10-Q 1 so_10qx3312015.htm 10-Q SO_10Q_3.31.2015
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 March 31, 2015
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from           to            
 
Commission
File Number
 
Registrant, State of Incorporation,
Address and Telephone Number
 
I.R.S. Employer
Identification No.
1-3526
 
The Southern Company
(A Delaware Corporation)
30 Ivan Allen Jr. Boulevard, N.W.
Atlanta, Georgia 30308
(404) 506-5000
 
58-0690070
 
 
 
 
 
1-3164
 
Alabama Power Company
(An Alabama Corporation)
600 North 18th Street
Birmingham, Alabama 35203
(205) 257-1000
 
63-0004250
 
 
 
 
 
1-6468
 
Georgia Power Company
(A Georgia Corporation)
241 Ralph McGill Boulevard, N.E.
Atlanta, Georgia 30308
(404) 506-6526
 
58-0257110
 
 
 
 
 
001-31737
 
Gulf Power Company
(A Florida Corporation)
One Energy Place
Pensacola, Florida 32520
(850) 444-6111
 
59-0276810
 
 
 
 
 
001-11229
 
Mississippi Power Company
(A Mississippi Corporation)
2992 West Beach Boulevard
Gulfport, Mississippi 39501
(228) 864-1211
 
64-0205820
 
 
 
 
 
333-98553
 
Southern Power Company
(A Delaware Corporation)
30 Ivan Allen Jr. Boulevard, N.W.
Atlanta, Georgia 30308
(404) 506-5000
 
58-2598670




Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Registrant
 
Large
Accelerated
Filer
 
Accelerated
Filer
 
Non-
accelerated
Filer
 
Smaller
Reporting
Company
The Southern Company
 
X
 
 
 
 
 
 
Alabama Power Company
 
 
 
 
 
X
 
 
Georgia Power Company
 
 
 
 
 
X
 
 
Gulf Power Company
 
 
 
 
 
X
 
 
Mississippi Power Company
 
 
 
 
 
X
 
 
Southern Power Company
 
 
 
 
 
X
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No þ (Response applicable to all registrants.)
 
Registrant
 
Description of
Common Stock
 
Shares Outstanding at March 31, 2015

The Southern Company
 
Par Value $5 Per Share
 
908,261,371

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

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.

2

INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2015


 
 
Page
Number
 
 
 
 
PART I—FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.

3

INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 2015


 
 
Page
Number
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Defaults Upon Senior Securities
Inapplicable
Item 4.
Mine Safety Disclosures
Inapplicable
Item 5.
Other Information
Inapplicable
Item 6.
 


4


DEFINITIONS
 
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 for Georgia Power for the years 2014 through 2016
AFUDC
Allowance for funds used during construction
Alabama Power
Alabama Power Company
ASC
Accounting Standards Codification
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
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
CPCN
Certificate of public convenience and necessity
CWIP
Construction work in progress
DOE
U.S. Department of Energy
ECO Plan
Mississippi Power's Environmental Compliance Overview Plan
EPA
U.S. Environmental Protection Agency
FERC
Federal Energy Regulatory Commission
FFB
Federal Financing Bank
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, 2014
GAAP
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 in Kemper County, Mississippi
KWH
Kilowatt-hour
LIBOR
London Interbank Offered Rate
MATS rule
Mercury and Air Toxics Standards rule
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

5


DEFINITIONS
(continued)
Term
Meaning
 
 
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 Plant Vogtle
power pool
The operating arrangement whereby the integrated generating resources of the traditional operating companies and Southern Power Company are subject to joint commitment and dispatch in order to serve their combined load obligations
PPA
Power purchase agreement
PSC
Public Service Commission
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
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
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


6


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 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, postretirement benefit plan, and nuclear decommissioning trust fund 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:

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;
current and future litigation, regulatory investigations, proceedings, or inquiries, including pending EPA civil actions against certain Southern Company subsidiaries, FERC matters, and IRS and state tax audits;
the effects, extent, and timing of the entry of additional competition in the markets in which Southern Company's subsidiaries operate;
variations in demand for electricity, including those relating to weather, the general economy and recovery from the 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;
actions related to cost recovery for the Kemper IGCC, including actions relating to proposed securitization, Mississippi PSC approval of a rate recovery plan, including the ability to complete the proposed sale of an interest in the Kemper IGCC to SMEPA, the ability to utilize bonus depreciation, which currently requires that assets be placed in service in 2015, and satisfaction of requirements to utilize ITCs and grants;
Mississippi PSC review of the prudence of Kemper IGCC costs;



7


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
(continued)
the ultimate outcome and impact of the February 2015 decision of the Mississippi Supreme Court, Mississippi Power's request for rehearing of such decision, and any further legal or regulatory proceedings regarding any settlement agreement between Mississippi Power and the Mississippi PSC, the March 2013 rate order regarding retail rate increases, or the Baseload Act;
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 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 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.


8


THE SOUTHERN COMPANY
AND SUBSIDIARY COMPANIES

9


THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
For the Three Months
Ended March 31,
 
2015
 
2014
 
(in millions)
Operating Revenues:
 
 
 
Retail revenues
$
3,542

 
$
3,858

Wholesale revenues
467

 
604

Other electric revenues
163

 
165

Other revenues
11

 
17

Total operating revenues
4,183

 
4,644

Operating Expenses:
 
 
 
Fuel
1,212

 
1,647

Purchased power
144

 
187

Other operations and maintenance
1,122

 
986

Depreciation and amortization
487

 
497

Taxes other than income taxes
252

 
247

Estimated loss on Kemper IGCC
9

 
380

Total operating expenses
3,226

 
3,944

Operating Income
957

 
700

Other Income and (Expense):
 
 
 
Allowance for equity funds used during construction
63

 
57

Interest expense, net of amounts capitalized
(213
)
 
(206
)
Other income (expense), net
(8
)
 
(7
)
Total other income and (expense)
(158
)
 
(156
)
Earnings Before Income Taxes
799

 
544

Income taxes
274

 
176

Consolidated Net Income
525

 
368

Dividends on Preferred and Preference Stock of Subsidiaries
17

 
17

Consolidated Net Income After Dividends on Preferred and Preference Stock of Subsidiaries
$
508

 
$
351

Common Stock Data:
 
 
 
Earnings per share (EPS) —
 
 
 
Basic EPS
$
0.56

 
$
0.39

Diluted EPS
$
0.56

 
$
0.39

Average number of shares of common stock outstanding (in millions)
 
 
 
Basic
910

 
890

Diluted
915

 
893

Cash dividends paid per share of common stock
$
0.5250

 
$
0.5075

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


10


THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
For the Three Months
Ended March 31,
 
2015
 
2014
 
(in millions)
Consolidated Net Income
$
525

 
$
368

Other comprehensive income (loss):
 
 
 
Qualifying hedges:
 
 
 
Changes in fair value, net of tax of $(11) and $-, respectively
(18
)
 

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

 
1

Pension and other post retirement benefit plans:
 
