W. Ron Hinson
Southern Company Services, Inc.
241 Ralph McGill Boulevard
Atlanta, GA 30308
404-506-6641
June 2, 2006
VIA EDGAR
Securities and Exchange Commission
100 F Street N.E.
Washington, D.C. 20549
Attn: Jim Allegretto
Senior Assistant Chief Accountant
Re: The Southern Company
Form 10-K for the year ended December 31, 2005
Filed February 27, 2006
File No. 1-3526
Alabama Power Company
Form 10-K for the year ended December 31, 2005
Filed February 27, 2006
File No. 1-3164
Georgia Power Company
Form 10-K for the year ended December 31, 2005
Filed February 27, 2006
File No. 1-6468
Gulf Power Company
Form 10-K for the year ended December 31, 2005
Filed February 27, 2006
File No. 0-2429
Mississippi Power Company
Form 10-K for the year ended December 31, 2005
Filed February 27, 2006
File No. 001-11229
Securities and Exchange Commission
June 2, 2006
Page 2
Savannah Electric and Power Company
Form 10-K for the year ended December 31, 2005
Filed February 27, 2006
File No. 1-5072
Southern Power Company
Form 10-K for the year ended December 31, 2005
Filed February 27, 2006
File No. 333-98553
Dear Mr. Allegretto:
The following is the response of The Southern Company (Southern
Company) to the Staff's comments on the Form 10-K for the fiscal year ended
December 31, 2005 (Form 10-K), transmitted in a letter from the Staff dated May
15, 2006. We are submitting this letter on behalf of Southern Company, and the
terms "we," "us," "our" and "the Company" in the following responses refer to
Southern Company.
SEC COMMENT:
1. We have read your response to comment three of our letter dated April
11, 2006. Please address in detail each of the criteria contained in
paragraph 5 of FIN 46R with respect to your synthetic fuel production
entities. Please tell us whether Clairton 1314B qualifies for section
29 tax credits or other tax benefits. If so, please address the
paragraph 5 analysis for your investment in coke production. Condition
two of paragraph 4h of FIN 46 states that, "the entity is designed so
that substantially all of its activities either involve or are
conducted on the behalf of the reporting enterprise and its related
parties". This condition addresses entities that have a narrow
business purpose because they were designed to complement the
company's operating or financing activities. We believe that both a
qualitative and quantitative approach should be utilized when
evaluating this condition. We note that you are recording material tax
credits related to investments in synthetic fuel. If such tax benefits
are skewed toward benefiting Southern, then condition two may also be
applicable. Furthermore, we are unclear on what role Southern played
in the design of the above entities as discussed in condition one to
paragraph 5. You may want to provide us with a detailed description of
transactions that resulted in formation, capitalization, acquisition
of synfuel assets and how the tax benefits are allocated to the
owners. We may have further comment.
Securities and Exchange Commission
June 2, 2006
Page 3
SOUTHERN COMPANY RESPONSE:
With regard to your request to address the criteria contained in paragraph 5 and
4.h. of FIN 46R, we will address each partnership separately:
Clairton 1314B Partnership, L.P. (Clairton)
This entity did not qualify for tax credits or other tax benefits from 2003
through 2005 (coke production credits expired in 2002).
Clairton is a limited partnership that owns and operates coke batteries for the
production of coke, which is used to produce steel. The partnership has two
limited partners with an aggregate 54.25% percentage interest and one general
partner with a 45.75% percentage interest. Southern Company is a limited partner
with a 14.7% percentage interest. Southern Company did not participate
significantly in the design or redesign or this entity.
Clairton meets the definition of a business as defined in Appendix C of FIN 46R.
A business must include inputs, processes applied to those inputs, and resulting
outputs. Clairton has inputs: tangible and intangible assets, contracts to
purchase raw materials, contracts for critical services, and employees;
operational processes: the standards, protocols and rules that exist to convert
the raw material into synthetic fuel; and outputs: the synthetic fuel produced
and the profits generated. We believe that Clairton is a business as defined in
Appendix C of FIN 46R. Therefore, we conclude that Clairton is excluded from the
scope of the Interpretation and does not require an analysis under paragraph 5
of FIN 46R. In reaching this conclusion, we also evaluated the four exclusions
under paragraph 4.h. with the results as follows:
Paragraph 4.h.(1) The reporting enterprise, its related parties, or both
participated significantly in the design or redesign of the entity. However,
this condition does not apply if the entity is an operating joint venture under
joint control of the reporting enterprise and one or more independent parties or
a franchise.
