-----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, OlBQGyYRw68bCqnW43jdWa/vF5OhELIBByJ4T/MMgub+lsqcydSWLDJpdHDXb/p9 bmnzQfklVALlvu5D1SvsSA== /in/edgar/work/0000092122-00-000087/0000092122-00-000087.txt : 20001115 0000092122-00-000087.hdr.sgml : 20001115 ACCESSION NUMBER: 0000092122-00-000087 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 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: SEC FILE NUMBER: 001-03526 FILM NUMBER: 763928 BUSINESS ADDRESS: STREET 1: 270 PEACHTREE ST CITY: ATLANTA STATE: GA ZIP: 30303 BUSINESS PHONE: 4045065000 MAIL ADDRESS: STREET 1: 270 PEACHTREE STREET CITY: ATLANTA STATE: GA ZIP: 30303 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: SEC FILE NUMBER: 001-03164 FILM NUMBER: 763929 BUSINESS ADDRESS: STREET 1: 600 N 18TH ST STREET 2: P O BOX 2641 CITY: BIRMINGHAM STATE: AL ZIP: 35291 BUSINESS PHONE: 2052571000 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: SEC FILE NUMBER: 001-06468 FILM NUMBER: 763930 BUSINESS ADDRESS: STREET 1: 241 RALPH MCGILL BOULEVARD CITY: ATLANTA STATE: GA ZIP: 30308 BUSINESS PHONE: 4045066526 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: SEC FILE NUMBER: 000-02429 FILM NUMBER: 763931 BUSINESS ADDRESS: STREET 1: ONE ENERGY PLACE CITY: PENSACOLA STATE: FL ZIP: 32520-0102 BUSINESS PHONE: 8504446111 MAIL ADDRESS: STREET 1: ONE ENERGY PLACE CITY: PENSACOLA STATE: FL ZIP: 32520-0102 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: SEC FILE NUMBER: 001-11229 FILM NUMBER: 763932 BUSINESS ADDRESS: STREET 1: 2992 W BEACH CITY: GULFPORT STATE: MS ZIP: 39501 BUSINESS PHONE: 2288641211 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: SEC FILE NUMBER: 001-05072 FILM NUMBER: 763933 BUSINESS ADDRESS: STREET 1: 600 BAY ST EAST CITY: SAVANNAH STATE: GA ZIP: 31401 BUSINESS PHONE: 9122327171 10-Q 1 0001.txt THIRD QUARTER FORM 10-Q 2000 ============================================================================== UNITED STATES 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, 2000 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 (404) 506-5000 1-3164 Alabama Power Company 63-0004250 (An Alabama Corporation) 600 North 18th Street Birmingham, Alabama 35291 (205) 257-1000 1-6468 Georgia Power Company 58-0257110 (A Georgia Corporation) 241 Ralph McGill Boulevard, N.E. Atlanta, Georgia 30308 (404) 506-6526 0-2429 Gulf Power Company 59-0276810 (A Maine Corporation) One Energy Place Pensacola, Florida 32520 (850) 444-6111 0-6849 Mississippi Power Company 64-0205820 (A Mississippi Corporation) 2992 West Beach Gulfport, Mississippi 39501 (228) 864-1211 1-5072 Savannah Electric and Power Company 58-0418070 (A Georgia Corporation) 600 East Bay Street Savannah, Georgia 31401 (912) 644-7171 =============================================================================== 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, 2000 The Southern Company Par Value $5 Per Share 650,878,248 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. 2 INDEX TO QUARTERLY REPORT ON FORM 10-Q September 30, 2000
Page Number DEFINITIONS........................................................................................................ 4 PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) 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........................................................ 7 Condensed Consolidated Statements of Cash Flows.................................................... 8 Condensed Consolidated Balance Sheets.............................................................. 9 Condensed Consolidated Statements of Comprehensive Income and Accumulated Other Comprehensive Income.......................................................... 11 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 12 Alabama Power Company Condensed Statements of Income..................................................................... 22 Condensed Statements of Cash Flows................................................................. 23 Condensed Balance Sheets........................................................................... 24 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 26 Exhibit 1 - Report of Independent Public Accountants............................................... 30 Georgia Power Company Condensed Statements of Income..................................................................... 32 Condensed Statements of Cash Flows................................................................. 33 Condensed Balance Sheets........................................................................... 34 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 36 Exhibit 1 - Report of Independent Public Accountants............................................... 40 Gulf Power Company Condensed Statements of Income..................................................................... 42 Condensed Statements of Cash Flows................................................................. 43 Condensed Balance Sheets........................................................................... 44 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 46 Mississippi Power Company Condensed Statements of Income..................................................................... 51 Condensed Statements of Cash Flows................................................................. 52 Condensed Balance Sheets........................................................................... 53 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 55 Savannah Electric and Power Company Condensed Statements of Income..................................................................... 61 Condensed Statements of Cash Flows................................................................. 62 Condensed Balance Sheets........................................................................... 63 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 65 Notes to the Condensed Financial Statements........................................................... 69 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 19 PART II - OTHER INFORMATION Item 1. Legal Proceedings......................................................................................... 77 Item 2. Changes in Securities and Use of Proceeds................................................................. 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.......................................................................... 77 Signatures ............................................................................................... 78