 
 
Reclassification adjustment for amounts included in net income,
net of tax of $1 and $-, respectively
2

 
1

Total other comprehensive income (loss)
(15
)
 
2

Dividends on preferred and preference stock of subsidiaries
(17
)
 
(17
)
Comprehensive Income
$
493

 
$
353

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


11


THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
For the Three Months
Ended March 31,
 
2015
 
2014
 
(in millions)
Operating Activities:
 
 
 
Consolidated net income
$
525

 
$
368

Adjustments to reconcile consolidated net income to net cash provided from operating activities —
 
 
 
Depreciation and amortization, total
578

 
587

Deferred income taxes
113

 
(37
)
Allowance for equity funds used during construction
(63
)
 
(57
)
Stock based compensation expense
56

 
28

Estimated loss on Kemper IGCC
9

 
380

Other, net
4

 
(42
)
Changes in certain current assets and liabilities —
 
 
 
-Receivables
180

 
(128
)
-Fossil fuel stock
76

 
441

-Materials and supplies
4

 
(5
)
-Other current assets
(89
)
 
(114
)
-Accounts payable
(426
)
 
(109
)
-Accrued taxes
197

 
(44
)
-Accrued compensation
(381
)
 
(144
)
-Mirror CWIP
40

 
34

-Other current liabilities
90

 
(55
)
Net cash provided from operating activities
913

 
1,103

Investing Activities:
 
 
 
Property additions
(1,097
)
 
(1,180
)
Distribution of restricted cash

 
9

Nuclear decommissioning trust fund purchases
(290
)
 
(231
)
Nuclear decommissioning trust fund sales
284

 
229

Cost of removal, net of salvage
(36
)
 
(22
)
Change in construction payables, net
65

 
51

Prepaid long-term service agreement
(37
)
 
(64
)
Other investing activities
4

 
(7
)
Net cash used for investing activities
(1,107
)
 
(1,215
)
Financing Activities:
 
 
 
Increase (decrease) in notes payable, net
597

 
(884
)
Proceeds —
 
 
 
Long-term debt issuances
550

 
1,251

Interest-bearing refundable deposit

 
75

Common stock issuances
112

 
128

Short-term borrowings
280

 

Redemptions —
 
 
 
Long-term debt
(333
)
 
(9
)
Common stock repurchased
(115
)
 
(4
)
Payment of common stock dividends
(478
)
 
(451
)
Payment of dividends on preferred and preference stock of subsidiaries
(17
)
 
(17
)
Other financing activities

 
(46
)
Net cash provided from financing activities
596

 
43

Net Change in Cash and Cash Equivalents
402

 
(69
)
Cash and Cash Equivalents at Beginning of Period
710

 
659

Cash and Cash Equivalents at End of Period
$
1,112

 
$
590

Supplemental Cash Flow Information:
 
 
 
Cash paid (received) during the period for —
 
 
 
Interest (net of $32 and $22 capitalized for 2015 and 2014, respectively)
$
207

 
$
186

Income taxes, net
(289
)
 
(7
)
Noncash transactions — Accrued property additions at end of period
347

 
450

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

12


THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
Assets
 
At March 31,
2015
 
At December 31,
2014
 
 
(in millions)
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
1,112

 
$
710

Receivables —
 
 
 
 
Customer accounts receivable
 
1,117

 
1,090

Unbilled revenues
 
374

 
432

Under recovered regulatory clause revenues
 
159

 
136

Other accounts and notes receivable
 
241

 
307

Accumulated provision for uncollectible accounts
 
(19
)
 
(18
)
Fossil fuel stock, at average cost
 
855

 
930

Materials and supplies, at average cost
 
1,050

 
1,039

Vacation pay
 
178

 
177

Prepaid expenses
 
299

 
665

Deferred income taxes, current
 
578

 
506

Other regulatory assets, current
 
363

 
346

Other current assets
 
65

 
50

Total current assets
 
6,372

 
6,370

Property, Plant, and Equipment:
 
 
 
 
In service
 
70,279

 
70,013

Less accumulated depreciation
 
24,307

 
24,059

Plant in service, net of depreciation
 
45,972

 
45,954

Other utility plant, net
 
275

 
211

Nuclear fuel, at amortized cost
 
914

 
911

Construction work in progress
 
8,314

 
7,792

Total property, plant, and equipment
 
55,475

 
54,868

Other Property and Investments:
 
 
 
 
Nuclear decommissioning trusts, at fair value
 
1,574

 
1,546

Leveraged leases
 
749

 
743

Miscellaneous property and investments
 
204

 
203

Total other property and investments
 
2,527

 
2,492

Deferred Charges and Other Assets:
 
 
 
 
Deferred charges related to income taxes
 
1,527

 
1,510

Unamortized debt issuance expense
 
200

 
202

Unamortized loss on reacquired debt
 
239

 
243

Other regulatory assets, deferred
 
4,462

 
4,334

Other deferred charges and assets
 
808

 
904

Total deferred charges and other assets
 
7,236

 
7,193

Total Assets
 
$
71,610

 
$
70,923

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


13


THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
Liabilities and Stockholders' Equity
 
At March 31,
2015
 
At December 31,
2014
 
 
(in millions)
Current Liabilities:
 
 
 
 
Securities due within one year
 
$
3,306

 
$
3,333

Interest-bearing refundable deposit
 
275

 
275

Notes payable
 
1,679

 
803

Accounts payable
 
1,289

 
1,593

Customer deposits
 
395

 
390

Accrued taxes —
 
 
 
 
Accrued income taxes
 
198

 
151

Other accrued taxes
 
248

 
487

Accrued interest
 
286

 
295

Accrued vacation pay
 
222

 
223

Accrued compensation
 
186

 
576

Mirror CWIP
 
311

 
271

Other current liabilities
 
790

 
570

Total current liabilities
 
9,185

 
8,967

Long-term Debt
 
21,093

 
20,841

Deferred Credits and Other Liabilities:
 
 
 
 
Accumulated deferred income taxes
 
11,706

 
11,568

Deferred credits related to income taxes
 
185

 
192

Accumulated deferred investment tax credits
 
1,198

 
1,208

Employee benefit obligations
 
2,416

 
2,432

Asset retirement obligations
 
2,151

 
2,168

Other cost of removal obligations
 
1,209

 
1,215

Other regulatory liabilities, deferred
 
439

 
398

Other deferred credits and liabilities
 
619

 
594

Total deferred credits and other liabilities
 
19,923

 
19,775

Total Liabilities
 
50,201

 
49,583

Redeemable Preferred Stock of Subsidiaries
 
375

 
375

Redeemable Noncontrolling Interest
 
40

 
39

Stockholders' Equity:
 
 
 
 
Common Stockholders' Equity:
 
 
 
 
Common stock, par value $5 per share —
 
 
 
 
Authorized — 1.5 billion shares
 
 
 
 
Issued — March 31, 2015: 912 million shares
 
 
 