We believe that this condition does not apply as the entity is under joint
control of Southern Company and the other partners. In reaching this
conclusion we considered APB No. 18, ACSEC's conclusions in the July 17,
1979 Issues Paper, Joint Venture Accounting, and SEC comments made at the
Twentieth Annual National Conference on Current SEC Developments on
January 12, 1993. This definitional guidance indicates that a significant
distinguishing characteristic of a joint venture from other forms of an
entity is the owner's joint control over the significant operating
decisions of an entity. With respect to the operations conducted by
Clairton, the general partner is responsible for the day-to-day operating
activities of the partnership. Per the partnership agreement, the limited
partners approve the annual budget and authorize major decisions of the
partnership such as selling of assets, incurring capital expenditures,
incurring indebtedness, etc. Based on these facts, Southern Company
concludes that joint control (i.e., none of the individual partners is in
a
Securities and Exchange Commission
June 2, 2006
Page 4
position to control its strategic decisions) with the other members is in
place over major decisions regarding Clairton and thus, this condition
does not apply.
Paragraph 4.h.(2) The entity is designed so that substantially all of its
activities either involve or are conducted on behalf of the reporting enterprise
and its related parties.
We have analyzed all of these facts and circumstances in determining
whether substantially all of Clairton's activities either involve or are
conducted on behalf of Southern Company or its related parties. Southern
Company is not required to make any additional capital contributions to
Clairton. Southern Company realizes income from the partnership based on
Southern Company's ownership percentage (14.7%). Also, cash is
periodically distributed to the partners based on their respective
ownership percentages. Materials are purchased from and products are sold
to unrelated parties of Southern Company. We have concluded that
substantially all activities are not conducted on behalf of Southern
Company and therefore this condition is not met.
Paragraph 4.h.(3) The reporting enterprise and its related parties provide more
than half of the equity, subordinated debt, and other forms of subordinated
financial support to the equity based on the analysis of the fair values of the
interests in the entity.
Southern Company's investment represents a 14.7% interest in this entity.
No other financial support is provided or required under the partnership
agreements and therefore this condition is not met.
Paragraph 4.h.(4) The activities of the entity are primarily related to
securitizations or other forms of asset-backed financings or single-lessee
leasing arrangements.
The purpose of this entity is to produce and sell coke products; therefore
this condition is not met.
Paragraph 5
As noted above, Southern Company concluded that Clairton is excluded from
the scope of FIN 46R as it meets the scope exception for entities deemed
to be a business. As such, an analysis under paragraph 5 is not
necessary.
Carbontronics Synfuels Investors, LP (Carbontronics)
The Carbontronics partnership interest was originally purchased in June 1998
for an initial investment of $20.5 million (24.98% interest in the partnership)
used to fund the acquisition of the synthetic fuel facilities and initial
working capital. The partnership has three other limited partners and one
general partner. The general partner is responsible for the day to day operating
activities of the partnership.
Securities and Exchange Commission
June 2, 2006
Page 5
Carbontronics meets the definition of a business as defined in Appendix C of FIN
46R. A business must include inputs, processes applied to those inputs, and
resulting outputs. Carbontronics has inputs: tangible and intangible assets,
contracts to purchase raw materials, contracts for critical services, and
employees; operational processes: the standards, protocols and rules that exist
to convert the raw material into synthetic fuel; and outputs: the synthetic fuel
produced and the tax credits generated. We believe that Carbontronics is a
business as defined in Appendix C of FIN 46R. Therefore, we conclude that
Carbontronics is excluded from the scope of the Interpretation and does not
require an analysis under paragraph 5 of FIN 46R. In reaching this conclusion,
we also evaluated the four exclusions under paragraph 4.h. with the results as
follows:
Paragraph 4.h.(1) The reporting enterprise, its related parties, or both
participated significantly in the design or redesign of the entity. However,
this condition does not apply if the entity is an operating joint venture under
joint control of the reporting enterprise and one or more independent parties or
a franchise.
We believe that this condition does not apply as the entity is under joint
control of Southern Company and the other partners. In reaching this
conclusion we considered APB No. 18, ACSEC's conclusions in the July 17,
1979 Issues Paper, Joint Venture Accounting, and SEC comments made at the
Twentieth Annual National Conference on Current SEC Developments on
January 12, 1993. This definitional guidance indicates that a significant
distinguishing characteristic of a joint venture from other forms of an
entity is the owner's joint control over the significant operating
decisions of an entity. With respect to the operations conducted by
Carbontronics, the general partner is the managing member and makes all
decisions on behalf of Carbontronics. Per the partnership agreement, the
limited partners approve the budget and authorize major decisions of the
partnership such as moving a facility, entering into long-term agreements,
selling assets, and incurring indebtedness. Based on these facts, Southern
Company concludes that joint control (i.e., none of the individual
partners is in a position to control its strategic decisions) with the
other members is in place over major decisions regarding Carbontronics and
thus, this condition does not apply.
