRS certification requirements, including an in-service date no later than April 19, 2016cost and the capture and sequestration (via enhanced oil recovery) of at least 65%of the CO2 produced by the Kemper IGCC during operations in accordance with the Internal Revenue Code. Through September 30, 2015, Southern Company and Mississippi Power had recorded tax benefits totaling $276 million for the Phase II credits, of which approximately $235 million had been utilized. While the in-service date for the remainderschedule of the Kemper IGCC is currently expectedand that Mississippi Power's alleged breaches interfered with and destroyed economically advantageous relationships between the plaintiffs and their current and prospective business associates. The plaintiffs seek unspecified actual damages and punitive damages as well as attorney's fees, costs, and interest. The plaintiffs also seek an injunction to occur in the first half of 2016,prevent any Kemper IGCC costs from being charged to customers through electric rates. Mississippi Power now anticipates the in-service date to occur subsequent to April 19, 2016, butbelieves this legal challenge has not madeno merit; however, an adverse outcome in this proceeding could impact Southern Company's results of operations, financial condition, and liquidity and could have a final determination to that effect. Due to this uncertainty, Southern Companymaterial impact on Mississippi Power's results of operations, financial condition, and liquidity. Mississippi Power have reflected these tax credits as unrecognized tax benefitswill vigorously defend the matter, and reclassified the Phase II credits to a current liability on their September 30, 2015 balance sheets, with no impact to net income. Repayment to the IRS would occur with the quarterly estimated tax payment following a final determination that the in-service date would occur subsequent to April 19, 2016. Any cash funding requirements necessary for Mississippi Power to make this repayment are expected to be provided by Southern Company. See Note (G) herein under "Unrecognized Tax Benefits – Investment Tax Credits" for additional information. The ultimate outcome of this tax matter cannot be determined at this time.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| |
| (C) | FAIR VALUE MEASUREMENTS |
As of March 31, 2016, assets and liabilities measured at fair value on a recurring basis during the period, together with their associated level of the fair value hierarchy, were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using | | | | |
| As of March 31, 2016: | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Net Asset Value as a Practical Expedient (NAV) | | Total |
| | (in millions) |
| Southern Company | | | | | | | | | |
| Assets: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 12 |
| | $ | — |
| | $ | — |
| | $ | 12 |
|
| Interest rate derivatives | — |
| | 33 |
| | — |
| | — |
| | 33 |
|
Nuclear decommissioning trusts(a) | 624 |
| | 898 |
| | — |
| | 16 |
| | 1,538 |
|
| Cash equivalents | 503 |
| | — |
| | — |
| | — |
| | 503 |
|
| Other investments | 9 |
| | — |
| | 1 |
| | — |
| | 10 |
|
| Total | $ | 1,136 |
| | $ | 943 |
| | $ | 1 |
| | $ | 16 |
| | $ | 2,096 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 201 |
| | $ | — |
| | $ | — |
| | $ | 201 |
|
| Interest rate derivatives | — |
| | 193 |
| | — |
| | — |
| | 193 |
|
| Total | $ | — |
| | $ | 394 |
| | $ | — |
| | $ | — |
| | $ | 394 |
|
| | | | | | | | | | |
| Alabama Power | | | | | | | | | |
| Assets: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
Nuclear decommissioning trusts(b) | | | | | | | | |
|
|
| Domestic equity | 365 |
| | 67 |
| | — |
| | — |
| | 432 |
|
| Foreign equity | 46 |
| | 48 |
| | — |
| | — |
| | 94 |
|
| U.S. Treasury and government agency securities | — |
| | 25 |
| | — |
| | — |
| | 25 |
|
| Corporate bonds | 11 |
| | 137 |
| | — |
| | — |
| | 148 |
|
| Mortgage and asset backed securities | — |
| | 21 |
| | — |
| | — |
| | 21 |
|
| Private Equity | — |
| | — |
| | — |
| | 16 |
| | 16 |
|
| Other | — |
| | 9 |
| | — |
| | — |
| | 9 |
|
| Cash equivalents | 321 |
| | — |
| | — |
| | — |
| | 321 |
|
| Total | $ | 743 |
| | $ | 310 |
| | $ | — |
| | $ | 16 |
| | $ | 1,069 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 49 |
| | $ | — |
| | $ | — |
| | $ | 49 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Section 174 Research and Experimental Deduction
Southern Company, on behalf of Mississippi Power, reflected deductions for research and experimental (R&E) expenditures related to the Kemper IGCC in its federal income tax calculations for 2013, 2014, and 2015. In May 2015, Southern Company amended its 2008 through 2013 federal income tax returns to include deductions for Kemper IGCC-related R&E expenditures. Due to the uncertainty related to this tax position, Southern Company and Mississippi Power had unrecognized tax benefits associated with these R&E deductions totaling approximately $414 million as of September 30, 2015. See Note 5 to the financial statements of Southern Company and Mississippi Power under "Unrecognized Tax Benefits" in Item 8 of the Form 10-K and Note (G) herein under "Unrecognized Tax Benefits – Section 174 Research and Experimental Deduction" for additional information. The ultimate outcome of this tax matter cannot be determined at this time. |
| | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using | | | | |
| As of March 31, 2016: | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Net Asset Value as a Practical Expedient (NAV) | | Total |
| | (in millions) |
| Georgia Power | | | | | | | | | |
| Assets: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | 4 |
|
| Interest rate derivatives | — |
| | 14 |
| | — |
| | — |
| | 14 |
|
Nuclear decommissioning trusts(b) (c) | | | | | | | | | |
| Domestic equity | 180 |
| | 1 |
| | — |
| | — |
| | 181 |
|
| Foreign equity | — |
| | 115 |
| | — |
| | — |
| | 115 |
|
| U.S. Treasury and government agency securities | — |
| | 111 |
| | — |
| | — |
| | 111 |
|
| Municipal bonds | — |
| | 66 |
| | — |
| | — |
| | 66 |
|
| Corporate bonds | — |
| | 146 |
| | — |
| | — |
| | 146 |
|
| Mortgage and asset backed securities | — |
| | 145 |
| | — |
| | — |
| | 145 |
|
| Other | 22 |
| | 7 |
| | — |
| | — |
| | 29 |
|
| Cash equivalents | 57 |
| | — |
| | — |
| | — |
| | 57 |
|
| Total | $ | 259 |
| | $ | 609 |
| | $ | — |
| | $ | — |
| | $ | 868 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | 11 |
|
| | | | | | | | | | |
| Gulf Power | | | | | | | | | |
| Assets: | | | | | | | | | |
| Cash equivalents | $ | 20 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 20 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 94 |
| | $ | — |
| | $ | — |
| | $ | 94 |
|
| Interest rate derivatives | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
| Total | $ | — |
| | $ | 99 |
| | $ | — |
| | $ | — |
| | $ | 99 |
|
| | | | | | | | | | |
| Mississippi Power | | | | | | | | | |
| Assets: | | | | | | | | | |
| Cash equivalents | $ | 24 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 24 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 44 |
| | $ | — |
| | $ | — |
| | $ | 44 |
|
| | | | | | | | | | |
| Southern Power | | | | | | | | | |
| Assets: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 5 |
|
| Interest rate derivatives | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Cash equivalents | 39 |
| | — |
| | — |
| | — |
| | 39 |
|
| Total | $ | 39 |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 45 |
|
| Liabilities: | | | | | | | | | |
| Energy-related derivatives | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| |
(C) | FAIR VALUE MEASUREMENTS |
As of September 30, 2015, assets and liabilities measured at fair value on a recurring basis during the period, together with the associated level of the fair value hierarchy, were as follows:
|
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements Using | | |
| As of September 30, 2015: | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| | | (in millions) |
| Southern Company | | | | | | | | |
| Assets: | | | | | | | | |
| Energy-related derivatives | | $ | — |
| | $ | 4 |
| | $ | — |
| | $ | 4 |
|
| Interest rate derivatives | | — |
| | 20 |
| | — |
| | 20 |
|
Nuclear decommissioning trusts(a) | | 587 |
| | 869 |
| | 16 |
| | 1,472 |
|
| Cash equivalents | | 747 |
| | — |
| | — |
| | 747 |
|
| Other investments | | 9 |
| | — |
| | 1 |
| | 10 |
|
| Total | | $ | 1,343 |
| | $ | 893 |
| | $ | 17 |
| | $ | 2,253 |
|
| Liabilities: | | | | | | | | |
| Energy-related derivatives | | $ | — |
| | $ | 211 |
| | $ | — |
| | $ | 211 |
|
| Interest rate derivatives | | — |
| | 36 |
| | — |
| | 36 |
|
| Total | | $ | — |
| | $ | 247 |
| | $ | — |
| | $ | 247 |
|
| | | | | | | | | |
| Alabama Power | | | | | | | | |
| Assets: | | | | | | | | |
| Energy-related derivatives | | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
|
Nuclear decommissioning trusts(b) | | | | | | | | |
| Domestic equity | | 346 |
| | 72 |
| | — |
| | 418 |
|
| Foreign equity | | 46 |
| | 45 |
| | — |
| | 91 |
|
| U.S. Treasury and government agency securities | | — |
| | 28 |
| | — |
| | 28 |
|
| Corporate bonds | | 10 |
| | 126 |
| | — |
| | 136 |
|
| Mortgage and asset backed securities | | — |
| | 18 |
| | — |
| | 18 |
|
| Other | | — |
| | 4 |
| | 16 |
| | 20 |
|
| Cash equivalents | | 484 |
| | — |
| | — |
| | 484 |
|
| Total | | $ | 886 |
| | $ | 295 |
| | $ | 16 |
| | $ | 1,197 |
|
| Liabilities: | | | | | | | | |
| Energy-related derivatives | | $ | — |
| | $ | 54 |
| | $ | — |
| | $ | 54 |
|
| Interest rate derivatives | | — |
| | 17 |
| | — |
| | 17 |
|
| Total | | $ | — |
| | $ | 71 |
| | $ | — |
| | $ | 71 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| | | Fair Value Measurements Using | | |
| As of September 30, 2015: | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
| | | (in millions) |
| Georgia Power | | | | | | | | |
| Assets: | | | | | | | | |
| Energy-related derivatives | | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
|
| Interest rate derivatives | | — |
| | 9 |
| | — |
| | 9 |
|
Nuclear decommissioning trusts(b) (c) | | | | | | | | |
| Domestic equity | | 169 |
| | 1 |
| | — |
| | 170 |
|
| Foreign equity | | — |
| | 109 |
| | — |
| | 109 |
|
| U.S. Treasury and government agency securities | | — |
| | 112 |
| | — |
| | 112 |
|
| Municipal bonds | | — |
| | 74 |
| | — |
| | 74 |
|
| Corporate bonds | | — |
| | 166 |
| | — |
| | 166 |
|
| Mortgage and asset backed securities | | — |
| | 109 |
| | — |
| | 109 |
|
| Other | | 16 |
| | 5 |
| | — |
| | 21 |
|
| Cash equivalents | | 37 |
| | — |
| | — |
| | 37 |
|
| Total | | $ | 222 |
| | $ | 587 |
| | $ | — |
| | $ | 809 |
|
| Liabilities: | | | | | | | | |
| Energy-related derivatives | | $ | — |
| | $ | 16 |
| | $ | — |
| | $ | 16 |
|
| Interest rate derivatives | | — |
| | 19 |
| | — |
| | 19 |
|
| Total | | $ | — |
| | $ | 35 |
| | $ | — |
| | $ | 35 |
|
| | | | | | | | | |
| Gulf Power | | | | | | | | |
| Assets: | | | | | | | | |
| Cash equivalents | | $ | 18 |
| | $ | — |
| | $ | — |
| | $ | 18 |
|
| Liabilities: | | | | | | | | |
| Energy-related derivatives | | — |
| | 94 |
| | — |
| | 94 |
|
| | | | | | | | | |
| Mississippi Power | | | | | | | | |
| Assets: | | | | | | | | |
| Cash equivalents | | $ | 64 |
| | $ | — |
| | $ | — |
| | $ | 64 |
|
| Liabilities: | | | | | | | | |
| Energy-related derivatives | | — |
| | 47 |
| | — |
| | 47 |
|
| | | | | | | | | |
| Southern Power | | | | | | | | |
| Assets: | | | | | | | | |
| Interest rate derivatives | | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
|
| Cash equivalents | | 103 |
| | — |
| | — |
| | 103 |
|
| Total | | $ | 103 |
| | $ | 1 |
| | $ | — |
| | $ | 104 |
|
| |
| (a) | For additional detail, see the nuclear decommissioning trusts sections for Alabama Power and Georgia Power in this table. |
| |
| (b) | Excludes receivables related to investment income, pending investment sales, payables related to pending investment purchases, and currencies. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| |
| (c) | Includes the investment securities pledged to creditors and collateral received and excludes payables related to the securities lending program. As of September 30, 2015,March 31, 2016, approximately $69$58 million of the fair market value of Georgia Power's nuclear decommissioning trust funds' securities were on loan to creditors under the funds' managers' securities lending program. |
Southern Company, Alabama Power, and Georgia Power continue to elect the option to fair value investment securities held in the nuclear decommissioning trust funds. For the three months ended March 31, 2016 and March 31, 2015, the change in fair value of the funds, including reinvested interest and dividends and excluding the funds' expenses, increased by $20 million and $33 million, respectively, at Southern Company. For the three months ended March 31, 2016 and March 31, 2015, Alabama Power recorded an increase in fair value of $11 million and $15 million, respectively, as an increase in regulatory liabilities related to its asset retirement obligations. For the three months ended March 31, 2016 and March 31, 2015, Georgia Power recorded an increase in fair value of $9 million and $18 million, respectively, as a reduction of its regulatory asset related to its asset retirement obligations.
Valuation Methodologies
The energy-related derivatives primarily consist of over-the-counter financial products for natural gas and physical power products, including, from time to time, basis swaps. These are standard products used within the energy industry and are valued using the market approach. The inputs used are mainly from observable market sources, such as forward natural gas prices, power prices, implied volatility, and overnight index swap interest rates. Interest rate derivatives are also standard over-the-counter financial products that are valued using theobservable market approach. Inputs fordata and assumptions commonly used by market participants. The fair value of interest rate derivatives reflect the net present value of expected payments and receipts under the swap agreement based on the market's expectation of future interest rates. Additional inputs to the net present value calculation may include LIBOR interest rates, interest rate futures contracts,the contract terms, counterparty credit risk, and occasionally, implied volatility of interest rate options. The interest rate derivatives are categorized as Level 2 under Fair Value Measurements as these inputs are based on observable data and valuations of similar instruments. See Note (H) herein for additional information on how these derivatives are used.
The NRC requires licensees of commissioned nuclear power reactors to establish a plan for providing reasonable assurance of funds for future decommissioning. For fair value measurements of the investments within the nuclear decommissioning trusts, external pricing vendors are designated for each asset class with each security specifically assigned a primary pricing source. For investments held within commingled funds, fair value is determined at the end of each business day through the net asset value, which is established by obtaining the underlying securities' individual prices from the primary pricing source. A market price secured from the primary source vendor is then evaluated by management in its valuation of the assets within the trusts. As a general approach, fixed income market pricing vendors gather market data (including indices and market research reports) and integrate relative credit information, observed market movements, and sector news into proprietary pricing models, pricing systems, and mathematical tools. Dealer quotes and other market information, including live trading levels and pricing analysts' judgment,judgments, are also obtained when available.
Investments See Note 1 to the financial statements of Southern Company, Alabama Power, and Georgia Power under "Nuclear Decommissioning" in private equity and real estate within Alabama Power's nuclear decommissioning trusts, which are reflected as "Other" in the table above, are generally classified as Level 3, as the underlying assets typically do not have observable inputs. The fund manager values these assets using various inputs and techniques depending on the natureItem 8 of the underlying investments. The fair value of partnerships is determined by aggregating the value of the underlying assets.Form 10-K for additional information.
"Other investments" include investments that are not traded in the open market. The fair value of these investments have been determined based on market factors including comparable multiples and the expectations regarding cash flows and business plan executions.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
As of September 30, 2015,March 31, 2016, the fair value measurements of private equity investments held in the nuclear decommissioning trust that are calculated at net asset value per share (or its equivalent), as a practical expedient, as well as the nature and risks of those investments, were as follows:
|
| | | | | | | | | | |
| As of September 30, 2015: | | Fair Value | | Unfunded Commitments | | Redemption Frequency | | Redemption Notice Period |
| | | (in millions) | | | | | | |
| Southern Company | | | | | | |
| Nuclear decommissioning trusts: | | | | | | | | |
| Foreign equity funds | | $ | 109 |
| | None | | Monthly | | 5 days |
| Equity - commingled funds | | 45 |
| | None | | Daily | | Daily |
| Debt - commingled funds | | 16 |
| | None | | Daily | | 5 days |
| Other - commingled funds | | 5 |
| | None | | Daily | | Not applicable |
| Other - money market funds | | 16 |
| | None | | Daily | | Not applicable |
| Trust-owned life insurance | | 112 |
| | None | | Daily | | 15 days |
| Cash equivalents: | | | | | | | | |
| Money market funds | | 747 |
| | None | | Daily | | Not applicable |
| Alabama Power | | | | | | | | |
| Nuclear decommissioning trusts: | | | | | | | | |
| Equity - commingled funds | | $ | 45 |
| | None | | Daily | | Daily |
| Debt - commingled funds | | 16 |
| | None | | Daily | | 5 days |
| Trust-owned life insurance | | 112 |
| | None | | Daily | | 15 days |
| Cash equivalents: | | | | | | | | |
| Money market funds | | 484 |
| | None | | Daily | | Not applicable |
| Georgia Power | | | | | | | | |
| Nuclear decommissioning trusts: | | | | | | | | |
| Foreign equity funds | | $ | 109 |
| | None | | Monthly | | 5 days |
| Other - commingled funds | | 5 |
| | None | | Daily | | Not applicable |
| Other - money market funds | | 16 |
| | None | | Daily | | Not applicable |
| Cash equivalents: | | | | | | | | |
| Money market funds | | 37 |
| | None | | Daily | | Not applicable |
| Gulf Power | | | | | | | | |
| Cash equivalents: | | | | | | | | |
| Money market funds | | $ | 18 |
| | None | | Daily | | Not applicable |
| Mississippi Power | | | | | | | | |
| Cash equivalents: | | | | | | | | |
| Money market funds | | $ | 64 |
| | None | | Daily | | Not applicable |
| Southern Power | | | | | | | | |
| Cash equivalents: | | | | | | | | |
| Money market funds | | $ | 103 |
| | None | | Daily | | Not applicable |
|
| | | | | | | | | | | | |
| As of March 31, 2016: | | Fair Value | | Unfunded Commitments | | Redemption Frequency | | Redemption Notice Period |
| | | (in millions) | | | | |
| Southern Company | | $ | 16 |
| | $ | 29 |
| | Not Applicable | | Not Applicable |
| Alabama Power | | $ | 16 |
| | $ | 29 |
| | Not Applicable | | Not Applicable |
The NRC requires licensees of commissioned nuclear power reactors to establishPrivate equity funds include a plan for providing reasonable assurance of funds for future decommissioning. Alabama Power and Georgia Power have external trust funds (the Funds) to comply with the NRC's regulations. The foreign equity fund in Georgia Power's nuclear decommissioning trusts seeks to provide long-term capital appreciation. In pursuing this investment objective, the foreign equity fund primarilyfund-of-funds that invests in high-quality private equity funds across several market sectors, a diversified portfolio of equity securities of foreign companies, including thosefund that invests in emerging markets. These equity securities may include, but are not limited to, common stocks, preferred stocks, real estate investment trusts, convertible securities, depositary receipts (including American depositary receipts, European depositary receipts,assets, and global depositary receipts), and rights and warrantsa fund that acquires companies to buy common stocks. Georgia Power may withdraw all or a portion of its investment on the last business day of each month subject to a minimum
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
withdrawal of $1 million, provided that a minimum investment of $10 million remains. If notices of withdrawal exceed 20% of the aggregate value of the foreigncreate resale value. Private equity fund, then the foreign equity fund's board may refuse to permit the withdrawal of all such investments and may scale down the amounts to be withdrawn pro rata and may further determine that any withdrawal that has been postponed will have priority on the subsequent withdrawal date.
