-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MiioViB2tDeoM3ElRHT336z/5YChtphiK5J4McrPTcIShvTHn2USOYcEytWoD3t4 yhzCPjlRlVpiYV5q7GzU+w== 0000092122-96-000104.txt : 19970103 0000092122-96-000104.hdr.sgml : 19970103 ACCESSION NUMBER: 0000092122-96-000104 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN CO CENTRAL INDEX KEY: 0000092122 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 580690070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03526 FILM NUMBER: 96661648 BUSINESS ADDRESS: STREET 1: 64 PERIMETER CENTER EAST CITY: ATLANTA STATE: GA ZIP: 30346 BUSINESS PHONE: 770-393-06 MAIL ADDRESS: STREET 1: 64 PERIMETER CENTER EAST CITY: ATLANTA STATE: GA ZIP: 30346 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALABAMA POWER CO CENTRAL INDEX KEY: 0000003153 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 630004250 STATE OF INCORPORATION: AL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03164 FILM NUMBER: 96661649 BUSINESS ADDRESS: STREET 1: 600 N 18TH ST STREET 2: P O BOX 2641 CITY: BIRMINGHAM STATE: AL ZIP: 35291 BUSINESS PHONE: 2052501000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEORGIA POWER CO CENTRAL INDEX KEY: 0000041091 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 580257110 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06468 FILM NUMBER: 96661650 BUSINESS ADDRESS: STREET 1: 333 PIEDMONT AVE NE CITY: ATLANTA STATE: GA ZIP: 30308 BUSINESS PHONE: 4045266526 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GULF POWER CO CENTRAL INDEX KEY: 0000044545 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 590276810 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-02429 FILM NUMBER: 96661651 BUSINESS ADDRESS: STREET 1: 500 BAYFRONT PKWY CITY: PENSACOLA STATE: FL ZIP: 32501 BUSINESS PHONE: 9044446111 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MISSISSIPPI POWER CO CENTRAL INDEX KEY: 0000066904 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 640205820 STATE OF INCORPORATION: MS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11229 FILM NUMBER: 96661652 BUSINESS ADDRESS: STREET 1: 2992 W BEACH CITY: GULFPORT STATE: MS ZIP: 39501 BUSINESS PHONE: 6018641211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAVANNAH ELECTRIC & POWER CO CENTRAL INDEX KEY: 0000086940 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 580418070 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05072 FILM NUMBER: 96661653 BUSINESS ADDRESS: STREET 1: 600 BAY ST EAST CITY: SAVANNAH STATE: GA ZIP: 31401 BUSINESS PHONE: 9122327171 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _____to_____ Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. - - ----------- ----------------------------------- ------------------ 1-3526 The Southern Company 58-0690070 (A Delaware Corporation) 270 Peachtree Street, N.W. Atlanta, Georgia 30303 (770) 393-0650 1-3164 Alabama Power Company 63-0004250 (An Alabama Corporation) 600 North 18th Street Birmingham, Alabama 35291 (205) 250-1000 1-6468 Georgia Power Company 58-0257110 (A Georgia Corporation) 333 Piedmont Avenue, N.E. Atlanta, Georgia 30308 (404) 526-6526 0-2429 Gulf Power Company 59-0276810 (A Maine Corporation) 500 Bayfront Parkway Pensacola, Florida 32501 (904) 444-6111 0-6849 Mississippi Power Company 64-0205820 (A Mississippi Corporation) 2992 West Beach Gulfport, Mississippi 39501 (601) 864-1211 1-5072 Savannah Electric and Power Company 58-0418070 (A Georgia Corporation) 600 East Bay Street Savannah, Georgia 31401 (912) 232-7171 ================================================================================ 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 X No____
Description of Shares Outstanding Registrant Common Stock at October 31, 1996 - - ---------- -------------- ------------------- The Southern Company Par Value $5 Per Share 673,652,878 Alabama Power Company Par Value $40 Per Share 5,608,955 Georgia Power Company No Par Value 7,761,500 Gulf Power Company No Par Value 992,717 Mississippi Power Company Without Par Value 1,121,000 Savannah Electric and Power Company Par Value $5 Per Share 10,844,635
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 Savannah Electric and Power Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies.
INDEX TO QUARTERLY REPORT ON FORM 10-Q September 30, 1996 Page Number DEFINITIONS................................................................................................... 4 PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) and Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition The Southern Company and Subsidiary Companies Condensed Consolidated Statements of Income................................................... 6 Condensed Consolidated Statements of Cash Flows............................................... 7 Condensed Consolidated Balance Sheets......................................................... 8 Management's Discussion and Analysis of Results of Operations and Financial Condition......... 10 Alabama Power Company Condensed Statements of Income................................................................ 16 Condensed Statements of Cash Flows............................................................ 17 Condensed Balance Sheets...................................................................... 18 Management's Discussion and Analysis of Results of Operations and Financial Condition......... 20 Exhibit 1 - Report of Independent Public Accountants.......................................... 24 Georgia Power Company Condensed Statements of Income................................................................ 26 Condensed Statements of Cash Flows............................................................ 27 Condensed Balance Sheets...................................................................... 28 Management's Discussion and Analysis of Results of Operations and Financial Condition......... 30 Exhibit 1 - Report of Independent Public Accountants.......................................... 34 Gulf Power Company Condensed Statements of Income................................................................ 36 Condensed Statements of Cash Flows............................................................ 37 Condensed Balance Sheets...................................................................... 38 Management's Discussion and Analysis of Results of Operations and Financial Condition......... 40 Mississippi Power Company Condensed Statements of Income................................................................ 45 Condensed Statements of Cash Flows............................................................ 46 Condensed Balance Sheets...................................................................... 47 Management's Discussion and Analysis of Results of Operations and Financial Condition......... 49 Savannah Electric and Power Company Condensed Statements of Income................................................................ 54 Condensed Statements of Cash Flows............................................................ 55 Condensed Balance Sheets...................................................................... 56 Management's Discussion and Analysis of Results of Operations and Financial Condition......... 58 Notes to the Condensed Financial Statements...................................................... 61 PART II - OTHER INFORMATION Item 1. Legal Proceedings.................................................................................... 66 Item 2. Changes in Securities................................................................................ Inapplicable Item 3. Defaults Upon Senior Securities...................................................................... Inapplicable Item 4. Submission of Matters to a Vote of Security Holders.................................................. Inapplicable Item 5. Other Information.................................................................................... Inapplicable Item 6. Exhibits and Reports on Form 8-K..................................................................... 66 Signatures .......................................................................................... 67 3
DEFINITIONS TERM MEANING affiliates.................... ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH ALABAMA....................... Alabama Power Company Clean Air Act ................ Clean Air Act Amendments of 1990 ECO Plan...................... Environmental Compliance Overview Plan Energy Act.................... Energy Policy Act of 1992 EWG........................... Exempt wholesale generator FASB.......................... Financial Accounting Standards Board FERC.......................... Federal Energy Regulatory Commission Form 10-K..................... Combined Annual Report on Form 10-K of SOUTHERN, ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH for the year ended December 31, 1995 FUCO.......................... Foreign utility company GEORGIA....................... Georgia Power Company GULF.......................... Gulf Power Company MEAG.......................... Municipal Electric Authority of Georgia MISSISSIPPI................... Mississippi Power Company OPC........................... Oglethorpe Power Corporation operating affiliates.......... see affiliates operating companies........... see affiliates PEP........................... Performance Evaluation Plan PSC........................... Public Service Commission SAVANNAH...................... Savannah Electric and Power Company SEC........................... Securities and Exchange Commission SOUTHERN...................... The Southern Company Southern Energy............... Southern Energy, Inc. (formerly Southern Electric International, Inc.) SWEB.......................... South Western Electricity plc (United Kingdom) TVA........................... Tennessee Valley Authority 4
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES 5
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------------- ------------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- OPERATING REVENUES $ 2,916,635 $ 2,758,848 $ 7,870,821 $ 6,871,461 -------------- -------------- -------------- -------------- OPERATING EXPENSES: Operation-- Fuel 642,400 665,190 1,700,351 1,660,738 Purchased power 252,291 115,091 746,951 244,180 Other (Note G) 430,606 430,888 1,298,316 1,180,913 Maintenance 169,675 142,936 552,774 465,244 Depreciation and amortization 247,892 243,639 740,023 672,680 Amortization of deferred Plant Vogtle costs (Note M) 34,077 32,493 101,070 90,443 Taxes other than income taxes 162,384 131,995 483,335 376,875 Income taxes 293,596 323,112 678,424 668,556 -------------- -------------- -------------- -------------- Total operating expenses 2,232,921 2,085,344 6,301,244 5,359,629 -------------- -------------- -------------- -------------- OPERATING INCOME 683,714 673,504 1,569,577 1,511,832 OTHER INCOME: Allowance for equity funds used during construction 1,169 843 2,213 5,847 Interest income 11,781 10,753 39,588 19,132 Other, net (2,450) (32,266) (14,759) (31,807) Income taxes applicable to other income (16,268) 8,751 19,584 13,790 -------------- -------------- -------------- -------------- INCOME BEFORE INTEREST CHARGES 677,946 661,585 1,616,203 1,518,794 -------------- -------------- -------------- -------------- INTEREST CHARGES AND OTHER: Interest on long-term debt 126,428 131,999 389,774 405,500 Allowance for debt funds used during construction (4,400) (3,663) (15,189) (14,902) Interest on notes payable 30,288 15,501 95,095 43,892 Amortization of debt discount, premium and expense, net 15,560 7,836 36,500 23,777 Other interest charges 16,509 14,982 52,301 40,416 Minority interests in subsidiaries' earnings 3,765 4,318 4,591 10,940 Preferred dividends of subsidiary companies 22,356 21,788 65,556 66,491 -------------- -------------- -------------- -------------- Net interest charges and other, net 210,506 192,761 628,628 576,114 -------------- -------------- -------------- -------------- CONSOLIDATED NET INCOME $ 467,440 $ 468,824 $ 987,575 $ 942,680 ============== ============== ============== ============== AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (Thousands) 673,651 665,774 671,838 664,279 EARNINGS PER SHARE OF COMMON STOCK $0.69 $0.71 $1.47 $1.42 CASH DIVIDENDS PAID PER SHARE OF COMMON STOCK $0.315 $0.305 $0.945 $0.915 The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements. 6
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, ------------------------------ 1996 1995 ---- ---- OPERATING ACTIVITIES: Consolidated net income $ 987,575 $ 942,680 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 913,122 836,792 Deferred income taxes and investment tax credits 67,694 82,255 Allowance for equity funds used during construction (2,213) (5,847) Amortization of deferred Plant Vogtle costs (Note M) 101,070 90,443 Gain on asset sales (62,787) (23,533) Other, net 39,254 107,832 Changes in certain current assets and liabilities-- Receivables, net (75,918) (224,916) Fossil fuel stock 64,170 81,768 Materials and supplies 22,266 8,610 Payables (136,168) (216,121) Customer deposits (83,360) 33,135 Taxes accrued 159,459 234,696 Other (111,844) (77,530) ------------- ------------- Net cash provided from operating activities 1,882,320 1,870,264 ------------- ------------- INVESTING ACTIVITIES: Gross property additions (911,435) (967,016) SEI investments - (343,947) Sale of minority interest in SWEB 188,663 - Sales of property and other investments 20,895 131,099 Other (98,990) 17,224 ------------- ------------- Net cash used for investing activities (800,867) (1,162,640) ------------- ------------- FINANCING ACTIVITIES: Proceeds-- Common stock 95,873 186,610 Subsidiary obligated mandatorily redeemable preferred securities 322,000 - First mortgage bonds 60,000 345,210 Pollution control bonds 146,100 515,300 Other long-term debt 319,148 265,772 Retirements-- Preferred stock (78,897) (1,000) First mortgage bonds (377,149) (538,414) Pollution control bonds (91,460) (355,205) Other long-term debt (1,116,073) (261,551) Special deposits-redemption funds (61,480) (149,585) Notes payable, net (40,027) 96,753 Payment of common stock dividends (634,553) (607,988) Miscellaneous (16,318) (11,315) ------------- ------------- Net cash used for financing activities (1,472,836) (515,413) ------------- ------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (391,383) 192,211 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 772,340 139,309 ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 380,957 $ 331,520 ============= ============= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $ 545,845 $ 486,235 Income taxes 458,731 453,265 The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements. 7
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, 1996 At December 31, (Unaudited) 1995 ---------------- ------------------ UTILITY PLANT: Plant in service $ 32,809,676 $ 31,878,166 Less accumulated provision for depreciation 10,737,018 10,067,081 ---------------- ---------------- 22,072,658 21,811,085 Nuclear fuel, at amortized cost 228,828 225,386 Construction work in progress 777,556 989,808 ---------------- ---------------- Total 23,079,042 23,026,279 ---------------- ---------------- OTHER PROPERTY AND INVESTMENTS: Argentine operating concession, being amortized 420,194 431,212 Goodwill 290,262 343,897 Nuclear decommissioning trusts, at market 240,820 200,641 Miscellaneous 347,526 317,103 ---------------- ---------------- Total 1,298,802 1,292,853 ---------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 380,957 772,340 Special deposits 61,480 156,114 Receivables, less accumulated provisions for uncollectible accounts of $32,618 at September 30, 1996 and $37,119 at December 31, 1995 1,434,922 1,362,912 Fossil fuel stock, at average cost 262,499 326,669 Materials and supplies, at average cost 533,908 551,546 Prepayments 284,583 265,988 Vacation pay deferred 77,656 74,135 ---------------- ---------------- Total 3,036,005 3,509,704 ---------------- ---------------- DEFERRED CHARGES: Deferred charges related to income taxes 1,330,666 1,386,116 Deferred Plant Vogtle costs (Note M) 206,568 307,638 Debt expense, being amortized 76,913 68,539 Premium on reacquired debt, being amortized 275,039 294,825 Miscellaneous 624,051 636,327 ---------------- ---------------- Total 2,513,237 2,693,445 ---------------- ---------------- TOTAL ASSETS $ 29,927,086 $ 30,522,281 ================ ================ The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements. 8