Paragraph 4.h.(2) The entity is designed so that substantially all of its
activities either involve or are conducted on behalf of the reporting enterprise
and its related parties.
We have analyzed all of these facts and circumstances in determining
whether substantially all of Carbontronics activities either involve or
are conducted on behalf of Southern Company or its related parties.
Operating profits and losses, associated tax deductions, and tax credits
generated by the partnership are allocated to Southern Company based on
our ownership percentage (24.98%). Capital contributions are based on
Southern Company's ownership percentage (24.98%) and a proportionate share
of tax credits produced. Materials are purchased from and products are
sold to unrelated parties of Southern Company. We have concluded that
substantially all activities are not conducted on behalf of Southern
Company and therefore this condition is not met.
Securities and Exchange Commission
June 2, 2006
Page 6
Paragraph 4.h.(3) The reporting enterprise and its related parties provide more
than half of the equity, subordinated debt, and other forms of subordinated
financial support to the equity based on the analysis of the fair values of the
interests in the entity.
Southern Company's investment represents a 24.98% interest in this entity.
We are obligated to fund operating losses with additional equity
contributions based on our 24.98% ownership. This support does not
represent more than half of the support of the entity. No other financial
support is provided or required under the partnership agreements and
therefore this condition is not met.
Paragraph 4.h.(4) The activities of the entity are primarily related to
securitizations or other forms of asset-backed financings or single-lessee
leasing arrangements.
The purpose of this entity is to produce and sell synthetic fuel to
generate tax credits; therefore this condition is not met.
Paragraph 5
As noted above, Southern Company concluded that Carbontronics is excluded
from the scope of FIN 46R as it meets the scope exception for entities
deemed to be a business. As such, an analysis under paragraph 5 is not
necessary.
Alabama Fuel Products, LLC (AFP)
The partnership was originally formed by parties unrelated to Southern Company
in 1999. Southern Company purchased an indirect 30% partnership interest in AFP
in April 2001 from an unrelated, privately-held company and its affiliates for
$10 million. These companies retained a 70% indirect ownership in AFP. AFP meets
the definition of a business as defined in Appendix C of FIN 46R. A business
must include inputs, processes applied to those inputs, and resulting outputs.
AFP has inputs: tangible and intangible assets, contracts to purchase raw
materials, contracts for critical services, and employees; operational
processes: the standards, protocols and rules that exist to convert the raw
material into synthetic fuel; and outputs: the synthetic fuel produced and the
tax credits generated. We believe that AFP is a business as defined in Appendix
C of FIN 46R. Therefore, we conclude that AFP is excluded from the scope of the
Interpretation and does not require an analysis under paragraph 5 of FIN 46R. In
reaching this conclusion we also evaluated the four exclusions under paragraph
4.h. with the results as follows:
Paragraph 4.h.(1) The reporting enterprise, its related parties, or both
participated significantly in the design or redesign of the entity. However,
this condition does not apply if the entity is an operating joint venture under
joint control of the reporting enterprise and one or more independent parties or
a franchise.
Securities and Exchange Commission
June 2, 2006
Page 7
We believe that this condition does not apply as the entity is under joint
control of Southern Company and the other partners. In reaching this
conclusion we considered APB No. 18, ACSEC's conclusions in the July 17,
1979 Issues Paper, Joint Venture Accounting, and SEC comments made at the
Twentieth Annual National Conference on Current SEC Developments on
January 12, 1993. This definitional guidance indicates that a significant
distinguishing characteristic of a joint venture from other forms of an
entity is the owner's joint control over the significant operating
decisions of an entity. With respect to the operations conducted by AFP,
an unrelated partner is the managing member and all major decisions
require our consent including incurring capital expenditures in excess of
$1 million, incurring any liability in excess of $1 million, amending or
terminating any material contract, and making any material change in the
scope of the business of AFP. Based on these facts, Southern Company
concludes that joint control (i.e., none of the individual partners is in
a position to control its strategic decisions) is in place regarding AFP
and thus, this condition does not apply.
Paragraph 4.h.(2) The entity is designed so that substantially all of its
activities either involve or are conducted on behalf of the reporting enterprise
and its related parties.
The business purpose of this entity is to produce synthetic fuel which
allows its investors/members to receive tax credits under Section 45K of
the Internal Revenue Code. Operating profits, losses and tax credits are
allocated to the members based primarily on their respective ownership
percentages, as defined in the operating agreement. Southern Company has
an indirect 30% ownership in AFP and shares in the losses and benefits
(including tax credits) of the company in accordance with this percentage.
An unrelated partner indirectly owns the other 70% of this entity and
shares in the losses and benefits of the company in accordance with this
percentage.