The other-commingled funds and other-money market funds in Georgia Power's nuclear decommissioning trusts are invested primarily in a diversified portfolio of high-quality, short-term, liquid debt securities. The funds represent cash collateral received under the Funds' managers' securities lending program and/or excess cash held within each separate investment account. The primary objective of the funds is to provide a high level of current income consistent with stability of principal and liquidity. The funds invest primarily in, but not limited to, commercial paper, floating and variable rate demand notes, debt securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, time deposits, repurchase agreements, municipal obligations, notes, and other high-quality short-term liquid debt securities that mature in 90 days or less. Redemptions are available on a same day basis up to the full amount of the investment in the fund. See Note 1 to the financial statements of Southern Company and Georgia Power under "Nuclear Decommissioning" in Item 8 of the Form 10-K for additional information.
Alabama Power's nuclear decommissioning trusts include investments in Trust-Owned Life Insurance (TOLI). The taxable nuclear decommissioning trusts invest in the TOLI in order to minimize the impact of taxes on the portfolios and can draw on the value of the TOLI through death proceeds, loans against the cash surrender value, and/or the cash surrender value, subject to legal restrictions. The amounts reported in the table above reflect the fair value of investments the insurer has made in relation to the TOLI agreements. The nuclear decommissioning trusts do not ownhave redemption rights. Distributions from these funds will be received as the underlying investments but the fair value of the investments approximates the cash surrender value of the TOLI policies. The investments made by the insurer are in commingled funds. These commingled funds, along with other equity and debt commingled funds held in Alabama Power's nuclear decommissioning trusts, primarily include investments in domestic and international equity securities and predominantly high-quality fixed income securities. These fixed income securities may include U.S. Treasury and government agency fixed income securities, non-U.S. government and agency fixed income securities, domestic and foreign corporate fixed income securities, and mortgage and asset backed securities. The passively managed funds seek to replicate the performance of a related index. The actively managed funds seek to exceed the performance of a related index through security analysis and selection. See Note 1 to the financial statements of Southern Company and Alabama Power under "Nuclear Decommissioning" in Item 8 of the Form 10-K for additional information.
Southern Company, Alabama Power, and Georgia Power continue to elect the option to fair value investment securities held in the nuclear decommissioning trust funds. For the three and nine months ended September 30, 2015, the change in fair value of the funds, including reinvested interest and dividends and excluding the funds' expenses, decreased by $65 million and $33 million, respectively, at Southern Company. For the three and nine months ended September 30, 2015, Alabama Power recorded a decrease in fair value of $39 million and $19 million, respectively, as a decrease in regulatory liabilities. For the three and nine months ended September 30, 2015, Georgia Power recorded a decrease in fair value of $26 million and $14 million, respectively, as a reduction of its regulatory asset related to its ARO.
The money market funds are short-term investments of excess funds inliquidated. Liquidations are expected to occur at various money market mutual funds, which are portfolios of short-term debt securities. The money market funds are regulated bytimes over the SEC and typically receive the highest rating from credit rating agencies. Regulatory and rating agency requirements for money market funds include minimum credit ratings and maximum maturities for individual securities and a maximum weighted average portfolio maturity. Redemptions are available on a same day basis up to the full amount of the investment in the money market funds.next ten years.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
As of September 30, 2015,March 31, 2016, other financial instruments for which the carrying amount did not equal fair value were as follows:
| | | | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | | (in millions) | | (in millions) |
| Long-term debt, including securities due within one year: | | | | | | | | |
| Southern Company | | $ | 25,489 |
| | $ | 26,099 |
| | $ | 28,341 |
| | $ | 29,827 |
|
| Alabama Power | | $ | 7,295 |
| | $ | 7,558 |
| | $ | 7,089 |
| | $ | 7,688 |
|
| Georgia Power | | $ | 9,887 |
| | $ | 10,231 |
| | $ | 10,549 |
| | $ | 11,400 |
|
| Gulf Power | | $ | 1,310 |
| | $ | 1,338 |
| | $ | 1,303 |
| | $ | 1,366 |
|
| Mississippi Power | | $ | 2,273 |
| | $ | 2,228 |
| | $ | 3,209 |
| | $ | 2,938 |
|
| Southern Power | | $ | 2,142 |
| | $ | 2,149 |
| | $ | 3,123 |
| | $ | 3,171 |
|
The fair values are determined using Level 2 measurements and are based on quoted market prices for the same or similar issues or on the current rates available to the registrants.
Earnings per Share
For Southern Company, the only difference in computing basic and diluted earnings per share is attributable to awards outstanding under the stock option and performance share plans. See Note 8 to the financial statements of Southern Company in Item 8 of the Form 10-K for information on the stock option and performance share plans. The effect of both stock options and performance share award units was determined using the treasury stock method. Shares used to compute diluted earnings per share were as follows:
| | | | | Three Months Ended September 30, 2015 |
| Three Months Ended September 30, 2014 | | Nine Months Ended September 30, 2015 | | Nine Months Ended September 30, 2014 | | Three Months Ended March 31, 2016 |
| Three Months Ended March 31, 2015 |
| | | (in millions) | | (in millions) |
| As reported shares | | 910 |
| | 898 |
| | 910 |
| | 894 |
| | 916 |
| | 910 |
|
| Effect of options and performance share award units | | 2 |
| | 4 |
| | 3 |
| | 4 |
| | 6 |
| | 5 |
|
| Diluted shares | | 912 |
| | 902 |
| | 913 |
| | 898 |
| | 922 |
| | 915 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Stock options and performance share award units that were not included in the diluted earnings per share calculation because they were anti-dilutive were 15 million and 1 millionimmaterial for the three and nine months ended September 30, 2015, respectively,March 31, 2016 and were 16 million and 17 million for the three and nine months ended September 30, 2014, respectively.2015.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Changes in Stockholders' Equity
The following table presents year-to-date changes in stockholders' equity of Southern Company:
| | | | Number of Common Shares | | Common
Stockholders'
Equity | | Preferred and Preference Stock of Subsidiaries | | | | Total
Stockholders'
Equity | Number of Common Shares | | Common
Stockholders'
Equity | | Preferred and Preference Stock of Subsidiaries | | | | Total
Stockholders'
Equity |
| | Issued | | Treasury | | Noncontrolling Interest(*) | | Issued | | Treasury | | Noncontrolling Interests(*) | |
| | (in thousands) | | (in millions) | (in thousands) | | (in millions) |
| Balance at December 31, 2015 | | 915,073 |
| | (3,352 | ) | | $ | 20,592 |
| | $ | 609 |
| | $ | 781 |
| | $ | 21,982 |
|
| Consolidated net income attributable to Southern Company | | — |
| | — |
| | 485 |
| | — |
| | — |
| | 485 |
|
| Other comprehensive income (loss) | | — |
| | — |
| | (114 | ) | | — |
| | — |
| | (114 | ) |
| Stock issued | | 6,572 |
| | — |
| | 270 |
| | — |
| | — |
| | 270 |
|
| Stock-based compensation | | — |
| | — |
| | 60 |
| | — |
| | — |
| | 60 |
|
| Cash dividends on common stock | | — |
| | — |
| | (497 | ) | | — |
| | — |
| | (497 | ) |
| Contributions from noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | 129 |
| | 129 |
|
| Distributions to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
| Purchase of membership interests from noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | (129 | ) | | (129 | ) |
| Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Other | | — |
| | (35 | ) | | 1 |
| | — |
| | — |
| | 1 |
|
| Balance at March 31, 2016 | | 921,645 |
| | (3,387 | ) | | $ | 20,797 |
| | $ | 609 |
| | $ | 778 |
| | $ | 22,184 |
|
| | | | | | | | | | | | | |
| Balance at December 31, 2014 | 908,502 |
| | (725 | ) | | $ | 19,949 |
| | $ | 756 |
| | $ | 221 |
| | $ | 20,926 |
| 908,502 |
| | (725 | ) | | $ | 19,949 |
| | $ | 756 |
| | $ | 221 |
| | $ | 20,926 |
|
| Net income after dividends on preferred and preference stock | — |
| | — |
| | 2,096 |
| | — |
| | — |
| | 2,096 |
| |
| Consolidated net income attributable to Southern Company | | — |
| | — |
| | 508 |
| | — |
| | — |
| | 508 |
|
| Other comprehensive income (loss) | — |
| | — |
| | (7 | ) | | — |
| | — |
| | (7 | ) | — |
| | — |
| | (15 | ) | | — |
| | — |
| | (15 | ) |
| Stock issued | 3,769 |
| | — |
| | 136 |
| | — |
| | — |
| | 136 |
| 3,094 |
| | — |
| | 112 |
| | — |
| | — |
| | 112 |
|
| Stock-based compensation | — |
| | — |
| | 78 |
| | — |
| | — |
| | 78 |
| — |
| | — |
| | 53 |
| | — |
| | — |
| | 53 |
|
| Stock repurchased, at cost | — |
| | (2,599 | ) | | (115 | ) | | — |
| | — |
| | (115 | ) | — |
| | (2,599 | ) | | (115 | ) | | — |
| | — |
| | (115 | ) |
| Cash dividends on common stock | — |
| | — |
| | (1,465 | ) | | — |
| | — |
| | (1,465 | ) | — |
| | — |
| | (478 | ) | | — |
| | — |
| | (478 | ) |
| Preference stock redemption | — |
| | — |
| | — |
| | (150 | ) | | — |
| | (150 | ) | |
| Contributions from noncontrolling interest | — |
| | — |
| | — |
| | — |
| | 429 |
| | 429 |
| |
| Distributions to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | (13 | ) | | (13 | ) | |
| Net income attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | 13 |
| | 13 |
| |
| Other | — |
| | (8 | ) | | (8 | ) | | 3 |
| | — |
| | (5 | ) | — |
| | (11 | ) | | 3 |
| | — |
| | — |
| | 3 |
|
| Balance at September 30, 2015 | 912,271 |
| | (3,332 | ) | | $ | 20,664 |
| | $ | 609 |
| | $ | 650 |
| | $ | 21,923 |
| |
| | | | | | | | | | | | | |
| Balance at December 31, 2013 | 892,733 |
| | (5,647 | ) | | $ | 19,008 |
| | $ | 756 |
| | $ | — |
| | $ | 19,764 |
| |
| Net income after dividends on preferred and preference stock | — |
| | — |
| | 1,680 |
| | — |
| | — |
| | 1,680 |
| |
| Other comprehensive income (loss) | — |
| | — |
| | 6 |
| | — |
| | — |
| | 6 |
| |
| Treasury stock re-issued | — |
| | 4,996 |
| | 225 |
| | — |
| �� | — |
| | 225 |
| |
| Stock issued | 7,781 |
| | — |
| | 332 |
| | — |
| | — |
| | 332 |
| |
| Stock repurchased, at cost | — |
| | — |
| | (5 | ) | | — |
| | — |
| | (5 | ) | |
| Cash dividends on common stock | — |
| | — |
| | (1,390 | ) | | — |
| | — |
| | (1,390 | ) | |
| Other | — |
| | (51 | ) | | 1 |
| | — |
| | — |
| | 1 |
| |
| Balance at September 30, 2014 | 900,514 |
| | (702 | ) | | $ | 19,857 |
| | $ | 756 |
| | $ | — |
| | $ | 20,613 |
| |
| Balance at March 31, 2015 | | 911,596 |
| | (3,335 | ) | | $ | 20,017 |
| | $ | 756 |
| | $ | 221 |
| | $ | 20,994 |
|
| |
| (*) | Primarily related to Southern Power Company. |
Stock Repurchased
On March 2, 2015, Southern Company announced a program to repurchase up to 20 million shares of Southern Company common stock to offset all or a portion of the incremental shares issued under its employee and director equity compensation plans, including through stock option exercises, until December 31, 2017. Under this program, approximately 2.6 million shares were repurchased through September 30, 2015 at a total cost of approximately
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
$115 million. There were no repurchases during the three months ended September 30, 2015 and no further repurchases under this program are anticipated.
Bank Credit Arrangements
Bank credit arrangements provide liquidity support to the registrants' commercial paper borrowings and the traditional operating companies' variable rate pollution control revenue bonds. The amount of variable rate pollution control revenue bonds outstanding requiring liquidity support as of September 30, 2015March 31, 2016 was approximately $1.8 billion (comprised of approximately $810 million at Alabama Power, $872$868 million at Georgia Power, $82 million at Gulf Power, and $40 million at Mississippi Power). In addition, at September 30, 2015,March 31, 2016, the traditional operating companies had approximately $354$269 million (comprised of approximately $200$167 million at Alabama Power, $121$69 million at Georgia Power, and $33 million at Gulf Power) of fixed rate pollution control revenue bonds outstanding that were required to be reoffered within the next 12 months, of which $120 million were remarketed by Alabama Power subsequent to September 30, 2015.months. See Note 6 to the financial statements of each registrant under "Bank Credit Arrangements" in Item 8 of the Form 10-K for additional information. See "Financing Activities" herein for additional information.
The following table outlines the committed credit arrangements by company as of September 30, 2015:March 31, 2016:
| | | | | Expires | | | | Executable Term Loans | | Due Within One Year | Expires | | | | Executable Term Loans | | Due Within One Year |
| Company | | 2015 |
| | 2016 |
| | 2017 | | 2018 | | 2020 | | Total | | Unused | | One Year | | Two Years | | Term Out | | No Term Out | 2016 |
| 2017 | 2018 | 2020 | | Total | | Unused | | One Year | | Two Years | | Term Out | | No Term Out |
| | | (in millions) | | | | (in millions) | | (in millions) | | (in millions) | | | | (in millions) | | (in millions) | | (in millions) |
Southern Company (a) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,000 |
| | $1,250 | | $ | 2,250 |
| | $ | 2,250 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | 1,000 |
| $1,250 | | $ | 2,250 |
| | $ | 2,250 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Alabama Power | | — |
| | 40 |
| | — |
| | 500 |
| | 800 |
| | 1,340 |
| | 1,339 |
| | — |
| | — |
| | — |
| | 40 |
| 40 |
| — |
| 500 |
| 800 |
| | 1,340 |
| | 1,340 |
| | — |
| | — |
| | — |
| | 40 |
|
| Georgia Power | | — |
| | — |
| | — |
| | — |
| | 1,750 |
| | 1,750 |
| | 1,732 |
| | — |
| | — |
| | — |
| | — |
| — |
| — |
| — |
| 1,750 |
| | 1,750 |
| | 1,732 |
| | — |
| | — |
| | — |
| | — |
|
| Gulf Power | | 20 |
| | 225 |
| | 30 |
| | — |
| | — |
| | 275 |
| | 275 |
| | 50 |
| | — |
| | 50 |
| | 195 |
| 75 |
| 40 |
| 165 |
| — |
| | 280 |
| | 280 |
| | 45 |
| | — |
| | 45 |
| | 40 |
|
Mississippi Power (b) | | 15 |
| | 220 |
| | — |
| | — |
| | — |
| | 235 |
| | 210 |
| | 30 |
| | 30 |
| | 60 |
| | 175 |
| 205 |
| — |
| — |
| — |
| | 205 |
| | 180 |
| | 30 |
| | 15 |
| | 45 |
| | 160 |
|
Southern Power (c) | | — |
| | — |
| | — |
| | — |
| | 600 |
| | 600 |
| | 567 |
| | — |
| | — |
| | — |
| | — |
| |
Southern Power Company (b) | | — |
| — |
| — |
| 600 |
| | 600 |
| | 560 |
| | — |
| | — |
| | — |
| | — |
|
| Other | | — |
| | 70 |
| | — |
| | — |
| | — |
| | 70 |
| | 70 |
| | — |
| | — |
| | — |
| | 70 |
| 70 |
| — |
| — |
| — |
| | 70 |
| | 70 |
| | 20 |
| | — |
| | 20 |
| | 50 |
|
| Total | | $ | 35 |
| | $ | 555 |
| | $ | 30 |
| | $ | 1,500 |
| | $4,400 | | $ | 6,520 |
| | $ | 6,443 |
| | $ | 80 |
| | $ | 30 |
| | $ | 110 |
| | $ | 480 |
| $ | 390 |
| $ | 40 |
| $ | 1,665 |
| $4,400 | | $ | 6,495 |
| | $ | 6,412 |
| | $ | 95 |
| | $ | 15 |
| | $ | 110 |
| | $ | 290 |
|
| |
| (a) | Excludes the $8.1 billion Bridge Agreement entered into in September 2015 that will be funded only to the extent necessary to provide financing for the Merger as discussed herein. |
| |
| (b) | Subsequent to September 30, 2015, a $15 million bank credit arrangement expired pursuant toExcluding its terms. |
| |
(c) | Excludes the Tranquillitysubsidiaries. See "Project Credit Agreement assumed with the acquisition of Tranquillity on August 28, 2015, which is non-recourse to Southern Power Company, the proceeds of which are being used to finance project costs related to Tranquillity's solar facility currently under construction in California. SeeFacilities" below and Note (I) to the Condensed Financial Statements hereinunder "Southern Power" for additional information regarding Tranquillity.information. |
As reflected in the table above, in August 2015, Southern Company, Alabama Power, Georgia Power, and Southern Power Company each amended and restated their multi-year credit arrangements, which, among other things, extended the maturity dates from 2018 to 2020. Southern Company and Southern Power Company increased their borrowing ability under these arrangements to $1.25 billion from $1.0 billion and to $600 million from $500 million, respectively. Georgia Power increased its borrowing ability by $150 million under its facility maturing in 2020, and terminated its aggregate $150 million facilities maturing in 2016. In September 2015, Southern Company entered into an additional multi-year credit arrangement for $1.0 billion with a maturity date of 2018, which contains a covenant that limits debt levels to 70% of total capitalization, as defined in the agreement. Additionally, Southern Company amended its existing multi-year credit arrangement to increase the limit on debt levels to 70% from 65% of total capitalization, as defined in the agreement. Alabama Power entered into a new $500 million three-year credit arrangement which replaced a majority of Alabama Power's bi-lateral credit arrangements.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Subject to applicable market conditions, Southern Company and its subsidiaries expect to renew or replace their bank credit arrangements as needed, prior to expiration. In connection therewith, Southern Company and its subsidiaries may extend the maturity dates and/or increase or decrease the lending commitments thereunder.
Southern Company intends to initially fund the cash consideration for the Merger using approximately $7.0 billiona mix of debt and $1.0 billion of equity. Southern Company finances its capital needs on a portfolio basis and expects to issue approximately $2.0a minimum of $8.0 billion in debt prior to closing the Merger and a minimum of additional$1.2 billion in equity through 2019during 2016. This capital is expected to offset a portionprovide funding for the Merger, the proposed acquisition of PowerSecure International, Inc. (PowerSecure), and Southern Power and other Southern Company system capital projects. Total capital raised in 2016 may increase due to cash needed at the closing of the debt issued to fund the cash consideration for the Merger.Merger, settlement of hedges, and incremental investment opportunities, including additional Southern Power projects in excess of its current capital plans. In addition, Southern Company entered into the $8.1 billion Bridge Agreement on September 30, 2015 to provide financing for the Merger in the event long-term financing is not available.
