Income Taxes

12 Months Ended

Dec. 31, 2013

Southern Company files a consolidated federal income tax return, combined state income tax returns for the States of Alabama, Georgia, and Mississippi, and unitary income tax returns for the States of California, North Carolina, and Texas. Under a joint consolidated income tax allocation agreement, each Southern Company subsidiary's current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more current expense than would be paid if it filed a separate income tax return. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability.

Current and Deferred Income Taxes

Details of income tax provisions are as follows:



	2013			2012		2011
	(in millions)
Federal —
Current	$	363		$	177	$	57
Deferred	386			1,011		1,035
	749			1,188		1,092
State —
Current	(10		)	61		8
Deferred	110			85		119
	100			146		127
Total	$	849		$	1,334	$	1,219

Net cash payments/(refunds) for income taxes in 2013, 2012, and 2011 were $139 million, $38 million, and $(401) million, respectively.

The tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases, which give rise to deferred tax assets and liabilities, are as follows:



	2013			2012
	(in millions)
Deferred tax liabilities —
Accelerated depreciation	$	9,710		$	9,022
Property basis differences	1,515			1,254
Leveraged lease basis differences	287			278
Employee benefit obligations	491			536
Premium on reacquired debt	113			84
Regulatory assets associated with employee benefit obligations	705			988
Regulatory assets associated with asset retirement obligations	824			1,108
Other	350			349
Total	13,995			13,619
Deferred tax assets —
Federal effect of state deferred taxes	421			394
Employee benefit obligations	1,048			1,678
Over recovered fuel clause	30			135
Other property basis differences	157			134
Deferred costs	84			39
ITC carryforward	121			256
Unbilled revenue	116			101
Other comprehensive losses	54			84
Asset retirement obligations	824			720
Estimated Loss on Kemper IGCC	472			—
Deferred state tax assets	77			68
Other	220			363
Total	3,624			3,972
Valuation allowance	(49		)	(54		)
Total deferred tax assets	3,575			3,918
Total deferred tax liabilities, net	10,420			9,701
Portion included in prepaid expenses (accrued income taxes), net	143			237
Accumulated deferred income taxes	$	10,563		$	9,938

At December 31, 2013, Southern Company had subsidiaries with State of Georgia net operating loss (NOL) carryforwards totaling $707 million, which could result in net state income tax benefits of $41 million, if utilized. However, the subsidiaries have established a valuation allowance for the potential $41 million tax benefit due to the remote likelihood that the tax benefit will be realized. These NOLs expire between 2018 and 2021. Beginning in 2002, the State of Georgia allowed Southern Company to file a combined return, which has prevented the creation of any additional NOL carryforwards.

At December 31, 2013, Southern Company had an ITC carryforward which is expected to result in $28 million of federal income tax benefit. The ITC carryforward expires in 2023, but is expected to be utilized in 2014. Additionally, Southern Company had a state ITC carryforward of $118 million, which will expire between 2020 and 2024.

At December 31, 2013, the tax-related regulatory assets to be recovered from customers were $1.4 billion. These assets are primarily attributable to tax benefits flowed through to customers in prior years, deferred taxes previously recognized at rates lower than the current enacted tax law, and taxes applicable to capitalized interest.

At December 31, 2013, the tax-related regulatory liabilities to be credited to customers were $202 million. These liabilities are primarily attributable to deferred taxes previously recognized at rates higher than the current enacted tax law and to unamortized ITCs.

In accordance with regulatory requirements, deferred federal ITCs are amortized over the life of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of income. Credits amortized in this manner amounted to $16 million in 2013, $23 million in 2012, and $19 million in 2011. At December 31, 2013, all ITCs available to reduce federal income taxes payable had not been utilized. The remaining ITCs will be carried forward and utilized in future years.

In 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term production-period projects placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term production-period projects placed in service in 2013).

On January 2, 2013, ATRA was signed into law. The ATRA retroactively extended several tax credits through 2013 and extended 50% bonus depreciation for property placed in service in 2013 (and for certain long-term production-period projects to be placed in service in 2014, including the Kemper IGCC, which is scheduled for completion in 2014).

The application of the bonus depreciation provisions in these laws significantly increased deferred tax liabilities related to accelerated depreciation in 2013, 2012, and 2011.

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:



	2013		2012		2011
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income tax, net of federal deduction	2.5		2.5		2.4
Employee stock plans dividend deduction	(1.6	)	(1.0	)	(1.1	)
Non-deductible book depreciation	1.5		0.9		0.7
AFUDC-Equity	(2.6	)	(1.3	)	(1.5	)
ITC basis difference	(1.2	)	(0.3	)	(0.2	)
Other	(0.5	)	(0.2	)	(0.3	)
Effective income tax rate	33.1	%	35.6	%	35.0	%

Southern Company's effective tax rate is typically lower than the statutory rate due to its employee stock plans' dividend deduction and non-taxable AFUDC equity. Additionally, the 2013 effective rate decrease, as compared to 2012, is primarily due to an increase in non-taxable AFUDC equity. No material change occurred in the effective tax rate from 2011 to 2012.

