W. Ron Hinson Southern Company
Comptroller and Bin 10137
Chief Accounting Officer 241 Ralph McGill Boulevard
Atlanta, GA 30308-3374
Tel 404.506.7146
Fax 404.506.4310
wrhinson@southernco.com
July 12, 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
July 12, 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
June 20, 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 one of our letter dated May 15,
2006. Please address the following issue related to your partnership
in Alabama Fuel Products, LLC (AFP):
a. We believe that condition two to paragraph 4h of FIN46R should be
based primarily on a qualitative assessment. The fact pattern
presented regarding the "substantially all" issue indicates that
you purchase 85% of the synfuel produced by the venture, and
provide materials and services to the partnership; presumably the
raw materials. Please advise as to the percentage of materials
you provide to AFP. Accordingly, it appears that several
indicators are present that suggest the activities of AFP are
conducted primarily on behalf of Southern. Therefore, we are not
clear how AFP meets the business exception under FIN46R. If you
do not concur, please explain your rationale. Otherwise please
address the paragraph 5 criteria in FIN46R. If you conclude that
AFP is a variable interest entity, then please indicate to us who
the primary beneficiary is, and how you reached your conclusion.
Furthermore, please provide to us any computations, and related
analysis, to reach your conclusion regarding this issue.
b. Please tell us the percentage of losses, or future capital
contributions, you are required to make to AFP. In this regard,
you state in your response that you have a 30% interest in AFP.
Securities and Exchange Commission
July 12, 2006
Page 3
Explain how the payments to the previous owners regarding the
thermal content of the synthetic fuel are calculated and whether
that was considered in your expected loss calculation. Lastly,
please tell us how the tax benefits are allocated between the
parties and how that allocation factored into your analysis.
SOUTHERN COMPANY RESPONSE:
In response to part a. of your comment:
We performed both a qualitative and quantitative assessment with regard
to condition two of paragraph 4h of FIN 46R and concluded that
substantially all of the activities of the entity are not conducted on
behalf of Southern Company and its related parties. The following key
factors were:
o The entity was originally formed in 1998 by entities not
affiliated with Southern Company. Three production facilities
were constructed and placed in service at that time. The entity
was acquired by a privately held company in 1999 and the purchase
agreement provided for certain payments to the former owners of
the limited liability company. Southern Company joined the entity
as a member in April of 2001.
o The business purpose of this entity is to generate tax credits,
to provide a return for investors and to produce and sell
synthetic fuel. The primary activity of this business is the
generation of tax credits - the credits are allocated 70% to our
privately held business partner and 30% to Southern Company. Tax
credits generated by the entity from 1999-2005 totaled $1,420
million of which $390 million have been allocated to Southern
Company and the remainder have been allocated to our business
partner.
o Inputs to the business processes include raw materials in the
form of feedstock coal and binder.
|X| A subsidiary of our privately held business partner
purchases coal from unrelated parties and sells the coal to
the entity. The subsidiary earns a fee for financing the
inventory and securing the supply contracts. Coal purchases,
including associated freight, represent 73% of the total
costs of the business.
|X| Another subsidiary of our privately held business partner
supplies all of the binder materials to the entity. Total
binder material purchased represents 9% of the total costs
of the business.
|X| Southern Company does not provide any of the raw materials
used by the business. Coal freight charges are incurred by
our operating subsidiaries and we are reimbursed by the
Securities and Exchange Commission
July 12, 2006
Page 4
entity dollar for dollar for these services, i.e., it is
just a pass-through cost.
o Processes used in the business include operating and maintaining
the machinery and equipment, performing administrative tasks and
employing plant personnel. One of the former owners of the entity
performs certain of these duties and receives reimbursement of
actual costs plus a management fee. Total day-to-day operating
and administrative costs of the plants represent 4% of total
costs of the business. Such former owner provides approximately
half of these services.
o Other processing costs include fuel handling services. Southern
Company provides approximately 75% of these services to the
entity which represents less than 5% of the total costs of the
business.
o Selling and general expenses include sales commission activities,
rent expense for synfuel plant sites and royalties paid for
certain intellectual property rights.
|X| A subsidiary of our privately held business partner markets
and sells all of the synfuel produced by the entity for a
commission. This commission represents approximately 5% of
the total costs of the business.
|X| One of our wholly owned subsidiaries has entered into lease
agreements for two of the three plant sites with the former
owner/operator of the plants. The rent expense incurred by
the former owner is passed on to the entity and represents
approximately 1% of the total costs of the business.
|X| Royalties are paid to unrelated third parties and represent
approximately 1% of the total costs of the business.
o The output of the business process is synthetic fuel. Alabama
Power Company and Georgia Power Company purchased approximately
85% of the synfuel produced by the entity in 2005. Unrelated
third parties purchased the remaining 15% of the output.
In response to part b. of your comment:
Production losses and payments to former owners are funded by Southern
Company and our privately held business partner. Southern Company's
funding obligation is limited to a percentage of the value of tax
credits generated - 31.2% of the credits produced as a result of the
first six million tons of production and 34% of the credits produced as
a result of production in excess of six million tons. The entity
produces approximately 12.5 million tons per year.