The Bridge Agreement provides for total loan commitments in an aggregate amount of $8.1 billion to fund the payment of the cash consideration payable under the Merger Agreement and other cash payments required in connection with the consummation of the Merger, the Bridge Agreement and the borrowings thereunder, the other financing transactions related to the Merger, and the payment of fees and expenses incurred in connection with the foregoing. If funded, the loan under the Bridge Agreement will mature and be payable in full on the date that is 364 days after the funding of the commitments under the Bridge Agreement (Closing Date). As of September 30, 2015,March 31, 2016, Southern Company had no outstanding loans under the Bridge Agreement. See Note (I) under "Southern Company – Proposed Merger with AGL Resources" herein for additional information regarding the Merger. See Note 6 to the financial statements of Southern Company under "Bank Credit Arrangements" in Item 8 of the Form 10-K for additional information regarding the Bridge Agreement.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Southern Power Project Credit Facilities
In connection with the construction of solar facilities by RE Tranquillity LLC, RE Roserock LLC, and RE Garland Holdings LLC, indirect subsidiaries of Southern Power, each subsidiary entered into separate credit agreements (Project Credit Facilities), which are non-recourse to Southern Power (other than the subsidiary party to the agreement). Each Project Credit Facility provides (a) a senior secured construction loan credit facility, (b) a senior secured bridge loan facility, and (c) a senior secured letter of credit facility that is secured by the membership interests of the respective project company. Proceeds from the Project Credit Facilities are being used to finance project costs related to the respective solar facilities currently under construction. Each Project Credit Facility is secured by the assets of the applicable project subsidiary and membership interests of the applicable project subsidiary. The table below summarizes each Project Credit Facility as of March 31, 2016.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Project | | Maturity Date | | Construction Loan Facility | | Bridge Loan Facility | | Total | | Total Undrawn | | Letter of Credit Facility | | Total Undrawn |
| | | | | (in millions) |
| Tranquillity | | Earlier of COD or December 31, 2016 | | $ | 86 |
| | $ | 172 |
| | $ | 258 |
| | $ | 52 |
| | $ | 77 |
| | $ | 26 |
|
| Roserock | | Earlier of COD or November 30, 2016 | | 63 |
| | 180 |
| | 243 |
| | 121 |
| | 23 |
| | 16 |
|
| Garland | | Earlier of COD or November 30, 2016 | | 86 |
| | 308 |
| | 394 |
| | 309 |
| | 49 |
| | 32 |
|
| Total | | | | $ | 235 |
| | $ | 660 |
| | $ | 895 |
| | $ | 482 |
| | $ | 149 |
| | $ | 74 |
|
The Project Credit Facilities had total amounts outstanding as of March 31, 2016 of $413 million at a weighted average interest rate of 1.99%. For the three months ended March 31, 2016, these credit agreements had a maximum amount outstanding of $413 million, and an average amount outstanding of $260 million at a weighted average interest rate of 1.99%.
Financing Activities
The following table outlines the long-term debt financing activities for Southern Company and its subsidiaries for the first ninethree months of 2015:2016:
| | Company | Senior Note Issuances | | Senior Note Redemptions | | Revenue Bond Issuances and Reofferings of Purchased Bonds(a) | | Revenue
Bond
Maturities and
Repurchases | | Other Long-Term Debt Issuances | | Other Long-Term Debt Redemptions and Maturities(b) | Senior Note Issuances | | Senior Note Maturities and Redemptions | | Revenue
Bond
Maturities Redemptions and
Repurchases | | Other Long-Term Debt Issuances | | Other Long-Term Debt Redemptions and Maturities(b) |
| | (in millions) | (in millions) |
| Southern Company | $ | 600 |
| | $ | 400 |
| | $ | — |
| | $ | — |
| | $ | 400 |
| | $ | — |
| |
| Alabama Power | 975 |
| | 250 |
| | 80 |
| | 134 |
| | — |
| | — |
| $ | 400 |
| | $ | 200 |
| | $ | — |
| | $ | 45 |
| | $ | — |
|
| Georgia Power | — |
| | 525 |
| | 274 |
| | 268 |
| | 600 |
| | 20 |
| 650 |
| | 250 |
| | 4 |
| | — |
| | 1 |
|
| Gulf Power | — |
| | 60 |
| | 13 |
| | 13 |
| | — |
| | — |
| |
| Mississippi Power | — |
| | — |
| | — |
| | — |
| | — |
| | 352 |
| — |
| | — |
| | — |
| | 1,100 |
| | 426 |
|
| Southern Power | 650 |
| | 525 |
| | — |
| | — |
| | 400 |
| | 3 |
| — |
| | — |
| | — |
| | 2 |
| | 3 |
|
| Other | — |
| | — |
| | — |
| | — |
| | — |
| | 13 |
| — |
| | — |
| | — |
| | — |
| | 4 |
|
Elimination(c) | | — |
| | — |
| | — |
| | (200 | ) | | — |
|
| Total | $ | 2,225 |
| | $ | 1,760 |
| | $ | 367 |
| | $ | 415 |
| | $ | 1,400 |
| | $ | 388 |
| $ | 1,050 |
| | $ | 450 |
| | $ | 4 |
| | $ | 947 |
| | $ | 434 |
|
| |
| (a) | Includes a reoffering by Alabama Power of $80 million aggregate principal amount of revenue bonds purchasedSouthern Company and held since April 2015; reofferings by Georgia Power of $104.6 million and $65 million aggregate principal amount of revenue bonds purchased and held since 2013 and April 2015, respectively; and a reoffering by Gulf Power did not issue or redeem any long-term debt during the first three months of $13 million aggregate principal amount of revenue bonds purchased and held in July 2015. Also includes repurchases and reofferings by Georgia Power of $94.6 million and $10 million aggregate principal amount of revenue bonds in August 2015 in connection with optional tenders.2016. |
| |
| (b) | Includes reductions in capital lease obligations resulting from cash payments under capital leases. |
| |
| (c) | Intercompany loans from Southern Company to Mississippi Power eliminated in Southern Company's Consolidated Financial Statements. |
In June 2015, Southern Company issued $600 million aggregate principal amount of Series 2015A 2.750% Senior Notes due June 15, 2020. The proceeds were used to pay a portion of Southern Company's outstanding short-term indebtedness and for other general corporate purposes.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
In September 2015, Southern Company entered into a $400 million aggregate principal amount 18-month floating rate bank loan bearing interest based on one-month LIBOR. The proceeds were used for working capital and other general corporate purposes.
Subsequent to September 30, 2015, Southern Company issued $1.0 billion aggregate principal amount of Series 2015A 6.25% Junior Subordinated Notes due October 15, 2075. The proceeds were used to pay a portion of Southern Company's outstanding short-term indebtedness and for other general corporate purposes.
Alabama Power
In March 2015,January 2016, Alabama Power issued $550$400 million aggregate principal amount of Series 2015A 3.750%2016A 4.30% Senior Notes due March 1, 2045.January 2, 2046. The proceeds were used to redeem $250repay at maturity $200 million aggregate principal amount of Alabama Power's Series DD 5.65%FF 5.20% Senior Notes due MarchJanuary 15, 20352016 and for general corporate purposes, including Alabama Power's continuous construction program.program.
In April 2015,March 2016, Alabama Power purchasedentered into three bank term loan agreements with maturity dates of March 2021, in an aggregate principal amount of $45 million, one of which bears interest at 2.38% per annum and held $80two of which bear interest based on three-month LIBOR.
Georgia Power
In March 2016, Georgia Power issued $325 million aggregate principal amount of Industrial Development Board of the City of Mobile, Alabama Pollution Control Revenue Bonds (Alabama Power Company Barry Plant Project), Series 2007-B. Alabama Power reoffered these bonds to the public in May 2015.
Also in2016A 3.25% Senior Notes due April 2015, Alabama Power issued $1751, 2026 and $325 million additional aggregate principal amount of its Series 2015A 3.750%2016B 2.40% Senior Notes due MarchApril 1, 2045 (Additional2021. An amount equal to the proceeds from the Series 2015A2016A 3.25% Senior Notes) andNotes due April 1, 2026 will be allocated to eligible green expenditures, including financing of or investments in solar power generation facilities or electric vehicle charging infrastructure, or payments under PPAs served by solar power or wind generation facilities. The proceeds from the Series 2016B 2.40% Senior Notes due April 1, 2021 were used to repay at maturity $250 million aggregate principal amount of itsGeorgia Power's Series 2015B 2.800%2013B Floating Rate Senior Notes due April 1, 2025 (Series 2015B Senior Notes). AMarch 15, 2016, to repay a portion of the proceeds of the Additional Series 2015A Senior NotesGeorgia Power's short-term indebtedness, and the Series 2015B Senior Notes were used in May 2015 to redeem 6.48 million shares ($162 million aggregate stated capital) of Alabama Power's 5.20% Class A Preferred Stock at a redemption price of $25 per share plus accrued and unpaid dividends to the redemption date, 4.0 million shares ($100 million aggregate stated capital) of Alabama Power's 5.30% Class A Preferred Stock at a redemption price of $25 per share plus accrued and unpaid dividends to the redemption date, and 6.0 million shares ($150 million aggregate stated capital) of Alabama Power's 5.625% Series Preference Stock at a redemption price of $25 per share plus accrued and unpaid dividends to the redemption date, and the remaining net proceeds were used for general corporate purposes, including AlabamaGeorgia Power's continuous construction program.
Georgia Power
In April 2015, Georgia Power purchased and held $65 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), Second Series 2008. Georgia Power reoffered these bonds to the public in May 2015.
In May 2015, Georgia Power reoffered to the public $104.6 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 2013, which had been previously purchased and held since 2013.
In June 2015, Georgia Power made additional borrowings under the FFB Credit Facility in an aggregate principal amount of $600 million. The interest rate applicable to the $600 million principal amount is 3.283% for an interest period that extends to the final maturity date of February 20, 2044. The proceeds were used to reimburse Georgia Power for Eligible Project Costs relating to the construction of Plant Vogtle Units 3 and 4. Georgia Power settled $350 million of interest rate swaps related to this borrowing for approximately $6 million, which will be amortized to interest expense over 10 years.
In August 2015, in connection with optional tenders, Georgia Power repurchased and reoffered to the public $94.6 million aggregate principal amount of Development Authority of Bartow County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Bowen Project), First Series 2009 and $10 million aggregate principal amount of Development Authority of Burke County (Georgia) Pollution Control Revenue Bonds (Georgia Power Company Plant Vogtle Project), First Series 2013.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Mississippi Power
In April 2015, Mississippi Power entered into two short-term floating rate bank loans with a maturity date of April 1,January 2016, in an aggregate principal amount of $475 million, bearing interest based on one-month LIBOR. The proceeds of these loans were used for the repayment of term loans in an aggregate principal amount of $275 million, working capital, and other general corporate purposes, including Mississippi Power's ongoing construction program. Mississippi Power also amended three outstanding floating rate bank loans for an aggregate principal amount of $425 million which, among other things, extended the maturity dates from various dates in 2015 to April 1, 2016.
In June 2015, Mississippi Power issued an 18-montha floating rate promissory note to Southern Company in an aggregate principal amount of up to $275 million, which matures on December 1, 2017, bearing interest based on one-month LIBOR. ThisAs of March 31, 2016, Mississippi Power had borrowed $100 million under this promissory note waswith a $50 million draw occurring on each of January 29, 2016 and March 14, 2016. In addition, on January 19, 2016, Mississippi Power borrowed $100 million from Southern Company pursuant to a promissory note issued in November 2015.
On March 8, 2016, Mississippi Power entered into an unsecured term loan agreement for an aggregate principal amount of approximately $301 million, the amount paid by Southern Company to SMEPA pursuant to Southern Company's guarantee of the return of SMEPA's deposits in connection with the termination of the APA. See Note (B) under "Integrated Coal Gasification Combined Cycle – Termination of Proposed Sale of Undivided Interest to SMEPA" herein for additional information.
Southern Power
In May 2015, Southern Power Company issued $350 million aggregate principal amount of Series 2015A 1.500% Senior Notes due June 1, 2018 and $300 million aggregate principal amount of Series 2015B 2.375% Senior Notes due June 1, 2020. The proceeds were used$1.2 billion to repay a portion of its outstanding short-termexisting indebtedness and for other general corporate purposes, including Southern Power's growth strategypurposes. Mississippi Power borrowed $900 million under the term loan agreement and continuous construction program,has the right to borrow the remaining $300 million on or before October 15, 2016, upon satisfaction of certain customary conditions. Mississippi Power used the initial proceeds to repay $900 million in maturing bank notes on March 8, 2016 and forexpects the remaining $300 million to be used to repay senior notes maturing in October 2016. The term loan pursuant to this agreement matures on April 1, 2018 and bears interest based on one-month LIBOR.
Also in March 2016, Mississippi Power renewed a portion of the repayment at maturity of $525$10 million aggregate principal amount of Southern Power Company's 4.875% Senior Notesshort-term note, which matures on July 15, 2015.
In August 2015, Southern Power Company entered into a $400 million aggregate principal amount 13-month floating rate bank loanJune 30, 2016, bearing interest based on one-monththree-month LIBOR. The proceeds were used for working capital and other general corporate purposes, including
Southern Power's growth strategy and continuous construction program.Power
During the ninethree months ended September 30, 2015,March 31, 2016, Southern Power prepaid $2.6Power's subsidiary repaid $3 million of long-term debt payable to Turner Renewable Energy, LLC.LLC (TRE) and borrowed $2 million due February 28, 2036 under promissory notes payable to TRE.
During the three months ended March 31, 2016, Southern Power's subsidiaries borrowed $276 million pursuant to the Project Credit Facilities at a weighted average interest rate of 1.99%. In addition, Southern Power's subsidiaries issued $8 million in letters of credit.
Southern Company has a defined benefit, trusteed, pension plan covering substantially all employees. The qualified pension plan is funded in accordance with requirements of the Employee Retirement Income Security Act of 1974,
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
as amended. No mandatory contributions to the qualified pension plan are anticipated for the year ending December 31, 2015.2016. Southern Company also provides certain defined benefit pension plans for a selected group of management and highly compensated employees. Benefits under these non-qualified pension plans are funded on a cash basis. In addition, Southern Company provides certain medical care and life insurance benefits for retired employees through other postretirement benefit plans. The traditional operating companies fund related other postretirement trusts to the extent required by their respective regulatory commissions.
See Note 2 to the financial statements of Southern Company, Alabama Power, Georgia Power, Gulf Power, and Mississippi Power in Item 8 of the Form 10-K for additional information.
Components of the net periodic benefit costs for the three months ended March 31, 2016 were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| Pension Plans | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power |
| | | (in millions) |
| Three Months Ended March 31, 2016 | | | | | | | | | | |
| Service cost | | $ | 62 |
| | $ | 14 |
| | $ | 17 |
| | $ | 3 |
| | $ | 3 |
|
| Interest cost | | 100 |
| | 24 |
| | 34 |
| | 5 |
| | 5 |
|
| Expected return on plan assets | | (187 | ) | | (46 | ) | | (64 | ) | | (9 | ) | | (9 | ) |
| Amortization: | | | | | | | | | | |
| Prior service costs | | 4 |
| | 1 |
| | 1 |
| | — |
| | — |
|
| Net (gain)/loss | | 38 |
| | 10 |
| | 14 |
| | 2 |
| | 2 |
|
| Net cost | | $ | 17 |
| | $ | 3 |
| | $ | 2 |
| | $ | 1 |
| | $ | 1 |
|
| Three Months Ended March 31, 2015 | | | | | | | | | | |
| Service cost | | $ | 64 |
| | $ | 15 |
| | $ | 18 |
| | $ | 3 |
| | $ | 3 |
|
| Interest cost | | 111 |
| | 26 |
| | 38 |
| | 5 |
| | 5 |
|
| Expected return on plan assets | | (181 | ) | | (45 | ) | | (63 | ) | | (8 | ) | | (8 | ) |
| Amortization: | | | | | | | | | | |
| Prior service costs | | 6 |
| | 2 |
| | 3 |
| | — |
| | — |
|
| Net (gain)/loss | | 54 |
| | 14 |
| | 19 |
| | 3 |
| | 3 |
|
| Net cost | | $ | 54 |
| | $ | 12 |
| | $ | 15 |
| | $ | 3 |
| | $ | 3 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Components of the net periodic benefit costs for the three and nine months ended September 30, 2015 and 2014 were as follows:
| | | Pension Plans | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | |
| Postretirement Benefits | | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power |
| | | (in millions) | | (in millions) |
| Three Months Ended September 30, 2015 | | | | | | | | | | | |
| Three Months Ended March 31, 2016 | | | | | | | | | | | |
| Service cost | | $ | 65 |
| | $ | 14 |
| | $ | 18 |
| | $ | 3 |
| | $ | 3 |
| | $ | 5 |
| | $ | 1 |
| | $ | 2 |
| | $ | — |
| | $ | — |
|
| Interest cost | | 111 |
| | 26 |
| | 38 |
| | 5 |
| | 5 |
| | 18 |
| | 5 |
| | 8 |
| | 1 |
| | 1 |
|
| Expected return on plan assets | | (181 | ) | | (44 | ) | | (62 | ) | | (8 | ) | | (8 | ) | | (14 | ) | | (6 | ) | | (6 | ) | | — |
| | — |
|
| Amortization: | | | | | | | | | | | | | | | | | | | | |
| Prior service costs | | 6 |
| | 2 |
| | 2 |
| | 1 |
| | — |
| | 2 |
| | 1 |
| | — |
| | — |
| | — |
|
| Net (gain)/loss | | 53 |
| | 14 |
| | 19 |
| | 2 |
| | 3 |
| | 3 |
| | — |
| | 2 |
| | — |
| | — |
|
| Net cost | | $ | 54 |
| | $ | 12 |
| | $ | 15 |
| | $ | 3 |
| | $ | 3 |
| | $ | 14 |
| | $ | 1 |
| | $ | 6 |
| | $ | 1 |
| | $ | 1 |
|
| Nine Months Ended September 30, 2015 | | | | | | | | | | | |
| Three Months Ended March 31, 2015 | | | | | | | | | | | |
| Service cost | | $ | 193 |
| | $ | 44 |
| | $ | 54 |
| | $ | 9 |
| | $ | 9 |
| | $ | 6 |
| | $ | 1 |
| | $ | 2 |
| | $ | — |
| | $ | — |
|
| Interest cost | | 333 |
| | 79 |
| | 115 |
| | 15 |
| | 16 |
| | 19 |
| | 5 |
| | 8 |
| | 1 |
| | 1 |
|
| Expected return on plan assets | | (543 | ) | | (133 | ) | | (188 | ) | | (24 | ) | | (25 | ) | | (15 | ) | | (6 | ) | | (6 | ) | | — |
| | — |
|
| Amortization: | | | | | | | | | | | | | | | | | | | | |
| Prior service costs | | 19 |
| | 5 |
| | 7 |
| | 1 |
| | 1 |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
|
| Net (gain)/loss | | 161 |
| | 41 |
| | 57 |
| | 7 |
| | 8 |
| | 5 |
| | — |
| | 3 |
| | — |
| | — |
|
| Net cost | | $ | 163 |
| | $ | 36 |
| | $ | 45 |
| | $ | 8 |
| | $ | 9 |
| | $ | 16 |
| | $ | 1 |
| | $ | 7 |
| | $ | 1 |
| | $ | 1 |
|
| Three Months Ended September 30, 2014 | | | | | | | | | | | |
| Service cost | | $ | 53 |
| | $ | 12 |
| | $ | 16 |
| | $ | 4 |
| | $ | 3 |
| |
| Interest cost | | 109 |
| | 26 |
| | 39 |
| | 4 |
| | 5 |
| |
| Expected return on plan assets | | (161 | ) | | (42 | ) | | (57 | ) | | (7 | ) | | (8 | ) | |
| Amortization: | | | | | | | | | | | |
| Prior service costs | | 6 |
| | 2 |
| | 2 |
| | — |
| | — |
| |
| Net (gain)/loss | | 28 |
| | 7 |
| | 10 |
| | 1 |
| | 2 |
| |
| Net cost | | $ | 35 |
| | $ | 5 |
| | $ | 10 |
| | $ | 2 |
| | $ | 2 |
| |
| Nine Months Ended September 30, 2014 | | | | | | | | | | | |
| Service cost | | $ | 160 |
| | $ | 36 |
| | $ | 47 |
| | $ | 8 |
| | $ | 8 |
| |
| Interest cost | | 326 |
| | 78 |
| | 115 |
| | 14 |
| | 15 |
| |
| Expected return on plan assets | | (484 | ) | | (126 | ) | | (170 | ) | | (21 | ) | | (22 | ) | |
| Amortization: | | | | | | | | | | | |
| Prior service costs | | 19 |
| | 5 |
| | 7 |
| | 1 |
| | 1 |
| |
| Net (gain)/loss | | 83 |
| | 23 |
| | 30 |
| | 3 |
| | 4 |
| |
| Net cost | | $ | 104 |
| | $ | 16 |
| | $ | 29 |
| | $ | 5 |
| | $ | 6 |
| |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | |
| Postretirement Benefits | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power |
| | | (in millions) |
| Three Months Ended September 30, 2015 | | | | | | | | | | |
| Service cost | | $ | 6 |
| | $ | 1 |
| | $ | 2 |
| | $ | 1 |
| | $ | — |
|
| Interest cost | | 20 |
| | 5 |
| | 9 |
| | — |
| | 1 |
|
| Expected return on plan assets | | (15 | ) | | (6 | ) | | (6 | ) | | — |
| | — |
|
| Amortization: | | | | | | | | | | |
| Prior service costs | | 1 |
| | 2 |
| | — |
| | — |
| | — |
|
| Net (gain)/loss | | 4 |
| | — |
| | 2 |
| | — |
| | — |
|
| Net cost | | $ | 16 |
| | $ | 2 |
| | $ | 7 |
| | $ | 1 |
| | $ | 1 |
|
| Nine Months Ended September 30, 2015 | | | | | | | | | | |
| Service cost | | $ | 17 |
| | $ | 4 |
| | $ | 5 |
| | $ | 1 |
| | $ | 1 |
|
| Interest cost | | 59 |
| | 15 |
| | 26 |
| | 2 |
| | 3 |
|
| Expected return on plan assets | | (44 | ) | | (19 | ) | | (18 | ) | | (1 | ) | | (1 | ) |
| Amortization: | | | | | | | | | | |
| Prior service costs | | 3 |
| | 3 |
| | — |
| | — |
| | — |
|
| Net (gain)/loss | | 13 |
| | 1 |
| | 8 |
| | — |
| | — |
|
| Net cost | | $ | 48 |
| | $ | 4 |
| | $ | 21 |
| | $ | 2 |
| | $ | 3 |
|
| Three Months Ended September 30, 2014 | | | | | | | | | | |
| Service cost | | $ | 5 |
| | $ | 1 |
| | $ | 2 |
| | $ | — |
| | $ | — |
|
| Interest cost | | 19 |
| | 5 |
| | 9 |
| | — |
| | — |
|
| Expected return on plan assets | | (14 | ) | | (6 | ) | | (6 | ) | | — |
| | — |
|
| Amortization: | | | | | | | | | | |
| Prior service costs | | 1 |
| | 1 |
| | — |
| | — |
| | — |
|
| Net (gain)/loss | | 1 |
| | — |
| | — |
| | — |
| | — |
|
| Net cost | | $ | 12 |
| | $ | 1 |
| | $ | 5 |
| | $ | — |
| | $ | — |
|
| Nine Months Ended September 30, 2014 | | | | | | | | | | |
| Service cost | | $ | 16 |
| | $ | 4 |
| | $ | 5 |
| | $ | 1 |
| | $ | 1 |
|
| Interest cost | | 59 |
| | 15 |
| | 26 |
| | 2 |
| | 2 |
|
| Expected return on plan assets | | (44 | ) | | (19 | ) | | (19 | ) | | (1 | ) | | (1 | ) |
| Amortization: | | | | | | | | | | |
| Prior service costs | | 3 |
| | 3 |
| | — |
| | — |
| | — |
|
| Net (gain)/loss | | 2 |
| | — |
| | 1 |
| | — |
| | — |
|
| Net cost | | $ | 36 |
| | $ | 3 |
| | $ | 13 |
| | $ | 2 |
| | $ | 2 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Current and Deferred Income Taxes
State of Georgia Tax Benefits
During the second quarter 2015, an agreement was reached with the Georgia Department of Revenue that will allow Southern Company to utilize a net operating loss carryforward over a four-year period beginning in 2017. Consequently, Southern Company reversed the related valuation allowance and recognized approximately $24 million in net tax benefits. See Note 5 to the financial statements of Southern Company under "Current and Deferred Income Taxes" in Item 8 of the Form 10-K for additional information.