Unrecognized Tax Benefits

Changes during the year in unrecognized tax benefits were as follows:



	2013			2012			2011
	(in millions)
Unrecognized tax benefits at beginning of year	$	70		$	120		$	296
Tax positions from current periods	3			13			46
Tax positions increase from prior periods	—			7			1
Tax positions decrease from prior periods	(66		)	(56		)	(111		)
Reductions due to settlements	—			(10		)	(112		)
Reductions due to expired statute of limitations	—			(4		)	—
Balance at end of year	$	7		$	70		$	120

The tax positions decrease from prior periods for 2013 relate primarily to the tax accounting method change for repairs-generation assets. See "Tax Method of Accounting for Repairs" herein for additional information.

The impact on Southern Company's effective tax rate, if recognized, is as follows:



	2013		2012		2011
	(in millions)
Tax positions impacting the effective tax rate	$	7	$	5	$	69
Tax positions not impacting the effective tax rate	—		65		51
Balance of unrecognized tax benefits	$	7	$	70	$	120

The tax positions impacting the effective tax rate for 2013 primarily relate to state income tax credits. These amounts are presented on a gross basis without considering the related federal or state income tax impact.

Accrued interest for unrecognized tax benefits was as follows:



	2013		2012			2011
	(in millions)
Interest accrued at beginning of year	$	1	$	10		$	29
Interest reclassified due to settlements	—		(9		)	(24		)
Interest accrued during the year	—		—			5
Balance at end of year	$	1	$	1		$	10

Southern Company classifies interest on tax uncertainties as interest expense. Southern Company did not accrue any penalties on uncertain tax positions.

It is reasonably possible that the amount of the unrecognized tax benefits could change within 12 months. The settlement of federal and state audits could impact the balances significantly. At this time, an estimate of the range of reasonably possible outcomes cannot be determined.

The IRS has finalized its audits of Southern Company's consolidated federal income tax returns through 2011. Southern Company has filed its 2012 federal income tax return and has received a full acceptance letter from the IRS; however, the IRS has not finalized its audit. For tax years 2012 and 2013, Southern Company was a participant in the Compliance Assurance Process of the IRS. The audits for Southern Company's state income tax returns have either been concluded, or the statute of limitations has expired, for years prior to 2007.

Tax Method of Accounting for Repairs

In 2011, the IRS published regulations on the deduction and capitalization of expenditures related to tangible property that generally apply for tax years beginning on or after January 1, 2014. Additionally, on April 30, 2013, the IRS issued Revenue Procedure 2013-24, which provides guidance for taxpayers related to the deductibility of repair costs associated with generation assets. Based on a review of the regulations, Southern Company incorporated provisions related to repair costs for generation assets into its consolidated 2012 federal income tax return and reversed all related unrecognized tax positions. On September 19, 2013, the IRS issued Treasury Decision 9636, "Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property," which are final tangible property regulations applicable to taxable years beginning on or after January 1, 2014. Southern Company is currently reviewing this new guidance. The ultimate outcome of this matter cannot be determined at this time; however, these regulations are not expected to have a material impact on the Company's financial statements.

Alabama Power [Member]

Income Tax Disclosure [Line Items]

INCOME TAXES

On behalf of the Company, Southern Company files a consolidated federal income tax return and combined state income tax returns for the States of Alabama, Georgia, and Mississippi. In addition, the Company files a separate company income tax return for the State of Tennessee. Under a joint consolidated income tax allocation agreement, each Southern Company subsidiary's current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more current expense than would be paid if it filed a separate income tax return. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability.

Current and Deferred Income Taxes

Details of income tax provisions are as follows:



	2013		2012		2011
	(in millions)
Federal —
Current	$	243	$	262	$	20
Deferred	160		137		377
	403		399		397
State —
Current	36		51		(1		)
Deferred	39		27		82
	75		78		81
Total	$	478	$	477	$	478



	2013		2012
	(in millions)
Deferred tax liabilities —
Accelerated depreciation	$	3,187	$	2,989
Property basis differences	458		420
Premium on reacquired debt	33		36
Employee benefit obligations	209		218
Under recovered energy clause	—		16
Regulatory assets associated with employee benefit obligations	198		378
Asset retirement obligations	38		—
Regulatory assets associated with asset retirement obligations	265		248
Other	128		114
Total	4,516		4,419
Deferred tax assets —
Federal effect of state deferred taxes	205		194
Unbilled fuel revenue	41		39
Storm reserve	32		34
Employee benefit obligations	231		408
Other comprehensive losses	18		19
Asset retirement obligations	303		248
Other	108		98
Total	938		1,040
Total deferred tax liabilities, net	3,578		3,379
Portion included in prepaid expenses (accrued income taxes)	25		25
Accumulated deferred income taxes	$	3,603	$	3,404

At December 31, 2013, the Company's tax-related regulatory assets to be recovered from customers were $519 million. These assets are primarily attributable to tax benefits that flowed through to customers in prior years, to deferred taxes previously recognized at rates lower than the current enacted tax law, and to taxes applicable to capitalized interest.

