Effective Tax Rate and Unrecognized Tax Benefits

3 Months Ended

Mar. 31, 2012

Effective Tax Rate and Unrecognized Tax Benefits [Abstract]

EFFECTIVE TAX RATE AND UNRECOGNIZED TAX BENEFITS

(G) EFFECTIVE TAX RATE AND UNRECOGNIZED TAX BENEFITS

Effective Tax Rate

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

Southern Company

Southern Company’s effective tax rate was 34.2% for the three months ended March 31, 2012 compared to 34.6% for the corresponding period in 2011. Southern Company’s effective tax rate is lower than the statutory rate primarily due to its employee stock plans’ dividend deduction and non-taxable AFUDC equity.

Alabama Power

Alabama Power’s effective tax rate was 38.3% for the three months ended March 31, 2012 compared to 37.1 % for the corresponding period in 2011. The increase was due to an increase in Alabama state income taxes as a result of a decrease in the state income tax deduction for federal income taxes paid.

Georgia Power

Georgia Power’s effective tax rate was 34.9% for the three months ended March 31, 2012 compared to 34.6% for the corresponding period in 2011. The increase was primarily due to a decrease in AFUDC equity, which is non-taxable.

Gulf Power

Gulf Power’s effective tax rate was 34.6% for the three months ended March 31, 2012 compared to 33.8% for the corresponding period in 2011. The increase was primarily due to a decrease in AFUDC equity, which is non-taxable.

Mississippi Power

Mississippi Power’s effective tax rate was 24.7% for the three months ended March 31, 2012 compared to 32.2% for the corresponding period in 2011. The decrease was primarily due to an increase in AFUDC equity, which is non-taxable, related to the Kemper IGCC.

Southern Power

Southern Power’s effective tax rate was 31.3% for the three months ended March 31, 2012 compared to 35.6% for the corresponding period in 2011. The decrease was primarily due to lower earnings before income taxes and a settlement with the IRS related to the production activities deduction. See “Unrecognized Tax Benefits” herein for additional information.

Unrecognized Tax Benefits

Changes during 2012 for unrecognized tax benefits were as follows:

	Southern Company	Alabama Power	Georgia Power	Gulf Power	Mississippi Power	Southern Power
	(in millions)
Unrecognized tax benefits as of December 31, 2011	$ 120	$ 32	$ 47	$   3	$   5	$   3
Tax positions from current periods	3	1	1	—	—	—
Tax positions from prior periods	(6)	(3)	(1)	—	(1)	(2)
Reductions due to settlements	(5)	(2)	(3)	(1)	—	1
Reductions due to expired statute of limitations	—	—	—	—	—	—
Balance as of March 31, 2012	$ 112	$ 28	$ 44	$   2	$   4	$   2

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

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

	As of March 31, 2012			As of   December 31,   2011
	Georgia Power	Other Registrants	Southern Company	Southern Company
	(in millions)
Tax positions impacting the effective tax rate	$24	$  5	$  59	$  69
Tax positions not impacting the effective tax rate	20	32	53	51
Balance of unrecognized tax benefits	$44	$37	$112	$120

The tax positions impacting the effective tax rate primarily relate to state investment tax credits and a litigation settlement refund claim for Southern Company. See Note 5 to the financial statements of Southern Company under “Effective Tax Rate” in Item 8 of the Form 10-K for additional information. The tax positions not impacting the effective tax rate relate to the timing difference associated with the tax accounting method change for repairs-generation assets. See “Tax Method of Accounting for Repairs” herein for additional information. These amounts are presented on a gross basis without considering the related federal or state income tax impact.

Accrued interest for unrecognized tax benefits was as follows:

	Georgia Power	Other Registrants	Southern Company
	(in millions)
Interest accrued as of December 31, 2011	$ 6	$   3	$ 10
Interest reclassified due to settlements	(2)	(3)	(5)
Interest accrued during the period	1	—	1
Balance as of March 31, 2012	$ 5	$ —	$   6

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

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

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

Tax Method of Accounting for Repairs

Southern Company submitted a tax accounting method change for repair costs associated with its subsidiaries’ generation, transmission, and distribution systems with the filing of the 2009 federal income tax return in September 2010. On August 19, 2011, the IRS issued a revenue procedure, which provides a safe harbor method of accounting that taxpayers may use to determine repair costs for transmission and distribution property. However, the IRS continues to work with the utility industry in an effort to resolve the repair costs for generation assets matter in a consistent manner for all utilities. On December 23, 2011, the IRS published regulations on the deduction and capitalization of expenditures related to tangible property that generally apply for tax years beginning on or after January 1, 2012. The utility industry anticipates more detailed guidance concerning these regulations. Due to uncertainty regarding the ultimate resolution of the repair costs for generation assets, an unrecognized tax position has been recorded for the tax accounting method change for repairs-generation assets. The ultimate outcome of this matter cannot be determined at this time.