Southern Power ITC Carryforwards
As of March 31, 2016, Southern Power had federal ITC carryforwards which are expected to result in $212$694 million of federal income tax benefits as of September 30, 2015, compared to $305$551 million as of December 31, 2014.2015. The carryforwards as of September 30, 2015 expire between 2031 and 2035 andMarch 31, 2016 begin expiring in 2034 but are expected to be utilized by the end of 2016.2021.
Effective Tax Rate
See Note 5 to the financial statements of each registrant in Item 8 of the Form 10-K for additional tax information.
Southern Company
Southern Company's effective tax rate is typically lower than the statutory rate due to employee stock plans' dividend deduction, non-taxable AFUDC equity, and federal income tax benefits from ITCs and PTCs.
Southern Company's effective tax rate was 30.8% for the three months ended March 31, 2016 compared to 34.3% for the corresponding period in 2015. The effective tax rate decrease was primarily due to increased federal income tax benefits from ITCs and PTCs and lower pre-tax earnings in 2016.
Mississippi Power
Mississippi Power's effective tax rate was (20.9)(838.7)% for the ninethree months ended September 30, 2015March 31, 2016 compared to (45.5)%10.0% for the corresponding period in 2014.2015. The increaseeffective tax rate decrease was primarily due to a reductionan increase in tax benefits related to the estimated probable losses on construction of the Kemper IGCC, and a decrease in non-taxable AFUDC equity related to placing the Kemper IGCC combined cycle in service in August 2014.IGCC.
Southern Power
Southern Power's effective tax rate was 6.9%(84.0)% for the ninethree months ended September 30, 2015March 31, 2016 compared to 14.4%25.8% for the corresponding period in 2014.2015. The effective tax rate decrease was primarily due to increased federal income tax benefits from ITCs related to ITCssolar projects expected to be placed in 2015, partially offset by higher pre-tax earningsservice in 20152016 and beneficial state income tax changesadditional PTCs related to wind projects in 2014.2016 compared to 2015.
Unrecognized Tax Benefits
See Note 5 to the financial statements of each registrant under "Unrecognized Tax Benefits" in Item 8 of the Form 10-K for additional information.
Changes during 20152016 for unrecognized tax benefits were as follows:
|
| | | | | | | | | | | |
| | Mississippi Power | | Southern Power | | Southern Company |
| | (in millions) |
| Unrecognized tax benefits as of December 31, 2014 | $ | 165 |
| | $ | 5 |
| | $ | 170 |
|
| Tax positions from current periods | 24 |
| | 7 |
| | 31 |
|
| Tax positions from prior periods | 459 |
| | (6 | ) | | 456 |
|
| Reductions due to settlements | — |
| | — |
| | — |
|
| Balance as of September 30, 2015 | $ | 648 |
| | $ | 6 |
| | $ | 657 |
|
|
| | | | | | | | | | | |
| | Mississippi Power | | Southern Power | | Southern Company |
| | (in millions) |
| Unrecognized tax benefits as of December 31, 2015 | $ | 421 |
| | $ | 8 |
| | $ | 433 |
|
| Tax positions from current periods | — |
| | 5 |
| | 5 |
|
| Balance as of March 31, 2016 | $ | 421 |
| | $ | 13 |
| | $ | 438 |
|
The tax positions from priorcurrent periods primarily relate primarily to 2008 through 2013 amended federal income tax returns that were filed to include deductions for Kemper IGCC-related R&E expenditures and deferred federal investment tax credits that no longer meet the more-likely-than-not recognition threshold. See "Section 174 Research and Experimental Deduction" and "Investment Tax Credits" herein for additional information.benefits from ITCs.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
The impact on the effective tax rate, if recognized, wasis as follows:
| | | | As of September 30, 2015 | | As of December 31, 2014 | As of March 31, 2016 | | As of December 31, 2015 |
| | Mississippi Power | | Southern Power | | Southern Company | | Southern Company | Mississippi Power | | Southern Power | | Southern Company | | Southern Company |
| | (in millions) | (in millions) |
| Tax positions impacting the effective tax rate | $ | (2 | ) | | $ | 6 |
| | $ | 7 |
| | $ | 10 |
| $ | (2 | ) | | $ | 13 |
| | $ | 15 |
| | $ | 10 |
|
| Tax positions not impacting the effective tax rate | 650 |
| | — |
| | 650 |
| | 160 |
| 423 |
| | — |
| | 423 |
| | 423 |
|
| Balance of unrecognized tax benefits | $ | 648 |
| | $ | 6 |
| | $ | 657 |
| | $ | 170 |
| $ | 421 |
| | $ | 13 |
| | $ | 438 |
| | $ | 433 |
|
The tax positions impacting the effective tax rate primarily relate to federal income tax benefits related tofrom ITCs. The tax positions not impacting the effective tax rate relate to deductions for Kemper IGCC-related R&E expendituresresearch and deferred federal investment tax credits that no longer meet the more-likely-than-not recognition threshold.experimental (R&E) expenditures. See "Section 174 Research and Experimental Deduction" and "Investment Tax Credits" hereinbelow for additional information. These amounts are presented on a gross basis without considering the related federal or state income tax impact.
Accrued interest for unrecognized tax benefits was immaterial for all periods presented.
All of the registrants classify interest on tax uncertainties as interest expense. None of the registrants accrued any penalties on uncertain tax positions.
It is reasonably possible that the amount of the unrecognized tax benefits could change within 12 months. The settlement of federal and state audits could impact the balances significantly. At this time, an estimate of the range of reasonably possible outcomes cannot be determined.
The IRS has finalized its audits of Southern Company's consolidated federal income tax returns through 2012. Southern Company has filed its 2013 and 2014 federal income tax returns and has received partial acceptance letters from the IRS; however, the IRS has not finalized its audits. Southern Company is a participant in the Compliance Assurance Process of the IRS. The audits for the Southern Company's state income tax returns have either been concluded, or the statute of limitations has expired, for years prior to 2011.
Section 174 Research and Experimental Deduction
Southern Company reduced tax payments for 2015, and included in its 2013 and 2014 consolidated federal income tax returnshas reflected deductions for R&E expenditures related to the Kemper IGCC. In May 2015, Southern CompanyIGCC in its federal income tax calculations since 2013 and has filed amended its 2008 through 2013 federal income tax returns for 2008 through 2013 to also include deductions for Kemper IGCC-related R&E expenditures.such deductions.
The Kemper IGCC is based on first-of-a-kind technology, and Southern Company and Mississippi Power believe that a significant portion of the plant costs qualify as deductible R&E expenditures under Internal Revenue Code Section 174. The IRS is currently reviewing the underlying support for the deduction, but has not completed its audit of these expenditures. Due to the uncertainty related to this tax position, Southern Company and Mississippi Power had related unrecognized tax benefits associated with these R&E deductions of approximately $414$423 million and associated interest of $7$12 million as of September 30, 2015.March 31, 2016. The ultimate outcome of this matter cannot be determined at this time.
Investment Tax Credits
The IRS allocated $279 million (Phase II) of Internal Revenue Code Section 48A tax credits to Mississippi Power in connection with the Kemper IGCC. These tax credits are dependent upon meeting the IRS certification requirements, including an in-service date no later than April 19, 2016 and the capture and sequestration (via enhanced oil recovery) of at least 65% of the CO2 produced by the Kemper IGCC during operations in accordance with the Internal Revenue Code. Through September 30, 2015, Southern Company and Mississippi Power had recorded tax benefits totaling $276 million for the Phase II credits, of which approximately $235 million had been utilized. While the in-service date for the remainder of the Kemper IGCC is currently expected to occur in the first half of 2016, Mississippi Power now anticipates the in-service date to occur subsequent to April 19, 2016, but has not made a final determination to that effect. As of September 30, 2015, the more-likely-than-not threshold had no longer been met for recognition of these benefits; therefore, Southern Company and Mississippi Power have reflected these tax credits as unrecognized tax benefits and reclassified the Phase II credits to a current liability on their September 30, 2015 balance sheets, with no impact to net income. Repayment to the IRS would occur with the quarterly estimated tax payment following a final determination that the in-service date would occur subsequent to April 19, 2016. The ultimate outcome of this matter cannot be determined at this time.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Southern Company, the traditional operating companies, and Southern Power are exposed to market risks, primarily commodity price risk and interest rate risk. To manage the volatility attributable to these exposures, each company nets its exposures, where possible, to take advantage of natural offsets and enters into various derivative transactions for the remaining exposures pursuant to each company's policies in areas such as counterparty exposure and risk management practices. Each 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
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
techniques including, but not limited to, market valuation, value at risk, stress testing, and sensitivity analysis. Derivative instruments are recognized at fair value in the balance sheets as either assets or liabilities and are presented on a gross basis. See Note (C) herein for additional information. In the statements of cash flows, the cash impacts of settled energy-related and interest rate derivatives are recorded as operating activities.
Energy-Related Derivatives
The traditional operating companies and Southern Power enter into energy-related derivatives to hedge exposures to electricity, gas, and other fuel price changes. However, due to cost-based rate regulations and other various cost recovery mechanisms, the traditional operating companies have limited exposure to market volatility in commodity fuel prices and prices of electricity. Each of the traditional operating companies manages fuel-hedging programs, implemented per the guidelines of their respective state PSCs, through the use of financial derivative contracts, which is expected to continue to mitigate price volatility. The traditional operating companies (with respect to wholesale generating capacity) and Southern Power have limited exposure to market volatility in commodity fuel prices and prices of electricity because their long-term sales contracts shift substantially all fuel cost responsibility to the purchaser. However, the traditional operating companies and Southern Power may be exposed to market volatility in energy-related commodity prices to the extent any uncontracted wholesale generating capacity is used to sell electricity.
To mitigate residual risks relative to movements in electricity prices, the traditional operating companies and Southern Power may enter into physical fixed-price contracts for the purchase and sale of electricity through the wholesale electricity market. To mitigate residual risks relative to movements in gas prices, the traditional operating companies and Southern Power may enter into fixed-price contracts for natural gas purchases; however, a significant portion of contracts are priced at market.
Energy-related derivative contracts are accounted for under one of three methods:
Regulatory Hedges — Energy-related derivative contracts which are designated as regulatory hedges relate primarily 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 the underlying fuel is used in operations and ultimately recovered through the respective fuel cost recovery clauses.
Cash Flow Hedges — Gains and losses on energy-related derivatives designated as cash flow hedges which(which are mainly used to hedge anticipated purchases and sales andsales) are initially deferred in OCI before being recognized in the statements of income in the same period as the hedged transactions are reflected in earnings.
Not Designated — 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.
Some energy-related derivative contracts require physical delivery as opposed to financial settlement, and this type of derivative is both common and prevalent within the electric industry. When an energy-related derivative contract is settled physically, any cumulative unrealized gain or loss is reversed and the contract price is recognized in the respective line item representing the actual price of the underlying goods being delivered.
At September 30, 2015,March 31, 2016, the net volume of energy-related derivative contracts for natural gas positions for the Southern Company system, together with the longest hedge date over which the respective entity is hedging its
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
exposure to the variability in future cash flows for forecasted transactions and the longest non-hedge date for derivatives not designated as hedges, were as follows:
| | | | | Net Purchased mmBtu | | Longest Hedge Date | | Longest Non-Hedge Date | | Net Purchased mmBtu | | Longest Hedge Date | | Longest Non-Hedge Date |
| | | (in millions) | | | | | | (in millions) | |
| Southern Company | | 221 | | 2020 | | 2017 | | 235 | | 2020 | | 2017 |
| Alabama Power | | 50 | | 2018 | |
| | 60 | | 2019 | | — |
| Georgia Power | | 50 | | 2017 | |
| | 65 | | 2019 | | — |
| Gulf Power | | 83 | | 2020 | |
| | 74 | | 2020 | | — |
| Mississippi Power | | 37 | | 2018 | |
| | 28 | | 2018 | | — |
| Southern Power | | 1 | | 2016 | | 2017 | | 8 | | 2016 | | 2017 |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
In addition to the volumes discussed in the above table, the traditional operating companies and Southern Power enter into physical natural gas supply contracts that provide the option to sell back excess gas due to operational constraints. The maximum expected volume of natural gas subject to such a feature is 54 million mmBtu for Southern Company 4 million mmBtu forand Georgia Power, and 1 million mmBtu for Southern Power.
For cash flow hedges, the amounts expected to be reclassified from accumulated OCI to earnings for the next 12-month period ending September 30, 2016March 31, 2017 are immaterial for all registrants.