At December 31, 2013, the Company's tax-related regulatory liabilities to be credited to customers were $75 million. These liabilities are primarily attributable to unamortized ITCs.

In accordance with regulatory requirements, deferred ITCs are amortized over the life of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of income. Credits amortized in this manner amounted to $8 million in each of 2013, 2012, and 2011. At December 31, 2013, all ITCs available to reduce federal income taxes payable had been utilized.

The application of the bonus depreciation provisions in these laws significantly increased deferred tax liabilities related to accelerated depreciation in 2013, 2012, and 2011.

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:



	2013		2012		2011
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income tax, net of federal deduction	4.0		4.1		4.3
Non-deductible book depreciation	1.0		0.9		0.8
Differences in prior years' deferred and current tax rates	(0.1	)	(0.1	)	(0.1	)
AFUDC equity	(0.9	)	(0.5	)	(0.6	)
Other	(0.1	)	(0.3	)	(0.4	)
Effective income tax rate	38.9	%	39.1	%	39.0	%

The changes in the Company's 2013 and 2012 effective tax rates were not material.

Unrecognized Tax Benefits

Changes during the year in unrecognized tax benefits were as follows:



	2013			2012			2011
				(in millions)
Unrecognized tax benefits at beginning of year	$	31		$	32		$	43
Tax positions from current periods	—			5			6
Tax positions from prior periods	(31		)	(4		)	(17		)
Reductions due to settlements	—			(2		)	—
Balance at end of year	$	—		$	31		$	32

The tax positions decrease from prior periods for 2013 relates primarily to the tax accounting method change for repairs-generation assets. See "Tax Method of Accounting for Repairs" herein for additional information.

The impact on the Company's effective tax rate, if recognized, is as follows:



	2013		2012		2011
			(in millions)
Tax positions impacting the effective tax rate	$	—	$	—	$	5
Tax positions not impacting the effective tax rate	—		31		27
Balance of unrecognized tax benefits	$	—	$	31	$	32

The tax positions not impacting the effective tax rate for 2012 relate to the timing difference associated with the tax accounting method change for repairs-generation assets. See "Tax Method of Accounting for Repairs" herein for additional information. These amounts are presented on a gross basis without considering the related federal or state income tax impact.

Accrued interest for unrecognized tax benefits is as follows:



	2013		2012			2011
			(in millions)
Interest accrued at beginning of year	$	—	$	1.9		$	1.5
Interest reclassified due to settlements	—		(1.9		)	—
Interest accrued during the year	—		—			0.4
Balance at end of year	$	—	$	—		$	1.9

The Company classifies interest on tax uncertainties as interest expense. The Company did not accrue any penalties on uncertain tax positions.

The IRS has finalized its audits of Southern Company's consolidated federal income tax returns through 2011. Southern Company has filed its 2012 federal income tax return and has received a full acceptance letter from the IRS; however, the IRS has not finalized its audit. For tax years 2012 and 2013, Southern Company was a participant in the Compliance Assurance Process of the IRS. The audits for the Company's state income tax returns have either been concluded, or the statute of limitations has expired, for years prior to 2007.

Tax Method of Accounting for Repairs

Georgia Power [Member]

Income Tax Disclosure [Line Items]

INCOME TAXES

On behalf of the Company, Southern Company files a consolidated federal income tax return and combined state income tax returns for the States of Alabama, Georgia, and Mississippi. Under a joint consolidated income tax allocation agreement, each Southern Company subsidiary's current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more current expense than would be paid if it filed a separate income tax return. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability.

Current and Deferred Income Taxes

Details of income tax provisions are as follows:



	2013			2012		2011
	(in millions)
Federal –
Current	$	277		$	273	$	106
Deferred	374			370		479
	651			643		585
State –
Current	(30		)	38		19
Deferred	102			7		21
	72			45		40
Total	$	723		$	688	$	625



	2013		2012
	(in millions)
Deferred tax liabilities –
Accelerated depreciation	$	4,479	$	4,201
Property basis differences	873		757
Employee benefit obligations	232		255
Premium on reacquired debt	73		77
Regulatory assets associated with employee benefit obligations	276		536
Asset retirement obligations	495		446
Other	168		93
Total	6,596		6,365
Deferred tax assets –
Federal effect of state deferred taxes	159		142
Employee benefit obligations	388		644
Other property basis differences	93		100
Other deferred costs	84		39
Cost of removal obligations	17		29
State tax credit carry forward	118		86
Federal tax credit carry forward	3		—
Over-recovered fuel costs	22		89
Unbilled fuel revenue	53		39
Asset retirement obligations	495		446
Other	32		42
Total	1,464		1,656
Total deferred tax liabilities, net	5,132		4,709
Portion included in current assets/(liabilities), net	68		152
Accumulated deferred income taxes	$	5,200	$	4,861

At December 31, 2013, tax-related regulatory assets were $722 million. These assets are primarily attributable to tax benefits flowed through to customers in prior years, deferred taxes previously recognized at rates lower than the current enacted tax law, and taxes applicable to capitalized interest.