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1996 At December 31, (Unaudited) 1995 ------------------ ----------------- CAPITALIZATION: Common stock, par value $5 per share-- Authorized -- 1 billion shares Outstanding -- September 30, 1996: 673,651,015 shares -- December 31, 1995: 669,542,914 shares $ 3,368,255 $ 3,347,715 Paid-in capital 1,985,114 1,940,823 Retained earnings 3,835,643 3,483,624 ---------------- ---------------- 9,189,012 8,772,162 Preferred stock of subsidiaries 1,153,056 1,332,203 Subsidiary obligated mandatorily redeemable preferred securities 422,000 100,000 Long-term debt 7,356,378 8,274,012 ---------------- ---------------- Total 18,120,446 18,478,377 ---------------- ---------------- CURRENT LIABILITIES: Preferred stock of subsidiaries due within one year 100,250 - Long-term debt due within one year 212,080 508,572 Notes payable 1,629,711 1,669,738 Accounts payable 597,190 785,490 Customer deposits 133,284 216,644 Taxes accrued-- Income taxes 144,678 92,684 Other 285,251 178,807 Interest accrued 158,630 199,112 Vacation pay accrued 104,067 99,678 Miscellaneous 442,107 530,461 ---------------- ---------------- Total 3,807,248 4,281,186 ---------------- ---------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 4,714,244 4,611,081 Deferred credits related to income taxes 892,148 935,611 Accumulated deferred investment tax credits 795,292 820,127 Employee benefits provisions 478,858 430,802 Minority interests in subsidiaries 373,141 230,500 Prepaid capacity revenues 125,024 131,186 Department of Energy assessments 86,113 86,113 Disallowed Plant Vogtle capacity buyback costs 57,050 58,514 Storm damage reserves 34,136 30,777 Miscellaneous 443,386 428,007 ---------------- ---------------- Total 7,999,392 7,762,718 ---------------- ---------------- TOTAL CAPITALIZATION AND LIABILITIES $ 29,927,086 $ 30,522,281 ================ ================ The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements. 9
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1996 vs. THIRD QUARTER 1995 AND YEAR-TO-DATE 1996 vs. YEAR-TO-DATE 1995 RESULTS OF OPERATIONS Earnings SOUTHERN's consolidated net income for the third quarter and year-to-date 1996 was $467 million ($0.69 per share) and $988 million ($1.47 per share), respectively, compared to $469 million ($0.71 per share) and $943 million ($1.42 per share) for the corresponding periods of 1995. This resulted in a consolidated net income decrease of 0.3% for the quarter and an increase of 4.8% year to date. Milder weather during the third quarter of 1996 when compared with the third quarter of 1995 kept earnings relatively flat; however, year-to-date earnings of the core business were positively affected by more favorable weather conditions during the first half of 1996. The performance of Southern Energy (primarily resulting from the acquisition of SWEB effective September 18, 1995) also contributed to 1996 earnings. (Reference is made to Note 14 of SOUTHERN's financial statements in Item 8 of the Form 10-K for additional information regarding the acquisition of SWEB. Reference is also made to "Future Earnings Potential" below relating to the sale, in July 1996, of a 25% share of SWEB to a subsidiary of PP&L Resources, Inc.) SOUTHERN's core business is primarily represented by its five domestic electric utility operating companies, which provide electric service in four Southeastern states. Another significant portion of SOUTHERN's business is represented by Southern Energy, which owns and manages international and domestic businesses for SOUTHERN. Businesses acquired by Southern Energy have been included in the consolidated statements of income since the date of acquisition. Certain changes in operating revenues and expenses from the prior period are the result of such acquisitions. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) -------------------------------------------------------------- Third Quarter Year-To-Date ------------------------------- ------------------------------ (in thousands) % (in thousands) % Operating revenues............................... $157,787 5.7 $999,360 14.5 Purchased power expense.......................... 137,200 119.2 502,771 205.9 Maintenance expense.............................. 26,739 18.7 87,530 18.8 Depreciation and amortization expense............ 4,253 1.7 67,343 10.0 Taxes other than income taxes.................... 30,389 23.0 106,460 28.2 Interest on long-term debt....................... (5,571) (4.2) (15,726) (3.9) Interest on notes payable........................ 14,787 95.4 51,203 116.7
Operating revenues. The changes in operating revenues of the core business were influenced most heavily by changes in the amount of retail energy sold. Compared to the corresponding periods of 1995, total retail kilowatt-hour sales for the third quarter decreased 0.3%; however, for the current year-to-date period, total retail kilowatt-hour sales increased 3.7%. Retail revenues, excluding those revenues which represent the pass-through of fuel and certain other expenses and do not affect income, decreased $48 million for the third quarter and increased $79 million year-to-date 1996. Residential and commercial energy sales experienced the most significant changes for the third quarter and 10 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION year-to-date periods, respectively. Compared to the corresponding periods of 1995, residential kilowatt-hour sales for the third quarter decreased 5.2%; however, for the current year-to-date period, residential kilowatt-hour sales increased 3.6%. Commercial kilowatt-hour sales increased 2.8% and 6.0% for the current quarter and year-to-date periods, respectively. Compared to the same periods of 1995, there was growth in the number of residential and commercial customers served; however, residential energy sales were mainly influenced by favorable weather conditions during the third quarter of 1995 and the first half of 1996. For the third quarter and year-to-date 1996, operating revenues applicable to Southern Energy-related activities increased by $245 million and $881 million, respectively, as compared to the corresponding periods of 1995. The primary reason for these increases relates to the acquisition of SWEB. Purchased power expense. The substantial increase in purchased power expense is attributable to Southern Energy-related activities, specifically, SWEB's operations. (SWEB's main business is the distribution of electricity. It must purchase essentially all of its power.) Purchased power expense in the core business decreased 10.6% or $9 million for the third quarter and 2.7% or $5 million for year-to-date 1996 compared to the corresponding periods of 1995. Maintenance expense. After excluding those amounts attributable to Southern Energy-related business activities, maintenance expense related to the core business increased $13 million or 9.3% for the third quarter and $46 million or 10.0% for year-to-date 1996 compared to the corresponding periods of 1995. The increase in the current quarter is primarily attributable to the timing of scheduled maintenance performed on generating units and a write-off by ALABAMA of obsolete steam generating plant inventory. The year-to-date increase is primarily due to the timing of scheduled maintenance performed on generating units and an accrual by ALABAMA to partially replenish its natural disaster reserve. Depreciation and amortization expense. After excluding those amounts attributable to Southern Energy-related business activities, depreciation and amortization expense in the core business decreased $9 million or 3.7% for the third quarter and increased $23 million or 3.5% for year-to-date 1996 compared to the corresponding periods of 1995. The decrease in the current quarter is primarily due to a charge to amortization expense by GEORGIA in September 1995 for software development costs. The increase in year-to-date 1996 is mainly due to accelerated depreciation of certain generating plants pursuant to a new retail rate plan at GEORGIA effective January 1, 1996, and additional plant investment. Taxes other than income taxes. After excluding those amounts attributable to Southern Energy-related business activities, taxes other than income taxes associated with the core business increased $2 million or 1.4% for the current quarter and $13 million or 3.4% for the current year-to-date period compared to the corresponding periods of 1995 primarily due to higher municipal and county franchise taxes. Changes in such franchise taxes, which are collected from customers, have no impact on earnings. Interest on long-term debt. After excluding those amounts attributable to Southern Energy-related business activities, interest on long-term debt in the core business decreased $12 million (9.6%) for the third quarter and $50 million (13.3%) year-to-date 1996 compared to the corresponding periods of 1995 reflecting the redemption and refinancing of long-term debt by the operating companies. 11 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Interest on notes payable. After excluding those amounts attributable to Southern Energy-related business activities, interest on notes payable in the core business decreased $3 million or 20.0% for the current quarter and increased $5 million or 12.1% year-to-date 1996 reflecting a lower amount of short-term debt outstanding in the current quarter compared to the same period of 1995 and a higher amount of short-term debt outstanding in the current year-to-date period compared to the corresponding period of 1995. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from energy sales growth to a less regulated, more competitive environment, with Southern Energy and other business becoming more significant. With respect to Southern Energy-related activities, SOUTHERN received, in April 1996, an order from the SEC which in effect allows it to use the proceeds from financings to increase its aggregate investment in EWGs and FUCOs up to an amount not exceeding 100% of SOUTHERN's consolidated retained earnings. A consumer group that had sought to intervene in the SEC proceeding has filed a motion for reconsideration of such order with the SEC and an appeal with the U.S. Court of Appeals for the 11th Circuit. At September 30, 1996, SOUTHERN's consolidated retained earnings amounted to $3,836 million, and its aggregate investment in EWGs and FUCOs amounted to $889 million. For additional information relating to Southern Energy and SOUTHERN's other business activities, see Item 1 - BUSINESS - "New Business Development" in the Form 10-K. In addition to the discussion in the Form 10-K relating to SWEB, on July 1, 1996, Southern Energy sold, indirectly, a 25% share in SWEB to a subsidiary of PP&L Resources, Inc. for some $189 million. On October 9, 1996, Southern Energy announced that a $2.7 billion agreement had been entered into between Southern Energy, Southern Energy-Asia, Inc. (an indirect, wholly-owned subsidiary of SOUTHERN), Consolidated Electric Power Asia Limited (CEPA) and Hopewell Holdings Limited, providing for the acquisition by Southern Energy-Asia of an 80% interest in CEPA. For additional information, reference is made to the Current Report on Form 8-K, dated October 9, 1996, filed by SOUTHERN. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. Legislation has been enacted in Alabama that would establish a process for determining whether utilities would experience "stranded costs" upon the transfer of an existing customer of a utility to another electric supplier. This legislation authorizes the Alabama PSC to make a determination of whether stranded costs would exist as a result of such a transfer by a customer of ALABAMA and could require the customer seeking an alternative supplier to pay any stranded costs found to exist. The legislation has termination provisions keyed to passage of comprehensive retail electric service competition legislation which addresses stranded costs of existing utilities and eliminates the obligation of utilities to provide generating resources. For additional information, see Item 1 - BUSINESS "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS "Environmental Matters" of SOUTHERN in the Form 10-K. 12 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Reference is made to Notes (B), (C), (E), (F), (H), (J), (L), (M), (N), (O), (Q) and (R) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. FINANCIAL CONDITION Overview The major change in SOUTHERN's financial condition during the first nine months of 1996 was the addition of approximately $911 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations. See SOUTHERN's Condensed Statements of Cash Flows for further details. Financing Activities During the first nine months of 1996, the operating companies sold $60 million of first mortgage bonds, and through public authorities, $146 million of pollution control revenue bonds. Retirements, including maturities, of the operating companies' first mortgage bonds and pollution control revenue bonds totaled $463 million, and redemptions of preferred stock totaled $79 million. A subsidiary of ALABAMA formed as a statutory business trust sold $97 million of trust preferred securities guaranteed by ALABAMA and loaned the proceeds of such securities to ALABAMA. See Note (I) in the "Notes to the Condensed Financial Statements" herein for further details. A subsidiary of GEORGIA formed as a statutory business trust sold $225 million of trust preferred securities guaranteed by GEORGIA and loaned the proceeds of such securities to GEORGIA. See Note (K) in the "Notes to the Condensed Financial Statements" herein for further details. During the first nine months of 1996, SOUTHERN raised $96 million from the issuance of new common stock under SOUTHERN's various stock plans. The market price of SOUTHERN's common stock at September 30, 1996 was $22.50 per share and the book value was $13.64 per share, representing a market-to-book ratio of 165%, compared to $24.625, $13.10 and 188%, respectively, at the end of 1995. The dividend for the third quarter of 1996 was $0.315 per share. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of SOUTHERN under "Capital Requirements for Construction," "Environmental Matters" and "Other Capital Requirements" in the Form 10-K for a description of the Southern electric system's capital requirements for its construction program, environmental compliance efforts, sinking fund requirements and maturing debt. Approximately $312 million will be required by September 30, 1997, for present sinking fund requirements, redemption of preferred stock and redemptions and maturities of long-term debt. Also, the operating companies plan to continue, to the extent possible, a program to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital. Sources of Capital In addition to the financing activities previously described, SOUTHERN may require additional equity capital during the remainder of the year. The amounts and timing of additional equity capital to be raised in 1996, as well as in subsequent years, will be contingent on SOUTHERN's investment opportunities. The 13 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION operating companies plan to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. Currently, each of the operating companies expects to have adequate earnings coverage ratios for any anticipated security sales through at least 1998. See Item 1 BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, the SOUTHERN system had at September 30, 1996, approximately $381 million of cash and cash equivalents and approximately $4,119 million of unused credit arrangements with banks (including $808 million of such arrangements under which borrowings may be made only to fund purchase obligations of the operating companies relating to variable rate pollution control bonds). At September 30, 1996, the system companies had outstanding approximately $1,040 million of short-term notes payable and $590 million of commercial paper. Since SOUTHERN's construction program with respect to major generating projects in the core business has been completed, management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. See Note (D) in the "Notes to the Condensed Financial Statements" herein for discussion of financial derivative contracts entered into by SOUTHERN. 14 ALABAMA POWER COMPANY 15