Interest Rate Derivatives
Southern Company and certain subsidiaries may also enter into interest rate derivatives to hedge exposure to changes in interest rates. The derivatives employed as hedging instruments are structured to minimize ineffectiveness. Derivatives related to existing variable rate securities or forecasted transactions are accounted for as cash flow hedges where the effective portion of the derivatives' fair value gains or losses is recorded in OCI and is reclassified into earnings at the same time the hedged transactions affect earnings, with any ineffectiveness recorded directly to earnings. Derivatives related to existing fixed rate securities are accounted for as fair value hedges, where the derivatives' fair value gains or losses and hedged items' fair value gains or losses are both recorded directly to earnings, providing an offset, with any difference representing ineffectiveness. Fair value gains or losses on derivatives that are not designated or fail to qualify as hedges are recognized in the statements of income as incurred.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
At September 30, 2015,March 31, 2016, the following interest rate derivatives were outstanding:
| | | | | Notional Amount | | Interest Rate Received | | Weighted Average Interest Rate Paid | | Hedge Maturity Date | | Fair Value
Gain (Loss) at September 30, 2015 | | Notional Amount | | Interest Rate Received | | Weighted Average Interest Rate Paid | | Hedge Maturity Date | | Fair Value
Gain (Loss) at March 31, 2016 |
| | | (in millions) | | | | | | | | (in millions) | | (in millions) | | | | | | | | (in millions) |
| Cash Flow Hedges of Forecasted Debt | Cash Flow Hedges of Forecasted Debt | | | Cash Flow Hedges of Forecasted Debt | | |
| Alabama Power | | $ | 200 |
| | 3-month
LIBOR | | 2.93% | | October 2025 | | $ | (17 | ) | |
| Georgia Power | | 350 |
| | 3-month
LIBOR | | 2.57% | | November 2025 | | (18 | ) | |
| Southern Company | | | $ | 1,500 |
| | 3-month
LIBOR | | 2.14% | | November 2026 | | $ | (55 | ) |
| Southern Company | | | 1,200 |
| | 3-month
LIBOR | | 2.60% | | November 2046 | | (127 | ) |
| Gulf Power | | | 80 |
| | 3-month
LIBOR | | 2.32% | | December 2026 | | (4 | ) |
| Cash Flow Hedges of Existing Debt | Cash Flow Hedges of Existing Debt | | | Cash Flow Hedges of Existing Debt | | |
| Georgia Power | | 250 |
| | 3-month
LIBOR + 0.32% | | 0.75% | | March 2016 | | — |
| |
| Georgia Power | | 200 |
| | 3-month
LIBOR + 0.40% | | 1.01% | | August 2016 | | — |
| | 200 |
| | 3-month
LIBOR + 0.40% | | 1.01% | | August 2016 | | — |
|
| Fair Value Hedges on Existing Debt | Fair Value Hedges on Existing Debt | | | Fair Value Hedges on Existing Debt | | |
| Southern Company | | 250 |
| | 1.30% | | 3-month
LIBOR + 0.17% | | August 2017 | | 2 |
| | 250 |
| | 1.30% | | 3-month
LIBOR + 0.17% | | August 2017 | | 1 |
|
| Southern Company | | 300 |
| | 2.75% | | 3-month
LIBOR + 0.92% | | June 2020 | | 8 |
| | 300 |
| | 2.75% | | 3-month
LIBOR + 0.92% | | June 2020 | | 10 |
|
| Georgia Power | | 250 |
| | 5.40% | | 3-month
LIBOR + 4.02% | | June 2018 | | 3 |
| | 250 |
| | 5.40% | | 3-month
LIBOR + 4.02% | | June 2018 | | 3 |
|
| Georgia Power | | 200 |
| | 4.25% | | 3-month
LIBOR + 2.46% | | December 2019 | | 5 |
| | 200 |
| | 4.25% | | 3-month
LIBOR + 2.46% | | December 2019 | | 6 |
|
| Georgia Power | | | 500 |
| | 1.95% | | 3-month
LIBOR + 0.76% | | December 2018 | | 5 |
|
| Derivatives not Designated as Hedges | Derivatives not Designated as Hedges | | | Derivatives not Designated as Hedges | | |
Southern Power(a) | | 65 |
| (b) | 3-month
LIBOR | | 2.50% | | October 2016 | (c) | 1 |
| |
| Southern Power | | | 65 |
| (a,d) | 3-month
LIBOR | | 2.50% | | October 2016 | (e) | — |
|
| Southern Power | | | 47 |
| (b,d) | 3-month
LIBOR | | 2.21% | | October 2016 | (e) | — |
|
| Southern Power | | | 65 |
| (c,d) | 3-month
LIBOR | | 2.21% | | November 2016 | (f) | — |
|
| Total | | $ | 2,065 |
| | $ | (16 | ) | | $ | 4,657 |
| | $ | (161 | ) |
| |
| (a) | Swaption at RE Tranquillity LLC, a subsidiary of Tranquillity.LLC. See Note (I)12 to the Condensed Financial Statements hereinfinancial statements of Southern Company and Note 2 to the financial statements of Southern Power in Item 8 of the Form 10-K for additional information regarding Tranquillity.information. |
| |
| (b) | Swaption at RE Roserock LLC. See Note 12 to the financial statements of Southern Company and Note 2 to the financial statements of Southern Power in Item 8 of the Form 10-K for additional information. |
| |
| (c) | Swaption at RE Garland Holdings LLC. See Note 12 to the financial statements of Southern Company and Note 2 to the financial statements of Southern Power in Item 8 of the Form 10-K for additional information. |
| |
| (d) | Amortizing notional amount. |
| |
(c)(e) | Represents the mandatory settlement date. Settlement will be based on a 15-year amortizing swap. |
| |
| (f) | Represents the mandatory settlement date. Settlement will be based on a 12-year amortizing swap. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
The estimated pre-tax gains (losses) that will be reclassified from accumulated OCI to interest expense for the next 12-month period ending September 30, 2016March 31, 2017 are immaterial for all registrants. Southern Company and certain subsidiaries have deferred gains and losses that are expected to be amortized into earnings through 2037.2046.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Derivative Financial Statement Presentation and Amounts
At September 30,March 31, 2016, the fair value of energy-related derivatives and interest rate derivatives was reflected in the balance sheets as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives at March 31, 2016 |
| | | Fair Value |
| Derivative Category and Balance Sheet Location | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | | Southern Power |
| | | (in millions) |
| Derivatives designated as hedging instruments for regulatory purposes | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | |
| Other current assets | | $ | 2 |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | |
| Other deferred charges and assets | | 5 |
| | 2 |
| | 3 |
| | — |
| | — |
| | |
| Total derivatives designated as hedging instruments for regulatory purposes | | $ | 7 |
| | $ | 3 |
| | $ | 4 |
| | $ | — |
| | $ | — |
| | N/A |
|
| Derivatives designated as hedging instruments in cash flow and fair value hedges | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | |
Other current assets(*) | | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4 |
|
| Interest rate derivatives: | | | | | | | | | | | | |
| Other current assets | | 18 |
| | — |
| | 7 |
| | — |
| | — |
| | — |
|
| Other deferred charges and assets | | 14 |
| | — |
| | 7 |
| | — |
| | — |
| | — |
|
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | | $ | 36 |
| | $ | — |
| | $ | 14 |
| | $ | — |
| | $ | — |
| | $ | 4 |
|
| Derivatives not designated as hedging instruments | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | |
Other current assets(*) | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Interest rate derivatives: | | | | | | | | | | | | |
Other current assets(*) | | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Total derivatives not designated as hedging instruments | | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2 |
|
| Total asset derivatives | | $ | 45 |
| | $ | 3 |
| | $ | 18 |
| | $ | — |
| | $ | — |
| | $ | 6 |
|
| |
| (*) | Southern Power includes current assets related to derivatives in "Assets from risk management activities." |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Derivatives at March 31, 2016 |
| | | Fair Value |
Derivative Category and Balance Sheet Location | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | | Southern Power |
| | | (in millions) |
| Derivatives designated as hedging instruments for regulatory purposes | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | |
Liabilities from risk management activities(*) | | $ | 124 |
| | $ | 37 |
| | $ | 9 |
| | $ | 49 |
| | $ | 29 |
| | |
| Other deferred credits and liabilities | | 74 |
| | 12 |
| | 2 |
| | 45 |
| | 15 |
| | |
| Total derivatives designated as hedging instruments for regulatory purposes | | $ | 198 |
| | $ | 49 |
| | $ | 11 |
| | $ | 94 |
| | $ | 44 |
| | N/A |
|
| Derivatives designated as hedging instruments in cash flow and fair value hedges | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | |
Liabilities from risk management activities(*) | | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2 |
|
| Interest rate derivatives: | | | | | | | | | | | | |
Liabilities from risk management activities(*) | | 193 |
| | — |
| | — |
| | 5 |
| | — |
| | — |
|
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | | $ | 195 |
| | $ | — |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 2 |
|
| Derivatives not designated as hedging instruments | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Energy-related derivatives: | | | | | | | | | | | | |
Liabilities from risk management activities(*) | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Total liability derivatives | | $ | 394 |
| | $ | 49 |
| | $ | 11 |
| | $ | 99 |
| | $ | 44 |
| | $ | 3 |
|
| |
| (*) | Georgia Power, Mississippi Power, and Southern Power include current liabilities related to derivatives in "Other current liabilities." |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
At December 31, 2015, the fair value of energy-related derivatives and interest rate derivatives was reflected in the balance sheets as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives at September 30, 2015 |
| | | Fair Value |
| Derivative Category and Balance Sheet Location | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | | Southern Power |
| | | (in millions) |
| Derivatives designated as hedging instruments for regulatory purposes | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | |
| Other current assets | | $ | 3 |
| | $ | 1 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | |
| Other deferred charges and assets | | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | |
| Total derivatives designated as hedging instruments for regulatory purposes | | $ | 4 |
| | $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | N/A |
|
| Derivatives designated as hedging instruments in cash flow and fair value hedges | | | | | | | | | | | | |
| Interest rate derivatives: | | | | | | | | | | | | |
| Other current assets | | $ | 11 |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Other deferred charges and assets | | 8 |
| | — |
| | 4 |
| | — |
| | — |
| | — |
|
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | | $ | 19 |
| | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Derivatives not designated as hedging instruments | | | | | | | | | | | | |
| Interest rate derivatives: | | | | | | | | | | | | |
| Other deferred charges and assets | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Total asset derivatives | | $ | 24 |
| | $ | 2 |
| | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Derivatives at September 30, 2015 |
| | | Fair Value |
Derivative Category and Balance Sheet Location | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | | Southern Power |
| | | (in millions) |
| Derivatives designated as hedging instruments for regulatory purposes | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | |
Other current liabilities(*) | | $ | 117 |
| | $ | 36 |
| | $ | 14 |
| | $ | 41 |
| | $ | 26 |
| | |
| Other deferred credits and liabilities | | 94 |
| | 18 |
| | 2 |
| | 53 |
| | 21 |
| | |
| Total derivatives designated as hedging instruments for regulatory purposes | | $ | 211 |
| | $ | 54 |
| | $ | 16 |
| | $ | 94 |
| | $ | 47 |
| | N/A |
|
| Derivatives designated as hedging instruments in cash flow and fair value hedges | | | | | | | | | | | | |
| Interest rate derivatives: | | | | | | | | | | | | |
Other current liabilities(*) | | $ | 36 |
| | $ | 17 |
| | $ | 19 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Total liability derivatives | | $ | 247 |
| | $ | 71 |
| | $ | 35 |
| | $ | 94 |
| | $ | 47 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives at December 31, 2015 |
| | | Fair Value |
| Derivative Category and Balance Sheet Location | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | | Southern Power |
| | | (in millions) |
| Derivatives designated as hedging instruments for regulatory purposes | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | |
| Other current assets | | $ | 3 |
| | $ | 1 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | N/A |
|
| Derivatives designated as hedging instruments in cash flow and fair value hedges | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | |
Other current assets(*) | | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Interest rate derivatives: | | | | | | | | | | | | |
| Other current assets | | 19 |
| | — |
| | 5 |
| | 1 |
| | — |
| | — |
|
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | | $ | 22 |
| | $ | — |
| | $ | 5 |
| | $ | 1 |
| | $ | — |
| | $ | 3 |
|
| Derivatives not designated as hedging instruments | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | |
Other current assets(*) | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Interest rate derivatives: | | | | | | | | | | | | |
Other current assets(*) | | 3 |
| | — |
| | — |
| | — |
| | — |
| | 3 |
|
| Total derivatives not designated as hedging instruments | | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4 |
|
| Total asset derivatives | | $ | 29 |
| | $ | 1 |
| | $ | 7 |
| | $ | 1 |
| | $ | — |
| | $ | 7 |
|
| |
| (*) | GulfSouthern Power includes current liabilitiesassets related to derivatives designated as hedging instruments in "Liabilities"Assets from risk management activities." |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
At December 31, 2014, the fair value of energy-related derivatives and interest rate derivatives was reflected in the balance sheets as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Derivatives at December 31, 2014 |
| | | Fair Value |
| Derivative Category and Balance Sheet Location | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | | Southern Power |
| | | (in millions) |
| Derivatives designated as hedging instruments for regulatory purposes | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | |
| Other current assets | | $ | 7 |
| | $ | 1 |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | |
| Other deferred charges and assets | | — |
| | — |
| | 1 |
| | — |
| | — |
| | |
| Total derivatives designated as hedging instruments for regulatory purposes | | $ | 7 |
| | $ | 1 |
| | $ | 7 |
| | $ | — |
| | $ | — |
| | N/A |
|
| Derivatives designated as hedging instruments in cash flow and fair value hedges | | | | | | | | | | | | |
| Interest rate derivatives: | | | | | | | | | | | | |
| Other current assets | | $ | 7 |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Other deferred charges and assets | | 1 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
|
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | | $ | 8 |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Derivatives not designated as hedging instruments | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | |
| Other current assets | | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5 |
|
| Total asset derivatives | | $ | 21 |
| | $ | 1 |
| | $ | 13 |
| | $ | — |
| | $ | — |
| | $ | 5 |
|
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| | | Liability Derivatives at December 31, 2014 | |
| Liability Derivatives at December 31, 2015 | | Liability Derivatives at December 31, 2015 |
| | | Fair Value | | Fair Value |
Derivative Category and Balance Sheet Location | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | | Southern Power | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | | Southern Power |
| | | (in millions) | | (in millions) |
| Derivatives designated as hedging instruments for regulatory purposes | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Other current liabilities(*) | | $ | 118 |
| | $ | 32 |
| | $ | 23 |
| | $ | 37 |
| | $ | 26 |
| |
|
| |
Liabilities from risk management activities(*) | | | $ | 130 |
| | $ | 40 |
| | $ | 12 |
| | $ | 49 |
| | $ | 29 |
| | |
| Other deferred credits and liabilities | | 79 |
| | 21 |
| | 4 |
| | 35 |
| | 19 |
| |
|
| | 87 |
| | 15 |
| | 3 |
| | 51 |
| | 18 |
| |
|
|
| Total derivatives designated as hedging instruments for regulatory purposes | | $ | 197 |
| | $ | 53 |
| | $ | 27 |
| | $ | 72 |
| | $ | 45 |
| | N/A |
| | $ | 217 |
| | $ | 55 |
| | $ | 15 |
| | $ | 100 |
| | $ | 47 |
| | N/A |
|
| Derivatives designated as hedging instruments in cash flow and fair value hedges | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | | |
Liabilities from risk management activities(*) | | | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2 |
|
| Interest rate derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Other current liabilities(*) | | $ | 17 |
| | $ | 8 |
| | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| Liabilities from risk management activities | | | 23 |
| | 15 |
| | — |
| | — |
| | — |
| | — |
|
| Other deferred credits and liabilities | | 7 |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| | 7 |
| | — |
| | 6 |
| | — |
| | — |
| | — |
|
| Total derivatives designated as hedging instruments in cash flow and fair value hedges | | $ | 24 |
| | $ | 8 |
| | $ | 14 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 32 |
| | $ | 15 |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | 2 |
|
| Derivatives not designated as hedging instruments | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
| Other current liabilities | | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4 |
| |
Liabilities from risk management activities(*) | | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Total liability derivatives | | $ | 225 |
| | $ | 61 |
| | $ | 41 |
| | $ | 72 |
| | $ | 45 |
| | $ | 4 |
| | $ | 250 |
| | $ | 70 |
| | $ | 21 |
| | $ | 100 |
| | $ | 47 |
| | $ | 3 |
|
| |
| (*) | GulfGeorgia Power, includesMississippi Power, and Southern Power include current liabilities related to derivatives designated as hedging instruments in "Liabilities from risk management activities."Other current liabilities." |
The derivative contracts of Southern Company, the traditional operating companies, and Southern Power are not subject to master netting arrangements or similar agreements and are reported gross on each registrant's financial statements. Some of these energy-related and interest rate derivative contracts may contain certain provisions that permit intra-contract netting of derivative receivables and payables for routine billing and offsets related to events of default and settlements. Amounts related to energy-related derivative contracts and interest rate derivative contracts at September 30, 2015March 31, 2016 and December 31, 20142015 are presented in the following tables.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| | | Derivative Contracts at September 30, 2015 | |
| Derivative Contracts at March 31, 2016 | | Derivative Contracts at March 31, 2016 |
| | | Fair Value | | Fair Value |
| | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | | Southern Power | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | | Southern Power |
| | | (in millions) | | (in millions) |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Energy-related derivatives presented in the Balance Sheet (a) | | $ | 4 |
| | $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 12 |
| | $ | 3 |
| | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | 5 |
|
Gross amounts not offset in the Balance Sheet (b) | | (4 | ) | | (2 | ) | | (2 | ) | | — |
| | — |
| | — |
| | (10 | ) | | (3 | ) | | (3 | ) | | — |
| | — |
| | (2 | ) |
| Net energy-related derivative assets | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Interest rate derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate derivatives presented in the Balance Sheet (a) | | $ | 20 |
| | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 33 |
| | $ | — |
| | $ | 14 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
Gross amounts not offset in the Balance Sheet (b) | | (9 | ) | | — |
| | (2 | ) | | — |
| | — |
| | — |
| | (21 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Net interest rate derivative assets | | $ | 11 |
| | $ | — |
| | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 12 |
| | $ | — |
| | $ | 14 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Energy-related derivatives presented in the Balance Sheet (a) | | $ | 211 |
| | $ | 54 |
| | $ | 16 |
| | $ | 94 |
| | $ | 47 |
| | $ | — |
| | $ | 201 |
| | $ | 49 |
| | $ | 11 |
| | $ | 94 |
| | $ | 44 |
| | $ | 3 |
|
Gross amounts not offset in the Balance Sheet (b) | | (4 | ) | | (2 | ) | | (2 | ) | | — |
| | — |
| | — |
| | (10 | ) | | (3 | ) | | (3 | ) | | — |
| | — |
| | (2 | ) |
| Net energy-related derivative liabilities | | $ | 207 |
| | $ | 52 |
| | $ | 14 |
| | $ | 94 |
| | $ | 47 |
| | $ | — |
| | $ | 191 |
| | $ | 46 |
| | $ | 8 |
| | $ | 94 |
| | $ | 44 |
| | $ | 1 |
|
| Interest rate derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate derivatives presented in the Balance Sheet (a) | | $ | 36 |
| | $ | 17 |
| | $ | 19 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 193 |
| | $ | — |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
|
Gross amounts not offset in the Balance Sheet (b) | | (9 | ) | | — |
| | (2 | ) | | — |
| | — |
| | — |
| | (21 | ) | | — |
| | — |
| | — |
| | — |
| | — |
|
| Net interest rate derivative liabilities | | $ | 27 |
| | $ | 17 |
| | $ | 17 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 172 |
| | $ | — |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
|
| |
| (a) | None of the registrants offsets fair value amounts for multiple derivative instruments executed with the same counterparty on the balance sheets; therefore, gross and net amounts of derivative assets and liabilities presented on the balance sheets are the same. |
| |
| (b) | Includes gross amounts subject to netting terms that are not offset on the balance sheets and any cash/financial collateral pledged or received. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| | | Derivative Contracts at December 31, 2014 | |
| Derivative Contracts at December 31, 2015 | | Derivative Contracts at December 31, 2015 |
| | | Fair Value | | Fair Value |
| | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | | Southern Power | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | | Southern Power |