At December 31, 2013, tax-related regulatory liabilities to be credited to customers were $112 million. These liabilities are primarily attributable to deferred taxes previously recognized at rates higher than current enacted tax law and to unamortized ITCs. In 2011, the Company recorded a regulatory liability of $62 million related to a settlement with the Georgia Department of Revenue resolving claims for certain tax credits in 2005 through 2009. Amortization of the regulatory liability occurred ratably over the period from April 2012 through December 2013.

In accordance with regulatory requirements, deferred federal ITCs are amortized over the life of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of income. Credits amortized in this manner amounted to $5 million in 2013, $13 million in 2012, and $9 million in 2011. State ITCs are recognized in the period in which the credits are claimed on the state income tax return and totaled $27 million in 2013, $36 million in 2012, and $53 million in 2011. At December 31, 2013, the Company had $3 million in federal tax credit carry forwards that will expire by 2032 and $118 million in state ITC carry forwards that will expire between 2020 and 2024.

The application of the bonus depreciation provisions in these laws significantly increased deferred tax liabilities related to accelerated depreciation in 2013, 2012, and 2011.

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:



	2013		2012		2011
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income tax, net of federal deduction	2.5		1.6		1.5
Non-deductible book depreciation	1.3		1.2		0.8
AFUDC equity	(0.6	)	(1.0	)	(1.9	)
Other	(0.4	)	(0.1	)	(0.5	)
Effective income tax rate	37.8	%	36.7	%	34.9	%

The increase in the Company's 2013 effective tax rate is primarily the result of a decrease in state income tax credits and non-taxable AFUDC equity. The increase in the Company's 2012 effective tax rate is primarily the result of an increase in non-deductible book depreciation and a decrease in non-taxable AFUDC equity.

Unrecognized Tax Benefits

Changes during the year in unrecognized tax benefits were as follows:



	2013			2012			2011
	(in millions)
Unrecognized tax benefits at beginning of year	$	23		$	47		$	237
Tax positions from current periods	—			3			9
Tax positions increase from prior periods	—			3			—
Tax positions decrease from prior periods	(23		)	(19		)	(87		)
Reductions due to settlements	—			(8		)	(112		)
Reductions due to expired statute of limitations	—			(3		)	—
Balance at end of year	$	—		$	23		$	47

In addition, the tax reductions due to expired statute of limitations for 2012 relate to the Georgia jobs and retraining tax credits and the Georgia manufacturer's ITCs.

The impact on the Company's effective tax rate, if recognized, is as follows:



	2013		2012		2011
	(in millions)
Tax positions impacting the effective tax rate	$	—	$	—	$	28
Tax positions not impacting the effective tax rate	—		23		19
Balance of unrecognized tax benefits	$	—	$	23	$	47

Accrued interest for unrecognized tax benefits was as follows:



	2013		2012			2011
	(in millions)
Interest accrued at beginning of year	$	—	$	6		$	27
Interest reclassified due to settlements	—		(6		)	(24		)
Interest accrued during the year	—		—			3
Balance at end of year	$	—	$	—		$	6

The Company classifies interest on tax uncertainties as interest expense. The Company did not accrue any penalties on uncertain tax positions.

The IRS has finalized its audits of Southern Company's consolidated federal income tax returns through 2011. Southern Company has filed its 2012 federal income tax return and has received a full acceptance letter from the IRS; however, the IRS has not finalized its audit. For tax years 2012 and 2013, Southern Company was a participant in the Compliance Assurance Process of the IRS. The audits for the Company's state income tax returns have either been concluded, or the statute of limitations has expired, for years prior to 2007.

Tax Method of Accounting for Repairs

Gulf Power [Member]

Income Tax Disclosure [Line Items]

INCOME TAXES

On behalf of the Company, Southern Company files a consolidated federal income tax return and combined state income tax returns for the States of Alabama, Georgia, and Mississippi. In addition, the Company files a separate company income tax return for the State of Florida. Under a joint consolidated income tax allocation agreement, each Southern Company subsidiary's current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more current expense than would be paid if it filed a separate income tax return. In accordance with Internal Revenue Service (IRS) regulations, each company is jointly and severally liable for the federal tax liability.