 
  — December 31, 2014: 909 million shares
 
 
 
 
Treasury — March 31, 2015: 3.3 million shares
 
 
 
 
 — December 31, 2014: 0.7 million shares
 
 
 
 
Par value
 
4,555

 
4,539

Paid-in capital
 
6,108

 
5,955

Treasury, at cost
 
(142
)
 
(26
)
Retained earnings
 
9,639

 
9,609

Accumulated other comprehensive loss
 
(143
)
 
(128
)
Total Common Stockholders' Equity
 
20,017

 
19,949

Preferred and Preference Stock of Subsidiaries
 
756

 
756

Noncontrolling Interest
 
221

 
221

Total Stockholders' Equity
 
20,994

 
20,926

Total Liabilities and Stockholders' Equity
 
$
71,610

 
$
70,923

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

14

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FIRST QUARTER 2015 vs. FIRST QUARTER 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.
In addition, subsidiaries of Southern Company are constructing Plant Vogtle Units 3 and 4 and the Kemper IGCC. Georgia Power has a 45.7% ownership interest in Plant Vogtle Units 3 and 4, each with approximately 1,100 MWs, and Mississippi Power is ultimately expected to hold an 85% ownership interest in the 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.
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 2015 vs. First Quarter 2014
(change in millions)
 
(% change)
$157
 
44.7
Southern Company's first quarter 2015 net income after dividends on preferred and preference stock of subsidiaries was $508 million ($0.56 per share) compared to $351 million ($0.39 per share) for the first quarter 2014. The increase was primarily the result of a lower pre-tax charge of $9 million ($6 million after tax) recorded in the first quarter 2015 compared to a pre-tax charge of $380 million ($235 million after tax) recorded in the first quarter 2014 for revisions of estimated costs expected to be incurred on Mississippi Power's construction of the Kemper IGCC, as well as an increase in retail base rates. The increase in net income was partially offset by increases in non-fuel operations and maintenance expenses and a decrease in revenues due to milder weather in the first quarter 2015 as compared to the corresponding period in 2014.

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SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Retail Revenues
First Quarter 2015 vs. First Quarter 2014
(change in millions)
 
(% change)
$(316)
 
(8.2)
In the first quarter 2015, retail revenues were $3.5 billion compared to $3.9 billion for the corresponding period in 2014.
Details of the changes in retail revenues were as follows:
 
 
First
 Quarter 2015
 
 
(in millions)
 
(% change)
Retail – prior year
 
$
3,858

 
 
Estimated change resulting from –
 
 
 
 
Rates and pricing
 
77

 
2.0

Sales growth
 
18

 
0.5

Weather
 
(38
)
 
(1.0
)
Fuel and other cost recovery
 
(373
)
 
(9.7
)
Retail – current year
 
$
3,542

 
(8.2
)%
Revenues associated with changes in rates and pricing increased in the first quarter 2015 when compared to the corresponding period in 2014 primarily due to increased revenues at Alabama Power associated with an increase in rates under rate stabilization and equalization (Rate RSE) and at Georgia Power related to base tariff increases 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, all effective January 1, 2015. The increase was partially offset by lower contributions from market-driven rates from commercial and industrial customers at Georgia 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" in Item 8 of the Form 10-K for additional information.
Revenues attributable to changes in sales increased in the first quarter 2015 as compared to the corresponding period in 2014. Industrial KWH sales increased 2.0% in the first quarter 2015 primarily due to increased sales in the paper, non-manufacturing, stone, clay, and glass, transportation, textiles, and pipeline sectors, partially offset by decreased sales in the primary metals and chemicals sectors. Weather-adjusted commercial KWH sales increased 0.7% in the first quarter 2015 primarily due to customer growth. Weather-adjusted residential KWH sales increased 0.2% in the first quarter 2015 as a result of customer growth, partially offset by decreased customer usage.
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 2014 KWH sales among customer classes that is consistent with the actual allocation in 2015. Without this adjustment, first quarter 2015 industrial KWH sales increased 1.9%, weather-adjusted commercial sales increased 0.3%, and weather-adjusted residential sales decreased 0.1% as compared to the corresponding period in 2014.
Fuel and other cost recovery revenues decreased $373 million in the first quarter 2015 when compared to the corresponding period in 2014 primarily due to a decrease in fuel prices and decreased energy sales as a result of milder weather in the first quarter 2015 as compared to the corresponding period in 2014.
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

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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 2015 vs. First Quarter 2014
(change in millions)
 
(% change)
$(137)
 
(22.7)
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 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 2015, wholesale revenues were $467 million compared to $604 million for the corresponding period in 2014 primarily related to a $118 million decrease in energy revenues and a $19 million decrease in capacity revenues. The decrease in energy revenues was primarily related to decreased demand resulting from milder weather in the first quarter 2015 as compared to the corresponding period in 2014 and lower natural gas prices, as well as contract expirations at Southern Power. The decrease in energy revenues was partially offset by new solar PPAs at Southern Power. The decrease in capacity revenues was primarily a result of the expiration of wholesale contracts in December 2014 at Georgia Power and contract expirations at Southern Power.
Fuel and Purchased Power Expenses
 
 
First Quarter 2015
vs.
First Quarter 2014
 
 
(change in millions)
 
(% change)
Fuel
 
$
(435
)
 
(26.4)
Purchased power
 
(43
)
 
(23.0)
Total fuel and purchased power expenses
 
$
(478
)
 
 
In the first quarter 2015, total fuel and purchased power expenses were $1.4 billion compared to $1.8 billion for the corresponding period in 2014. The decrease was primarily the result of a $443 million decrease in the average cost of fuel and purchased power primarily due to lower coal and natural gas prices and a $35 million decrease in the volume of KWHs generated and purchased primarily due to decreased demand resulting from milder weather in the first quarter 2015 as compared to the corresponding period in 2014.
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.

17

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Details of the Southern Company system's generation and purchased power were as follows:
 
 
First Quarter
2015
 
First Quarter
2014
Total generation (billions of KWHs)
 
46
 
47
Total purchased power (billions of KWHs)
 
3
 
3
Sources of generation (percent) —
 
 
 
 
Coal
 
33
 
47
Nuclear
 
16
 
16
Gas
 
47
 
33
Hydro
 
4
 
4
Cost of fuel, generated (cents per net KWH) 
 
 
 
 
Coal
 
3.70
 
4.19
Nuclear
 
0.67
 
0.89
Gas
 
2.71
 
4.19
Average cost of fuel, generated (cents per net KWH)
 
2.71
 
3.63
Average cost of purchased power (cents per net KWH)(a)
 
7.18
 
8.89
(a)
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 2015, fuel expense was $1.2 billion compared to $1.6 billion for the corresponding period in 2014. The decrease was primarily due to a 25.3% decrease in the average cost of fuel per KWH generated and a 31.0% decrease in the volume of KWHs generated by coal, partially offset by a 45.5% increase in the volume of KWHs generated by natural gas.
Purchased Power
In the first quarter 2015, purchased power expense was $144 million compared to $187 million for the corresponding period in 2014. The decrease was primarily due to a 19.2% decrease in the average cost per KWH purchased primarily as a result of lower natural gas prices and a 10.2% decrease in the volume of KWHs purchased primarily as a result of decreased demand from milder weather in the first quarter 2015 as compared to the corresponding period in 2014.
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
First Quarter 2015 vs. First Quarter 2014
(change in millions)
 