| | | (in millions) | | (in millions) |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Energy-related derivatives presented in the Balance Sheet (a) | | $ | 13 |
| | $ | 1 |
| | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | 5 |
| | $ | 7 |
| | $ | 1 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 4 |
|
Gross amounts not offset in the Balance Sheet (b) | | (9 | ) | | — |
| | (7 | ) | | — |
| | — |
| | — |
| | (6 | ) | | (1 | ) | | (2 | ) | | — |
| | — |
| | (1 | ) |
| Net energy-related derivative assets | | $ | 4 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Interest rate derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate derivatives presented in the Balance Sheet (a) | | $ | 8 |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 22 |
| | $ | — |
| | $ | 5 |
| | $ | 1 |
| | $ | — |
| | $ | 4 |
|
Gross amounts not offset in the Balance Sheet (b) | | (8 | ) | | — |
| | (6 | ) | | — |
| | — |
| | — |
| | (9 | ) | | — |
| | (4 | ) | | — |
| | — |
| | — |
|
| Net interest rate derivative assets | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 13 |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | 4 |
|
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| Energy-related derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Energy-related derivatives presented in the Balance Sheet (a) | | $ | 201 |
| | $ | 53 |
| | $ | 27 |
| | $ | 72 |
| | $ | 45 |
| | $ | 4 |
| | $ | 220 |
| | $ | 55 |
| | $ | 15 |
| | $ | 100 |
| | $ | 47 |
| | $ | 3 |
|
Gross amounts not offset in the Balance Sheet (b) | | (9 | ) | | — |
| | (7 | ) | | — |
| | — |
| | — |
| | (6 | ) | | (1 | ) | | (2 | ) | | — |
| | — |
| | (1 | ) |
| Net energy-related derivative liabilities | | $ | 192 |
| | $ | 53 |
| | $ | 20 |
| | $ | 72 |
| | $ | 45 |
| | $ | 4 |
| | $ | 214 |
| | $ | 54 |
| | $ | 13 |
| | $ | 100 |
| | $ | 47 |
| | $ | 2 |
|
| Interest rate derivatives: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate derivatives presented in the Balance Sheet (a) | | $ | 24 |
| | $ | 8 |
| | $ | 14 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 30 |
| | $ | 15 |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Gross amounts not offset in the Balance Sheet (b) | | (8 | ) | | — |
| | (6 | ) | | — |
| | — |
| | — |
| | (9 | ) | | — |
| | (4 | ) | | — |
| | — |
| | — |
|
| Net interest rate derivative liabilities | | $ | 16 |
| | $ | 8 |
| | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 21 |
| | $ | 15 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| |
| (a) | None of the registrants offsets fair value amounts for multiple derivative instruments executed with the same counterparty on the balance sheets; therefore, gross and net amounts of derivative assets and liabilities presented on the balance sheets are the same. |
| |
| (b) | Includes gross amounts subject to netting terms that are not offset on the balance sheets and any cash/financial collateral pledged or received. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
At September 30, 2015March 31, 2016 and December 31, 2014,2015, the pre-tax effects of unrealized derivative gains (losses) arising from energy-related derivative instruments designated as regulatory hedging instruments and deferred were as follows:
| | | Regulatory Hedge Unrealized Gain (Loss) Recognized on the Balance Sheet at September 30, 2015 | |
| Regulatory Hedge Unrealized Gain (Loss) Recognized on the Balance Sheet at March 31, 2016 | | Regulatory Hedge Unrealized Gain (Loss) Recognized on the Balance Sheet at March 31, 2016 |
Derivative Category and Balance Sheet Location | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power |
| | | (in millions) | | (in millions) |
| Energy-related derivatives: | | | | | | | | | | | | | | | | | | | | |
| Other regulatory assets, current | | $ | (117 | ) | | $ | (36 | ) | | $ | (14 | ) | | $ | (41 | ) | | $ | (26 | ) | | $ | (124 | ) | | $ | (37 | ) | | $ | (9 | ) | | $ | (49 | ) | | $ | (29 | ) |
| Other regulatory assets, deferred | | (94 | ) | | (18 | ) | | (2 | ) | | (53 | ) | | (21 | ) | | (74 | ) | | (12 | ) | | (2 | ) | | (45 | ) | | (15 | ) |
Other regulatory liabilities, current (a) | | 3 |
| | 1 |
| | 2 |
| | — |
| | — |
| | 2 |
| | 1 |
| | 1 |
| | — |
| | — |
|
Other regulatory liabilities, deferred (b) | | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | 5 |
| | 2 |
| | 3 |
| | — |
| | — |
|
| Total energy-related derivative gains (losses) | | $ | (207 | ) | | $ | (52 | ) | | $ | (14 | ) | | $ | (94 | ) | | $ | (47 | ) | | $ | (191 | ) | | $ | (46 | ) | | $ | (7 | ) | | $ | (94 | ) | | $ | (44 | ) |
| |
| (a) | Southern Company, Alabama Power, and Georgia Power include other regulatory liabilities, current in other current liabilities. |
| |
| (b) | Georgia Power includes other regulatory liabilities, deferred in other deferred credits and liabilities. |
| | | Regulatory Hedge Unrealized Gain (Loss) Recognized on the Balance Sheet at December 31, 2014 | |
| Regulatory Hedge Unrealized Gain (Loss) Recognized on the Balance Sheet at December 31, 2015 | | Regulatory Hedge Unrealized Gain (Loss) Recognized on the Balance Sheet at December 31, 2015 |
Derivative Category and Balance Sheet Location | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power | | Southern Company | | Alabama Power | | Georgia Power | | Gulf Power | | Mississippi Power |
| | | (in millions) | | (in millions) |
| Energy-related derivatives: | | | | | | | | | | | | | | | | | | | | |
| Other regulatory assets, current | | $ | (118 | ) | | $ | (32 | ) | | $ | (23 | ) | | $ | (37 | ) | | $ | (26 | ) | | $ | (130 | ) | | $ | (40 | ) | | $ | (12 | ) | | $ | (49 | ) | | $ | (29 | ) |
| Other regulatory assets, deferred | | (79 | ) | | (21 | ) | | (4 | ) | | (35 | ) | | (19 | ) | | (87 | ) | | (15 | ) | | (3 | ) | | (51 | ) | | (18 | ) |
Other regulatory liabilities, current (a) | | 7 |
| | 1 |
| | 6 |
| | — |
| | — |
| |
Other regulatory liabilities, deferred (b) | | — |
| | — |
| | 1 |
| | — |
| | — |
| |
Other regulatory liabilities, current(*) | | | 3 |
| | 1 |
| | 2 |
| | — |
| | — |
|
| Total energy-related derivative gains (losses) | | $ | (190 | ) | | $ | (52 | ) | | $ | (20 | ) | | $ | (72 | ) | | $ | (45 | ) | | $ | (214 | ) | | $ | (54 | ) | | $ | (13 | ) | | $ | (100 | ) | | $ | (47 | ) |
| |
(a)(*) | Southern Company, Alabama Power, and Georgia Power include other regulatory liabilities, current in other current liabilities. |
| |
(b) | Georgia Power includes other regulatory liabilities, deferred in other deferred credits and liabilities. |
For the three months ended September 30,March 31, 2016 and 2015, and 2014, the pre-tax effects of interest rate derivatives designated as cash flow hedging instruments were as follows:
|
| | | | | | | | | | | | | | | | | | |
Derivatives in Cash Flow Hedging Relationships | | Gain (Loss) Recognized in OCI on Derivative (Effective Portion) | | Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
| | | Statements of Income Location | | Amount |
| | | 2015 | | 2014 | | | | 2015 | | 2014 |
| | | (in millions) | | | | (in millions) |
| Southern Company | | | | | | | | | | |
| Interest rate derivatives | | $ | (28 | ) | | $ | (1 | ) | | Interest expense, net of amounts capitalized | | $ | (2 | ) | | $ | (2 | ) |
| Alabama Power | | | | | | | | | | |
| Interest rate derivatives | | $ | (10 | ) | | $ | (1 | ) | | Interest expense, net of amounts capitalized | | $ | (1 | ) | | $ | (1 | ) |
| Georgia Power | | | | | | | | | | |
| Interest rate derivatives | | $ | (18 | ) | | $ | — |
| | Interest expense, net of amounts capitalized | | $ | (1 | ) | | $ | (1 | ) |
For the nine months ended September 30, 2015 and 2014, the pre-tax effects of interest rate derivatives designated as cash flow hedging instruments were as follows:
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
| | Derivatives in Cash Flow Hedging Relationships | | Gain (Loss) Recognized in OCI on Derivative (Effective Portion) | | Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Gain (Loss) Recognized in OCI on Derivative (Effective Portion) | | Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
| | | Statements of Income Location | | Amount | | | Statements of Income Location | | Amount |
| | | 2015 | | 2014 | | 2015 | | 2014 | | 2016 | | 2015 | | 2016 | | 2015 |
| | | (in millions) | | (in millions) | | (in millions) | | (in millions) |
| Southern Company | | | | | | | | | | | | | | | | |
| Interest rate derivatives | | $ | (26 | ) | | $ | (1 | ) | | Interest expense, net of amounts capitalized | | $ | (7 | ) | | $ | (6 | ) | | $ | (190 | ) | | $ | (29 | ) | | Interest expense, net of amounts capitalized | | $ | (3 | ) | | $ | (2 | ) |
| Alabama Power | | | | | | | | | | | | | | | | |
| Interest rate derivatives | | $ | (9 | ) | | $ | (1 | ) | | Interest expense, net of amounts capitalized | | $ | (2 | ) | | $ | (2 | ) | | $ | (4 | ) | | $ | (6 | ) | | Interest expense, net of amounts capitalized | | $ | (1 | ) | | $ | (1 | ) |
| Georgia Power | | | | | | | | | | | | | | | | |
| Interest rate derivatives | | $ | (17 | ) | | $ | — |
| | Interest expense, net of amounts capitalized | | $ | (3 | ) | | $ | (2 | ) | | $ | — |
| | $ | (23 | ) | | Interest expense, net of amounts capitalized | | $ | (1 | ) | | $ | (1 | ) |
| Mississippi Power | | | | | | | | | |
| Gulf Power | | | | | | | | | |
| Interest rate derivatives | | $ | — |
| | $ | — |
| | Interest expense, net of amounts capitalized | | $ | (1 | ) | | $ | (1 | ) | | $ | (5 | ) | | $ | — |
| | Interest expense, net of amounts capitalized | | $ | — |
| | $ | — |
|
| Southern Power | | | | | | | | | |
| Interest rate derivatives | | $ | — |
| | $ | — |
| | Interest expense, net of amounts capitalized | | $ | (1 | ) | | $ | (1 | ) | |
For the three and nine months ended September 30,March 31, 2016 and 2015, and 2014, the pre-tax effects of energy-related derivatives designated as cash flow hedging instruments recognized in OCI and those reclassified from accumulated OCI into earnings were immaterial for all registrants.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
For the three months ended September 30,March 31, 2016 and 2015, and 2014, the pre-tax effects of interest rate derivatives designated as fair value hedging instruments were as follows:
|
| | | | | | | | | |
| Derivatives in Fair Value Hedging Relationships | |
| | | | Gain (Loss) |
| Derivative Category | | Statements of Income Location | 2015 | | 2014 |
| | | | (in millions) |
| Southern Company | | | | | |
| Interest rate derivatives: | | Interest expense, net of amounts capitalized | $ | 15 |
| | $ | (1 | ) |
| Georgia Power | | | | | |
| Interest rate derivatives: | | Interest expense, net of amounts capitalized | $ | 7 |
| | $ | — |
|
For the nine months ended September 30, 2015 and 2014, the pre-tax effects of interest rate derivatives designated as fair value hedging instruments were as follows:
| | | Derivatives in Fair Value Hedging Relationships | | | |
| | | Gain (Loss) | | Gain (Loss) |
| Derivative Category | | Statements of Income Location | 2015 | | 2014 | | Statements of Income Location | 2016 | | 2015 |
| | | (in millions) | | (in millions) |
| Southern Company | | | | | | | | |
| Interest rate derivatives: | | Interest expense, net of amounts capitalized | $ | 19 |
| | $ | (4 | ) | | Interest expense, net of amounts capitalized | $ | 20 |
| | $ | 7 |
|
| Georgia Power | | | | | | | | |
| Interest rate derivatives: | | Interest expense, net of amounts capitalized | $ | 9 |
| | $ | — |
| | Interest expense, net of amounts capitalized | $ | 14 |
| | $ | 6 |
|
For the three and nine months ended September 30,March 31, 2016 and 2015, and 2014, the pre-tax effects of interest rate derivatives designated as fair value hedging instruments were offset by changes to the carrying value of long-term debt.
There was no material ineffectiveness recorded in earnings for any registrant for any period presented.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
For the three and nine months ended September 30,March 31, 2016 and 2015, and 2014, the pre-tax effects of energy-related derivatives and interest rate derivatives not designated as hedging instruments were immaterial for all registrants.
Contingent Features
The registrants do 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 derivatives that could require collateral, but not accelerated payment, in the event of various credit rating changes of certain Southern Company subsidiaries. At September 30, 2015,March 31, 2016, the registrants' collateral posted with their derivative counterparties was immaterial.
At September 30, 2015,March 31, 2016, the fair value of derivative liabilities with contingent features was $54$49 million for all registrants. The maximum potential collateral requirements arising from the credit-risk-related contingent features, at a rating below BBB- and/or Baa3, were $54$49 million and include certain agreements that could require collateral in the event that one or more Southern Company power pool participants has a credit rating change to below investment grade.
Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. If collateral is required, fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral are not offset against fair value amounts recognized for derivatives executed with the same counterparty.
Southern Company, the traditional operating companies, and Southern Power are exposed to losses related to financial instruments in the event of counterparties' nonperformance. Southern Company, the traditional operating companies, and Southern Power only enter into agreements and material transactions with counterparties that have investment grade credit ratings by Moody's and S&P or with counterparties who have posted collateral to cover potential credit exposure. Southern Company, the traditional operating companies, and Southern Power have also established risk management policies and controls to determine and monitor the creditworthiness of counterparties in order to mitigate Southern Company's, the traditional operating companies', and Southern Power's exposure to counterparty credit risk. Therefore, Southern Company, the traditional operating companies, and Southern Power do not anticipate a material adverse effect on the financial statements as a result of counterparty nonperformance.
Southern Company
Proposed Merger with AGL Resources
On August 23, 2015, Southern Company AGL Resources, and Merger Sub entered into the Merger Agreement.Agreement to acquire AGL Resources. Under the terms of the Merger Agreement, subject to the satisfaction or waiver (if permissible under applicable law) of
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
specified conditions, Merger Sub will be merged with and into AGL Resources. AGL Resources will survive the Merger and become a wholly-owned, direct subsidiary of Southern Company. Upon the consummation of the Merger, each share of common stock of AGL Resources issued and outstanding immediately prior to the effective time of the Merger (Effective Time), other than shares owned by AGL Resources as treasury stock, shares owned by a subsidiary of AGL Resources, and shares owned by shareholders who have properly exercised and perfected dissenters' rights, will be converted into the right to receive $66 in cash, without interest and less any applicable withholding taxes. Other equity-based securities of AGL Resources will be cancelled for cash consideration or converted into new awards from Southern Company as described in the Merger Agreement.
In accordance with GAAP, theThe Merger will be accounted for using the acquisition method of accounting whereby the assets acquired and liabilities assumed are recognized at fair value as of the acquisition date. The excess of the purchase price over the fair values of AGL Resources' assets and liabilities will be recorded as goodwill. Southern Company expects total cash of $8.2 billion to be required to fund the purchase price of approximately $8.0 billion to acquire AGL Resources common stock, options to purchase shares of AGL Resources common stock, and restricted stock units payable in shares of AGL Resources common stock and to fund acquisition-related expenses and financing costs of approximately $200 million. Southern Company will also assume AGL Resources' outstanding indebtedness.
TableThrough May 5, 2016, the Maryland PSC, the Georgia PSC, the California Public Utilities Commission, and the Virginia State Corporation Commission have approved the Merger. On April 15, 2016, Southern Company, AGL Resources, and Northern Illinois Gas Company (collectively, the Joint Applicants) and the Retail Energy Supply Association filed a settlement agreement with the Illinois Commerce Commission. On April 28, 2016, the Joint Applicants, the Illinois Attorney General's Office, and the Citizens Utility Board filed a settlement agreement with the Illinois Commerce Commission. Collectively, these agreements resolve all remaining contested issues for Illinois Commerce Commission approval of Contents
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
the Merger. On May 5, 2016, Southern Company, AGL Resources, Merger Sub, Pivotal Utility Holdings, Inc. d/b/a Elizabethtown Gas, the Division of Rate Counsel, the Staff of the New Jersey Board of Public Utilities, and New Jersey Large Energy Users Coalition entered into a comprehensive settlement agreement relating to the New Jersey Board of Public Utilities review of the Merger. Additionally, the Federal Communications Commission (FCC) has approved the transfer of control over the FCC licenses of certain AGL Resources subsidiaries. Consummation of the Merger isremains subject to the satisfaction or waiver of certain closing conditions, including, among others, (i) approval of the Merger Agreement by AGL Resources' shareholders, which is scheduled for vote on November 19, 2015, (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (iii) the approval of the California Public Utilities Commission, Georgia PSC, Illinois Commerce Commission Maryland PSC,and the New Jersey Board of Public Utilities and Virginia State Corporation Commission, and other approvals required under applicable state laws, and the approval of the Federal Communications Commission (FCC) for the transfer of control over the FCC licenses of certain subsidiaries of AGL Resources and any other approval which Southern Company and AGL Resources agree are required, (iv)(ii) the absence of a judgment, order, decision, injunction, ruling, or other finding or agency requirement of a governmental entity prohibiting the consummation of the Merger, and (v)(iii) other customary closing conditions, including (a) subject to certain materiality qualifiers, the accuracy of each party's representations and warranties and (b) each party's performance in all material respects of its obligations under the Merger Agreement.
During the first quarter 2016, Southern Company expects to completerecorded in its statements of income external transaction costs for financing, legal, and consulting services associated with the required state regulatory filingsproposed Merger of approximately $20 million, of which $6 million is included in the fourth quarter 2015.
Subject to certain limitations, either party may terminate the Merger Agreement if the Mergeroperating expenses and $14 million is not consummated by August 23, 2016, which date may be extended by either party to February 23, 2017 if, on August 23, 2016, all conditions to closingincluded in other than those relating to (i) regulatory approvalsincome and (ii) the absence of legal restraints preventing consummation of the Merger (to the extent relating to regulatory approvals) have been satisfied. Upon termination of the Merger Agreement under certain specified circumstances, AGL Resources will be required to pay Southern Company a termination fee of $201 million or reimburse Southern Company's expenses up to $5 million (which reimbursement shall reduce on a dollar-for-dollar basis any termination fee subsequently payable by AGL Resources)(expense). Southern Company currently expects to complete the transaction in the second half of 2016.
The ultimate outcome of these matters cannot be determined at this time. See Note 12 to the financial statements of Southern Company under "Southern Company – Proposed Merger with AGL Resources" in Item 8 of the Form 10-K for additional information.
Merger Financing
Southern Company intends to initially fund the cash consideration for the Merger using approximately $7.0 billiona mix of debt and $1.0 billion of equity. Southern Company expects to issue approximately $2.0 billion of additional equity through 2019 to offset a portion of the debt issued to fund the cash consideration for the Merger.Merger in several tranches including long-dated maturities. The amount of debt issued at each maturity will depend on prevailing market conditions at the time of the offering and other factors. In addition, Southern Company entered into the $8.1 billion Bridge Agreement on September 30, 2015 to provide financing for the Merger in the event long-term financing is not available. See Note (E) under "Bank Credit Arrangements" herein for additional information regarding the Bridge Agreement.
Southern Power
See Note 26 to the financial statements of Southern PowerCompany under "2014 – SG2 Imperial Valley, LLC""Bank Credit Arrangements" in Item 8 of the Form 10-K for additional information. Duringinformation regarding the second quarter 2015,Bridge Agreement.
Proposed Acquisition of PowerSecure
On February 24, 2016, Southern Company entered into an Agreement and Plan of Merger to acquire PowerSecure. Under the fair valuesterms of this merger agreement, the assets acquiredstockholders of SG2 Imperial Valley, LLC were finalized and recorded as follows: $707 million as property, plant, and equipment and $20 million as prepayments relatedPowerSecure will be entitled to transmission services.receive $18.75 in cash for each share of common stock in a transaction with a total purchase price of approximately $431 million.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
During 2015,Following this transaction, PowerSecure will become a wholly-owned subsidiary of Southern Company. This transaction is expected to close in May 2016. The ultimate outcome of this matter cannot be determined at this time.
Southern Power
See Note 2 to the financial statements of Southern Power and Note 12 to the financial statements of Southern Company under "Southern Power" in Item 8 of the Form 10-K for additional information. During the first quarter 2016, the fair values of the assets and liabilities acquired of Lost Hills, Blackwell, North Star, and Morelos were finalized and there were no changes.