Current and Deferred Income Taxes

Details of income tax provisions are as follows:



	2013			2012			2011
	(in thousands)
Federal -
Current	$	5,009		$	(92,610	)	$	(1,548	)
Deferred	63,134			161,096			56,087
	68,143			68,486			54,539
State -
Current	(2,410		)	(2,484		)	(412		)
Deferred	13,935			13,209			7,141
	11,525			10,725			6,729
Total	$	79,668		$	79,211		$	61,268



	2013		2012
	(in thousands)
Deferred tax liabilities-
Accelerated depreciation	$	721,087	$	696,502
Property basis differences	45,960		—
Fuel recovery clause	7,972		—
Pension and other employee benefits	25,800		28,579
Regulatory assets associated with employee benefit obligations	27,660		57,279
Regulatory assets associated with asset retirement obligations	6,554		6,502
Other	23,947		16,019
Total	858,980		804,881
Deferred tax assets-
Federal effect of state deferred taxes	24,277		20,656
Postretirement benefits	17,816		17,905
Fuel recovery clause	—		6,922
Pension and other employee benefits	33,015		61,939
Other basis differences	—		23,549
Property reserve	15,144		13,773
Other comprehensive loss	696		993
Asset retirement obligations	6,554		6,502
Alternative minimum tax carryforward	18,420		938
Other	17,084		4,724
Total	133,006		157,901
Net deferred tax liabilities	725,974		646,980
Portion included in current assets (liabilities), net	8,381		1,972
Accumulated deferred income taxes	$	734,355	$	648,952

At December 31, 2013, the tax-related regulatory assets to be recovered from customers were $50.9 million. These assets are primarily attributable to tax benefits that flowed through to customers in prior years, to deferred taxes previously recognized at rates lower than the current enacted tax law, and to taxes applicable to capitalized interest.

At December 31, 2013, the tax-related regulatory liabilities to be credited to customers were $5.2 million. These liabilities are primarily attributable to deferred taxes previously recognized at rates higher than the current enacted tax law and to unamortized ITCs.

In accordance with regulatory requirements, deferred ITCs are amortized over the life of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of income. Credits amortized in this manner amounted to $1.4 million in 2013, $1.4 million in 2012, and $1.3 million in 2011. At December 31, 2013, all ITCs available to reduce federal income taxes payable had been utilized.

The application of the bonus depreciation provisions in these laws significantly increased deferred tax liabilities related to accelerated depreciation in 2013, 2012, and 2011.

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:



	2013		2012		2011
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income tax, net of federal deduction	3.5		3.3		2.5
Non-deductible book depreciation	0.5		0.5		0.5
Differences in prior years' deferred and current tax rates	(0.2	)	(0.2	)	(0.3	)
AFUDC equity	(1.1	)	(0.9	)	(2.0	)
Other, net	(0.1	)	(0.2	)	(0.2	)
Effective income tax rate	37.6	%	37.5	%	35.5	%

The increase in the 2013 effective tax rate was not material. The increase in the 2012 effective tax rate is primarily the result of a decrease in AFUDC equity, which is not taxable, and a decrease in state tax credits.

Unrecognized Tax Benefits

Changes during the year in unrecognized tax benefits were as follows:



	2013			2012			2011
	(in thousands)
Unrecognized tax benefits at beginning of year	$	5,007		$	2,892		$	3,870
Tax positions from current periods	45			2,630			540
Tax positions from prior periods	(5,007		)	515			(1,518		)
Reductions due to settlements	—			(1,030		)	—
Balance at end of year	$	45		$	5,007		$	2,892

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



	2013		2012		2011
	(in thousands)
Tax positions impacting the effective tax rate	$	45	$	45	$	1,804
Tax positions not impacting the effective tax rate	—		4,962		1,088
Balance of unrecognized tax benefits	$	45	$	5,007	$	2,892

The tax positions impacting the effective tax rate for 2013 relate primarily to the research and development credit. These amounts are presented on a gross basis without considering the related federal or state income tax impact.

Accrued interest for unrecognized tax benefits was not material for years 2013, 2012, and 2011.

The Company classifies interest on tax uncertainties as interest expense. The Company did not accrue any penalties on uncertain tax positions.

The IRS has finalized its audits of Southern Company's consolidated federal income tax returns through 2011. Southern Company has filed its 2012 federal income tax return and has received a full acceptance letter from the IRS; however, the IRS has not finalized its audit. For tax years 2012 and 2013, Southern Company was a participant in the Compliance Assurance Process of the IRS. The audits for the Company's state income tax returns have either been concluded, or the statute of limitations has expired, for years prior to 2007.

Tax Method of Accounting for Repairs

Mississippi Power [Member]

Income Tax Disclosure [Line Items]

INCOME TAXES

On behalf of the Company, Southern Company files a consolidated federal income tax return and combined state income tax returns for the States of Alabama and Mississippi. Under a joint consolidated income tax allocation agreement, each Southern Company subsidiary's current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more current expense than would be paid if it filed a separate income tax return. In accordance with IRS regulations, each company is jointly and severally liable for the federal tax liability.

