Effective Tax Rate and Unrecognized Tax Benefits

9 Months Ended

Sep. 30, 2012

Income Tax Disclosure [Abstract]

EFFECTIVE TAX RATE AND UNRECOGNIZED TAX BENEFITS

EFFECTIVE TAX RATE AND UNRECOGNIZED TAX BENEFITS

Effective Tax Rate

See Note 5 to the financial statements of each registrant in Item 8 of the Form 10-K for information on the effective income tax rate.

Southern Company

Southern Company's effective tax rate is typically lower than the statutory rate due to its employee stock plans' dividend deduction and non-taxable AFUDC equity.

Southern Company's effective tax rate was 35.3% for the nine months ended September 30, 2012 compared to 36.1% for the corresponding period in 2011. The decrease was primarily related to state income tax credits. See "Unrecognized Tax Benefits" herein for additional information.

Alabama Power

Alabama Power's effective tax rate was 38.8% for the nine months ended September 30, 2012 compared to 39.0% for the corresponding period in 2011. The decrease was primarily due to a decrease in Alabama state income taxes as a result of an increase in the state income tax deduction for federal income taxes paid.

Georgia Power

Georgia Power's effective tax rate was 35.8% for the nine months ended September 30, 2012 and for the corresponding period in 2011.

Gulf Power

Gulf Power's effective tax rate was 37.3% for the nine months ended September 30, 2012 compared to 36.6% for the corresponding period in 2011. The increase was primarily due to a decrease in non-taxable AFUDC equity.

Mississippi Power

Mississippi Power's effective tax rate was 26.7% for the nine months ended September 30, 2012 compared to 32.6% for the corresponding period in 2011. The decrease was primarily due to an increase in non-taxable AFUDC equity related to the Kemper IGCC construction.

Southern Power

Southern Power's effective tax rate was 34.4% for the nine months ended September 30, 2012 compared to 35.9% for the corresponding period in 2011. The decrease was primarily due to an increase in convertible investment tax credits and state tax credits.

Unrecognized Tax Benefits

Changes during 2012 for unrecognized tax benefits were as follows:

	Southern Company			Alabama Power			Georgia Power			Gulf Power			Mississippi Power		Southern Power
	(in millions)
Unrecognized tax benefits as of December 31, 2011	$	120		$	32		$	47		$	3		$	5	$	3
Tax positions from current periods	7			3			2			—			—		1
Tax positions from prior periods	(21		)	(4		)	(18		)	1			—		(2		)
Reductions due to settlements	(5		)	(2		)	(3		)	(1		)	—		1
Reductions due to expired statute of limitations	(3		)	—			(3		)	—			—		—
Balance as of September 30, 2012	$	98		$	29		$	25		$	3		$	5	$	3

The tax positions from current periods relate primarily to the tax accounting method change for repairs-generation assets. See "Tax Method of Accounting for Repairs" herein for additional information. The decreases in tax positions from prior periods primarily relate to state income tax credits. The reductions due to settlements relate to a settlement with the IRS of the calculation methodology for the production activities deduction.

The impact on the effective tax rate, if recognized, was as follows:

	As of September 30, 2012			As of December 31, 2011
		Southern Company
	(in millions)
Tax positions impacting the effective tax rate		$	38	$	69
Tax positions not impacting the effective tax rate		60		51
Balance of unrecognized tax benefits		$	98	$	120

The tax positions impacting the effective tax rate primarily relate to state income tax credits and a litigation settlement refund claim for Southern Company. See Note 5 to the financial statements of Southern Company under "Effective Tax Rate" in Item 8 of the Form 10-K for additional information. The tax positions not impacting the effective tax rate relate to the timing difference associated with the tax accounting method change for repairs-generation assets. See "Tax Method of Accounting for Repairs" herein 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 as follows:

		Southern Company
	(in millions)
Interest accrued as of December 31, 2011		$	10
Interest reclassified due to settlements		(9		)
Interest accrued during the period		—
Balance as of September 30, 2012		$	1

All of the registrants classify interest on tax uncertainties as interest expense. The interest reclassified due to settlements is primarily associated with state income tax credits and a settlement with the IRS related to the calculation methodology for the production activities deduction.

None of the registrants accrued any penalties on uncertain tax positions.

It is reasonably possible that the amount of the unrecognized tax benefits associated with a majority of the registrants' unrecognized tax positions will significantly increase or decrease within the next 12 months. The resolution of the tax accounting method change for repairs-generation assets, as well as the conclusion or settlement of federal and state audits, could also impact the balances significantly. At this time, an estimate of the range of reasonably possible outcomes cannot be determined.

Tax Method of Accounting for Repairs

Southern Company submitted a tax accounting method change for repair costs associated with its subsidiaries' generation, transmission, and distribution systems with the filing of the 2009 federal income tax return in September 2010. In August 2011, the IRS issued a revenue procedure, which provides a safe harbor method of accounting that taxpayers may use to determine repair costs for transmission and distribution property. However, the IRS continues to work with the utility industry in an effort to resolve the repair costs for generation assets matter in a consistent manner for all utilities. In December 2011, the IRS published regulations on the deduction and capitalization of expenditures related to tangible property that generally apply for tax years beginning on or after January 1, 2012. The utility industry anticipates more detailed guidance concerning these regulations. Due to uncertainty regarding the ultimate resolution of the repair costs for generation assets, an unrecognized tax position has been recorded for the tax accounting method change for repairs-generation assets. The ultimate outcome of this matter cannot be determined at this time.