ALABAMA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, ---------------------- ---------------------- 1996 1995 1996 1995 ---- ---- ---- ---- OPERATING REVENUES: Revenues $ 869,950 $ 910,023 $ 2,253,194 $ 2,264,183 Revenues from affiliates 43,358 28,261 172,510 73,925 -------------- -------------- -------------- -------------- Total operating revenues 913,308 938,284 2,425,704 2,338,108 -------------- -------------- -------------- -------------- OPERATING EXPENSES: Operation-- Fuel 245,385 242,649 668,034 596,257 Purchased power from non-affiliates 11,795 16,684 31,651 25,895 Purchased power from affiliates 27,502 41,011 67,365 93,695 Other 124,624 125,667 375,808 363,062 Maintenance 62,361 51,299 193,354 174,529 Depreciation and amortization 80,142 75,886 239,859 228,717 Taxes other than income taxes 46,507 45,959 140,244 137,668 Federal and state income taxes 92,469 105,807 193,141 204,329 -------------- -------------- -------------- -------------- Total operating expenses 690,785 704,962 1,909,456 1,824,152 -------------- -------------- -------------- -------------- OPERATING INCOME 222,523 233,322 516,248 513,956 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction 161 564 594 2,823 Income from subsidiary 944 990 2,885 2,865 Interest income 6,521 5,840 21,506 6,760 Other, net (7,907) (8,436) (30,526) (19,810) Income taxes applicable to other income 1,368 1,155 15,463 9,154 -------------- -------------- -------------- -------------- INCOME BEFORE INTEREST CHARGES 223,610 233,435 526,170 515,748 -------------- -------------- -------------- -------------- INTEREST CHARGES: Interest on long-term debt 42,179 44,737 127,067 135,684 Allowance for debt funds used during construction (1,390) (915) (5,112) (4,585) Interest on interim obligations 5,374 4,430 16,852 13,300 Amortization of debt discount, premium and expense, net 10,165 2,544 19,809 7,588 Other interest charges 8,009 7,999 26,107 21,192 -------------- -------------- -------------- -------------- Net interest charges 64,337 58,795 184,723 173,179 -------------- -------------- -------------- -------------- NET INCOME 159,273 174,640 341,447 342,569 DIVIDENDS ON PREFERRED STOCK 6,684 6,702 19,921 20,377 -------------- -------------- -------------- -------------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 152,589 $ 167,938 $ 321,526 $ 322,192 ============== ============== ============== ============== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. 16
ALABAMA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, --------------------- 1996 1995 ---- ---- OPERATING ACTIVITIES: Net income $ 341,447 $ 342,569 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 303,893 272,505 Deferred income taxes and investment tax credits, net (50) 27,182 Allowance for equity funds used during construction (594) (2,823) Other, net 22,666 59,823 Changes in certain current assets and liabilities-- Receivables, net (39,366) (88,215) Inventories 40,621 26,669 Payables (71,740) (100,678) Taxes accrued 81,314 83,959 Energy cost recovery, retail 25,186 (18,693) Other (37,291) (32,948) ------------ ------------ Net cash provided from operating activities 666,086 569,350 ------------ ------------ INVESTING ACTIVITIES: Gross property additions (325,313) (357,749) Other (34,838) (40,366) ------------ ------------ Net cash used for investing activities (360,151) (398,115) ------------ ------------ FINANCING ACTIVITIES: Proceeds-- Company obligated mandatorily redeemable preferred securities of Alabama Power Capital Trust I holding Company Junior Subordinated Notes (Note I) 97,000 - Other long-term debt - 50,000 Retirements-- First mortgage bonds (83,797) - Other long-term debt (706) (50,563) Interim obligations, net (58,637) 60,128 Payment of preferred stock dividends (19,945) (20,296) Payment of common stock dividends (228,800) (210,700) Miscellaneous (3,042) (1,567) ------------ ------------ Net cash used for financing activities (297,927) (172,998) ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 8,008 (1,763) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,616 14,676 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,624 $ 12,913 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $ 152,197 $ 148,104 Income taxes 135,370 112,268 The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. 17
ALABAMA POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, 1996 At December 31, (Unaudited) 1995 ------------------- ----------------- UTILITY PLANT: Plant in service $ 10,705,412 $ 10,430,792 Less accumulated provision for depreciation 4,051,259 3,838,093 ---------------- ---------------- 6,654,153 6,592,699 Nuclear fuel, at amortized cost 107,488 100,537 Construction work in progress 320,079 362,768 ---------------- ---------------- Total 7,081,720 7,056,004 ---------------- ---------------- OTHER PROPERTY AND INVESTMENTS: Southern Electric Generating Company, at equity 25,771 27,232 Nuclear decommissioning trusts, at market 122,526 108,368 Miscellaneous 20,937 19,156 ---------------- ---------------- Total 169,234 154,756 ---------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 20,624 12,616 Receivables-- Customer accounts receivable 384,271 355,833 Other accounts and notes receivable 26,719 28,082 Affiliated companies 48,639 41,819 Accumulated provision for uncollectible accounts (1,316) (1,212) Refundable income taxes - 2,635 Fossil fuel stock, at average cost 77,765 106,627 Materials and supplies, at average cost 167,344 179,103 Prepayments 146,903 116,331 Vacation pay deferred 28,369 29,458 ---------------- ---------------- Total 899,318 871,292 ---------------- ---------------- DEFERRED CHARGES: Deferred charges related to income taxes 424,567 436,837 Debt expense, being amortized 7,512 7,648 Premium on reacquired debt, being amortized 72,465 89,967 Uranium enrichment decontamination and decommissioning fund 40,282 40,282 Miscellaneous 90,518 87,574 ---------------- ---------------- Total 635,344 662,308 ---------------- ---------------- TOTAL ASSETS $ 8,785,616 $ 8,744,360 ================ ================ The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. 18
ALABAMA POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1996 At December 31, (Unaudited) 1995 ------------------- ------------------- CAPITALIZATION: Common stock equity-- Common stock (par value $40 per share)-- authorized 6,000,000 shares; outstanding 5,608,955 shares $ 224,358 $ 224,358 Paid-in capital 1,304,645 1,304,645 Premium on preferred stock 146 146 Retained earnings 1,253,923 1,161,225 -------------- -------------- 2,783,072 2,690,374 Preferred stock 440,400 440,400 Company obligated mandatorily redeemable preferred securities of Alabama Power Capital Trust I holding Company Junior Subordinated Notes (Note I) 97,000 - Long-term debt 2,353,522 2,374,948 -------------- -------------- Total 5,673,994 5,505,722 -------------- -------------- CURRENT LIABILITIES: Long-term debt due within one year 20,749 84,682 Notes payable to banks 20,000 - Commercial paper 311,379 390,016 Accounts payable-- Affiliated companies 71,643 76,326 Other 99,777 182,401 Customer deposits 32,630 30,353 Taxes accrued-- Federal and state income 45,577 13,599 Other 59,747 18,158 Interest accrued 46,517 53,527 Vacation pay accrued 28,369 29,458 Miscellaneous 82,825 70,543 -------------- -------------- Total 819,213 949,063 -------------- -------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 1,207,453 1,191,591 Accumulated deferred investment tax credits 296,835 305,372 Prepaid capacity revenues, net 125,024 131,186 Uranium enrichment decontamination and decommissioning fund 36,620 36,620 Deferred credits related to income taxes 368,316 386,038 Natural disaster reserve 20,306 17,959 Miscellaneous 237,855 220,809 -------------- -------------- Total 2,292,409 2,289,575 -------------- -------------- TOTAL CAPITALIZATION AND LIABILITIES $ 8,785,616 $ 8,744,360 ============== ============== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. 19
ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1996 vs. THIRD QUARTER 1995 AND YEAR-TO-DATE 1996 vs. YEAR-TO-DATE 1995 RESULTS OF OPERATIONS Earnings ALABAMA's net income after dividends on preferred stock for the third quarter and year-to-date 1996 was $152.6 million and $321.5 million, respectively, compared to $167.9 million and $322.2 million for the corresponding periods of 1995. Earnings decreased by 9.1% for the third quarter, primarily due to lower retail energy sales, and by 0.2% year-to-date. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) -------------------------------------------------------- Third Quarter Year-To-Date -------------------------- ----------------------------- (in thousands) % (in thousands) % Revenues............................................. $(40,073) (4.4) $(10,989) (0.5) Revenues from affiliates............................. 15,097 53.4 98,585 133.4 Fuel expense......................................... 2,736 1.1 71,777 12.0 Purchased power from affiliates...................... (13,509) (32.9) (26,330) (28.1) Maintenance expense.................................. 11,062 21.6 18,825 10.8 Interest income...................................... 681 11.7 14,746 218.1 Other, net........................................... 529 6.3 (10,716) (54.1) Amortization of debt discount, premium and expense, net...................................... 7,621 299.6 12,221 161.1
Revenues. Excluding fuel revenues, which represent the pass-through of fuel expenses and do not affect net income, revenues for the third quarter 1996 decreased $14.5 million, compared to the corresponding period of 1995. The decrease in third quarter 1996 revenues reflects a decrease in the amount of retail, particularly residential, energy sold as well as rate reductions initiated by ALABAMA for certain commercial and industrial customers. Milder weather during the third quarter of 1996 as compared to the exceptionally warm summer of 1995 primarily impacted residential energy sales, which were down 7.3% compared to the third quarter of 1995. Commercial energy sales increased 5.2%, and industrial energy sales decreased 1.8% for the third quarter compared to 1995. Total retail kilowatt-hour sales for the quarter were down 2.3% compared to the same period of 1995, and retail revenues, excluding fuel revenues, decreased $20.1 million. Revenues from affiliates and Purchased power from affiliates. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from period to period depending on demand, the availability, and cost of generating resources at each company. Fuel expense. The increase in fuel expense for the year-to-date 1996 period as compared to the corresponding period of 1995 can be attributed to higher generation. 20 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Maintenance expense. Maintenance expense increased for the third quarter of 1996 compared to the same period of 1995 primarily due to a reclassification of expenses previously charged to operations and the write-off of obsolete steam generating plant inventory. These items, plus an accrual to partially replenish the natural disaster reserve, represent the primary reasons for the year-to-date increase. Interest income. The 1996 year-to-date increase in interest income compared to the same period of 1995 reflects approximately $5 million resulting from the recognition of gains on sales of securities within the nuclear decommissioning trust. This increase in income was offset by a concurrent recognition of other interest charges in accordance with FERC requirements. In addition, interest income was reduced in May 1995, pursuant to litigation, as a result of a charge of $9 million to reflect the refund of interest on the sales of merchandise by vendors other than ALABAMA. Other, net. The change in this item for the year-to-date 1996 period compared to the same period of 1995 is primarily due to a $5.6 million gain on the disposition of property which was recognized in 1995 and increased contributions and injuries and damages expenses during 1996. Amortization of debt discount, premium and expense, net. The increase in this item for the current quarter and year-to-date periods compared to the same periods of 1995 is the result of ALABAMA's reducing the asset account, relating to premiums incurred in connection with the refinancing of high-cost debt, by approximately $5.0 million and $8.0 million in February and July 1996, respectively, as allowed by the Alabama PSC. See Note (H) in the "Notes to the Condensed Financial Statements" herein for further details. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from energy sales growth to a less regulated, more competitive environment. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. Legislation has been enacted in Alabama that would establish a process for determining whether utilities would experience "stranded costs" upon the transfer of an existing customer of a utility to another electric supplier. This legislation authorizes the Alabama PSC to make a determination of whether stranded costs would exist as a result of such a transfer by a customer of ALABAMA and could require the customer seeking an alternative supplier to pay any stranded costs found to exist. The legislation has termination provisions keyed to passage of comprehensive retail electric service competition legislation which addresses stranded costs of existing utilities and eliminates the obligation of utilities to provide generating resources. For additional information, see Item 1 - BUSINESS "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of ALABAMA in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS "Environmental Matters" of ALABAMA in the Form 10-K. Reference is made to Notes (B), (C), (F), (G), (H) and (J) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. 21 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL CONDITION Overview The major change in ALABAMA's financial condition during the first nine months of 1996 was the addition of approximately $325.3 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities. See ALABAMA's Condensed Statements of Cash Flows for further details. Financing Activities During the first quarter of 1996, maturities and redemptions of first mortgage bonds of ALABAMA totaled $83.8 million. Also, Alabama Power Capital Trust I, a statutory business trust established for the sole purpose of holding ALABAMA's junior subordinated notes and issuing preferred securities, sold $97.0 million of its 7.375% trust preferred securities which are guaranteed by ALABAMA. See Note (I) in the "Notes to the Condensed Financial Statements" herein for further details. No additional securities were issued, redeemed or matured during the second or third quarters. ALABAMA has authorized the sale, through a public authority, of $21.0 million of adjustable rate pollution control revenue refunding bonds due 2021. It is expected that proceeds from the sale of the new bonds will be applied not later than February 11, 1997, to the redemption of $21.0 million outstanding principal amount of 7.40% pollution control revenue bonds due 2016, at a redemption price of 102% plus accrued interest. ALABAMA has also announced that it intends to redeem on January 2, 1997, $19.8 million of its 9-1/4% first mortgage bonds due 2021, at par plus accrued interest, pursuant to provisions of ALABAMA's indenture relating to the improvement fund and use of proceeds of released property. ALABAMA will continue to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital, as market conditions permit. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of ALABAMA under "Capital Requirements," "Other Capital Requirements" and "Environmental Matters" in the Form 10-K for a description of ALABAMA's capital requirements for its construction program, maturing debt and environmental compliance efforts. Sources of Capital In addition to the financing activities previously described herein, ALABAMA plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. Currently, ALABAMA expects to have adequate earnings coverage ratios for any anticipated security sales through at least 1998. See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional information. 22 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION To meet short-term cash needs and contingencies, ALABAMA had at September 30, 1996, approximately $20.6 million of cash and cash equivalents and had committed lines of credit of approximately $795 million (including $187 million of such lines under which borrowings may be made only to fund purchase obligations relating to variable rate pollution control bonds) with regulatory authority for up to $750 million of short-term borrowing. At September 30, 1996, ALABAMA had outstanding $20.0 million of short-term notes payable to banks and $311.4 million of commercial paper. Since ALABAMA has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 23 ARTHUR ANDERSEN LLP Exhibit 1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO ALABAMA POWER COMPANY: We have reviewed the accompanying condensed balance sheet of ALABAMA POWER COMPANY as of September 30, 1996, and the related condensed statements of income for the three-month and nine-month periods ended September 30, 1996 and 1995, and condensed statements of cash flows for the nine-month periods ended September 30, 1996 and 1995. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of ALABAMA POWER COMPANY as of December 31, 1995 (not presented herein) and, in our report dated February 21, 1996, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1995 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. /s/ARTHUR ANDERSEN LLP Birmingham, Alabama November 8, 1996 24 GEORGIA POWER COMPANY 25