Current and Deferred Income Taxes

Details of income tax provisions are as follows:



	2013			2012		2011
	(in thousands)
Federal —
Current	$	23,345		$	1,212	$	(27,099	)
Deferred	(342,870		)	16,994		65,206
	(319,525		)	18,206		38,107
State —
Current	5,219			1,656		(2,473		)
Deferred	(53,529		)	694		6,559
	(48,310		)	2,350		4,086
Total	$	(367,835	)	$	20,556	$	42,193



	2013		2012
	(in thousands)
Deferred tax liabilities —
Accelerated depreciation	$	371,553	$	385,899
Property basis differences	130,679		72,451
Energy cost management clause under recovered	1,777		9,492
Regulatory assets associated with asset retirement obligations	16,764		16,851
Pensions and other benefits	23,769		33,756
Regulatory assets associated with employee benefit obligations	33,127		68,717
Regulatory assets associated with the Kemper IGCC	30,708		10,492
Rate differential	56,074		27,270
Federal effect of state deferred taxes	30,615		—
Other	35,583		33,886
Total	730,649		658,814
Deferred tax assets —
Federal effect of state deferred taxes	—		7,732
Fuel clause over recovered	7,741		38,955
Estimated loss on Kemper IGCC	472,000		31,200
Pension and other benefits	57,999		87,416
Property insurance	23,693		23,171
Premium on long-term debt	23,736		26,778
Unbilled fuel	12,136		11,642
Long-term service agreement	—		5,544
Asset retirement obligations	16,764		16,851
Interest rate hedges	5,094		5,644
ITC carryforward	—		170,938
Kemper rate factor - regulatory liability retail	36,210		—
Other	18,094		23,800
Total	673,467		449,671
Total deferred tax liabilities, net	57,182		209,143
Portion included in (accrued) prepaid income taxes, net	15,626		35,815
Accumulated deferred income taxes	$	72,808	$	244,958

At December 31, 2013, the tax-related regulatory assets were $144.4 million. These assets are primarily attributable to tax benefits that flowed through to customers in prior years, to deferred taxes previously recognized at rates lower than the current enacted tax law, and to taxes applicable to capitalized interest.

At December 31, 2013, the tax-related regulatory liabilities were $10.2 million. These liabilities are primarily attributable to deferred taxes previously recognized at rates higher than the current enacted tax law and to unamortized ITCs.

In accordance with regulatory requirements, deferred ITCs are amortized over the life of the related property with such amortization normally applied as a credit to reduce depreciation in the statements of income. Credits for non-Kemper IGCC related deferred ITCs amortized in this manner amounted to $1.2 million, $1.2 million, and $1.3 million for 2013, 2012, and 2011, respectively. At December 31, 2013, all non-Kemper IGCC ITCs available to reduce federal income taxes payable had been utilized.

In 2010, the Company began recognizing ITCs associated with the construction expenditures related to the Kemper IGCC. At December 31, 2013, the Company had $276.4 million in unamortized ITCs associated with the Kemper IGCC, which will be amortized over the life of the Kemper IGCC once placed in service and are dependent upon meeting the IRS certification requirements, including an in-service date no later than April 19, 2016 and the capture and sequestration (via enhanced oil recovery) of at least 65% of the CO₂ produced by the Kemper IGCC during operation in accordance with the Internal Revenue Code. A portion of the tax credits will be subject to recapture upon successful completion of SMEPA's purchase of an undivided interest in the Kemper IGCC.

On January 2, 2013, the ATRA was signed into law. The ATRA retroactively extended several tax credits through 2013 and extended 50% bonus depreciation for property placed in service in 2013 (and for certain long-term production-period projects to be placed in service in 2014, including the Kemper IGCC, which is scheduled for completion in 2014).

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:



	2013		2012		2011
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income tax, net of federal deduction	3.7		1.3		1.9
Non-deductible book depreciation	(0.1	)	0.3		0.3
AFUDC-equity	5.0		(18.6	)	(6.3	)
Other	0.1		(1.2	)	(0.3	)
Effective income tax rate	43.7	%	16.8	%	30.6	%

The Company's 2013 effective tax rate increased from 2012 primarily due to the increase in estimated losses associated with the Kemper IGCC.

Unrecognized Tax Benefits

Changes during the year in unrecognized tax benefits were as follows:



	2013			2012			2011
	(in thousands)
Unrecognized tax benefits at beginning of year	$	5,755		$	4,964		$	4,288
Tax positions from current periods	226			1,186			1,486
Tax positions from prior periods	(2,141		)	(26		)	(810		)
Settlements with taxing authorities	—			(369		)	—
Balance at end of year	$	3,840		$	5,755		$	4,964

The tax positions decrease from prior periods for 2013 relates to the uncertain tax position for the tax accounting method change for repairs-generation assets. See "Tax Method of Accounting for Repairs" below for additional information.

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



	2013		2012		2011
	(in thousands)
Tax positions impacting the effective tax rate	$	3,840	$	3,656	$	4,144
Tax positions not impacting the effective tax rate	—		2,099		820
Balance of unrecognized tax benefits	$	3,840	$	5,755	$	4,964

The tax positions impacting the effective tax rate for 2013 primarily relate to the State of Mississippi ITC. The tax positions not impacting the effective tax rate for 2012 related to the timing difference associated with the tax accounting method change for repairs - generation assets. See "Tax Method of Accounting for Repairs" herein for additional information. These amounts are presented on a gross basis without considering the related federal or state income tax impact.

Accrued interest for unrecognized tax benefits was as follows:



	2013		2012		2011
	(in thousands)
Interest accrued at beginning of year	$	772	$	680	$	413
Interest accrued during the year	399		92		267
Balance at end of year	$	1,171	$	772	$	680

The Company classifies interest on tax uncertainties as interest expense. The Company did not accrue any penalties on uncertain tax positions.