(% change)
$136
 
13.8
In the first quarter 2015, other operations and maintenance expenses were $1.1 billion compared to $986 million for the corresponding period in 2014. The increase was primarily due to a $35 million increase in employee compensation and benefits including pension costs, a $28 million increase in scheduled outage and maintenance costs at generation facilities, a $16 million increase in customer accounts, service, and sales costs primarily related to customer incentive and demand side management programs, a $9 million increase in transmission and

18

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

distribution costs primarily related to overhead line maintenance, and an $8 million increase in other generation expenses. In addition, Alabama Power deferred approximately $25 million of certain non-nuclear outage expenditures under an accounting order in the first quarter 2014. See Note 3 to the financial statements of Southern Company under "Retail Regulatory Matters – Alabama Power – Non-Nuclear Outage Accounting Order" in Item 8 of the Form 10-K for additional information related to non-nuclear outage expenditures. Also see Note (F) to the Condensed Financial Statements herein for additional information related to pension costs.
Depreciation and Amortization
First Quarter 2015 vs. First Quarter 2014
(change in millions)
 
(% change)
$(10)
 
(2.0)
In the first quarter 2015, depreciation and amortization was $487 million compared to $497 million for the corresponding period in 2014. The decrease was primarily due to a $26 million reduction in depreciation rates at Alabama Power and a $13 million reduction in depreciation at Gulf Power, as approved by the Florida PSC, partially offset by an increase of $28 million as a result of additional plant in service at the traditional operating companies and Southern Power.
Estimated Loss on Kemper IGCC
First Quarter 2015 vs. First Quarter 2014
(change in millions)
 
(% change)
$(371)
 
(97.6)
In the first quarter 2015 and 2014, estimated probable losses on the Kemper IGCC of $9 million and $380 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 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" 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
First Quarter 2015 vs. First Quarter 2014
(change in millions)
 
(% change)
$6
 
10.5
In the first quarter 2015, AFUDC equity was $63 million compared to $57 million for the corresponding period in 2014. The increase was primarily related to $17 million of additional capital expenditures for environmental and transmission projects at the traditional operating companies, partially offset by an $11 million decrease related to placing the combined cycle and the associated common facilities portion of Mississippi Power's Kemper IGCC in service in August 2014. See Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for additional information regarding the Kemper IGCC.

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SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Income Taxes
First Quarter 2015 vs. First Quarter 2014
(change in millions)
 
(% change)
$98
 
55.7
In the first quarter 2015, income taxes were $274 million compared to $176 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, partially offset by otherwise lower pre-tax earnings in 2015.
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 factors include the traditional operating companies' ability to maintain a constructive regulatory environment that continues to allow for the timely recovery of prudently-incurred costs during a time of increasing costs 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 the competitive wholesale business and successfully expanding investments in renewable 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 creditworthiness of customers, total generating capacity available and related costs, future acquisitions and construction of generating facilities, including the impact of ITCs, and the successful remarketing of capacity as current contracts expire. Changes in regional and global economic conditions may impact sales for the traditional operating companies and Southern Power as the pace of the economic recovery remains uncertain. The timing and extent of the economic recovery will impact growth and may impact future earnings. For additional information relating to these issues, see RISK FACTORS in Item 1A and MANAGEMENT'S DISCUSSION AND ANALYSIS – FUTURE EARNINGS POTENTIAL of Southern Company in Item 7 of the Form 10-K.
Environmental Matters
Compliance costs related to federal and state environmental statutes and regulations could affect earnings if such costs cannot continue to be fully recovered in rates on a timely basis 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. 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
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

20

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.
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, setting October 14, 2015 as the effective date of the CCR Rule. The ultimate impact of the CCR Rule cannot be determined at this time and 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. Based on initial estimates, Southern Company expects to record incremental asset retirement obligations of approximately $525 million to $575 million related to the CCR Rule in the second quarter 2015.
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 has directed the traditional operating companies and Southern Power, within 60 days, 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 are evaluating the order. The ultimate outcome of this matter cannot be determined at this time.
Retail Regulatory Matters
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.
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" 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.

21

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Rate CNP
In March 2015, the Emerging Issues Task Force unanimously recommended to allow the normal purchases and normal sales exception for physical forward transactions in nodal energy markets. The Financial Accounting Standards Board (FASB) proposed new accounting guidance reflecting the recommendation on April 23, 2015. This guidance is subject to a public comment period before the FASB issues a final accounting standard. The ultimate outcome of this matter cannot be determined at this time.
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. Alabama Power is continuing to evaluate its plans for Plant Barry Unit 3 (225 MWs), which is currently unavailable for generation.
In accordance with an accounting order from the Alabama PSC, Alabama Power will transfer 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. As a result, these decisions will not have a significant impact on Southern Company's financial statements.
Rate CNP Compliance (Formerly Known As Rate CNP Environmental)
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 for additional information regarding Alabama Power's development of a revised cost recovery mechanism.
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 $14 million of non-environmental compliance costs during the first quarter 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 the year.
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 (DSM) tariffs, Environmental Compliance Cost Recovery (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 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.
Renewables Development
As part of the Georgia Power Advanced Solar Initiative program, Georgia Power executed ten PPAs that were approved by the Georgia PSC in 2014 and provide for the purchase of energy from 515 MWs of solar capacity. These PPAs are expected to commence in December 2015 and 2016 and have terms ranging from 20 to 30 years. As

22

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

a result of certain acquisitions by Southern Power, Georgia Power expects that 229 MWs of the 515 MWs will be purchased from solar facilities owned or under development by Southern Power.
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 Unit 7 and is underway at Plant Yates Unit 6. Plant Yates Unit 7 was returned to service on May 4, 2015 and Plant Yates Unit 6 is expected to return to service in mid-2015.
Gulf Power
Renewables
The Florida PSC preliminarily approved on April 16, 2015, three energy purchase agreements totaling 120 MWs of utility-scale solar generation located at three military installations in northwest Florida. These contracts are expected to begin in 2016 with a term of 25 years each. The Florida PSC preliminarily approved on May 5, 2015, an energy purchase agreement for up to 178 MWs of wind generation in central Oklahoma. The agreement is expected to begin by the end of 2015 with a term of 20 years. Purchases under these agreements will be for energy only and are expected to be recovered through Gulf Power's fuel cost recovery mechanism. The ultimate outcome of these matters cannot be determined at this time.
Mississippi Power
Renewables
Subsequent to March 31, 2015, Mississippi Power entered into separate PPAs for three solar facilities for a combined total of approximately 105 MWs. Mississippi Power would purchase all of the energy produced by the solar facilities for the 25-year term of the contracts. If approved by the Mississippi PSC, the projects are expected to be in service by the end of 2016 and the resulting energy purchases will be recovered through Mississippi Power's fuel cost recovery mechanism. The ultimate outcome of this matter cannot be determined at this time.
Construction Program
The subsidiary companies of Southern Company are engaged in continuous construction programs to accommodate existing and estimated future loads on their respective systems. The Southern Company system intends to continue its strategy of developing and constructing new generating facilities, 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 and the Kemper IGCC. Georgia Power has a 45.7% ownership interest in Plant Vogtle Units 3 and 4, each with approximately 1,100 MWs, and Mississippi Power is ultimately expected to hold an 85% ownership interest in the 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 (I) to the Condensed Financial Statements herein.
From 2013 through March 31, 2015, Southern Company recorded pre-tax charges totaling $2.06 billion ($1.27 billion after tax) for revisions of estimated costs expected to be incurred on Mississippi Power's construction