GEORGIA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, ---------------------- ---------------------- 1996 1995 1996 1995 ---- ---- ---- ---- OPERATING REVENUES: Revenues $ 1,303,783 $ 1,341,661 $ 3,444,445 $ 3,356,077 Revenues from affiliates 7,044 31,895 29,367 66,875 -------------- -------------- -------------- -------------- Total operating revenues 1,310,827 1,373,556 3,473,812 3,422,952 -------------- -------------- -------------- -------------- OPERATING EXPENSES: Operation-- Fuel 245,635 282,111 648,320 714,366 Purchased power from non-affiliates 46,563 53,871 124,335 142,585 Purchased power from affiliates 51,592 36,721 174,349 94,606 Provision for separation benefits 7,947 2,073 34,821 6,052 Other 171,032 211,983 532,035 549,969 Maintenance 65,014 64,197 217,617 201,384 Depreciation and amortization 108,556 122,449 323,824 317,942 Amortization of deferred Plant Vogtle costs (Note M) 34,077 32,493 101,070 90,443 Taxes other than income taxes 56,725 56,301 163,585 158,602 Federal and state income taxes 184,787 174,278 390,026 372,927 -------------- -------------- -------------- -------------- Total operating expenses 971,928 1,036,477 2,709,982 2,648,876 -------------- -------------- -------------- -------------- OPERATING INCOME 338,899 337,079 763,830 774,076 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction 912 61 1,167 2,471 Equity in earnings of unconsolidated subsidiary 944 991 2,885 2,866 Interest income 1,002 1,860 3,916 4,529 Other, net (20,281) (11,997) (29,671) 5,368 Income taxes applicable to other income 7,800 2,841 10,326 (8,467) -------------- -------------- -------------- -------------- INCOME BEFORE INTEREST CHARGES 329,276 330,835 752,453 780,843 -------------- -------------- -------------- -------------- INTEREST CHARGES: Interest on long-term debt 51,492 61,571 157,602 199,029 Allowance for debt funds used during construction (2,724) (2,447) (9,215) (9,498) Interest on interim obligations 3,500 5,356 14,657 17,476 Amortization of debt discount, premium and expense, net 3,597 3,983 11,069 11,999 Other interest charges 5,517 5,826 18,265 16,152 -------------- -------------- -------------- -------------- Net interest charges 61,382 74,289 192,378 235,158 -------------- -------------- -------------- -------------- NET INCOME 267,894 256,546 560,075 545,685 DIVIDENDS ON PREFERRED STOCK 12,415 11,843 35,906 36,321 -------------- -------------- -------------- -------------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 255,479 $ 244,703 $ 524,169 $ 509,364 ============== ============== ============== ============== The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. 26
GEORGIA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, ------------------------ 1996 1995 ---- ---- OPERATING ACTIVITIES: Net income $ 560,075 $ 545,685 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 384,726 397,225 Deferred income taxes and investment tax credits, net 45,883 46,289 Allowance for equity funds used during construction (1,167) (2,471) Amortization of deferred Plant Vogtle costs (Note M) 101,070 90,443 Gain on asset sales (2,265) (23,344) Other, net 45,120 61,254 Changes in certain current assets and liabilities-- Receivables, net (55,008) (136,413) Inventories 27,632 62,153 Payables (58,218) (55,295) Taxes accrued 125,462 109,460 Energy cost recovery, retail (9,416) 28,145 Other (15,161) 15,818 -------------- --------------- Net cash provided from operating activities 1,148,733 1,138,949 -------------- --------------- INVESTING ACTIVITIES: Gross property additions (328,219) (326,858) Sales of property 1,800 131,099 Other (50,967) (53,362) -------------- --------------- Net cash used for investing activities (377,386) (249,121) -------------- --------------- FINANCING ACTIVITIES: Proceeds-- Company obligated mandatorily redeemable preferred securities of subsidiary substantially all of whose assets are Junior Subordinated Notes (Note K) 225,000 - First mortgage bonds 10,000 75,000 Pollution control bonds 112,825 454,700 Retirements-- Preferred stock (78,897) - First mortgage bonds (210,860) (505,789) Pollution control bonds (58,185) (305,205) Other long-term debt - (37,000) Special deposits - redemption funds (61,480) (149,585) Interim obligations, net (298,117) (33,875) Payment of preferred stock dividends (35,705) (36,540) Payment of common stock dividends (365,700) (333,800) Miscellaneous (8,409) (12,261) -------------- --------------- Net cash used for financing activities (769,528) (884,355) -------------- --------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 1,819 5,473 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 28,930 12,539 -------------- --------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 30,749 $ 18,012 ============== =============== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $ 199,603 $ 241,955 Income taxes 261,270 277,260 The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. 27
GEORGIA POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, 1996 At December 31, (Unaudited) 1995 ------------------- ------------------ UTILITY PLANT: Plant in service $ 14,733,046 $ 14,538,595 Less accumulated provision for depreciation 4,730,005 4,417,120 ---------------- ---------------- 10,003,041 10,121,475 Nuclear fuel, at amortized cost 121,340 124,849 Construction work in progress 273,215 236,715 ---------------- ---------------- Total 10,397,596 10,483,039 ---------------- ---------------- OTHER PROPERTY AND INVESTMENTS: Southern Electric Generating Company, at equity 25,771 27,232 Nuclear decommissioning trusts, at market 123,511 92,273 Miscellaneous 141,850 120,383 ---------------- ---------------- Total 291,132 239,888 ---------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 30,749 28,930 Special deposits - redemption funds 61,480 - Receivables-- Customer accounts receivable 488,678 418,749 Other accounts and notes receivable 81,626 102,953 Affiliated companies 15,427 15,482 Accumulated provision for uncollectible accounts (5,800) (5,000) Fossil fuel stock, at average cost 119,636 145,151 Materials and supplies, at average cost 284,687 286,804 Prepayments 96,068 107,764 Vacation pay deferred 40,257 35,543 ---------------- ---------------- Total 1,212,808 1,136,376 ---------------- ---------------- DEFERRED CHARGES: Deferred charges related to income taxes 830,323 871,783 Deferred Plant Vogtle costs (Note M) 206,568 307,638 Premium on reacquired debt, being amortized 167,322 174,018 Debt expense, being amortized 32,556 27,227 Miscellaneous 187,743 230,306 ---------------- ---------------- Total 1,424,512 1,610,972 ---------------- ---------------- TOTAL ASSETS $ 13,326,048 $ 13,470,275 ================ ================ The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. 28
GEORGIA POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1996 At December 31, (Unaudited) 1995 ------------------- ------------------ CAPITALIZATION: Common stock equity-- Common stock (without par value)-- authorized 15,000,000 shares; outstanding 7,761,500 shares $ 344,250 $ 344,250 Paid-in capital 2,384,849 2,384,444 Premium on preferred stock 371 413 Retained earnings 1,728,416 1,569,905 ---------------- ---------------- 4,457,886 4,299,012 Preferred stock 513,640 692,787 Company obligated mandatorily redeemable preferred securities of subsidiaries substantially all of whose assets are Junior Subordinated Debentures or Notes (Note K) 325,000 100,000 Long-term debt 3,259,807 3,315,460 ---------------- ---------------- Total 8,556,333 8,407,259 ---------------- ---------------- CURRENT LIABILITIES: Preferred stock due within one year 100,250 - Long-term debt due within one year 61,838 150,446 Notes payable to banks 1,300 178,000 Commercial paper 100,913 222,330 Accounts payable-- Affiliated companies 74,885 72,878 Other 222,664 316,278 Customer deposits 62,690 53,145 Taxes accrued-- Federal and state income 80,307 7,759 Other 149,547 96,633 Interest accrued 77,868 96,162 Vacation pay accrued 38,739 34,233 Miscellaneous 124,434 137,184 ---------------- ---------------- Total 1,095,435 1,365,048 ---------------- ---------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 2,519,528 2,510,458 Accumulated deferred investment tax credits 419,359 432,184 Deferred credits related to income taxes 389,579 410,016 Miscellaneous 345,814 345,310 ---------------- ---------------- Total 3,674,280 3,697,968 ---------------- ---------------- TOTAL CAPITALIZATION AND LIABILITIES $ 13,326,048 $ 13,470,275 ================ ================ The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. 29
GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1996 vs. THIRD QUARTER 1995 AND YEAR-TO-DATE 1996 vs. YEAR-TO-DATE 1995 RESULTS OF OPERATIONS Earnings GEORGIA's net income after dividends on preferred stock for the third quarter and year-to-date 1996 was $255.5 million and $524.2 million, respectively, compared to $244.7 million and $509.4 million for the corresponding periods of 1995. Earnings increased by 4.4% for the quarter primarily due to lower operating and interest expenses and by 2.9% year-to-date primarily as a result of increased retail revenues and lower interest costs. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) ------------------------------------------------------- Third Quarter Year-To-Date -------------------------- ---------------------------- (in thousands) % (in thousands) % Revenues............................................. $(37,878) (2.8) $ 88,368 2.6 Revenue from affiliates.............................. (24,851) (77.9) (37,508) (56.1) Fuel expense......................................... (36,476) (12.9) (66,046) (9.2) Purchased power from affiliates...................... 14,871 40.5 79,743 84.3 Provision for separation benefits.................... 5,874 283.4 28,769 475.4 Other operation expense.............................. (40,951) (19.3) (17,934) (3.3) Depreciation and amortization expense................ (13,893) (11.3) 5,882 1.9 Other, net........................................... (8,284) (69.1) (35,039) (652.7) Income taxes applicable to other income.............. 4,959 (174.6) 18,793 (222.0) Interest on long-term debt........................... (10,079) (16.4) (41,427) (20.8)
Revenues. Excluding fuel revenues, which represent the pass-through of fuel expenses and do not affect income, revenues for the third quarter decreased $31.6 million and for year-to-date increased $45.3 million, compared to the corresponding periods of 1995. The decrease in revenues for the third quarter is primarily due to a 4.0% decrease in residential kilowatt-hour sales resulting from milder-than-normal weather. Total retail kilowatt-hour sales increased year-to-date primarily due to more favorable weather conditions during the first and second quarters of 1996 and a slight increase in the number of customers served. Retail revenues, excluding fuel revenues, decreased 3.1% or $30.3 million for the current quarter and increased 1.9% or $46.3 million year-to-date. Energy sales to non-affiliated wholesale customers for the third quarter 1996 compared to the same period in 1995 remained relatively flat, but increased 6.5% for year-to-date 1996 versus 1995 primarily due to increased demand by municipalities and cooperatives in Georgia. However, capacity revenues from sales to non-affiliated utilities outside the service territory fell $0.2 million for the quarter and $13.3 million year-to-date primarily due to the scheduled decline in megawatts of capacity under long-term contracts. 30 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Revenues from affiliates. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Fuel expense. Fuel expense decreased primarily due to a decrease in generation resulting from the timing of maintenance at fossil and nuclear plants and a slightly lower average cost of fuel. (See Purchased power from affiliates below.) Purchased power from affiliates. As a result of the timing of maintenance at fossil and nuclear plants discussed above, purchased power from affiliates increased compared to the same periods of 1995. Purchased power transactions among the affiliated companies within the Southern electric system will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Provision for separation benefits. The increase in provision for separation benefits for each period is attributable to work force reduction programs, which have been implemented to control growth in future operating expenses. See Note (G) in the "Notes to the Condensed Financial Statements" herein for further details. Other operation expense. The decrease in other operation expense for the current quarter and year-to-date is primarily due to a charge in July 1995 of $21.8 million of demand-side option program costs not collected through rate riders (see Note (O) in the "Notes to the Condensed Financial Statements" herein) and a charge in August 1995 of $12.6 million of Nuclear Regulatory Commission mandated study costs, partially offset by increased cost under a new three-year retail rate plan effective January 1, 1996. Depreciation and amortization expense. The decrease in depreciation and amortization for the current quarter compared to the same period of 1995 is primarily due to a $15.3 million charge to amortization expense in September 1995 for software development costs. Depreciation and amortization increased year-to-date 1996 compared to year-to-date 1995 primarily due to accelerated depreciation of generating plant pursuant to a new retail rate plan effective January 1, 1996, and an increase in plant-in-service. Other, net and Income taxes applicable to other income. For the current quarter, the change in each of these items is primarily the result of expenses incurred in connection with activities related to the 1996 Summer Olympic games. For the year-to-date period, the primary reason for the change in each of these items is the completion of the sale, in June 1995, of Plant Scherer Unit 4, which resulted in an after-tax gain of approximately $12.0 million. Interest on long-term debt. The decline in interest on long-term debt reflects the redemption and refinancing of long-term debt. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from energy sales growth to movement towards a less regulated, more competitive environment. 31 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form 10-K. Effective January 1, 1996, GEORGIA began operating under a three-year retail rate plan. Under the plan, GEORGIA's earnings will be evaluated against a retail return on common equity range of 10% to 12.5%. GEORGIA is required to absorb cost increases of approximately $29.0 million annually during the plan's three-year operation, including $14.0 million annually of accelerated depreciation of electric plant. Reference is made to Note (L) in the "Notes to the Condensed Financial Statements" herein for additional information. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS "Environmental Issues" of GEORGIA in the Form 10-K. Reference is made to Notes (B), (C), (F) and (L) through (R) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. FINANCIAL CONDITION Overview The major change in GEORGIA's financial condition during the first nine months of 1996 was the addition of approximately $328.2 million to utility plant. These additions were primarily related to transmission and distribution facilities and to the purchase of nuclear fuel. The funds for these additions and other capital requirements were derived primarily from operations. See GEORGIA's Condensed Statements of Cash Flows for further details. Financing Activities During the first quarter of 1996, $150.0 million of GEORGIA's first mortgage bonds matured, and GEORGIA sold $10.0 million of medium-term notes and redeemed $6.8 million of industrial development bonds. In June 1996, GEORGIA sold, through a public authority, $51.3 million of variable rate pollution control revenue bonds, and the proceeds were applied to the redemption on July 1, 1996 of $51.3 million outstanding principal amount of 7.25% pollution control revenue bonds. In August 1996, Georgia Power Capital Trust I, a statutory business trust established for the sole purpose of holding GEORGIA's junior subordinated notes and issuing preferred securities, sold $225.0 million of its 7.75% trust preferred securities, which are guaranteed by GEORGIA. (See Note (K) in the "Notes to the Condensed Financial Statements" herein for further details.) In September 1996, GEORGIA sold, through public authorities, $61.5 million of variable rate pollution control revenue bonds due 2026, and the proceeds were applied to the redemption on October 1, 1996 of $61.5 million outstanding principal amount of 6-3/8% to 8% pollution control revenue bonds. Also during the third quarter 1996, GEORGIA redeemed $78.9 million of preferred stock and $60.9 million of first mortgage bonds. 32 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On November 2, 1996, GEORGIA redeemed all of its 4,000,000 outstanding shares of $2.125 preferred stock at the redemption price of $25.00 per share, plus accrued dividends. GEORGIA plans to continue, to the extent possible, a program to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GEORGIA under "Liquidity and Capital Requirements" and "Environmental Issues" in the Form 10-K for a description of GEORGIA's capital requirements for its construction program and environmental compliance efforts. Sources of Capital In addition to the financing activities previously described herein, GEORGIA plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. Currently, GEORGIA expects to have adequate earnings coverage ratios for any anticipated security sales through at least 1998. See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, GEORGIA had at September 30, 1996, approximately $30.7 million of cash and cash equivalents and approximately $854.7 million of unused credit arrangements with banks (including $589.7 million of such arrangements under which borrowings may be made only to fund purchase obligations relating to variable rate pollution control bonds). At September 30, 1996, GEORGIA had outstanding $1.3 million of short-term notes payable to banks and $100.9 million of commercial paper. Since GEORGIA has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 33 ARTHUR ANDERSEN LLP Exhibit 1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO GEORGIA POWER COMPANY: We have reviewed the accompanying condensed balance sheet of GEORGIA POWER COMPANY (a Georgia corporation) as of September 30, 1996, and the related condensed statements of income for the three-month and nine-month periods ended September 30, 1996 and 1995, and the condensed statements of cash flows for the nine-month periods ended September 30, 1996 and 1995. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of GEORGIA POWER COMPANY as of December 31, 1995 (not presented herein), and, in our report dated February 21, 1996, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1995, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. /s/ARTHUR ANDERSEN LLP Atlanta, Georgia November 8, 1996 34 GULF POWER COMPANY 35
GULF POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, -------------------- ------------------- 1996 1995 1996 1995 ---- ---- ---- ---- OPERATING REVENUES: Revenues $ 173,993 $ 178,335 $ 477,986 $ 461,441 Revenues from affiliates 5,626 5,916 10,375 16,785 ------------ ------------ ------------- ------------ Total operating revenues 179,619 184,251 488,361 478,226 ------------ ------------ ------------- ------------ OPERATING EXPENSES: Operation-- Fuel 56,105 55,590 140,240 148,822 Purchased power from non-affiliates 2,941 3,897 6,804 6,964 Purchased power from affiliates 6,835 9,696 32,177 19,884 Other 28,324 25,042 83,062 79,899 Maintenance 8,998 9,975 38,360 32,952 Depreciation and amortization 14,199 13,863 42,373 41,212 Taxes other than income taxes 14,527 14,169 40,377 38,057 Federal and state income taxes 15,122 16,832 30,634 32,356 ------------ ------------ ------------- ------------ Total operating expenses 147,051 149,064 414,027 400,146 ------------ ------------ ------------- ------------ OPERATING INCOME 32,568 35,187 74,334 78,080 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction 1 22 12 69 Interest income 376 520 1,142 1,433 Other, net (294) (213) (1,041) (508) Income taxes applicable to other income (74) (171) (167) (522) ------------ ------------ ------------- ------------ INCOME BEFORE INTEREST CHARGES 32,577 35,345 74,280 78,552 ------------ ------------ ------------- ------------ INTEREST CHARGES: Interest on long-term debt 5,880 5,838 18,264 17,709 Other interest charges 288 339 793 1,044 Interest on notes payable 716 668 1,845 2,433 Amortization of debt discount, premium, and expense, net 524 507 1,567 1,524 Allowance for debt funds used during construction (3) (32) (61) (98) ------------ ------------ ------------- ------------ Net interest charges 7,405 7,320 22,408 22,612 ------------ ------------ ------------- ------------ NET INCOME 25,172 28,025 51,872 55,940 DIVIDENDS ON PREFERRED STOCK 1,451 1,437 4,312 4,376 ------------ ------------ ------------- ------------ NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 23,721 $ 26,588 $ 47,560 $ 51,564 ============ ============ ============= ============ The accompanying notes as they relate to GULF are an integral part of these condensed statements. 36
GULF POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, ---------------------- 1996 1995 ---- ---- OPERATING ACTIVITIES: Net income $ 51,872 $ 55,940 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 56,903 57,320 Deferred income taxes, net 559 (3,454) Allowance for equity funds used during construction (12) (69) Deferred costs of 1995 coal contract renegotiation 7,172 - Other, net 5,841 (7,794) Changes in certain current assets and liabilities-- Receivables, net (7,868) (20,755) Inventories 14,132 3,716 Payables (9,553) 17,211 Taxes accrued 16,987 20,416 Other (8,157) 423 ------------ ------------ Net cash provided from operating activities 127,876 122,954 ------------ ------------ INVESTING ACTIVITIES: Gross property additions (49,747) (44,915) Other (3,533) 3,081 ------------ ------------ Net cash used for investing activities (53,280) (41,834) ------------ ------------ FINANCING ACTIVITIES: Proceeds-- First mortgage bonds 30,000 - Pollution control bonds 33,275 - Other long-term debt 22,148 - Retirements-- Preferred stock subject to mandatory redemption - (1,000) First mortgage bonds (1,750) (1,750) Pollution control bonds (33,275) - Other long-term debt (32,588) (9,053) Notes payable, net (43,000) (30,500) Payment of preferred stock dividends (4,312) (4,376) Payment of common stock dividends (37,100) (34,300) Miscellaneous (1,852) (131) ------------ ------------ Net cash used for financing activities (68,454) (81,110) ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 6,142 10 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 680 902 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,822 $ 912 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $ 19,269 $ 17,570 Income taxes 20,846 25,505 The accompanying notes as they relate to GULF are an integral part of these condensed statements. 37
GULF POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, 1996 At December 31, (Unaudited) 1995 -------------------- ------------------- UTILITY PLANT: Plant in service $ 1,724,784 $ 1,695,814 Less accumulated provision for depreciation 685,361 658,806 ---------------- -------------- 1,039,423 1,037,008 Construction work in progress 28,400 26,301 ---------------- -------------- Total 1,067,823 1,063,309 ---------------- -------------- OTHER PROPERTY AND INVESTMENTS: 654 740 ---------------- -------------- CURRENT ASSETS: Cash and cash equivalents 6,822 680 Receivables-- Customer accounts receivable 74,271 69,166 Other accounts and notes receivable 3,618 3,393 Affiliated companies 3,413 802 Accumulated provision for uncollectible accounts (841) (768) Fossil fuel stock, at average cost 25,707 37,875 Materials and supplies, at average cost 31,722 33,686 Current portion of deferred coal contract costs 16,359 12,767 Regulatory clauses under recovery 8,120 3,432 Prepaid income taxes - 4,232 Other prepayments 9,485 8,000 Vacation pay deferred 4,419 4,419 ---------------- -------------- Total 183,095 177,684 ---------------- -------------- DEFERRED CHARGES: Deferred charges related to income taxes 28,689 29,093 Debt expense and loss, being amortized 20,668 20,459 Deferred coal contract costs 19,198 33,768 Deferred storm charges 4,537 7,502 Miscellaneous 9,725 9,304 ---------------- -------------- Total 82,817 100,126 ---------------- -------------- TOTAL ASSETS $ 1,334,389 $ 1,341,859 ================ ============== The accompanying notes as they relate to GULF are an integral part of these condensed statements. 38
GULF POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1996 At December 31, (Unaudited) 1995 ------------------- ----------------- CAPITALIZATION: Common stock equity-- Common stock (without par value)-- authorized and outstanding--992,717 shares $ 38,060 $ 38,060 Paid-in capital 218,438 218,438 Premium on preferred stock 81 81 Retained earnings 190,093 179,663 ---------------- -------------- 446,672 436,242 Preferred stock 89,602 89,602 Long-term debt 331,871 323,376 ---------------- -------------- Total 868,145 849,220 ---------------- -------------- CURRENT LIABILITIES: Long-term debt due within one year 40,817 31,548 Notes payable 37,500 80,500 Accounts payable-- Affiliated companies 12,785 14,447 Other 16,839 27,196 Customer deposits 13,453 13,195 Taxes accrued-- Federal and state income 9,138 - Other 17,007 9,547 Interest accrued 7,088 5,719 Regulatory clauses over recovery 4,584 2,800 Vacation pay accrued 4,419 4,419 Miscellaneous 5,555 7,356 ---------------- -------------- Total 169,185 196,727 ---------------- -------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 165,667 162,345 Deferred credits related to income taxes 65,258 67,481 Accumulated deferred investment tax credits 34,288 36,052 Accumulated provision for postretirement benefits 17,661 16,301 Miscellaneous 14,185 13,733 ---------------- -------------- Total 297,059 295,912 ---------------- -------------- TOTAL CAPITALIZATION AND LIABILITIES $ 1,334,389 $ 1,341,859 ================ ============== The accompanying notes as they relate to GULF are an integral part of these condensed statements. 39
GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1996 vs. THIRD QUARTER 1995 AND YEAR-TO-DATE 1996 vs. YEAR-TO-DATE 1995 RESULTS OF OPERATIONS Earnings GULF's net income after dividends on preferred stock for the third quarter and year-to-date 1996 was $23.7 million and $47.6 million, respectively, compared to $26.6 million and $51.6 million for the corresponding periods of 1995. Earnings decreased by 10.8% for the quarter primarily due to lower revenues as a result of this year's milder summer temperatures compared to the exceptionally hot summer of 1995 and due to increased other operation expense. Earnings decreased by 7.8% year-to-date primarily due to higher operation and maintenance expenses. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) ---------------------------------------------------------- Third Quarter Year-To-Date ------------------------------ --------------------------- (in thousands) % (in thousands) % Revenues......................................... $(4,342) (2.4) $16,545 3.6 Revenues from affiliates......................... (290) (4.9) (6,410) (38.2) Purchased power from affiliates.................. (2,861) (29.5) 12,293 61.8 Other operation expense.......................... 3,282 13.1 3,163 4.0 Maintenance expense.............................. (977) (9.8) 5,408 16.4
Revenues. Of the $16.5 million increase in revenues year-to-date 1996, approximately $6.9 million impacted earnings. Territorial revenues, excluding those revenues which represent the pass-through of fuel expense and certain other expenses and do not affect income, increased $4.9 million. The increase in territorial revenues for the current year-to-date period was influenced by a 2.6% increase in retail kilowatt-hour sales compared to the same period of 1995. This change in year-to-date retail energy sales is primarily due to higher residential and commercial sales as a result of colder-than-normal winter weather during the first quarter of 1996 and a slight increase in the number of customers served. Industrial sales were up for the current quarter and year-to-date periods while industrial revenues were down for the current quarter and year-to-date periods, compared to a year ago, primarily due to increased participation in the Real-Time-Pricing program. See Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GULF in the Form 10-K for information on initiatives to remain competitive and to meet conservation goals set by the Florida PSC. Revenues from affiliates. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. 40 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Purchased power from affiliates. The reduction in purchased power from affiliates for the current quarter, compared to one year ago, is primarily due to increased availability of GULF's generating units. Purchased power from affiliates was higher for the year-to-date 1996 period compared to the corresponding period of 1995 due to maintenance outages at Plant Crist and Plant Daniel during the first half of 1996. Purchased power transactions among the affiliated companies within the Southern electric system will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Other operation expense. Other operation expense increased for the third quarter and year-to-date 1996 primarily due to increases in various administrative and general expenses, including expenses related to the approved increase of GULF's annual accrual to the accumulated provision for property damage to amortize deferred storm charges and restore the account balance to a reasonable level. For additional information regarding the provision for property damage, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GULF in the Form 10-K. Costs associated with work force reduction programs also contributed to the year-to-date increase in other operation expense. For additional information regarding work force reduction programs, see Note (G) in the "Notes to the Condensed Financial Statements" herein. Maintenance expense. The fluctuation in maintenance expense for the quarter and year-to-date periods is primarily due to the scheduling of maintenance on production facilities. The increase in maintenance expense for the year-to-date 1996 period compared to 1995 is primarily attributable to scheduled maintenance performed at Plant Crist and Plant Daniel during the first half of 1996. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from energy sales growth to a less regulated, more competitive environment. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. On September 3, 1996, the Florida PSC approved GULF's petition for the Commercial/Industrial Service Rider (CISR) to be implemented on a pilot/experimental basis. The CISR will allow GULF the flexibility to negotiate prices and other terms of service with its large commercial and industrial customers who have competitive alternatives to taking electric service from GULF. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS "Future Earnings Potential" of GULF and Item 1 - BUSINESS - "Competition" in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs are not fully recovered through GULF's environmental cost recovery clause. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of GULF in the Form 10-K. Reference is made to Notes (B) and (F) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. 41 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL CONDITION Overview The major change in GULF's financial condition during the first nine months of 1996 was the addition of approximately $49.7 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations. See GULF's Condensed Statements of Cash Flows for further details. Financing Activities During the first half of 1996, GULF sold $30.0 million of first mortgage bonds; sold, through public authorities, $33.3 million of pollution control revenue refunding bonds and issued a $22.1 million bank note. GULF retired $1.8 million of first mortgage bonds, redeemed $12.075 million of pollution control revenue bonds, redeemed $21.2 million of pollution control revenue refunding bonds and retired a $25.0 million bank note. No additional securities were issued, redeemed or matured during the third quarter. On November 6, 1996, GULF entered into an agreement to sell $25.0 million of 6-1/2% first mortgage bonds due 2006, and it is expected that delivery of the bonds will be made on November 20, 1996. Also, on November 20, 1996, GULF plans to issue a $27.0 million bank note due 1999. The proceeds from the sale of the bonds together with the bank borrowings will be applied by GULF to the redemption in December 1996 of the $49.2 million outstanding principal amount of its 8-3/4% first mortgage bonds due 2021. Such redemption is subject to GULF's closing the sale of the bonds and effecting the bank borrowings. GULF plans to continue, to the extent possible, a program to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital. Under the terms of GULF's supplemental indenture dated as of January 1, 1996, retained earnings of $127 million were restricted against the payment of cash dividends on common stock at September 30, 1996. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GULF under "Capital Requirements for Construction," "Environmental Matters" and "Other Capital Requirements" in the Form 10-K for a description of GULF's capital requirements for its construction program, environmental compliance efforts and maturing debt. GULF's capital requirements for its construction program for 1996 through 1998 were reduced in October 1996 by $52 million due to various cost reduction initiatives. GULF's gross property additions, including those amounts related to environmental compliance, are now budgeted at $157 million for 1996 through 1998 ($61 million in 1996, $47 million in 1997 and $49 million in 1998). Approximately $40.8 million will be required through September 30, 1997, for maturities of long-term debt. Sources of Capital In addition to the financing activities previously described herein, GULF plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. Currently, GULF expects to have adequate earnings coverage ratios for any anticipated security sales through at least 1998. See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional information. 42 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION To meet short-term cash needs and contingencies, GULF had at September 30, 1996, approximately $6.8 million of cash and cash equivalents and $49.3 million of unused committed lines of credit with banks (including $20.3 million liquidity support for variable rate pollution control bonds). At September 30, 1996, GULF had outstanding $37.5 million of short-term notes payable to banks. Since GULF has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 43 MISSISSIPPI POWER COMPANY 44
MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, -------------------- -------------------- 1996 1995 1996 1995 ---- ---- ---- ---- OPERATING REVENUES: Revenues $ 148,125 $ 154,405 $ 403,425 $ 388,507 Revenues from affiliates 8,478 2,714 16,881 6,688 ------------ ------------ ------------ ------------- Total operating revenues 156,603 157,119 420,306 395,195 ------------ ------------ ------------ ------------- OPERATING EXPENSES: Operation-- Fuel 40,029 37,366 106,506 90,692 Purchased power from non-affiliates 11,075 3,386 17,011 5,298 Purchased power from affiliates 5,840 15,520 26,359 38,059 Other 25,686 27,807 76,958 78,502 Maintenance 10,278 8,668 35,116 26,107 Depreciation and amortization 11,559 10,533 34,912 30,605 Taxes other than income taxes 11,082 10,893 32,532 30,097 Federal and state income taxes 13,384 14,429 27,477 29,396 ------------ ------------ ------------ ------------- Total operating expenses 128,933 128,602 356,871 328,756 ------------ ------------ ------------ ------------- OPERATING INCOME 27,670 28,517 63,435 66,439 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction 29 123 153 300 Interest income 23 24 201 56 Other, net 787 1,212 3,519 3,323 Income taxes applicable to other income 40 (241) (983) (777) ------------ ------------ ------------ ------------- INCOME BEFORE INTEREST CHARGES 28,549 29,635 66,325 69,341 ------------ ------------ ------------ ------------- INTEREST CHARGES: Interest on long-term debt 4,691 5,444 15,119 16,737 Allowance for debt funds used during construction (225) (131) (541) (353) Interest on notes payable 488 371 1,339 942 Amortization of debt discount, premium, and expense, net 390 392 1,159 1,137 Other interest charges 196 173 696 1,037 ------------ ------------ ------------ ------------- Net interest charges 5,540 6,249 17,772 19,500 ------------ ------------ ------------ ------------- NET INCOME 23,009 23,386 48,553 49,841 DIVIDENDS ON PREFERRED STOCK 1,225 1,225 3,674 3,674 ------------ ------------ ------------ ------------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 21,784 $ 22,161 $ 44,879 $ 46,167 ============ ============ ============ ============= The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. 45
MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, -------------------- 1996 1995 ---- ---- OPERATING ACTIVITIES: Net income $ 48,553 $ 49,841 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 39,372 40,259 Deferred income taxes (2,757) (918) Allowance for equity funds used during construction (153) (300) Other, net 113 4,376 Changes in certain current assets and liabilities-- Receivables, net 1,751 (11,100) Inventories 4,765 3,880 Payables (1,489) 7,595 Taxes accrued 2,834 (2,913) Other 327 2,482 ------------ ------------ Net cash provided from operating activities 93,316 93,202 ------------ ------------ INVESTING ACTIVITIES: Gross property additions (43,879) (52,314) Other (2,765) (6,880) ------------ ------------ Net cash used for investing activities (46,644) (59,194) ------------ ------------ FINANCING ACTIVITIES: Proceeds-- Capital contribution 27 - Pollution control bonds - 10,600 Other long-term debt 30,000 - Retirements-- First mortgage bonds (45,447) (1,625) Other long-term debt (20,000) (38,619) Notes payable, net 16,500 29,000 Payment of preferred stock dividends (3,674) (3,674) Payment of common stock dividends (31,900) (29,100) Miscellaneous (2,932) - ------------ ------------ Net cash used for financing activities (57,426) (33,418) ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS (10,754) 590 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,641 1,317 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,887 $ 1,907 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $ 16,715 $ 17,307 Income taxes 22,240 25,616 The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. 46
MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, 1996 At December 31, (Unaudited) 1995 ------------------- ------------------- UTILITY PLANT: Plant in service, at original cost $ 1,469,969 $ 1,434,327 Less accumulated provision for depreciation 525,536 499,308 -------------- -------------- 944,433 935,019 Construction work in progress 41,785 41,210 -------------- -------------- Total 986,218 976,229 -------------- -------------- OTHER PROPERTY AND INVESTMENTS: 3,081 4,160 -------------- -------------- CURRENT ASSETS: Cash and cash equivalents 1,887 12,641 Receivables-- Customer accounts receivable 32,069 30,761 Other accounts and notes receivable 9,468 9,438 Affiliated companies 6,351 9,213 Accumulated provision for uncollectible accounts (1,029) (802) Fossil fuel stock, at average cost 12,215 15,666 Materials and supplies, at average cost 21,244 22,558 Current portion of deferred fuel charges - 1,546 Current portion of accumulated deferred income taxes 4,474 5,180 Prepayments 3,505 2,404 Vacation pay deferred 4,611 4,715 -------------- -------------- Total 94,795 113,320 -------------- -------------- DEFERRED CHARGES: Debt expense and loss, being amortized 12,531 10,039 Deferred charges related to income taxes 23,073 23,384 Deferred early retirement program costs 5,041 7,286 Miscellaneous 14,451 14,535 -------------- -------------- Total 55,096 55,244 -------------- -------------- TOTAL ASSETS $ 1,139,190 $ 1,148,953 ============== ============== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. 47
MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1996 At December 31, (Unaudited) 1995 -------------------- ------------------ CAPITALIZATION: Common stock equity-- Common stock (without par value)-- authorized 1,130,000 shares; outstanding 1,121,000 shares $ 37,691 $ 37,691 Paid-in capital 179,389 179,362 Premium on preferred stock 372 372 Retained earnings 170,437 157,459 -------------- -------------- 387,889 374,884 Preferred stock 74,414 74,414 Long-term debt 276,312 288,820 -------------- -------------- Total 738,615 738,118 -------------- -------------- CURRENT LIABILITIES: Long-term debt due within one year 35,010 57,229 Notes payable 16,500 - Accounts payable-- Affiliated companies 9,881 13,646 Other 37,350 37,129 Customer deposits 3,016 2,716 Taxes accrued-- Federal and state income 8,988 97 Other 25,759 31,816 Interest accrued 4,398 4,701 Miscellaneous 13,061 13,453 -------------- -------------- Total 153,963 160,787 -------------- -------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 128,111 129,711 Accumulated deferred investment tax credits 28,696 29,773 Deferred credits related to income taxes 41,111 43,266 Accumulated provision for property damage 12,580 12,018 Miscellaneous 36,114 35,280 -------------- -------------- Total 246,612 250,048 -------------- -------------- TOTAL CAPITALIZATION AND LIABILITIES $ 1,139,190 $ 1,148,953 ============== ============== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. 48
MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1996 vs. THIRD QUARTER 1995 AND YEAR-TO-DATE 1996 vs. YEAR-TO-DATE 1995 RESULTS OF OPERATIONS Earnings MISSISSIPPI's net income after dividends on preferred stock for the third quarter and year-to-date 1996 was $21.8 million and $44.9 million, respectively, compared to $22.2 million and $46.2 million for the corresponding periods of 1995. The 1.7% decrease in earnings for the current quarter was primarily due to a decrease in revenues and an increase in operating expenses. An increase in operating expenses also affected year-to-date results as evidenced by the 2.8% decrease in earnings compared to prior year. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) -------------------------------------------------------- Third Quarter Year-To-Date --------------------------- ---------------------------- (in thousands) % (in thousands) % Revenues........................................... $(6,280) (4.1) $ 14,918 3.8 Revenues from affiliates........................... 5,764 212.4 10,193 152.4 Fuel expense....................................... 2,663 7.1 15,814 17.4 Purchased power from non-affiliates................ 7,689 227.1 11,713 221.1 Purchased power from affiliates.................... (9,680) (62.4) (11,700) (30.7) Maintenance expense................................ 1,610 18.6 9,009 34.5 Depreciation and amortization expense.............. 1,026 9.7 4,307 14.1 Interest on long-term debt......................... (753) (13.8) (1,618) (9.7)
Revenues. For the quarter and year-to-date periods, compared to one year ago, the changes in revenues are due primarily to changes in the amount of retail energy sold. Retail kilowatt-hour sales decreased 0.3% for the quarter and increased 3.8% year to date. Retail revenues, excluding those revenues which represent the recovery of fuel expense and certain other expenses and do not affect income, decreased $1.4 million for the quarter and increased $5.8 million year to date. The changes in retail sales for the quarter and year-to-date periods were primarily affected by favorable weather extremes experienced in the summer of 1995 and in the first half of 1996, respectively. For the third quarter, sales to territorial wholesale customers were only slightly lower than in 1995. For the year-to-date period, sales to territorial wholesale customers were positively impacted by favorable weather during the first half of 1996 and customer growth. Year-to-date 1996 revenues from territorial wholesale customers, excluding fuel revenues which do not affect income, increased $4.5 million compared to the same period of 1995, with an increase in energy sales of 7.4%. Revenues from affiliates and Purchased power from affiliates. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. 49 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Fuel expense. The increase in fuel expense for the third quarter and year-to-date 1996 as compared to the corresponding periods of 1995 can be attributed to higher generation due to increased kilowatt-hour sales to affiliated companies. Purchased power from non-affiliates. The increase in this item for the current quarter and year-to-date periods results primarily from the purchase, beginning in June 1996, of capacity and energy from another utility as discussed later under "Future Earnings Potential." Maintenance expense. The increase in maintenance expense for the current quarter is primarily attributable to maintenance performed at two generating plants/units during the third quarter of 1996. Maintenance performed at two generating plants during the first and second quarters of 1996 also contributed to the increase in maintenance expense for the 1996 year-to-date period. In 1995, maintenance normally performed during the first quarter was postponed until the fourth quarter. Depreciation and amortization expense. Additional plant investment, higher depreciation rates beginning in 1996, and increased amortization of regulatory assets, primarily those assets related to the ECO plan, accounted for the increases in this item. Interest on long-term debt. The decline in interest on long-term debt reflects the redemption and refinancing of long-term debt. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from energy sales growth to a less regulated, more competitive environment. Operating revenues will be affected by any changes in rates under the PEP and ECO plans. The PEP has proven to be a stabilizing force on electric rates, with only moderate changes in rates taking place. Based upon MISSISSIPPI's semi-annual PEP evaluation for the period ended June 30, 1996, the Mississippi PSC approved a retail revenue increase of $4.5 million (1.06% of annual retail revenue), effective October 1996. MISSISSIPPI's 1996 annual filing under the ECO plan with the Mississippi PSC resulted in an approved annual revenue requirement decrease of $3.0 million, effective April 1996. MISSISSIPPI has entered into agreements to purchase summer peaking power and options for power for the years 1996 through 2000. For June through September of 1996, MISSISSIPPI entered into an agreement to buy 242 megawatts of capacity and energy from another electric utility. For each June through September period of 1997 through 2000, MISSISSIPPI has purchased options from power marketers for up to 250 megawatts of peaking power in 1997; 300 megawatts in 1998; 350 megawatts in 1999; and 400 megawatts in 2000. In June 1996, the Mississippi PSC approved MISSISSIPPI's request that it be allowed to earn a return on the capacity portion of these agreements. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI in the Form 10-K. 50 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be recovered. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of MISSISSIPPI in the Form 10-K. Reference is made to Notes (B), (F) and (G) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. FINANCIAL CONDITION Overview The major change in MISSISSIPPI's financial condition during the first nine months of 1996 was the addition of approximately $43.9 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations and an increase in short-term debt. See MISSISSIPPI's Condensed Statements of Cash Flows for further details. Financing Activities During the first half of 1996, $20.0 million in bank notes matured and MISSISSIPPI issued a $30.0 million bank note and redeemed $45.4 million of first mortgage bonds. No additional securities were issued, redeemed or matured during the third quarter. MISSISSIPPI plans to continue, to the extent possible, a program to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of MISSISSIPPI under "Capital Requirements for Construction," "Environmental Matters" and "Other Capital Requirements" in the Form 10-K for a description of MISSISSIPPI's capital requirements for its construction program, environmental compliance efforts, sinking fund requirements and maturities of long-term debt. Through September 30, 1997, approximately $35.0 million will be required for maturities of long-term debt. Sources of Capital In addition to the financing activities previously described herein, MISSISSIPPI plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. Currently, MISSISSIPPI expects to have adequate earnings coverage ratios for any anticipated security sales through at least 1998. See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional information. 51 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION To meet short-term cash needs and contingencies, MISSISSIPPI had at September 30, 1996, approximately $1.9 million of cash and cash equivalents and approximately $96.3 million of unused committed credit arrangements with banks (including $10.8 million of such arrangements under which borrowings may be made only to fund purchase obligations relating to variable rate pollution control bonds). At September 30, 1996, MISSISSIPPI had outstanding $16.5 million of short-term notes payable to banks. Since MISSISSIPPI has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 52 SAVANNAH ELECTRIC AND POWER COMPANY 53
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------- -------------------- 1996 1995 1996 1995 ---- ---- ---- ---- OPERATING REVENUES: Revenues $ 72,676 $ 71,517 $ 183,226 $ 172,731 Revenues from affiliates 683 1,932 2,614 5,134 ---------- ----------- ------------ ------------ Total operating revenues 73,359 73,449 185,840 177,865 ---------- ----------- ------------ ------------ OPERATING EXPENSES: Operation-- Fuel 11,482 12,096 24,174 21,587 Purchased power from non-affiliates 802 1,149 2,014 1,867 Purchased power from affiliates 14,395 13,417 45,915 40,861 Other 10,624 11,235 32,317 32,162 Maintenance 3,064 2,831 9,515 10,323 Depreciation and amortization 4,525 4,747 14,329 14,202 Taxes other than income taxes 3,195 2,871 9,373 8,791 Federal and state income taxes 8,730 8,665 15,313 15,246 ---------- ----------- ------------ ------------ Total operating expenses 56,817 57,011 152,950 145,039 ---------- ----------- ------------ ------------ OPERATING INCOME 16,542 16,438 32,890 32,826 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction 48 34 229 93 Interest income 24 5 129 106 Other, net (747) (121) (1,465) (235) Income taxes applicable to other income 607 45 840 50 ---------- ----------- ------------ ------------ INCOME BEFORE INTEREST CHARGES 16,474 16,401 32,623 32,840 ---------- ----------- ------------ ------------ INTEREST CHARGES: Interest on long-term debt 2,769 3,045 8,787 9,474 Allowance for debt funds used during construction (46) (112) (222) (307) Interest on notes payable 81 12 219 135 Amortization of debt discount, premium, and expense, net 185 103 396 344 Other interest charges 89 79 286 297 ---------- ----------- ------------ ------------ Net interest charges 3,078 3,127 9,466 9,943 ---------- ----------- ------------ ------------ NET INCOME 13,396 13,274 23,157 22,897 DIVIDENDS ON PREFERRED STOCK 581 581 1,743 1,743 ---------- ----------- ------------ ------------ NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 12,815 $ 12,693 $ 21,414 $ 21,154 ========== =========== ============ ============ The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. 54
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, -------------------- 1996 1995 ---- ---- OPERATING ACTIVITIES: Net income $ 23,157 $ 22,897 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 15,248 15,202 Deferred income taxes and investment tax credits, net 5,974 3,102 Allowance for equity funds used during construction (229) (93) Other, net 1,983 (783) Changes in certain current assets and liabilities-- Receivables, net (6,668) (6,674) Inventories (1,022) 2,090 Payables (171) 5,725 Taxes accrued 5,689 8,514 Other (3,594) (6,413) ------------ ------------ Net cash provided from operating activities 40,367 43,567 ------------ ------------ INVESTING ACTIVITIES: Gross property additions (21,078) (19,500) Other (4,774) (547) ------------ ------------ Net cash used for investing activities (25,852) (20,047) ------------ ------------ FINANCING ACTIVITIES: Proceeds-- First mortgage bonds 20,000 15,000 Other long-term debt 17,000 33,500 Retirements-- First mortgage bonds (29,400) (29,250) Other long-term debt (403) (22,554) Notes payable, net (2,500) (2,500) Payment of preferred stock dividends (1,743) (1,743) Payment of common stock dividends (14,400) (13,000) Miscellaneous (2,241) (2,019) ------------ ------------ Net cash used for financing activities (13,687) (22,566) ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 828 954 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 877 1,563 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,705 $ 2,517 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $ 10,987 $ 11,984 Income taxes 6,070 5,811 The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. 55
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, 1996 At December 31, (Unaudited) 1995 ---------------- --------------- UTILITY PLANT: Plant in service, at original cost $ 731,005 $ 715,146 Less accumulated provision for depreciation 299,406 287,004 ------------ ------------ 431,599 428,142 Construction work in progress 13,853 6,707 ------------ ------------ Total 445,452 434,849 ------------ ------------ OTHER PROPERTY AND INVESTMENTS: 1,786 1,788 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents 1,705 877 Receivables-- Customer accounts receivable 25,652 19,574 Other accounts and notes receivable 1,011 7,251 Affiliated companies 854 614 Accumulated provision for uncollectible accounts (887) (983) Fuel cost under recovery 6,494 - Fossil fuel stock, at average cost 6,868 6,076 Materials and supplies, at average cost 8,469 8,239 Prepayments 5,094 6,467 ------------ ------------ Total 55,260 48,115 ------------ ------------ DEFERRED CHARGES: Deferred charges related to income taxes 20,603 21,557 Premium on reacquired debt, being amortized 7,305 5,316 Cash surrender value of life insurance for deferred compensation plans 8,560 8,560 Miscellaneous 4,062 4,477 ------------ ------------ Total 40,530 39,910 ------------ ------------ TOTAL ASSETS $ 543,028 $ 524,662 ============ ============ The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. 56
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1996 At December 31, (Unaudited) 1995 ---------------- --------------- CAPITALIZATION: Common stock equity-- Common stock (par value $5 per share)-- authorized 16,000,000 shares; outstanding 10,844,635 shares $ 54,223 $ 54,223 Paid-in capital 8,688 8,688 Additional minimum liability for under-funded pension obligations (1,116) (132) Retained earnings 112,046 105,033 ------------ ------------ 173,841 167,812 Preferred stock 35,000 35,000 Long-term debt 161,826 153,679 ------------ ------------ Total 370,667 356,491 ------------ ------------ CURRENT LIABILITIES: Long-term debt due within one year 602 1,407 Notes payable 1,500 4,000 Accounts payable-- Affiliated companies 5,257 5,742 Other 5,629 5,620 Fuel cost over recovery - 865 Customer deposits 5,175 5,054 Taxes accrued-- Federal and state income 2,997 570 Other 4,276 1,014 Interest accrued 4,464 6,331 Vacation pay accrued 1,987 1,916 Pensions accrued 397 685 Miscellaneous 5,385 5,185 ------------ ------------ Total 37,669 38,389 ------------ ------------ DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 76,908 74,152 Accumulated deferred investment tax credits 13,436 13,934 Deferred credits related to income taxes 23,725 24,419 Deferred compensation plans 8,317 7,690 Deferred under-funded accrued benefit obligation 3,727 2,123 Postretirement benefits 5,464 4,728 Miscellaneous 3,115 2,736 ------------ ------------ Total 134,692 129,782 ------------ ------------ TOTAL CAPITALIZATION AND LIABILITIES $ 543,028 $ 524,662 ============ ============ The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. 57
SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1996 vs. THIRD QUARTER 1995 AND YEAR-TO-DATE 1996 vs. YEAR-TO-DATE 1995 RESULTS OF OPERATIONS Earnings SAVANNAH's earnings for the quarter and year-to-date periods remained fairly constant compared to the corresponding periods of 1995, increasing by 1.0% and 1.2%, respectively. SAVANNAH's net income after dividends on preferred stock for the third quarter and year-to-date 1996 was $12.8 million and $21.4 million, respectively, compared to $12.7 million and $21.2 million for the corresponding periods of 1995. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------- Third Quarter Year-To-Date --------------------------- ----------------------------- (in thousands) % (in thousands) % Revenues....................................... $ 1,159 1.6 $10,495 6.1 Revenues from affiliates....................... (1,249) (64.6) (2,520) (49.1) Fuel expense................................... (614) (5.1) 2,587 12.0 Purchased power from affiliates................ 978 7.3 5,054 12.4 Other, net..................................... (626) (517.4) (1,230) (523.4)
Revenues. Excluding fuel revenues, which represent the pass-through of fuel expenses and do not affect income, revenues for the quarter remained fairly constant, while revenues year-to-date 1996 increased approximately $227,000, compared to the corresponding periods of 1995. The increase in year-to-date revenues was due primarily to an increase in the amount of retail energy sold. Year-to-date 1996 total retail kilowatt-hour sales increased 2.1% over the same period of 1995, and retail revenues, excluding fuel revenues, increased approximately $1.0 million. A slight increase in the number of customers served coupled with increased usage per customer accounted for most of the increase in residential and commercial demand; however, kilowatt-hour sales to the industrial sector were down primarily due to a reduction in the production schedule of one of SAVANNAH's major industrial customers. Revenues from affiliates and Purchased power from affiliates. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Fuel expense. The decrease in fuel expense for the current quarter as compared to the same period of 1995 is primarily attributable to a timing difference in accrual of gas invoices. The increase in fuel expense for year-to-date 1996 as compared to year-to-date 1995 can be attributed to higher generation necessary to meet the increased demand for electricity and a higher average cost of fuel. 58 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Other, net. For the current quarter compared to the same period of 1995, the change in this item is primarily due to employee stock ownership plan contributions in September 1996 versus October 1995 and due to the sale of timber in 1995. The year-to-date change in this item is attributable to the same factors affecting the third quarter as well as the discontinuation of incentive revenues under the demand-side option program effective October 1, 1995. (For additional information about the demand-side option program, reference is made to Note (S) in the "Notes to the Condensed Financial Statements" herein.) Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from energy sales growth to a less regulated, more competitive environment. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SAVANNAH in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS "Environmental Matters" of SAVANNAH in the Form 10-K. Reference is made to Notes (B) and (T) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. FINANCIAL CONDITION Overview The major change in SAVANNAH's financial condition during the first nine months of 1996 was the addition of approximately $21.1 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations. See SAVANNAH's Condensed Statements of Cash Flows for further details. Financing Activities During the first quarter of 1996, SAVANNAH retired $1.2 million of its 9 3/8% first mortgage bonds to meet sinking fund requirements and entered into arrangements with the Savannah Economic Development Authority to provide $7.0 million for the financing of a new coal handling facility at Plant Kraft. During the second quarter, SAVANNAH issued $20.0 million of 6.90% first mortgage bonds due 2006 and a $10.0 million 6.88% bank note due 2001. The proceeds were used to redeem on July 1, 1996 all remaining outstanding 9 3/8% first mortgage bonds due 2021. No additional securities were issued, redeemed or matured during the third quarter. SAVANNAH plans to continue, to the extent possible, a program to retire higher-cost debt and replace these obligations with lower-cost capital. 59 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Sources of Capital SAVANNAH plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. Currently, SAVANNAH expects to have adequate earnings coverage ratios for any anticipated security sales through at least 1998. See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, SAVANNAH had at September 30, 1996, approximately $1.7 million of cash and cash equivalents and approximately $39.0 million of unused credit arrangements with banks. At September 30, 1996, SAVANNAH had $1.5 million of short-term notes payable to banks. Since SAVANNAH has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit. 60 NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES ALABAMA POWER COMPANY GEORGIA POWER COMPANY GULF POWER COMPANY MISSISSIPPI POWER COMPANY SAVANNAH ELECTRIC AND POWER COMPANY INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT Registrant Applicable Notes SOUTHERN A, B, C, D, E, F, G, H, I, J, K, L, M, N, O, P, Q, R ALABAMA A, B, C, F, G, H, I, J GEORGIA A, B, C, F, G, K, L, M, N, O, P, Q, R GULF A, B, F, G MISSISSIPPI A, B, F, G SAVANNAH A, B, G, S, T 61 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES ALABAMA POWER COMPANY GEORGIA POWER COMPANY GULF POWER COMPANY MISSISSIPPI POWER COMPANY SAVANNAH ELECTRIC AND POWER COMPANY NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (A) The condensed financial statements of the registrants included herein have been prepared by each registrant, without audit, pursuant to the rules and regulations of the SEC. In the opinion of each registrant's management, the information regarding such registrant furnished herein reflects all adjustments (which included only normal recurring adjustments) necessary to present fairly the results for the periods ended September 30, 1996 and 1995. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in each registrant's latest annual report on Form 10-K. Certain prior-period amounts have been reclassified to conform with current-period presentation. The condensed financial statements of ALABAMA and GEORGIA included herein have been reviewed by ALABAMA's and GEORGIA's independent public accountants as set forth in their reports included herein as Exhibit 1 to ALABAMA's and GEORGIA's condensed financial statements. (B) SOUTHERN's operating affiliates are subject to the provisions of FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation. In the event that a portion of a company's operations is no longer subject to these provisions, the company would be required to write off related regulatory assets and liabilities, and determine if any other assets have been impaired. For additional information, see Note 1 to the financial statements of each registrant in Item 8 of the Form 10-K. (C) The staff of the SEC has questioned certain of the current accounting practices of the electric utility industry--including SOUTHERN's--regarding the recognition, measurement and classification of decommissioning costs for nuclear generating facilities in the financial statements. In response to these questions, the FASB has decided to review the accounting for liabilities related to closure and removal of long-lived assets, including nuclear decommissioning. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN, ALABAMA and GEORGIA in Item 7 and Note 1 to the financial statements of SOUTHERN, ALABAMA and GEORGIA under "Depreciation and Nuclear Decommissioning" in Item 8 of the Form 10-K. (D) The SOUTHERN system utilizes certain financial derivative contracts solely for the purpose of risk management. The companies' participation in derivative contracts has been to hedge business exposure in connection with Southern Energy activities to fluctuations in interest rates and foreign currency exchange rates. At September 30, 1996, the status of outstanding derivative contracts was as follows: Maturity or Notional Unrealized Type Termination Amount Gain (Loss) ---- ----------- -------- ----------- (in thousands) Interest rate swaps 1999-2011 $851,706 $(18,550) Foreign currency forwards Renewed monthly 74,668 (50) Cross-currency swaps 2002 165,805 (3,617) 62 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (E) Reference is made to Note 3 to the financial statements of SOUTHERN in Item 8 of the Form 10-K for a description of the proceedings related to a derivative action filed against certain current and former directors and officers of SOUTHERN. In May 1996, a panel of the U.S. Court of Appeals for the 11th Circuit affirmed the trial court's dismissal of this suit. The plaintiffs' subsequent request for rehearing by the full appellate court was denied in August 1996. (F) Reference is made to Note 3 to each of the registrant's, except SAVANNAH's, financial statements in Item 8 of the Form 10-K for a discussion of the proceedings initiated by the FERC regarding the reasonableness of the return on common equity on certain of the Southern electric system's wholesale rate schedules and contracts. (G) Certain of the registrants and other SOUTHERN subsidiaries have instituted work force reduction programs. The expenses recognized and the unamortized balance of deferred expenses under these programs were as follows: (in thousands)
Three Months Ended Nine Months Ended Unamortized Balance September 30, September 30, at September 30, 1996 ------------------- ------------------ --------------------- 1996 1995 1996 1995 ---- ---- ---- ---- ALABAMA $ 5,951 $1,327 $18,360 $ 5,631 $37,373 GEORGIA 7,947 2,073 34,821 6,052 - GULF 238 490 2,472 490 - MISSISSIPPI 1,847 971 3,625 2,471 5,041 SAVANNAH 28 (4) 262 25 - Other 129 459 343 459 - ------- ------ ------- ------- -------- SOUTHERN system $16,140 $5,316 $59,883 $15,128 $42,414 ======= ====== ======= ======= =======
(H) In June 1995, the Alabama PSC issued a rate order granting ALABAMA's request for gradual adjustments to move toward parity among customer classes. This order also calls for a moratorium on any periodic retail rate increases (but not decreases) until July 2001. In December 1995, the Alabama PSC issued an order authorizing ALABAMA to reduce balance sheet items--such as plant and deferred charges--at any time ALABAMA's actual base rate revenues exceed the budgeted revenues. Reference is made to Note 3 to the financial statements of SOUTHERN and ALABAMA in Item 8 of the Form 10-K for additional information. (I) In January 1996, Alabama Power Capital Trust I (the "Trust"), of which ALABAMA owns all the common securities, issued $97 million of 7.375% mandatorily redeemable preferred securities. Substantially all of the assets of the Trust are $100 million aggregate principal amount of ALABAMA's 7.375% Junior Subordinated Notes due March 31, 2026. ALABAMA considers that the mechanisms and obligations relating to the preferred securities, taken together, constitute a full and unconditional guarantee by ALABAMA of the Trust's payment obligations with respect to the preferred securities. (J) Actions against ALABAMA have been filed in several counties in Alabama charging ALABAMA with fraud and non-compliance with regulatory statutes relating to the offer, sale and financing of "extended service contracts" in connection with the sale of electric appliances. Some of these cases have been filed as class actions, while others have been filed on behalf of multiple individual plaintiffs. The plaintiffs in these actions seek 63 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) damages in an unspecified amount. ALABAMA has offered extended service agreements to its customers since January 1984, and approximately 175,000 extended service agreements could be involved in these proceedings. The final outcome of these cases cannot now be determined. (K) In August 1996, Georgia Power Capital Trust I (the "Trust"), of which GEORGIA owns all the common securities, issued $225 million of 7.75% mandatorily redeemable preferred securities. Substantially all of the assets of the Trust are $232 million aggregate principal amount of GEORGIA's 7.75% Junior Subordinated Notes due June 30, 2036. GEORGIA considers that the mechanisms and obligations relating to the preferred securities, taken together, constitute a full and unconditional guarantee by GEORGIA of the Trust's payment obligations with respect to the preferred securities. Reference is also made to Note 9 to the financial statements of GEORGIA in Item 8 of the Form 10-K. (L) On February 16, 1996, the Georgia PSC approved a three-year retail rate plan for GEORGIA effective January 1, 1996. For additional information, reference is made to Note 3 to the financial statements of SOUTHERN and GEORGIA in Item 8 of the Form 10-K. In November 1996, on appeal by a consumer group, the Superior Court of Fulton County (Georgia) reversed the order of the Georgia PSC approving the rate plan and remanded the matter to the Georgia PSC. The court found that statutory requirements applicable to rate cases should have been, but were not, followed. GEORGIA currently intends to appeal the court's decision. (M) Pursuant to orders from the Georgia PSC, GEORGIA deferred financing and depreciation costs under phase-in plans for Plant Vogtle Units 1 and 2 until the allowed investment was fully reflected in rates as of October 1991. In addition, the Georgia PSC issued two separate accounting orders that required GEORGIA to defer substantially all operating and financing costs related to both units until rate orders addressed these costs. The Georgia PSC orders provide for recovery of deferred costs within 10 years. The Georgia PSC also ordered GEORGIA to levelize declining capacity buyback expense from the co-owners of the plant over a six-year period beginning October 1991. The unamortized balance of these deferred costs at September 30, 1996, was $206.6 million. See Notes 1 and 3 to the financial statements of SOUTHERN and GEORGIA, respectively, in Item 8 of the Form 10-K for additional information. (N) Reference is made to Note 3 to the financial statements of SOUTHERN and GEORGIA in Item 8 of the Form 10-K for information concerning the recovery by GEORGIA of its costs associated with the Rocky Mountain pumped storage hydroelectric plant. (O) Reference is made to Note 3 to the financial statements of SOUTHERN and GEORGIA in Item 8 of the Form 10-K for information regarding recovery by GEORGIA of its costs associated with its discontinued demand-side conservation programs. (P) Reference is made to Note 3 to the financial statements of GEORGIA in Item 8 of the Form 10-K for information concerning a joint complaint filed with the FERC by OPC and MEAG seeking recovery of alleged partial requirements rates overcharges and the order of the FERC dismissing such complaint. In June 1996, the U.S. Court of Appeals for the District of Columbia Circuit vacated the FERC's order insofar as it denied OPC's claim for a share of the settlement proceeds that GEORGIA received from Gulf States Utilities Company and remanded the case to the FERC. (Q) In May 1996, MEAG filed a complaint with the FERC seeking termination as of December 31, 1996 of the partial requirements tariff pursuant to which GEORGIA currently sells wholesale energy to MEAG. The complaint also seeks refunds in an unspecified amount as a result of alleged overcharges by GEORGIA under the tariff for the years 1993, 1994, 1995 and 1996. In its response, filed with the FERC in June 1996, GEORGIA also requests that its partial requirements service obligation to MEAG be terminated as of the date sought by MEAG. GEORGIA further denies that any refund is owed to MEAG. 64 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (R) Reference is made to Note 3 to the financial statements of SOUTHERN and GEORGIA in Item 8 of the Form 10-K for information regarding GEORGIA's designation as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act and other environmental contingencies. (S) Reference is made to Note 3 to the financial statements of SAVANNAH in Item 8 of the Form 10-K for information regarding SAVANNAH's discontinued demand-side conservation programs. In May and June 1996, SAVANNAH refunded to customers a total of $266,000, which is the amount that had been overcollected from demand-side rate riders as of December 31, 1995. (T) SAVANNAH is currently undergoing an earnings review by the Georgia PSC, and to date, the Georgia PSC has made no determination. 65 PART II - OTHER INFORMATION Item 1. Legal Proceedings. (1) Reference is made to the Notes to the Condensed Financial Statements herein for information regarding certain legal and administrative proceedings in which SOUTHERN and its reporting subsidiaries are involved. (2) Reference is made to Item 3 - LEGAL PROCEEDINGS in the Form 10-K for information regarding a tax deficiency notice received from the Internal Revenue Service relating to GEORGIA's tax accounting for the sale in 1984 of an interest in Plant Vogtle and related capacity and energy buyback commitments. (3) Reference is made to Item 3 - LEGAL PROCEEDINGS in the Form 10-K for information regarding an action filed by ALABAMA, GEORGIA and MISSISSIPPI in January 1996 which seeks to enjoin the TVA from violating a 1959 act that prohibits the TVA from selling power outside the area that was being served by it in 1957. On August 28, 1996, the U.S. District Court for the Northern District of ALABAMA granted a summary judgment in favor of ALABAMA, GEORGIA and MISSISSIPPI, finding that the LG&E Power Marketing (LPM) contract was unlawful. It is not currently known whether TVA or LPM will appeal this judgment. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit 24 - Powers of Attorney and resolutions. (Designated in the Form 10-K for the year ended December 31, 1995, File Nos. 1-3526, 1-3164, 1-6468, 0-2429, 0-6849 and 1-5072 as Exhibits 24(a), 24(b), 24(c), 24(d), 24(e) and 24(f), respectively, and incorporated herein by reference.) Exhibits 27 - Financial Data Schedules (a) SOUTHERN (b) ALABAMA (c) GEORGIA (d) GULF (e) MISSISSIPPI (f) SAVANNAH (b) Reports on Form 8-K. GEORGIA filed a Current Report on Form 8-K dated August 21, 1996: Items reported: Item 5 Item 7 Financial statements filed: None SOUTHERN filed a Current Report on Form 8-K dated October 9, 1996: Items reported: Item 5 Item 7 Financial statements filed: None 66 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. THE SOUTHERN COMPANY By A. W. Dahlberg Chairman, President and Chief Executive Officer (Principal Executive Officer) By W. L. Westbrook Financial Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 12, 1996 - - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. ALABAMA POWER COMPANY By Elmer B. Harris President and Chief Executive Officer (Principal Executive Officer) By William B. Hutchins, III Executive Vice President and Chief Financial Officer (Principal Financial Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 12, 1996 67 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. GEORGIA POWER COMPANY By H. Allen Franklin President and Chief Executive Officer (Principal Executive Officer) By Warren Y. Jobe Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 12, 1996 - - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. GULF POWER COMPANY By Travis J. Bowden President and Chief Executive Officer (Principal Executive Officer) By A. E. Scarbrough Vice President - Finance (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 12, 1996 68 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. MISSISSIPPI POWER COMPANY By Dwight H. Evans President and Chief Executive Officer (Principal Executive Officer) By Michael W. Southern Vice President, Secretary, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 12, 1996 - - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. SAVANNAH ELECTRIC AND POWER COMPANY By Arthur M. Gignilliat, Jr. President and Chief Executive Officer (Principal Executive Officer) By Kirby R. Willis Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 12, 1996 69 EX-27.A 2
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1996, and is qualified in its entirety by reference to such financial statements. 0000092122 THE SOUTHERN COMPANY 1,000 9-MOS DEC-31-1995 SEP-30-1996 PER-BOOK 23,079,042 1,298,802 3,036,005 2,513,237 0 29,927,086 3,368,255 1,985,114 3,835,643 9,189,012 422,000 1,153,056 6,968,970 1,039,991 238,835 589,720 209,202 100,250 148,573 2,878 9,864,599 29,927,086 7,870,821 678,424 5,622,820 6,301,244 1,569,577 46,626 1,616,203 563,072 1,053,131 65,556 987,575 634,553 0 1,882,320 1.47 0
EX-27.B 3
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1996, and is qualified in its entirety by reference to such financial statements. 0000003153 ALABAMA POWER COMPANY 1,000 9-MOS DEC-31-1995 SEP-30-1996 PER-BOOK 7,081,720 169,234 899,318 635,344 0 8,785,616 224,358 1,304,791 1,253,923 2,783,072 97,000 440,400 2,346,214 20,000 0 311,379 19,801 0 7,308 948 2,759,494 8,785,616 2,425,704 193,141 1,716,315 1,909,456 516,248 9,922 526,170 184,723 341,447 19,921 321,526 228,800 0 666,086 0 0
EX-27.C 4
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1996, and is qualified in its entirety by reference to such financial statements. 0000041091 GEORGIA POWER COMPANY 1,000 9-MOS DEC-31-1995 SEP-30-1996 PER-BOOK 10,397,596 291,132 1,212,808 1,424,512 0 13,326,048 344,250 2,385,220 1,728,416 4,457,886 325,000 513,640 3,172,979 1,300 0 100,913 61,480 100,250 86,828 358 4,505,414 13,326,048 3,473,812 390,026 2,319,956 2,709,982 763,830 (11,377) 752,453 192,378 560,075 35,906 524,169 365,700 0 1,148,733 0 0
EX-27.D 5
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1996, and is qualified in its entirety by reference to such financial statements. 0000044545 GULF POWER COMPANY 1,000 9-MOS DEC-31-1995 SEP-30-1996 PER-BOOK 1,067,823 654 183,095 82,817 0 1,334,389 38,060 218,519 190,093 446,672 0 89,602 321,054 37,500 10,817 0 40,817 0 0 0 387,927 1,334,389 488,361 30,634 383,393 414,027 74,334 (54) 74,280 22,408 51,872 4,312 47,560 37,100 0 127,876 0 0
EX-27.E 6
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1996, and is qualified in its entirety by reference to such financial statements. 0000066904 MISSISSIPPI POWER COMPANY 1,000 9-MOS DEC-31-1995 SEP-30-1996 PER-BOOK 986,218 3,081 94,795 55,096 0 1,139,190 37,691 179,761 170,437 387,889 0 74,414 246,312 16,500 30,000 0 35,010 0 0 0 349,065 1,139,190 420,306 27,477 329,394 356,871 63,435 2,890 66,325 17,772 48,553 3,674 44,879 31,900 0 93,316 0 0
EX-27.F 7
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1996, and is qualified in its entirety by reference to such financial statements. 0000086940 SAVANNAH ELECTRIC AND POWER COMPANY 1,000 9-MOS DEC-31-1995 SEP-30-1996 PER-BOOK 445,452 1,786 55,260 40,530 0 543,028 54,223 8,688 110,930 173,841 0 35,000 125,346 1,500 30,000 0 0 0 6,480 602 170,259 543,028 185,840 15,313 137,637 152,950 32,890 (267) 32,623 9,466 23,157 1,743 21,414 14,400 0 40,367 0 0
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