During 2016, in accordance with its overall growth strategy, Southern Power acquired or contracted to acquire through its wholly-owned subsidiaries, Southern Renewable Partnerships, LLC or Southern Renewable Energy, Inc. (SRE), the projects set forth in the following projects in accordance with its overall growth strategy, which are included in its capital program estimates for 2015.table. Acquisition-related costs were expensed as incurred and were not material. The acquisitions do not include any contingent consideration unless specifically noted.
|
| | | | | | | | | | | | | |
| Project Entity | Seller; Acquisition Date | Approx. Nameplate Capacity | Location | Southern Power Percentage Ownership | | Expected/Actual Commercial Operation Date | PPA
Counterparties for Entire Plant Output | PPA Contract Period | Approx. Purchase Price | |
| | | (MW) | | | | | | | (in millions) | |
| WIND |
| Kay Wind, LLC | Apex Clean Energy Holdings, LLC
| 299 | Kay County, Oklahoma | 100 | % | | Fourth quarter 2015 | Westar Energy, Inc. and Grant River Dam Authority | 20 years | $ | 492 |
| (a) |
| | | | | | | | | | | |
| Grant Wind, LLC | Apex Clean Energy Holdings, LLC
| 151 | Grant County, Oklahoma | 100 | % | | First quarter 2016 | Western Farmers, East Texas, and Northeast Texas Electric Cooperative | 20 years | $ | 264 |
| (a) |
| SOLAR |
| Lost Hills Blackwell Holdings, LLC (Lost Hills Blackwell) | First Solar, Inc. (First Solar)
April 15, 2015 | 35 | Kern County, California | 51 | % | (b) | April 17, 2015 | City of Roseville, California/Pacific Gas and Electric Company | 29 years | $ | 74 |
| (c) |
| | | | | | | | | | | |
| NS Solar Holdings, LLC (North Star) | First Solar
April 30, 2015 | 61 | Fresno County, California | 51 | % | (b) | June 20, 2015 | Pacific Gas and Electric Company | 20 years | $ | 211 |
| (d) |
| | | | | | | | | | | |
| Tranquillity | Recurrent Energy, LLC
August 28, 2015 | 204 | Fresno County, California | 51 | % | (b) | Fourth quarter 2016 | Shell Energy North America (US), LP/Southern California Edison Company | 18 years | $ | 100 |
| (e) |
| | | | | | | | | | | |
| Desert Stateline Holdings, LLC (Desert Stateline) | First Solar
August 31, 2015 | 300 | San Bernardino County, California | 51 | % | (b) | 8 Phases from December 2015 to Third quarter 2016 | Southern California Edison Company | 20 years | $ | 439 |
| (f) |
| | | | | | | | | | | |
| GASNA 31P, LLC (Morelos) | Solar Frontier Americas Holding, LLC
October 22, 2015 | 15 | Kern County, California | 90 | % | | Fourth quarter 2015 | Pacific Gas and Electric Company | 20 years | $ | 45 |
| (g) |
|
| | | | | | | | | | | | | |
| Project Facility | Seller; Acquisition Date | Approx. Nameplate Capacity | Location | Southern Power Percentage Ownership | | Expected/Actual COD | PPA
Counterparties for Plant Output | PPA Contract Period | Approx. Purchase Price | |
| | | (MW) | | | | | | | (in millions) | |
| SOLAR |
| Calipatria | Solar Frontier Americas Holding, LLC
February 11, 2016 | 20 | Imperial County, CA | 90 | % | | February 11, 2016 | San Diego Gas & Electric Company | 20 years | $ | 51 |
| (a) |
| East Pecos | First Solar, Inc. March 4, 2016 | 120 | Pecos County, TX | 100 | % | | Fourth quarter 2016 | Austin Energy | 15 years | $ | 41 |
| (b) |
| WIND |
| Grant Wind | Apex Clean Energy Holdings, LLC
April 7, 2016 | 151 | Grant County, OK | 100 | % | | April 8, 2016 | Western Farmers, East Texas, and Northeast Texas Electric Cooperative | 20 years | $ | 258 |
| (c) |
| Passadumkeag | Quantam Wind Acquisition I, LLC | 40 | Penobscot County, ME | 100 | % | | Second quarter 2016 | Western Massachusetts Electric Company | 15 years | $ | 127 |
| (d) |
| |
| (a) | Calipatria - The total purchase price, including the minority owner, TRE's 10% ownership interest and contingent consideration of $6 million, is approximately $57 million. As of March 31, 2016, the fair values of the assets and liabilities acquired through the business combination were recorded as follows: $58 million as property, plant, and equipment, $1 million as a transmission interconnection prepaid, and $2 million as payables; however, the allocation of the purchase price to individual assets has not been finalized. |
| |
| (b) | East Pecos - The total purchase price is approximately $41 million. As of March 31, 2016, the fair values of the assets acquired through the business combination were recorded as $41 million to CWIP; however, the allocation of the purchase price to individual assets has not been finalized. Total construction costs, which include the acquisition price allocated to CWIP, are expected to be approximately $200 million to $220 million. The ultimate outcome of this matter cannot be determined at this time. |
| |
| (c) | Grant Wind - Subsequent to March 31, 2016, Southern Power acquired all of the outstanding membership interests of Grant Wind, LLC. The purchase price includes approximately $23 million of contingent consideration which may be adjusted based on performance testing and production over the first 10 years of operation. |
| |
| (d) | Passadumkeag - On March 11, 2016, Southern Power entered into an agreement to acquire all of the outstanding membership interests of Quantum Wind Acquisition I, LLC, which is expected to close in the second quarter 2016. The ultimate outcome of this matter cannot be determined at this time. |
Construction Projects
(a) On February 24, 2015 and September 4, 2015,During the first quarter 2016, in accordance with its overall growth strategy, Southern Power entered into agreements to acquire Kay Wind, LLCcompleted construction of and Grant Wind, LLC, respectively. The completion of each acquisition is subject toplaced in service the seller achieving certain constructionButler Solar Farm and project milestones, as well as various other customary conditions to closing. Each acquisition is expected to close at or near the expected commercial operation date. In addition, the final purchase price may be adjusted based on performance testing as specified in the applicable purchase agreement. The Grant Wind, LLC purchase price includes contingent consideration. The ultimate outcome of this matter cannot be determined at this time.
(b) Southern Power owns 100% of the class A membership interests and a wholly-owned subsidiary of the seller owns 100% of the class B membership interests. Southern Power and the class B member are entitled to 51% and 49%, respectively, of all cash distributions from the respective project.Pawpaw solar facilities. In addition, Southern Power is entitled to substantially all of the federal tax benefits with respect to the respective transaction.
(c) Concurrently, a wholly-owned subsidiary of First Solar acquired 100% of the class B membership interests for approximately $33 million. The fair values of the assets acquired through the business combination were recorded as follows: $98 million as property, plant, and
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
equipmentcontinued construction of the projects set forth in the table below. Through March 31, 2016, total costs of construction incurred for the projects below were $2.2 billion, of which $1.5 billion remains in CWIP. The ultimate outcome of these matters cannot be determined at this time.
|
| | | | | | | | | | | | |
| Solar Facility | Seller | Approx. Nameplate Capacity | Location | Expected/Actual COD | PPA Counterparties
for Plant Output | PPA
Contract Period | Estimated Construction Costs | |
| | | (MW) | | | | | (in millions) | |
| Butler | CERSM, LLC and Community Energy, Inc. | 103 | Taylor County, GA | Fourth quarter 2016 | Georgia Power(a) | 30 years | $ | 220 |
| - | 230 | (b) |
| Desert Stateline | First Solar, Inc. | 299(c) | San Bernardino County, CA | Through third quarter 2016 | Southern California Edison Company (SCE) | 20 years | $ | 1,200 |
| - | 1,300 | (d) |
Garland and
Garland A | Recurrent Energy, LLC | 205 | Kern County, CA | Fourth quarter 2016 Third quarter 2016 | SCE | 15 years and
20 years | $ | 532 |
| - | 552 | (e,f) |
| Roserock | Recurrent Energy, LLC | 160 | Pecos County, TX | Fourth quarter 2016 | Austin Energy | 20 years | $ | 333 |
| - | 353 | (e,f) |
| Sandhills | N/A | 146 | Taylor County, GA | Fourth quarter 2016 | Cobb, Flint, Irwin, Middle Georgia and Sawnee Electric Membership Corporations | 25 years | $ | 260 |
| - | 280 | |
| Tranquillity | Recurrent Energy, LLC | 205 | Fresno County, CA | Third quarter 2016 | Shell Energy North America (US), LP/SCE | 18 years | $ | 473 |
| - | 493 | (f,g) |
| |
| (a) | Butler - Affiliate PPA subject to FERC approval. |
| |
| (b) | Butler - Total estimated construction costs include the acquisition price of all outstanding membership interests of the related entity. |
(c) Desert Stateline - The facility has a total of 299 MWs, of which 110 MWs were placed in service in the fourth quarter 2015 and $9 million as a receivable related76 MWs were placed in service in the first quarter 2016. Subsequent to transmission interconnection costs;March 31, 2016, 38 MWs were placed in service. The remaining 75 MWs are expected to be placed in service by the end of the third quarter 2016.
| |
| (d) | Desert Stateline - On March 29, 2016, Southern Power acquired an additional 15% interest in Desert Stateline. As a result, Southern Power and the class B member are entitled to 66% and 34%, respectively, of all cash distributions from Desert Stateline. In addition, Southern Power will continue to be entitled to substantially all of the federal tax benefits with respect to the transaction. Total estimated construction costs include the acquisition price allocated to CWIP; however, the allocation of the purchase price to individual assets has not been finalized. |
| |
| (e) | Total estimated construction costs include the acquisition price allocated to CWIP. During the first quarter 2016, the allocation of the purchase price to individual assets was finalized with no changes. |
| |
| (f) | Southern Power owns 100% of the class A membership interests and a wholly-owned subsidiary of the seller owns 100% of the class B membership interests. Southern Power and the class B member are entitled to 51% and 49%, respectively, of all cash distributions from the project. |
(g) Total estimated construction costs include the acquisition price allocated to CWIP; however, the allocation of the purchase price to individual assets has not been finalized.
(d) Concurrently, a wholly-owned subsidiary of First Solar acquired 100% of the class B membership interests for approximately $100 million. The fair values of the assets acquired through the business combination were recorded as follows: $266 million as property, plant, and equipment, $24 million as an intangible asset, and $21 million as a receivable related to transmission interconnection costs; however, the allocation of the purchase price to individual assets has not been finalized.
(e) Concurrently, a wholly-owned subsidiary of Recurrent Energy, LLC converted all its membership interests to 100% of the class B membership interests of Tranquillity after contributing approximately $157 million of assets and receiving an initial distribution of $100 million. The fair values of the assets acquired were recorded as follows: $170 million as CWIP, $24 million as other receivables, and $37 million as payables; however, the allocation of the purchase price to individual assets has not been finalized. Subsequent to the acquisition, Southern Power and Recurrent Energy, LLC are expected to make additional construction payments of approximately $215 million and $106 million, respectively. The ultimate outcome of this matter cannot be determined at this time.
(f) Concurrently, a wholly-owned subsidiary of First Solar acquired 100% of the class B membership interests for approximately $223 million. As of September 30, 2015, the fair values of the assets acquired, which includes Southern Power's and First Solar's initial payments due under the related construction agreement, were recorded as follows: $413 million as CWIP and $249 million as an intangible asset; however, the allocation of the purchase price to individual assets has not been finalized. The intangible asset consists of an acquired PPA that will be amortized over its 20-year term. The estimated amortization for future periods is approximately $6.2 million in 2016, $12.5 million per year for 2017 through 2020, and $192.8 million thereafter. Southern Power's and First Solar's remaining combined future payments, including construction payments, are estimated to be between $827 million to $844 million. The ultimate outcome of this matter cannot be determined at this time.
(g) On October 22, 2015, SRE and Turner Renewable Energy, LLC (TRE), through Southern Turner Renewable Energy, LLC, a jointly-owned subsidiary owned 90% by SRE, acquired all of the outstanding membership interests of Morelos. The total purchase price, including TRE's 10% ownership, is approximately $50 million.
Construction Projects
In December 2014, Southern Power Company announced plans to build a solar photovoltaic facility, and during 2015, Southern Power Company acquired all the outstanding membership interests of five separate solar project development entities. The construction projects are in accordance with Southern Power's overall growth strategy and included in its capital program estimates for 2015. The total cost of construction incurred for these projects through September 30, 2015 was $299 million. The ultimate outcome of these matters cannot be determined at this time.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Southern Power Company's construction projects, excluding the Tranquillity and Desert Stateline construction projects discussed above, are detailed in the table below:
|
| | | | | | | | | | | | |
| Solar Project | Seller | Approx. Nameplate Capacity | County Location in Georgia | Expected Commercial Operation Date | PPA Counterparties
for Entire Plant Output | PPA Contract Period | Estimated Construction Cost | |
| | | (MW) | | | | | (in millions) | |
| Taylor County | N/A | 146 | Taylor | Fourth quarter 2016 | Cobb, Flint, and Sawnee Electric Membership Corporations | 25 years | $ | 260 |
| - | $280 | |
| Decatur Parkway | TradeWind Energy, Inc. | 84 | Decatur | December 2015 | Georgia Power(a) | 25 years | $ | 170 |
| - | $173 | (c) |
| Decatur County | TradeWind Energy, Inc. | 20 | Decatur | December 2015 | Georgia Power(b) | 20 years | $ | 45 |
| - | $47 | (c) |
| Butler | CERSM, LLC and Community Energy, Inc. | 103 | Taylor | December 2016 | Georgia Power(b) | 30 years | $ | 220 |
| - | $230 | (c) |
| Pawpaw | Longview Solar, LLC | 30 | Taylor | December 2015 | Georgia Power(a) | 30 years | $ | 70 |
| - | $80 | (c) |
| Butler Solar Farm | Strata Solar Development, LLC | 20 | Taylor | December 2015 | Georgia Power(b) | 20 years | $ | 42 |
| - | $48 | (c) |
| |
(a) | Approved by the FERC subsequent to September 30, 2015. |
| |
(b) | Subject to FERC approval. |
| |
(c) | Includes the acquisition price of all outstanding membership interests. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
(J) SEGMENT AND RELATED INFORMATION
The primary business of the Southern Company system is electricity sales by the traditional operating companies and Southern Power. The four traditional operating companies – Alabama Power, Georgia Power, Gulf Power, and Mississippi Power – 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 reportable business segments are the sale of electricity by the four traditional operating companies and Southern Power. Revenues from sales by Southern Power to the traditional operating companies were $104$97 million and $303$114 million for the three and nine months ended September 30,March 31, 2016 and March 31, 2015, respectively, and $103 million and $243 million for the three and nine months ended September 30, 2014, respectively. The "All Other" column includes parent Southern Company, which does not allocate operating expenses to business segments. Also, this category includes segments below the quantitative threshold for separate disclosure. These segments include investments in telecommunications and leveraged lease projects. All other inter-segment revenues are not material.
Financial data for business segments and products and services for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Electric Utilities | | | | | | |
| | Traditional Operating Companies | | Southern Power | | Eliminations | | Total | | All Other | | Eliminations | | Consolidated |
| | (in millions) |
| Three Months Ended September 30, 2015: | | | | | | | | | | | | | |
| Operating revenues | $ | 5,098 |
| | $ | 401 |
| | $ | (109 | ) | | $ | 5,390 |
| | $ | 37 |
| | $ | (26 | ) | | $ | 5,401 |
|
Segment net income (loss)(a)(b) | 874 |
| | 102 |
| | — |
| | 976 |
| | (18 | ) | | 1 |
| | 959 |
|
| Nine Months Ended September 30, 2015: | | | | | | | | | | | | | |
| Operating revenues | $ | 13,123 |
| | $ | 1,086 |
| | $ | (322 | ) | | $ | 13,887 |
| | $ | 120 |
| | $ | (86 | ) | | $ | 13,921 |
|
Segment net income (loss)(a)(c) | 1,912 |
| | 181 |
| | — |
| | 2,093 |
| | 3 |
| | — |
| | 2,096 |
|
| Total assets at September 30, 2015 | $ | 67,750 |
| | $ | 7,040 |
| | $ | (404 | ) | | $ | 74,386 |
| | $ | 1,480 |
| | $ | (651 | ) | | $ | 75,215 |
|
| Three Months Ended September 30, 2014: | | | | | | | | | | | | | |
| Operating revenues | $ | 5,007 |
| | $ | 435 |
| | $ | (115 | ) | | $ | 5,327 |
| | $ | 34 |
| | $ | (22 | ) | | $ | 5,339 |
|
Segment net income (loss)(a)(b) | 658 |
| | 64 |
| | — |
| | 722 |
| | (2 | ) | | (2 | ) | | 718 |
|
| Nine Months Ended September 30, 2014: | | | | | | | | | | | | | |
| Operating revenues | $ | 13,594 |
| | $ | 1,115 |
| | $ | (301 | ) | | $ | 14,408 |
| | $ | 114 |
| | $ | (72 | ) | | $ | 14,450 |
|
Segment net income (loss)(a)(c) | 1,557 |
| | 128 |
| | — |
| | 1,685 |
| | — |
| | (5 | ) | | 1,680 |
|
| Total assets at December 31, 2014 | $ | 64,644 |
| | $ | 5,550 |
| | $ | (131 | ) | | $ | 70,063 |
| | $ | 1,156 |
| | $ | (296 | ) | | $ | 70,923 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Electric Utilities | | | | | | |
| | Traditional Operating Companies | | Southern Power | | Eliminations | | Total | | All Other | | Eliminations | | Consolidated |
| | (in millions) |
| Three Months Ended March 31, 2016: | | | | | | | | | | | | | |
| Operating revenues | $ | 3,742 |
| | $ | 315 |
| | $ | (103 | ) | | $ | 3,954 |
| | $ | 47 |
| | $ | (36 | ) | | $ | 3,965 |
|
Segment net income (loss)(a)(b) | 464 |
| | 50 |
| | — |
| | 514 |
| | (26 | ) | | (3 | ) | | 485 |
|
| Total assets at March 31, 2016 | $ | 69,240 |
| | $ | 8,999 |
| | $ | (396 | ) | | $ | 77,843 |
| | $ | 2,070 |
| | $ | (1,178 | ) | | $ | 78,735 |
|
| Three Months Ended March 31, 2015: | | | | | | | | | | | | | |
| Operating revenues | $ | 3,948 |
| | $ | 348 |
| | $ | (124 | ) | | $ | 4,172 |
| | $ | 40 |
| | $ | (29 | ) | | $ | 4,183 |
|
Segment net income (loss)(a)(b) | 477 |
| | 33 |
| | — |
| | 510 |
| | 3 |
| | (5 | ) | | 508 |
|
| Total assets at December 31, 2015 | $ | 69,052 |
| | $ | 8,905 |
| | $ | (397 | ) | | $ | 77,560 |
| | $ | 1,819 |
| | $ | (1,061 | ) | | $ | 78,318 |
|
| |
| (a) | After dividends on preferred and preference stock of subsidiaries.Attributable to Southern Company. |
| |
| (b) | Segment net income (loss) for the traditional operating companies for the three months ended September 30, 2015 and September 30, 2014 includes pre-tax charges of $150 million ($93 million after tax) and a pre-tax charge of $418 million ($258 million after tax), respectively, for estimated probable losses on the Kemper IGCC.IGCC of $53 million ($33 million after tax) and $9 million ($6 million after tax) for the three months ended March 31, 2016 and 2015, respectively. See Note (B) under "Integrated Coal Gasification Combined Cycle – Kemper IGCC Schedule and Cost Estimate" herein for additional information. |
| |
(c) | Segment net income (loss) for the traditional operating companies for the nine months ended September 30, 2015 and September 30, 2014 includes pre-tax charges of $182 million ($112 million after tax) and pre-tax charges of $798 million ($493 million after tax), respectively, for estimated probable losses on the Kemper IGCC. See Note (B) under "Integrated Coal Gasification Combined Cycle – Kemper IGCC Schedule and Cost Estimate" herein for additional information. |
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
(UNAUDITED)
Products and Services
|
| | | | | | | | | | | | | | | | |
| | | Electric Utilities' Revenues |
| Period | | Retail | | Wholesale | | Other | | Total |
| | | (in millions) |
| Three Months Ended September 30, 2015 | | $ | 4,701 |
| | $ | 520 |
| | $ | 169 |
| | $ | 5,390 |
|
| Three Months Ended September 30, 2014 | | 4,558 |
| | 600 |
| | 169 |
| | 5,327 |
|
| | | | | | | | | |
| Nine Months Ended September 30, 2015 | | $ | 11,958 |
| | $ | 1,435 |
| | $ | 494 |
| | $ | 13,887 |
|
| Nine Months Ended September 30, 2014 | | 12,186 |
| | 1,719 |
| | 503 |
| | 14,408 |
|
|
| | | | | | | | | | | | | | | | |
| | | Electric Utilities' Revenues |
| Period | | Retail | | Wholesale | | Other | | Total |
| | | (in millions) |
| Three Months Ended March 31, 2016 | | $ | 3,377 |
| | $ | 396 |
| | $ | 181 |
| | $ | 3,954 |
|
| Three Months Ended March 31, 2015 | | 3,542 |
| | 467 |
| | 163 |
| | 4,172 |
|
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
See the Notes to the Condensed Financial Statements herein for information regarding certain legal and administrative proceedings in which the registrants are involved.
Item 1A. Risk Factors.
In addition to the factors described inSee RISK FACTORS in Item 1A of the Form 10-K Southern Company faces the following additional risks:
Risks Related to the Proposed Merger with AGL Resources
Southern Company and AGL Resources may encounter difficulties in satisfying the conditions for the completiona discussion of the Merger, including receipt of all required regulatory approvals, which could delay the completionrisk factors of the Merger or impose conditions that couldregistrants. There have abeen no material adverse effect on the combined company or that could cause either partychanges to abandon the Merger.