23

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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. 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 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 January 29, 2015, Georgia Power announced it was notified by the Contractor of the Contractor's revised forecast for completion of Plant Vogtle Units 3 and 4, which would incrementally delay the previously disclosed estimated in-service dates by 18 months (from the fourth quarter of 2017 to the second quarter of 2019 for Unit 3 and from the fourth quarter of 2018 to the second quarter of 2020 for Unit 4).
While Georgia Power has not agreed to any change to the guaranteed substantial completion dates (April 2016 for Unit 3 and April 2017 for Unit 4) included in the engineering, procurement, and construction agreement relating to Plant Vogtle Units 3 and 4, Georgia Power's twelfth Vogtle Construction Monitoring (VCM) report, filed February 27, 2015, included a requested amendment (Requested Amendment) to the Plant Vogtle Units 3 and 4 certificate to reflect the Contractor's revised forecast, to include the estimated owner's costs associated with the proposed 18-month Contractor delay, and to increase the estimated in-service capital cost of Plant Vogtle Units 3 and 4 from $4.4 billion to $5.0 billion. No Contractor costs related to the Contractor's proposed 18-month delay were included in the twelfth VCM report. The twelfth VCM report estimated financing costs during the construction period to total approximately $2.5 billion.
On April 15, 2015, the Georgia PSC issued a procedural order in connection with the twelfth VCM report. 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.
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.
See FINANCIAL CONDITION AND LIQUIDITY – "Capital Requirements and Contractual Obligations" for additional information.
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.
Section 174 Research and Experimental Deduction
Southern Company reflected deductions for research and experimental expenditures related to the Kemper IGCC in its federal income tax calculations for 2013 and 2014. Due to the uncertainty related to this tax position, Southern Company had unrecognized tax benefits totaling approximately $211 million at March 31, 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" and "Unrecognized Tax Benefits," 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

24

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.
ACCOUNTING POLICIES
Application of Critical Accounting Policies and Estimates
Southern Company prepares its consolidated financial statements in accordance with GAAP. Significant accounting policies are described in Note 1 to the financial statements of Southern Company in Item 8 of the Form 10-K. In the application of these policies, certain estimates are made that may have a material impact on Southern Company's results of operations and related disclosures. Different assumptions and measurements could produce estimates that are significantly different from those recorded in the financial statements. See MANAGEMENT'S DISCUSSION AND ANALYSIS – ACCOUNTING POLICIES – "Application of Critical Accounting Policies and Estimates" of Southern Company in Item 7 of the Form 10-K for a complete discussion of Southern Company's critical accounting policies and estimates related to Electric Utility Regulation, Contingent Obligations, and Pension and Other Postretirement Benefits.
Kemper IGCC Estimated Construction Costs, Project Completion Date, and Rate Recovery
During 2015, 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 DOE Grants and excluding the Cost Cap Exceptions. Mississippi Power does not intend to seek any rate recovery or any joint owner contributions for any costs related to the construction of the Kemper IGCC that exceed the $2.88 billion cost cap, net of the 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 $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 $2.06 billion ($1.27 billion after tax) as a result of changes in the cost estimate for the Kemper IGCC through March 31, 2015.
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 DOE Grants and excluding the Cost Cap Exceptions will be reflected in Southern Company's statements of income 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

25

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

construction 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).
Mississippi Power's revised cost estimate includes costs through March 31, 2016. Any further extension of the in-service date is currently estimated to result in additional base costs of approximately $25 million to $30 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. Any further extension of the in-service date with respect to the Kemper IGCC 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 $13 million per month, as well as carrying costs and operating expenses on Kemper IGCC assets placed in service and consulting fees and legal fees which are being deferred as regulatory assets and are estimated to total approximately $6 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.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASC 606, Revenue from Contracts with Customers. ASC 606 revises the accounting for revenue recognition. On April 29, 2015, the FASB issued an exposure draft proposing the standard be 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 Accounting Standards Update (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. 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 March 31, 2015. Through March 31, 2015, Southern Company has incurred non-recoverable cash expenditures of $1.49 billion and is expected to incur approximately $567 million 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 $913 million for the first three months of 2015, a decrease of $190 million from the corresponding period in 2014. The decrease in net cash provided from operating activities was primarily due to a decrease in KWH generation from coal and the timing of fuel purchases. Net cash used for investing activities totaled $1.1 billion for the first three months of 2015 primarily due to gross property additions for installation of equipment to comply with environmental standards, construction of generation, transmission, and

26

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

distribution facilities, acquisitions of solar facilities, and purchases of nuclear fuel. Net cash provided from financing activities totaled $596 million for the first three months of 2015. This was primarily due to issuances of long-term debt and common stock and an increase in short-term debt outstanding, partially offset by common stock dividend payments, redemptions of long-term debt, and the repurchase of common stock. 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 three months of 2015 include an increase of $607 million in total property, plant, and equipment to comply with environmental standards and construction of generation, transmission, and distribution facilities. Other significant changes include an $876 million increase in notes payable and a $390 million decrease in accrued compensation.
At the end of the first quarter 2015, the market price of Southern Company's common stock was $44.28 per share (based on the closing price as reported on the New York Stock Exchange) and the book value was $22.04 per share, representing a market-to-book ratio of 201%, compared to $49.11, $21.98, and 223%, respectively, at the end of 2014. Southern Company's common stock dividend for the first quarter 2015 was $0.5250 per share compared to $0.5075 per share in the first quarter 2014. In April 2015, the quarterly dividend payable in June 2015 was increased to $0.5425 per share.
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 $3.7 billion will be required through March 31, 2016 to fund maturities of long-term debt and announced redemptions of preferred and preference stock of Alabama Power. See "Sources of Capital" herein for additional information.
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 due to market opportunities and Southern Power's ability to execute its growth strategy. 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.
Sources of Capital
Southern Company intends to meet its future capital needs through operating cash flow, 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 to be raised in 2015, as well as in subsequent years, will be contingent on Southern Company's investment opportunities and the Southern Company system's capital requirements.