Securities and Exchange Commission
July 12, 2006
Page 5
The total funding obligation of the members (including payments to the
former owners) is limited to an amount defined in the 1999 purchase
agreement pursuant to which our business partner purchased the
membership interest from the former owners. This amount is based on the
thermal content of the synthetic fuel produced. Expressed as a
percentage of tax credits produced, the obligation is limited to
88.436% of tax credits generated by the business. As a result of these
contractual mechanisms, Southern Company's obligation to fund losses of
the entity represents approximately 37% of the total. The other member
is responsible for the remaining 63%.
This obligation to fund losses coupled with the right to receive a 30%
allocation of tax credits results in Southern Company receiving
approximately 22% of the total after-tax cash returns generated by the
entity and our business partner receiving the remaining 78%.
In summary, based on the analysis detailed above, we believe AFP
qualifies for the business exception under paragraph 4h of FIN46R and
is correctly reflected in Southern Company's financial statements.
SEC COMMENT:
2. We have read your response to comment two of our letter dated May 15,
2006. If you are aware of any companies in the industry that reflect
changes in construction payables as an investing cash flow activity,
please identify such companies. In any event, please support your
classification of such items as investing cash flows in your
Statements of Cash Flows. We may have further comment.
SOUTHERN COMPANY RESPONSE:
Payables incurred for acquiring or constructing long-lived assets do
not result in cash inflows or outflows of the companies until the
liabilities are paid. The presentation followed by the companies
appropriately reflects this, as explained below.
o In the period a liability is incurred to acquire or construct
long-lived assets, the change in operating accounts payable is reduced
by such amounts and are reflected in the line "Changes in construction
payables" within investing activities.
o The line item "Property additions" within investing activities is a
gross amount that includes not only outflows for property additions
paid for in the current period, but also accrued property additions.
In order to accurately report cash outflows for investing activities,
this amount must be adjusted by the changes in construction payables,
as noted above.
o By reflecting the amounts in the manner described above, both
operating activities and investing activities are appropriately
reduced for
Securities and Exchange Commission
July 12, 2006
Page 6
non-cash transactions. The impact of such transactions is also
disclosed on the face of the Statement of Cash Flows.
Paragraph 29 of SFAS No. 95 states that the reconciliation of net
income to net cash flow from operating activities must separately
report all major classes of reconciling items, "including at a minimum
changes during the period... in payables pertaining to operating
activities". Any changes, then, in payables related to investing or
financing activities should be segregated from changes in operating
accounts payable.
In addition, paragraph 17(c) of SFAS No. 95, "Statement of Cash
Flows", describes payments "at the time of purchase or soon before or
after purchase to acquire property, plant, and equipment and other
productive assets" as a source of cash outflows for investing
activities. Since our construction payables are paid in a 30 day
period we believe that such payments are properly classified as a
reconciling item in the investing activities section of the Statements
of Cash Flows under paragraph 17(c).
Acquiring or constructing a productive or long-lived asset by
incurring a liability does not result in a cash inflow or outflow
until the liability is paid. We believe it is appropriate to reduce
the operating accounts payable by such an amount and reflect that
amount in the investing section. In the period the liability is paid,
the amount is reflected as a cash outflow for investing activities.
This treatment results in the correct reporting of both operating and
investing activities.
While we have not conducted a review of the reporting of construction
payables by any other companies, based on the analysis set forth above
we believe we have properly presented our construction payables in the
Statement of Cash Flows.
SEC COMMENT:
3. We have read your response to comment three of our letter dated May
15, 2006. We are unclear the reason for your reference to a 20%
materiality threshold, which is the threshold percentage test in
Article 11 of Regulation S-X for a significant acquisition. We believe
the evaluation of materiality should be based on SAB 99 which contains
a quantitative threshold of 5%. Accordingly, please provide the pro
forma disclosures required by paragraph 58(b) of SFAS No. 141 in your
June 20, 2006 Form 10-Q or advise in detail.
SOUTHERN COMPANY RESPONSE:
Management does not believe the acquisition was quantitatively
material as the pre-tax net income impact of the acquisition to
Southern Power was slightly less than 1%. The revenue impact was
approximately 6%. Qualitative factors were also considered under SAB
99.
Securities and Exchange Commission
July 12, 2006
Page 7
These qualitative factors also indicated that the acquisition was not
material to Southern Power. In particular, the acquisition: (1) did
not mask a change in earnings or other trends or significantly impact
earnings; (2) did not hide a failure to meet analyst expectations; (3)
did not hide or change a loss; (4) did not have a significant role in
operations or profitability; (5) did not affect Southern Power's
compliance with regulatory requirements; (6) did not affect compliance
with loan covenants or other contractual obligations; (7) did not have
the effect of increasing management's compensation; and (8) did not
involve the concealment of an unlawful transaction. In addition to the
qualitative factors set forth in SAB 99, management also considered
several additional qualitative factors management deemed applicable.
These factors included: (1) the acquisition involved Southern Power's
core business of the sale of electricity and did not involve a new
line of business; (2) the acquisition did not expose Southern Power to
business risks different than those of Southern Power's existing
operations; and (3) the acquisition was consistent with Southern
Power's public statements regarding its growth strategy.
Based on management's analysis of quantitative and qualitative factors
as described in SAB 99, management continues to believe the
acquisition was not material to Southern Power and that the pro forma
disclosures set forth in paragraph 58(b) of SFAS 141 are not required.
* * * * * *
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.
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.
Securities and Exchange Commission
July 12, 2006
Page 8
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. R. Hinson