In analyzing AFP`s activities, we considered all of the facts and
circumstances, both quantitative and qualitative. These activities
include:
o The primary activity of AFP, the generation of tax credits, is
allocated to Southern Company based on our 30% ownership
percentage.
o Affiliates of Southern Company purchase approximately 85% of the
synfuel produced by the venture.
o Affiliates of Southern Company and the other partners provide raw
materials and services to AFP. Southern Company provides services
totaling approximately 16% of AFP's total expenditures.
o Parties unrelated to Southern Company and the other partners
constructed the facilities and provide day-to-day administration,
operation and maintenance services.
o Previous owners of the venture receive ongoing payments based on
the thermal content of the synthetic fuel produced by the
venture.
While there are ancillary activities that involve parties related to
Southern Company, there are also significant activities that involve the
other partners and other unrelated parties.
Securities and Exchange Commission
June 2, 2006
Page 8
Therefore the activities of AFP do not meet the "substantially all"
requirement of the FIN 46R paragraph 4.h (2) condition to the business
exclusion.
Paragraph 4.h.(3) The reporting enterprise and its related parties provide more
than half of the equity, subordinated debt, and other forms of subordinated
financial support to the entity based on the analysis of the fair values of the
interests in the entity.
Southern Company's investment represents a 30% interest in this
entity. Southern Company and the other partners are obligated
to make capital contributions to the entity to fund operating
losses and payments to the former owners of the partnership.
Our contributions do not represent more than half of the equity
or other forms of financial support to the entity; therefore
this condition is not met.
Paragraph 4.h.(4) The activities of the entity are primarily related to
securitizations or other forms of asset-backed financings or single-lessee
leasing arrangements.
The purpose of this entity is to produce and sell synthetic
fuel to generate tax credits; therefore this condition is not
met.
Paragraph 5
As noted above, Southern Company concluded that AFP is
excluded from the scope of FIN 46R as it meets the scope
exception for entities deemed to be a business. As such, an
analysis under paragraph is not necessary.
SEC COMMENT:
2. We note your responses to comment 12, 13, 15, and 19 of our
letter dated April 11, 2006. Please indicate to us the time lag,
on average for each registrant, between when the accruals were
made and actually paid for each year presented. We may have
further comment.
SOUTHERN COMPANY RESPONSE:
On average for each registrant, Georgia Power Company, Gulf Power
Company, Mississippi Power Company and Southern Power Company, the
time lag between when the accruals are made and actually paid is
between 30 and 44 days for all years presented. This time lag is based
on lead lag studies and analysis of actual payment terms with vendors
and contractors.
Securities and Exchange Commission
June 2, 2006
Page 9
SEC COMMENT:
3. We were unable to locate any pro forma disclosure required by
paragraph 58(b) of SFAS no. 141 in your June 30, 2005 Form 10-Q. It
appears the acquisition was material, if not please explain the basis
for your conclusion using SAB 99. If the acquisition is material,
please provide such pro forma disclosure in your June 30, 2006 Form
10-Q.
SOUTHERN COMPANY RESPONSE:
SAB 99 (citing Concepts Statement No. 2, paragraph 123-124) notes that both
"quantitative" and "qualitative" considerations should be considered in the
assessment of materiality.
Quantitative considerations were applied based upon the results of the
three materiality tests: purchase price, total assets, and pre-tax income.
The results of the purchase price test returned a result of 10.55%, the
total assets test returned a result of 10.94% and the pre-tax income test
returned a result of 1%. All three tests were well below the 20%
materiality threshold. Based on these tests, we determined that the
transaction was not material and did not warrant the inclusion of the pro
forma disclosures required by SFAS 141, paragraph 58(b) for material
acquisitions.
While not quantitatively material, qualitative considerations were also
applied and the disclosure information under SFAS 141, paragraphs 51 and 52
was included. See Note O to the financial statements of Southern Company in
the Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 and
Note 2 to the financial statements of Southern Power Company in the Annual
Report on Form 10-K for the year ended December 31, 2005.
* * * * * *
In connection with the above responses to the Commission's comments, the
Company hereby acknowledges that:
o we are responsible for the adequacy and accuracy of the disclosure in
the filing;
o staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
o the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
Securities and Exchange Commission
June 2, 2006
Page 10
We appreciate the assistance the Staff has provided with its comments on
the Form 10-K. We will be pleased to respond promptly to any requests for
additional information or material that we may provide in order to facilitate
your review.
Please direct any further questions or comments you may regarding this
filing to the undersigned at (404) 506-6641, to Jan Hodnett at (404) 506-6709 or
to Wayne Boston at (404) 506-7146.
Very truly yours,
/s/W. Ron Hinson