The IRS has finalized its audits of Southern Company's consolidated federal income tax returns through 2011. Southern Company has filed its 2012 federal income tax return and has received a full acceptance letter from the IRS; however, the IRS has not finalized its audit. For tax years 2012 and 2013, Southern Company was a participant in the Compliance Assurance Process of the IRS. The audits for the Company's state income tax returns have either been concluded, or the statute of limitations has expired, for years prior to 2007.

Tax Method of Accounting for Repairs

Southern Power [Member]

Income Tax Disclosure [Line Items]

INCOME TAXES

On behalf of the Company, Southern Company files a consolidated federal income tax return and combined state income tax returns for the States of Alabama, Georgia, and Mississippi. In addition, the Company files separate company income tax returns for the States of Florida, New Mexico, South Carolina, and Tennessee. Unitary income tax returns are filed for the States of California, North Carolina, and Texas. Under a joint consolidated income tax allocation agreement, each Southern Company subsidiary's current and deferred tax expense is computed on a stand-alone basis and no subsidiary is allocated more current expense than would be paid if it filed a separate income tax return. In accordance with Internal Revenue Service (IRS) regulations, each company is jointly and severally liable for the federal tax liability.

Current and Deferred Income Taxes

Details of income tax provisions are as follows:



	2013			2012			2011
	(in millions)
Federal —
Current	$	(120.2	)	$	(133.1	)	$	61.6
Deferred	158.7			210.4			12.4
	38.5			77.3			74.0
State —
Current	(5.2		)	(3.0		)	9.8
Deferred	12.6			18.3			(7.9		)
	7.4			15.3			1.9
Total	$	45.9		$	92.6		$	75.9



	2013			2012
	(in millions)
Deferred tax liabilities —
Accelerated depreciation and other property basis differences	$	829.5		$	632.9
Basis difference on asset transfers	2.8			3.1
Levelized capacity revenues	11.2			—
Other	0.9			—
Total	844.4			636.0
Deferred tax assets —
Federal effect of state deferred taxes	29.7			25.2
Net basis difference on ITCs	58.0			28.6
Basis difference on asset transfers	2.9			3.9
Alternative minimum tax carryforward	1.1			1.1
Unrealized loss on interest rate swaps	11.2			15.7
Levelized capacity revenues	6.0			4.5
State net operating loss	17.0			8.3
Other	1.8			4.4
Total	127.7			91.7
Valuation Allowance	(7.5		)	(6.2		)
Net deferred income tax assets	120.2			85.5
Total deferred tax liabilities, net	724.2			550.5
Portion included in current income taxes	0.2			0.2
Accumulated deferred income taxes	$	724.4		$	550.7

Deferred tax liabilities are the result of property related timing differences primarily due to bonus depreciation. The transfer of the Plant McIntosh construction project to Georgia Power in 2004 resulted in a deferred gain for federal income tax purposes. Georgia Power is reimbursing the Company for the related tax liability balance of $2.8 million. Of this total, $0.3 million is included in the balance sheets in "Receivables – Affiliated companies" and the remainder is included in "Other deferred charges and assets – affiliated."

Deferred tax assets consist primarily of timing differences related to net basis differences on ITCs, the recognition of capacity revenues, and the unrealized loss on interest rate swaps reflected in AOCI. The transfer of Plants Dahlberg, Wansley, and Franklin to the Company from Georgia Power in 2001 also resulted in a deferred gain for federal income tax purposes. The Company will reimburse Georgia Power for the related tax asset of $2.6 million. Of this total, $1.0 million is included in the balance sheets in "Accounts payable – Affiliated" and the remainder is included in "Other deferred credits and liabilities – affiliated."

At December 31, 2013 and December 31, 2012, the Company had state net operating loss (NOL) carryforwards of $240.8 million and $117.7 million, respectively. The NOL carryforwards resulted in deferred tax assets of $11.0 million as of December 31, 2013 and $5.4 million as of December 31, 2012. The Company has established a valuation allowance due to the remote likelihood that the full tax benefits will be realized. During 2013, the estimated amount of NOL utilization decreased resulting in an $18.6 million increase in the valuation allowance. Of the NOL balance at December 31, 2013, approximately $87.0 million expires in 2015, approximately $40.0 million expires in 2017, and approximately $107.0 million expires in 2018.

In 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (Tax Relief Act) was signed into law. Major tax incentives in the Tax Relief Act include 100% bonus depreciation for property placed in service after September 8, 2010 and through 2011 (and for certain long-term production period projects placed in service in 2012) and 50% bonus depreciation for property placed in service in 2012 (and for certain long-term production period projects placed in service in 2013).