Consummation of the Merger is subject to the satisfaction or waiver of certain closing conditions, including, among others, (i) approval of the Merger Agreement by AGL Resources' shareholders, which is scheduled for vote on November 19, 2015, (ii) the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, (iii) the approval of the California Public Utilities Commission, Georgia PSC, Illinois Commerce Commission, Maryland PSC, New Jersey Board of Public Utilities, and Virginia State Corporation Commission, and other approvals required under applicable state laws, and the approval of the Federal Communications Commission (FCC) for the transfer of control over the FCC licenses of certain subsidiaries of AGL Resources and any other approval which Southern Company and AGL Resources agree are required, (iv) the absence of a judgment, order, decision, injunction, ruling, or other finding or agency requirement of a governmental entity prohibiting the consummation of the Merger, and (v) other customary closing conditions, including (a) subject to certain materiality qualifiers, the accuracy of each party's representations and warranties and (b) each party's performance in all material respects of its obligations under the Merger Agreement.
Southern Company expects to complete the required state regulatory filingsthese risk factors from those previously disclosed in the fourth quarter 2015. These governmental entities may decline to approve the Merger or may impose conditions on the completion, or require changes to the terms, of the Merger, including restrictions or conditions on the business, operations, or financial performance of the combined company following the Merger.Form 10-K.
Satisfying the conditions to completion of the Merger may take longer, and could cost more, than Southern Company expects. Any delay in completing the Merger or any additional conditions imposed in order to complete the Merger may materially adversely affect the benefits that Southern Company expects to achieve from the Merger and the integration of the companies' respective businesses.
In addition, conditions to the completion of the Merger may fail to be satisfied. Subject to certain limitations, either party may terminate the Merger Agreement if the Merger is not consummated by August 23, 2016, which date may be extended by either party to February 23, 2017 if, on August 23, 2016, all conditions to closing other than those relating to (i) regulatory approvals and (ii) the absence of legal restraints preventing consummation of the Merger (to the extent relating to regulatory approvals) have been satisfied.
Any delay in completing the Merger, conditions imposed by governmental entities, or failure to complete the Merger could have a material adverse effect on the financial condition, net income, and cash flows of Southern Company.
Failure to complete the Merger could negatively impact Southern Company's stock price and Southern Company's future business and financial results.
Completion of the Merger is not assured and is subject to risks, including the risks that approval of the transaction by governmental entities will not be obtained or that certain other closing conditions will not be satisfied. If the Merger is not completed, Southern Company's ongoing businesses and financial results may be adversely affected and Southern Company will be subject to a number of risks, including the following:
Southern Company will be required to pay significant costs relating to the Merger, including legal, accounting, and financial advisory costs, whether or not the Merger is completed;
matters relating to the Merger (including integration planning) may require substantial commitments of time and resources by Southern Company management, which could otherwise have been devoted to other opportunities that may have been beneficial to Southern Company; and
negative publicity and a negative impression of Southern Company in the investment community.
The occurrence of any of these events, individually or in combination, could cause the share price of Southern Company to decline if and to the extent that the current market prices reflect an assumption by the market that the Merger will be completed.
If completed, the Merger may not achieve its intended results.
Southern Company entered into the Merger Agreement with the expectation that the Merger would result in various benefits. Achieving the anticipated benefits of the Merger is subject to a number of uncertainties, including whether the business of AGL Resources is integrated in an efficient and effective manner, conditions imposed on the Merger by federal and state public utility, antitrust, and other regulatory authorities prior to approval, general market and economic conditions, and general competitive factors in the market place. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues generated by the combined company, and diversion of management's time and energy and could have an adverse effect on the combined company's financial condition, net income, and cash flows.
The Southern Company system will be subject to business uncertainties while the Merger is pending that could adversely affect Southern Company's financial results.
Uncertainty about the effect of the Merger on employees, suppliers, and customers of the Southern Company system may have an adverse effect on Southern Company. These uncertainties may impair the Southern Company system's ability to attract, retain, and motivate key personnel until the Merger is completed and for a period of time thereafter and could cause customers, suppliers, and others that deal with the Southern Company system to seek to change existing business relationships.
Employee retention and recruitment may be particularly challenging prior to the completion of the Merger, as employees and prospective employees may experience uncertainty about their future roles with the combined company. If key employees depart or fail to accept employment with the Southern Company system because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company, Southern Company's financial results could be adversely affected.
The pursuit of the Merger and the preparation for the integration of AGL Resources into the Southern Company system may place a significant burden on management and internal resources. The diversion of management attention away from day-to-day business concerns and any difficulties encountered in the transition and integration process could adversely affect Southern Company's financial results.
Southern Company is obligated to complete the Merger whether or not it has obtained the required financing.
Southern Company intends to initially fund the cash consideration for the Merger using approximately $7.0 billion of debt and $1.0 billion of equity. Southern Company expects to issue approximately $2.0 billion of additional equity through 2019 to offset a portion of the debt issued to fund the cash consideration for the Merger. In addition,
Southern Company entered into the $8.1 billion Bridge Agreement on September 30, 2015 to provide financing for the Merger in the event long-term financing is not available. The Bridge Agreement is subject to various conditions contained in the Bridge Agreement and the issuance of long-term debt and equity sales to finance the Merger will be subject to future market conditions.
Pending shareholder suits filed in connection with the Merger, the outcomes of which are uncertain, could delay or prevent the completion of the Merger.
AGL Resources and each member of the AGL Resources board of directors have been named as defendants in four purported shareholder class action lawsuits filed on behalf of named plaintiffs and other AGL Resources shareholders challenging the Merger and seeking, among other things, preliminary and permanent injunctive relief enjoining the Merger, and, in certain circumstances, damages. Southern Company and Merger Sub were also named as defendants in two of these lawsuits. If a plaintiff in these or any other future litigation is successful in obtaining an injunction prohibiting the parties from completing the Merger on the terms contemplated by the Merger Agreement, the injunction may prevent the completion of the Merger in the expected timeframe or altogether. If completion of the Merger is prevented or delayed, it could result in substantial costs to Southern Company. In addition, Southern Company could incur significant costs in connection with the lawsuits, including the costs associated with defending these lawsuits or any other liabilities or costs the parties may incur in connection with the litigation or settlement of these lawsuits.
Following the Merger, stockholders of Southern Company will own equity interests in a company whose subsidiary owns and operates a natural gas business.
AGL Resources is an energy services holding company whose primary business is the distribution of natural gas through natural gas distribution utilities. AGL Resources is involved in several other businesses that are mainly related and complementary to its primary business including: retail operations including the provision of natural gas commodity and related services to customers in competitive markets or markets that provide for customer choice, wholesale services including natural gas storage, gas pipeline arbitrage, and natural gas asset management and/or related logistics services, and midstream operations including high deliverability natural gas storage facilities and select pipelines. As a result, the combined company will be subject to various risks to which Southern Company is not currently subject, including risks related to transporting and storing natural gas. As stockholders of the combined company following the Merger, Southern Company stockholders may be adversely affected by these risks.
Southern Company may record goodwill that could become impaired and adversely affect its operating results.
In accordance with GAAP, the Merger will be accounted for using the acquisition method of accounting whereby the assets acquired and liabilities assumed are recognized at fair value as of the acquisition date. The excess of the purchase price over the fair values of AGL Resources' assets and liabilities will be recorded as goodwill.
The amount of goodwill, which could be material, will be allocated to the appropriate reporting units of the combined company. Southern Company is required to assess goodwill for impairment at least annually by comparing the fair value of reporting units to the carrying value of those reporting units. To the extent the carrying value of any of those reporting units is greater than the fair value, a second step comparing the implied fair value of goodwill to the carrying amount would be required to determine if the goodwill is impaired. Such a potential impairment could result in a material charge that would have a material impact on Southern Company's future operating results and consolidated balance sheet.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities
|
| | | | | | | | | |
2015 | | Total Number of
Shares
Purchased (*)
| | Average Price
Paid Per Share
| | Total Number of Shares Purchased as Part of Publicly Announced Plans or
Programs (*)
| | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (*)
|
July 1 – July 31 | | — |
| | N/A | | N/A | | N/A |
August 1 – August 31 | | — |
| | N/A | | N/A | | N/A |
September 1 – September 30 | | — |
| | N/A | | N/A | | N/A |
Total | | — |
| | N/A | | N/A | | 17,400,634 |
| |
(*) | On March 2, 2015, Southern Company announced a program to repurchase up to 20 million shares of Southern Company common stock to offset all or a portion of the incremental shares issued under its employee and director equity compensation plans, including through stock option exercises, until December 31, 2017. There were no repurchases under this program in the third quarter 2015. As of September 30, 2015, Southern Company had repurchased a total of 2,599,366 shares under this program. No further repurchases under this program are anticipated. |
Item 6. Exhibits.
The exhibits below with an asterisk (*) preceding the exhibit number are filed herewith. The remaining exhibits have previously been filed with the SEC and are incorporated herein by reference. The exhibits marked with a pound sign (#) are management contracts or compensatory plans or arrangements.
|
| | | | |
| | | (2) Plan(4) Instruments Describing Rights of acquisition, reorganization, arrangement, liquidation or successionSecurity Holders, Including Indentures |
| | | | | |
| | | Southern CompanyGeorgia Power |
| | | | | |
| | | (a)(c)1 | - | Agreement and PlanFifty-fourth Supplemental Indenture to Senior Note Indenture, dated as of Merger by and among Southern Company, Merger Sub, and AGL Resources, dated August 23, 2015.March 8, 2016, providing for the issuance of the Series 2016A 3.250% Senior Notes due April 1, 2026. (Designated in Form 8-K dated August 23, 2015,March 2, 2016, File No. 1-3526,1-6468, as Exhibit 2.1.4.2(a).) |
| | | | | |
| | | (3) Articles(c)2 | - | Fifty-fifth Supplemental Indenture to Senior Note Indenture, dated as of IncorporationMarch 8, 2016, providing for the issuance of the Series 2016B 2.400% Senior Notes due April 1, 2021. (Designated in Form 8-K dated March 2, 2016, File No. 1-6468, as Exhibit 4.2(b).) |
| | | | |
| * | (c)3 | - | Amendment No. 2 to Loan Guarantee Agreement between Georgia Power and By-Lawsthe DOE, dated as of March 9, 2016. |
| | |
| | Mississippi Power |
| | | | |
| * | (e)1 | - | Term Loan Agreement among Mississippi Power and the lenders identified therein, dated as of March 8, 2016. |
| | |
| | (10) Material Contracts |
| | | | | |
| | | Mississippi Power |
| | | | | |
| # | * | (e)1 | - | By-laws ofLetter Agreement between Mississippi Power as amended effective October 19, 2015, and as presently in effect. (Designated in Form 8-KEmile J. Troxclair III dated October 19, 2015, File No. 1-3164, as Exhibit 3.1.)December 11, 2014. |
| | | | | |
| # | * | (4) Instruments Describing Rights of Security Holders, Including Indentures |
| | | | |
| | Southern Company |
| | | | |
| | (a)1(e)2 | - | Subordinated Note Indenture, dated as of October 1, 2015,Performance Award Agreement between Southern Company Services, Inc. and Wells Fargo Bank, National Association, as Trustee. (Designated in Form 8-K dated October 1, 2015, File No. 1-3526, as Exhibit 4.3.) |
| | | | |
| | (a)2 | - | First Supplemental Indenture to Subordinated Note Indenture, datedEmile J. Troxclair III effective as of October 8, 2015, providing for the issuance of the Series 2015A 6.25% Junior Subordinated Notes due October 15, 2075. (Designated in Form 8-K dated October 1, 2015, File No. 1-3526, as Exhibit 4.4.) |
| | | | |
| | (10) Material Contracts |
| | |
| | Southern Company |
| | | | |
| | (a)1 | - | Commitment Letter, dated August 23,January 3, 2015. (Designated in Form 8-K dated August 23, 2015, File No. 1-3526, as Exhibit 10.1.) |
| | | | |
�� | | (a)2 | - | Bridge Credit Agreement, dated as of September 30, 2015, among Southern Company, as the Borrower, the Lenders identified therein, and Citibank, N.A., as Administrative Agent. (Designated in Form 8-K dated September 30, 2015, File No. 1-3526, as Exhibit 10.1.) |
| | |
| | Southern Power |
| | | | |
| * | (f)1 | - | Amended and Restated Engineering, Procurement and Construction Agreement between Desert Stateline Holdings, LLC and First Solar Electric (California), Inc. dated as of August 31, 2015. (Southern Power has requested confidential treatment for certain portions of this document pursuant to an application for confidential treatment sent to the SEC. Southern Power omitted such portions from the filing and filed them separately with the SEC.) |
| | | | | |
| | | (24) Power of Attorney and Resolutions |
| | | | | |
| | | Southern Company |
| | | | | |
| | | (a)1 | - | Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2014,2015, File No. 1-3526 as Exhibit 24(a).) |
| | | | | |
|
| | | | |
| | | Alabama Power |
| | | | | |
| | | (b)1 | - | Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2014,2015, File No. 1-3164 as Exhibit 24(b).) |
| | | | | |
| | | Georgia Power |
| | | | | |
| | | (c)1 | - | Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2014,2015, File No. 1-6468 as Exhibit 24(c).) |
| | | | | |
|
| | | | |
| | | Gulf Power |
| | | | | |
| | | (d)1 | - | Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2014,2015, File No. 001-31737 as Exhibit 24(d).) |
| | | | |
| | (d)2 | - | Power of Attorney for Xia Liu. (Designated in the Form 10-Q for the quarter ended June 30, 2015, File No. 001-31737 as Exhibit 24(d)2.) |
| | | | | |
| | | Mississippi Power |
| | | | | |
| | | (e)1 | - | Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2014,2015, File No. 001-11229 as Exhibit 24(e).1.) |
| | | | |
| | (e)2 | - | Power of Attorney for Anthony L. Wilson. (Designated in the Form 10-K for the year ended December 31, 2015, File No. 001-11229 as Exhibit 24(e)2.) |
| | | | | |
| | | Southern Power |
| | | | | |
| | | (f)1 | - | Power of Attorney and resolution. (Designated in the Form 10-K for the year ended December 31, 2014,2015, File No. 333-98553 as Exhibit 24(f).1.) |
| | | | |
| | (f)2 | - | Power of Attorney for Joseph A. Miller. (Designated in the Form 10-K for the year ended December 31, 2015, File No. 333-98553 as Exhibit 24(f)2.) |
| | | | | |
| | | (31) Section 302 Certifications |
| | | | | |
| | | Southern Company |
| | | | | |
| | * | (a)1 | - | Certificate of Southern Company's Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | * | (a)2 | - | Certificate of Southern Company's Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | | Alabama Power |
| | | | | |
| | * | (b)1 | - | Certificate of Alabama Power's Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | * | (b)2 | - | Certificate of Alabama Power's Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | | Georgia Power |
| | | | | |
| | * | (c)1 | - | Certificate of Georgia Power's Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | * | (c)2 | - | Certificate of Georgia Power's Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | | Gulf Power |
| | | | | |
| | * | (d)1 | - | Certificate of Gulf Power's Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | * | (d)2 | - | Certificate of Gulf Power's Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
|
| | | | |
| | | Mississippi Power |
| | | | | |
| | * | (e)1 | - | Certificate of Mississippi Power's Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | * | (e)2 | - | Certificate of Mississippi Power's Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
|
| | | | |
| | | Southern Power |
| | | | | |
| | * | (f)1 | - | Certificate of Southern Power Company's Chief Executive Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | * | (f)2 | - | Certificate of Southern Power Company's Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | | |
| | | (32) Section 906 Certifications |
| | | | | |
| | | Southern Company |
| | | | | |
| | * | (a) | - | Certificate of Southern Company's Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | | Alabama Power |
| | | | | |
| | * | (b) | - | Certificate of Alabama Power's Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | | Georgia Power |
| | | | | |
| | * | (c) | - | Certificate of Georgia Power's Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | | Gulf Power |
| | | | | |
| | * | (d) | - | Certificate of Gulf Power's Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | | Mississippi Power |
| | | | | |
| | * | (e) | - | Certificate of Mississippi Power's Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | | Southern Power |
| | | | | |
| | * | (f) | - | Certificate of Southern Power Company's Chief Executive Officer and Chief Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | | | |
| | | (101) XBRL – Related Documents |
| | | | | |
| | * | INS | - | XBRL Instance Document |
| | * | SCH | - | XBRL Taxonomy Extension Schema Document |
| | * | CAL | - | XBRL Taxonomy Calculation Linkbase Document |
| | * | DEF | - | XBRL Definition Linkbase Document |
| | * | LAB | - | XBRL Taxonomy Label Linkbase Document |
| | * | PRE | - | XBRL Taxonomy Presentation Linkbase Document |
THE SOUTHERN COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof included in such company's report.
|
| | | |
| | | THE SOUTHERN COMPANY |
| | | | |
| By | | Thomas A. Fanning |
| | | Chairman, President, and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | | |
| By | | Art P. Beattie |
| | | Executive Vice President and Chief Financial Officer |
| | | (Principal Financial Officer) |
| | | | |
| By | | /s/Melissa K. Caen | |
| | | (Melissa K. Caen, Attorney-in-fact) | |
Date: NovemberMay 5, 20152016
ALABAMA POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof included in such company's report.
|
| | | |
| | | ALABAMA POWER COMPANY |
| | | | |
| By | | Mark A. Crosswhite | |
| | | Chairman, President, and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | | |
| By | | Philip C. Raymond |
| | | Executive Vice President, Chief Financial Officer, and Treasurer |
| | | (Principal Financial Officer) |
| | | | |
| By | | /s/Melissa K. Caen | |
| | | (Melissa K. Caen, Attorney-in-fact) | |
Date: NovemberMay 5, 20152016
GEORGIA POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof included in such company's report.
|
| | | |
| | | GEORGIA POWER COMPANY |
| | | | |
| By | | W. Paul Bowers |
| | | Chairman, President, and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | | |
| By | | W. Ron Hinson |
| | | Executive Vice President, Chief Financial Officer, Treasurer, and TreasurerCorporate Secretary |
| | | (Principal Financial Officer) |
| | | | |
| By | | /s/Melissa K. Caen | |
| | | (Melissa K. Caen, Attorney-in-fact) | |
Date: NovemberMay 5, 20152016
GULF POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof included in such company's report.
|
| | | |
| | | GULF POWER COMPANY |
| | | | |
| By | | S. W. Connally, Jr. |
| | | Chairman, President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | | |
| By | | Xia Liu |
| | | Vice President and Chief Financial Officer |
| | | (Principal Financial Officer) |
| | | | |
| By | | /s/Melissa K. Caen | |
| | | (Melissa K. Caen, Attorney-in-fact) | |
Date: NovemberMay 5, 20152016
MISSISSIPPI POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof included in such company's report.
|
| | | |
| | | MISSISSIPPI POWER COMPANY |
| | | | |
| By | | G. Edison Holland, Jr.Anthony L. Wilson |
| | | ChairmanPresident and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | | |
| By | | Moses H. Feagin |
| | | Vice President, Treasurer, and Chief Financial Officer, and Treasurer |
| | | (Principal Financial Officer) |
| | | | |
| By | | /s/Melissa K. Caen | |
| | | (Melissa K. Caen, Attorney-in-fact) | |
Date: NovemberMay 5, 20152016
SOUTHERN POWER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof included in such company's report.
|
| | | |
| | | SOUTHERN POWER COMPANY |
| | | | |
| By | | Oscar C. Harper IVJoseph A. Miller |
| | | President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | | |
| By | | William C. Grantham |
| | | Vice President, Chief Financial Officer, and Treasurer |
| | | (Principal Financial Officer) |
| | | | |
| By | | /s/Melissa K. Caen | |
| | | (Melissa K. Caen, Attorney-in-fact) | |
Date: NovemberMay 5, 20152016