27

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 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 costs) to be made by Georgia Power under a multi-advance credit facility (FFB Credit Facility) among Georgia Power, the DOE, and the FFB. 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, 2015 would allow for borrowings of up to $2.1 billion under the FFB Credit Facility. Through March 31, 2015, Georgia Power has borrowed $1.2 billion under the FFB Credit Facility, leaving $0.9 billion of available borrowing ability.
Mississippi Power received $245 million of DOE Grants in prior years that were used for the construction of the Kemper IGCC. An additional $25 million of DOE Grants is expected to be received for commercial operation of the Kemper IGCC. In addition, see Note (B) to the Condensed Financial Statements under "Integrated Coal Gasification Combined Cycle" herein for information regarding legislation related to the securitization of certain costs of the Kemper IGCC.
As of March 31, 2015, Southern Company's current liabilities exceeded current assets by $2.8 billion, primarily due to long-term debt that is due within one year of $3.3 billion, including approximately $0.4 billion at Southern Company, $0.7 billion at Alabama Power, $1.6 billion at Georgia Power, and $0.5 billion at Southern Power. In addition, Mississippi Power has $0.9 billion in bank term loans that 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, in 2015, Georgia Power expects to utilize borrowings through the FFB Credit Facility as its primary source of long-term borrowed funds.

28

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

At March 31, 2015, Southern Company and its subsidiaries had approximately $1.1 billion of cash and cash equivalents. Committed credit arrangements with banks at March 31, 2015 were as follows:
 
 
Expires
 
 
 
Executable Term
Loans
 
Due Within One
Year
Company
 
2015
 
2016
 
2017
 
2018
 
Total
 
Unused
 
One
Year
 
Two
Years
 
Term
Out
 
No Term
Out
 
 
(in millions)
 
(in millions)
 
(in millions)
 
(in millions)
Southern Company
 
$

 
$

 
$

 
$
1,000

 
$
1,000

 
$
1,000

 
$

 
$

 
$

 
$

Alabama Power
 
228

 
50

 

 
1,030

 
1,308

 
1,308

 
58

 

 
58

 
170

Georgia Power
 

 
150

 

 
1,600

 
1,750

 
1,736

 

 

 

 
150

Gulf Power
 
45

 
200

 
30

 

 
275

 
275

 
50

 

 
50

 
195

Mississippi Power
 
135

 
165

 

 

 
300

 
270

 
25

 
40

 
65

 
235

Southern Power
 

 

 

 
500

 
500

 
488

 

 

 

 

Other
 
70

 

 

 

 
70

 
70

 
20

 

 
20

 
50

Total
 
$
478

 
$
565

 
$
30

 
$
4,130

 
$
5,203

 
$
5,147

 
$
153

 
$
40

 
$
193

 
$
800

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.
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 March 31, 2015 was approximately $1.8 billion. In addition, at March 31, 2015, the traditional operating companies had $396 million of fixed rate pollution control revenue bonds outstanding that were required to be remarketed within the next 12 months. Subsequent to March 31, 2015, $145 million of these fixed rate pollution control revenue bonds were purchased and are being held by the applicable traditional operating company and currently are not required to be remarketed within the next 12 months.
Subject to applicable market conditions, Southern Company and its subsidiaries expect to renew or replace their bank credit arrangements, as needed, prior to expiration.
Most of these bank credit arrangements contain covenants that limit debt levels and contain cross default provisions to other indebtedness (including guarantee obligations) that are restricted only to the 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. Southern Company, the traditional operating companies, and Southern Power 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, 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. 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 loans are included in notes payable in the balance sheets.

29

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
March 31, 2015
 
Short-term Debt During the Period(*)
 
 
Amount
Outstanding
 
Weighted
Average
Interest
Rate
 
Average
Outstanding
 
Weighted
Average
Interest
Rate
 
Maximum
Amount
Outstanding
 
 
(in millions)
 
 
 
(in millions)
 
 
 
(in millions)
Commercial paper
 
$
1,399

 
0.3
%
 
$
883

 
0.3
%
 
$
1,487

Short-term bank debt
 
280

 
0.8
%
 
10

 
1.1
%
 
280

Total
 
$
1,679

 
0.4
%
 
$
893

 
0.3
%
 
 
(*)    Average and maximum amounts are based upon daily balances during the three-month period ended March 31, 2015.
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.
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 Baa2, or 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, interest rate derivatives, and construction of new generation at Plant Vogtle Units 3 and 4.
The maximum potential collateral requirements under these contracts at March 31, 2015 were as follows:
Credit Ratings
Maximum Potential
Collateral
Requirements
 
(in millions)
At BBB and Baa2
$
9

At BBB- and/or Baa3
385

Below BBB- and/or Baa3
2,454

Generally, collateral may be provided by a Southern Company guaranty, letter of credit, or cash. Additionally, any credit rating downgrade could impact the ability of Southern Company and its subsidiaries to access capital markets, particularly the short-term debt market and the variable rate pollution control revenue bond market.
Financing Activities
During the first three months of 2015, Southern Company issued approximately 3.1 million shares of common stock primarily through the employee equity compensation plan and received proceeds of approximately $112 million. Southern Company is not currently issuing shares of common stock through the Southern Investment Plan or its employee savings plan. All sales under the Southern Investment Plan and the employee savings plan are currently being funded with shares acquired on the open market by independent plan administrators.
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 have been repurchased through March 31, 2015 at a total cost of approximately $115 million. Pursuant to board approval, Southern Company may repurchase shares through open market

30

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

purchases or privately negotiated transactions, including accelerated or other share repurchase programs, in accordance with applicable securities laws.
The following table outlines the long-term debt financing activities for Southern Company and its subsidiaries for the first three months of 2015:
Company(a)
Senior
Note Issuances
 
Senior
Note Redemptions
 
Other
Long-Term
Debt Redemptions
and Maturities(b)
 
(in millions)
Alabama Power
$
550

 
$
250

 
$

Georgia Power

 

 
3

Mississippi Power

 

 
76

Other

 

 
4

Total
$
550

 
$
250

 
$
83

(a)
Southern Company, Gulf Power, and Southern Power did not issue or redeem any long-term debt during the first three months of 2015.
(b)
Includes reductions in capital lease obligations resulting from cash payments under capital leases.
Alabama Power used the proceeds of the debt issuance shown in the table above for its redemption shown in the table above and for general corporate purposes, including its continuous construction program.
In March 2015, Georgia Power entered into a three-month floating rate bank loan bearing interest based on one-month LIBOR. This short-term loan was for $250 million aggregate principal amount and the proceeds were used for working capital and other general corporate purposes.
Subsequent to March 31, 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 may reoffer these bonds to the public at a later date.
Also subsequent to March 31, 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 will be used for the announced redemption on May 15, 2015 of 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 will be used for general corporate purposes, including Alabama Power's continuous construction program.
Also subsequent to March 31, 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 may reoffer these bonds to the public at a later date.
Also subsequent to March 31, 2015, Georgia Power redeemed $125 million aggregate principal amount of its Series Y 5.80% Senior Notes due April 15, 2035; as a result, Georgia Power reclassified the outstanding principal balance to securities due within one year at March 31, 2015.
Also subsequent to March 31, 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 were used for the repayment of term loans in an aggregate principal amount of

31

SOUTHERN COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

$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 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.