On January 2, 2013, the American Taxpayer Relief Act of 2012 (ATRA) was signed into law. The ATRA retroactively extended several tax credits through 2013 and extended 50% bonus depreciation for property placed in service in 2013 (and for certain long-term production-period projects to be placed in service in 2014). The extension of 50% bonus depreciation had a positive impact of $98.9 million on the Company’s cash flows in 2013 and significantly increased deferred tax liabilities related to accelerated depreciation in 2012 and 2013.

Effective Tax Rate

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:



	2013		2012		2011
Federal statutory rate	35.0	%	35.0	%	35.0	%
State income tax, net of federal deduction	2.2		3.7		0.6
Amortization of ITC	(1.7	)	(1.0	)	(0.4	)
ITC basis difference	(14.5	)	(2.6	)	(3.1	)
Other	0.3		(0.6	)	(0.3	)
Effective income tax rate	21.3	%	34.5	%	31.8	%

The Company's effective tax rate decreased in 2013 primarily as a result of ITCs recognized related to Plants Campo Verde and Spectrum. The Company's effective tax rate increased in 2012 primarily as a result of a decrease in the Alabama income tax deduction for federal income taxes paid.

In 2009, President Obama signed into law the ARRA. Major tax incentives in the ARRA included renewable energy incentives. The ATRA retroactively extended several renewable energy incentives through 2013, including extending ITCs for biomass projects which begin construction before January 1, 2014. The Company received ITCs under the renewable energy incentives related to Plants Nacogdoches, Cimarron, Apex, Granville, Spectrum, and Campo Verde, which had a material impact on cash flows and net income.

Cash ITCs received in 2013 for the construction of Plants Nacogdoches, Apex, Granville, Spectrum, and Campo Verde were $158.1 million. The tax benefit of the basis difference reduced income tax expense by $31.3 million in 2013.

Cash ITCs received in 2012 for the construction of Plants Nacogdoches, Apex, and Granville were $45.0 million. The tax benefit of the basis difference reduced income tax expense by $6.9 million in 2012.

Cash ITCs received in 2011 for the construction of Plants Nacogdoches and Cimarron were $84.7 million, which includes $42.9 million earned in 2010. The tax benefit of the basis difference reduced income tax expense by $7.3 million in 2011.

See Note 1 under "Investment Tax Credits" for additional information.

Unrecognized Tax Benefits

Changes in unrecognized tax benefits were as follows:



	2013			2012			2011
	(in millions)
Unrecognized tax benefits at beginning of year	$	2.9		$	2.6		$	2.3
Tax positions from current periods	1.6			0.7			0.4
Tax positions from prior periods	(3.0		)	(0.2		)	(0.1		)
Reductions due to settlements	—			(0.2		)	—
Balance at end of year	$	1.5		$	2.9		$	2.6

The increase in unrecognized tax benefits from current periods for 2013 relates primarily to ITCs. The decrease in unrecognized tax benefits from prior periods for 2013 relates primarily to the tax accounting method change for repairs-generation assets. See "Tax Method of Accounting for Repairs" herein for additional information.

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



	2013		2012		2011
	(in millions)
Tax positions impacting the effective tax rate	$	1.5	$	0.3	$	0.5
Tax positions not impacting the effective tax rate	—		2.6		2.1
Balance of unrecognized tax benefits	$	1.5	$	2.9	$	2.6

The tax positions impacting the effective tax rate for 2013 primarily relate to the ITCs realized in 2013. These amounts are presented on a gross basis without considering the related federal or state income tax impact.

Accrued interest for unrecognized tax benefits was immaterial for all years presented.

The Company classifies interest on tax uncertainties as interest expense. The Company did not accrue any penalties on uncertain tax positions.

It is reasonably possible that the amount of the unrecognized tax benefits could change within 12 months. The settlement of federal and state audits could impact the balances. At this time, an estimate of the range of reasonably possible outcomes cannot be determined.

The IRS has finalized its audits of Southern Company's consolidated federal income tax returns through 2011. For tax years 2012 and 2013, Southern Company is a participant in the Compliance Assurance Process of the IRS. Southern Company has filed its 2012 federal income tax return and has received a full acceptance letter from the IRS; however, the IRS has not finalized its audit. The audits for Southern Company's state income tax returns have either been concluded, or the statute of limitations has expired, for years prior to 2007.

Tax Method of Accounting for Repairs

In 2011, the IRS published regulations on the deduction and capitalization of expenditures related to tangible property that generally apply for tax years beginning on or after January 1, 2014. Additionally, on April 30, 2013, the IRS issued Revenue Procedure 2013-24, which provides guidance for taxpayers related to the deductibility of repair costs associated with generation assets. Based on a review of the regulations, Southern Company incorporated provisions related to repair costs for generation assets into its consolidated 2012 federal income tax return and reversed all related unrecognized tax positions. On September 19, 2013, the IRS issued Treasury Decision 9636, "Guidance Regarding Deduction and Capitalization of Expenditures Related to Tangible Property," which are final tangible property regulations applicable to taxable years beginning on or after January 1, 2014. Southern Company is currently reviewing this new guidance. The ultimate outcome of this matter cannot be determined at this time; however, these regulations are not expected to materially impact the Company's financial statements.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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