32


PART I
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
During the three months ended March 31, 2015, 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, 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). Based upon these evaluations, the Chief Executive Officer and the Chief Financial Officer, in each case, concluded that the disclosure controls and procedures are effective.
(b)
Changes in internal controls.
There have been no changes in Southern Company's, Alabama Power's, Georgia Power's, Gulf Power's, Mississippi Power's, or Southern Power 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) during the first quarter 2015 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.

33


ALABAMA POWER COMPANY

34


ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF INCOME (UNAUDITED)
 
 
For the Three Months
Ended March 31,
 
2015
 
2014
 
(in millions)
Operating Revenues:
 
 
 
Retail revenues
$
1,268

 
$
1,297

Wholesale revenues, non-affiliates
65

 
85

Wholesale revenues, affiliates
15

 
69

Other revenues
53

 
57

Total operating revenues
1,401

 
1,508

Operating Expenses:
 
 
 
Fuel
310

 
432

Purchased power, non-affiliates
41

 
57

Purchased power, affiliates
53

 
49

Other operations and maintenance
399

 
325

Depreciation and amortization
158

 
175

Taxes other than income taxes
94

 
89

Total operating expenses
1,055

 
1,127

Operating Income
346

 
381

Other Income and (Expense):
 
 
 
Allowance for equity funds used during construction
15

 
10

Interest expense, net of amounts capitalized
(65
)
 
(62
)
Other income (expense), net
(4
)
 
(5
)
Total other income and (expense)
(54
)
 
(57
)
Earnings Before Income Taxes
292

 
324

Income taxes
113

 
127

Net Income
179

 
197

Dividends on Preferred and Preference Stock
10

 
10

Net Income After Dividends on Preferred and Preference Stock
$
169

 
$
187


CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
For the Three Months
Ended March 31,
 
2015
 
2014
 
(in millions)
Net Income
$
179

 
$
197

Other comprehensive income (loss):
 
 
 
Qualifying hedges:
 
 
 
Changes in fair value, net of tax of $(2) and $-, respectively
(4
)
 

Total other comprehensive income (loss)
(4
)
 

Comprehensive Income
$
175

 
$
197

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

35


ALABAMA POWER COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
For the Three Months
Ended March 31,
 
2015
 
2014
 
(in millions)
Operating Activities:
 
 
 
Net income
$
179

 
$
197

Adjustments to reconcile net income to net cash provided from operating activities —
 
 
 
Depreciation and amortization, total
196

 
210

Deferred income taxes
16

 
25

Allowance for equity funds used during construction
(15
)
 
(10
)
Other, net
2

 
(22
)
Changes in certain current assets and liabilities —
 
 
 
-Receivables
(3
)
 
(17
)
-Fossil fuel stock

 
99

-Materials and supplies
12

 
3

-Other current assets
(80
)
 
(81
)
-Accounts payable
(229
)
 
(139
)
-Accrued taxes
246

 
147

-Accrued compensation
(89
)
 
(37
)
-Retail fuel cost over recovery
34

 
(20
)
-Other current liabilities
21

 
(3
)
Net cash provided from operating activities
290

 
352

Investing Activities:
 
 
 
Property additions
(325
)
 
(287
)
Nuclear decommissioning trust fund purchases
(129
)
 
(56
)
Nuclear decommissioning trust fund sales
129

 
56

Cost of removal, net of salvage
(13
)
 
(12
)
Change in construction payables
34

 
49

Other investing activities
(9
)
 
(5
)
Net cash used for investing activities
(313
)
 
(255
)
Financing Activities:
 
 
 
Proceeds —
 
 
 
Senior note issuances
550

 

Capital contributions from parent company
6

 
7

Redemptions — Senior notes
(250
)
 

Payment of preferred and preference stock dividends
(10
)
 
(10
)
Payment of common stock dividends
(143
)
 
(137
)
Other financing activities
(8
)
 

Net cash provided from (used for) financing activities
145

 
(140
)
Net Change in Cash and Cash Equivalents
122

 
(43
)
Cash and Cash Equivalents at Beginning of Period
273

 
295

Cash and Cash Equivalents at End of Period
$
395

 
$
252

Supplemental Cash Flow Information:
 
 
 
Cash paid (received) during the period for —
 
 
 
Interest (net of $5 and $4 capitalized for 2015 and 2014, respectively)
$
68

 
$
61

Income taxes, net
(136
)
 
(28
)
Noncash transactions — Accrued property additions at end of period
41

 
66

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

36


ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
 
Assets
 
At March 31,
2015
 
At December 31,
2014
 
 
(in millions)
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
395

 
$
273

Receivables —
 
 
 
 
Customer accounts receivable
 
374

 
345

Unbilled revenues
 
115

 
138

Under recovered regulatory clause revenues
 
16

 
74

Other accounts and notes receivable
 
24

 
23

Affiliated companies
 
36

 
37

Accumulated provision for uncollectible accounts
 
(10
)
 
(9
)
Fossil fuel stock, at average cost
 
268

 
268

Materials and supplies, at average cost
 
410

 
406

Vacation pay
 
66

 
65

Prepaid expenses
 
134

 
244

Other regulatory assets, current
 
91

 
84

Other current assets
 
4

 
5

Total current assets
 
1,923

 
1,953

Property, Plant, and Equipment:
 
 
 
 
In service
 
23,254

 
23,080

Less accumulated provision for depreciation
 
8,627

 
8,522

Plant in service, net of depreciation
 
14,627

 
14,558

Nuclear fuel, at amortized cost
 
359

 
348

Construction work in progress
 
1,089

 
1,006

Total property, plant, and equipment
 
16,075

 
15,912

Other Property and Investments:
 
 
 
 
Equity investments in unconsolidated subsidiaries
 
67

 
66

Nuclear decommissioning trusts, at fair value
 
770

 
756

Miscellaneous property and investments
 
85

 
84

Total other property and investments
 
922

 
906

Deferred Charges and Other Assets:
 
 
 
 
Deferred charges related to income taxes
 
523

 
525

Deferred under recovered regulatory clause revenues
 
87

 
31

Other regulatory assets, deferred
 
1,065

 
1,063

Other deferred charges and assets
 
161

 
162

Total deferred charges and other assets
 
1,836

 
1,781

Total Assets
 
$
20,756

 
$
20,552

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


37


ALABAMA POWER COMPANY
CONDENSED BALANCE SHEETS (UNAUDITED)
 
Liabilities and Stockholder's Equity
 
At March 31,
2015
 
At December 31,
2014
 
 
(in millions)
Current Liabilities:
 
 
 
 
Securities due within one year
 
$
734

 
$
454

Accounts payable —
 
 
 
 
Affiliated
 
225

 
248

Other
 
273

 
443

Customer deposits
 
88

 
87

Accrued taxes —
 
 
 
 
Accrued income taxes
 
37

 
2

Other accrued taxes
 
59

 
37

Accrued interest
 
59

 
66

Accrued vacation pay
 
54

 
54

Accrued compensation
 
44

 
131

Other regulatory liabilities, current
 
2

 
2

Other current liabilities
 
114

 
80

Total current liabilities
 
1,689

 
1,604

Long-term Debt
 
6,193

 
6,176

Deferred Credits and Other Liabilities:
 
 
 
 
Accumulated deferred income taxes
 
3,890

 
3,874

Deferred credits related to income taxes
 
71

 
72

Accumulated deferred investment tax credits
 
123

 
125

Employee benefit obligations
 
322

 
326

Asset retirement obligations
 
840

 
829

Other cost of removal obligations
 
743

 
744

Other regulatory liabilities, deferred
 
242

 
239

Deferred over recovered regulatory clause revenues
 
81

 
47

Other deferred credits and liabilities
 
88

 
79

Total deferred credits and other liabilities
 
6,400

 
6,335

Total Liabilities
 
14,282

 
14,115

Redeemable Preferred Stock
 
342

 
342

Preference Stock
 
343

 
343

Common Stockholder's Equity:
 
 
 
 
Common stock, par value $40 per share —
 
 
 
 
Authorized — 40,000,000 shares
 
 
 
 
Outstanding — 30,537,500 shares
 
1,222

 
1,222

Paid-in capital
 
2,318

 
2,304

Retained earnings
 
2,281

 
2,255

Accumulated other comprehensive loss
 
(32
)
 
(29
)
Total common stockholder's equity
 
5,789

 
5,752

Total Liabilities and Stockholder's Equity
 
$
20,756

 
$
20,552

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

38

ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS



FIRST QUARTER 2015 vs. FIRST QUARTER 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. 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
First Quarter 2015 vs. First Quarter 2014
(change in millions)

(% change)
$(18)
 
(9.6)
Alabama Power's net income after dividends on preferred and preference stock for the first quarter 2015 was $169 million compared to $187 million for the corresponding period in 2014. The decrease in net income was primarily related to an increase in non-fuel operations and maintenance expenses, partially offset by an increase in rates under rate stabilization and equalization (Rate RSE) as well as a decrease in depreciation expense. Also contributing to the decrease in net income was milder weather in the first quarter 2015 as compared to the corresponding period in 2014.
Retail Revenues
First Quarter 2015 vs. First Quarter 2014
(change in millions)
 
(% change)
$(29)
 
(2.2)
In the first quarter 2015, retail revenues were $1.27 billion compared to $1.30 billion for the corresponding period in 2014.

39

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:
 
 
First Quarter
2015
 
 
(in millions)

(% change)
Retail – prior year
 
$
1,297

 
 
Estimated change resulting from –
 
 
 
 
Rates and pricing
 
47

 
3.6

Sales growth
 
9

 
0.7

Weather
 
(20
)
 
(1.5
)
Fuel and other cost recovery
 
(65
)
 
(5.0
)
Retail – current year
 
$
1,268

 
(2.2
)%
Revenues associated with changes in rates and pricing increased in the first quarter 2015 when compared to the corresponding period in 2014 primarily due to a Rate RSE increase effective January 1, 2015. 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 changes in sales increased in the first quarter 2015 when compared to the corresponding period in 2014. Industrial KWH energy sales slightly increased 0.3% in the first quarter 2015 as a result of an increase in demand resulting from changes in production levels primarily in the pipelines, stone, clay, and glass, and automotive and plastics sectors, offset by a decrease in demand in the primary metals and forest products sectors. Weather-adjusted residential and commercial KWH energy sales increased 0.8% and 1.6%, respectively, in the first quarter 2015 as a result of increased customer usage and customer growth.
Revenues resulting from changes in weather decreased in the first quarter 2015 due to milder weather experienced in Alabama Power's service territory as compared to the corresponding period in 2014. For the first quarter 2015, the resulting decreases were 2.4% and 1.7% for residential and commercial sales revenue, respectively.
Fuel and other cost recovery revenues decreased in the first quarter 2015 when compared to the corresponding period in 2014 primarily due to a decrease in KWH generation and the average cost of natural gas. 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
First Quarter 2015 vs. First Quarter 2014
(change in millions)
 
(% change)
$(20)
 
(23.5)
Wholesale revenues from sales to non-affiliates will vary depending on the market prices of available wholesale energy compared to the cost of Alabama Power's and the Southern Company system's generation, demand for energy within the Southern Company system's service territory, and 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 the first quarter 2015, wholesale revenues from sales to non-affiliates were $65 million compared to $85 million for the corresponding period in 2014. The decrease was primarily due to a 9.0% decrease in KWH sales and a 15.9% decrease in the price of energy. In 2014, Alabama Power's fuel diversity led to increased sales to non-affiliates due to higher than normal natural gas prices. In 2015, lower natural gas prices and decreased availability of hydro generation, due to less rainfall, resulted in lower sales of Alabama Power's generation to non-affiliates.

40

ALABAMA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Wholesale Revenues Affiliates
First Quarter 2015 vs. First Quarter 2014
(change in millions)
 
(% change)
$(54)
 
(78.3)
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 first quarter 2015, wholesale revenues from sales to affiliates were $15 million compared to $69 million for the corresponding period in 2014. The decrease was primarily due to a 69.1% decrease in KWH sales and a 30.9% decrease in the price of energy. In 2014, Alabama Power's fuel diversity led to increased sales to affiliates due to higher than normal natural gas prices. In 2015, lower natural gas prices and decreased availability of hydro generation, due to less rainfall, resulted in lower sales of Alabama Power's generation to affiliates.
Fuel and Purchased Power Expenses
 
 
 First Quarter 2015
vs.
First Quarter 2014
 
 
(change in millions)

(% change)
Fuel
 
$
(122
)
 
(28.2)
Purchased power – non-affiliates
 
(16
)
 
(28.1)
Purchased power – affiliates
 
4

 
8.2
Total fuel and purchased power expenses
 
$
(134
)
 
 
In the first quarter 2015, total fuel and purchased power expenses were $404 million compared to $538 million for the corresponding period in 2014. The decrease was primarily due to a $69 million decrease in the average cost of fuel, a $53 million decrease related to the volume of KWHs generated, and a $37 million decrease in the average cost of purchased power, partially offset by a $25 million increase in the volume of KWHs purchased.
Fuel and purchased power energy transactions do not have a significant impact on earnings, since energy expenses are generally offset by energy revenues through Alabama Power's energy cost recovery 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.

41

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:
 
 
First Quarter
2015
 
First Quarter
2014
Total generation (billions of KWHs)
 
15
 
16
Total purchased power (billions of KWHs)
 
2
 
2
Sources of generation (percent) —
 
 
 
 
Coal