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DEFINITIONS TERM MEANING ALABAMA..................................... Alabama Power Company BEWAG....................................... Bewag AG Clean Air Act............................... Clean Air Act Amendments of 1990 ECO Plan.................................... Environmental Compliance Overview Plan Energy Act.................................. Energy Policy Act of 1992 EPA......................................... U. S. Environmental Protection Agency 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, 1999 GEORGIA..................................... Georgia Power Company GULF........................................ Gulf Power Company integrated Southeast utilities.............. ALABAMA, GEORGIA, GULF, MISSISSIPPI, and SAVANNAH MISSISSIPPI................................. Mississippi Power Company Mobile Energy............................... Mobile Energy Services Company, L.L.C. and Mobile Energy Services Holdings, Inc. PEP......................................... Performance Evaluation Plan PSC......................................... Public Service Commission RTO......................................... Regional Transmission Organization SAVANNAH.................................... Savannah Electric and Power Company SCEM........................................ Southern Company Energy Marketing L.P. SCS......................................... Southern Company Services, Inc. SEC......................................... Securities and Exchange Commission SOUTHERN.................................... The Southern Company Southern Energy............................. Southern Energy, Inc. including SOUTHERN subsidiaries managed or controlled by Southern Energy SOUTHERN system............................. SOUTHERN, integrated Southeast utilities, Southern Energy, and other subsidiaries SWEB........................................ South Western Electricity plc WPD......................................... Western Power Distribution (United Kingdom)
4 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-Q includes forward-looking statements in addition to historical information. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other comparable terminology. The registrants caution that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry and also changes in environmental and other laws and regulations to which SOUTHERN and its subsidiaries are subject, as well as changes in application of existing laws and regulations; current and future litigation, including the pending EPA civil action against GEORGIA and potentially other of SOUTHERN's subsidiaries and the diversity litigation against certain of SOUTHERN's subsidiaries; the extent and timing of the entry of additional competition in the markets of SOUTHERN's subsidiaries; potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial; internal restructuring or other restructuring options, that may be pursued by the registrants; state and federal rate regulation in the United States and in foreign countries in which the subsidiaries operate; political, legal and economic conditions and developments in the United States and in foreign countries in which the subsidiaries operate; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather and other natural phenomena; the performance of projects undertaken by the non-traditional business and the success of efforts to invest in and develop new opportunities; the ability of SOUTHERN to obtain additional generating capacity at competitive prices; the ability of SOUTHERN to meet the conditions to the spin-off of Southern Energy, which include regulatory and other approvals; and other factors discussed elsewhere herein and in other reports (including Form 10-K) filed from time to time by the registrants with the SEC. 5 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES 6
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 ---------------- ---------------- ------------------- ------------ (in thousands) (in thousands) Operating Revenues: Retail sales $2,732,295 $2,631,031 $6,703,288 $6,294,259 Sales for resale 325,136 297,661 732,253 658,515 Southern Energy revenues 4,281,602 686,478 5,475,493 1,711,341 Other revenues 139,944 121,479 336,179 305,179 ---------------- -------------------------------- ---------------- Total operating revenues 7,478,977 3,736,649 13,247,213 8,969,294 ---------------- -------------------------------- ---------------- Operating Expenses: Operation -- Fuel 2,433,071 893,394 3,945,069 2,062,750 Purchased power 1,893,531 350,731 2,178,390 869,309 Other 1,108,631 623,581 2,158,688 1,629,858 Maintenance 208,979 195,224 702,779 650,455 Depreciation and amortization 376,300 335,731 1,147,739 975,975 Taxes other than income taxes 181,376 159,199 499,038 450,521 Write down of assets 8,895 68,999 8,895 68,999 ---------------- -------------------------------- ---------------- Total operating expenses 6,210,783 2,626,859 10,640,598 6,707,867 ---------------- -------------------------------- ---------------- Operating Income 1,268,194 1,109,790 2,606,615 2,261,427 Other Income: Interest income 36,641 45,910 98,766 115,538 Equity in earnings of unconsolidated subsidiaries 64,544 7,926 115,359 150,849 Other, net 26,188 276,150 92,544 314,460 ---------------- -------------------------------- ---------------- Earnings Before Interest and Income Taxes 1,395,567 1,439,776 2,913,284 2,842,274 ---------------- -------------------------------- ---------------- Interest Charges and Other: Interest on long-term debt 212,726 164,769 621,643 495,477 Interest on notes payable 81,076 53,648 226,393 125,163 Amortization of debt discount, 11,471 10,159 30,594 29,170 premium and expense, net Other interest charges, net 9,798 22,350 15,890 51,603 Minority interests in subsidiaries 16,893 118,518 59,870 154,702 Distributions on capital and preferred 44,015 46,248 132,346 136,196 securities of subsidiaries Preferred dividends of subsidiaries 4,801 5,462 14,259 15,683 ---------------- -------------------------------- ---------------- Total interest charges and other, net 380,780 421,154 1,100,995 1,007,994 ---------------- -------------------------------- ---------------- Earnings Before Income Taxes 1,014,787 1,018,622 1,812,289 1,834,280 Income taxes 401,254 403,439 611,408 680,796 ---------------- -------------------------------- ---------------- Consolidated Net Income $613,533 $615,183 $1,200,881 $1,153,484 ================ ================================ ================ Common Stock Data: Average number of shares of 649,347 678,472 650,392 690,155 common stock outstanding (in thousands) Basic and diluted earnings $0.95 $0.90 $1.85 $1.67 per share of common stock Cash dividends paid $0.335 $0.335 $1.005 $1.005 per share of common stock The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 2000 1999 ----------------- ------------------ (in thousands) Operating Activities: Consolidated net income $1,200,881 $1,153,484 Adjustments to reconcile consolidated net income to net cash provided from operating activities -- Depreciation and amortization 1,149,878 1,048,897 Deferred income taxes and investment tax credits 167,965 155,668 Write down of assets 8,895 68,999 Equity in earnings of unconsolidated subsidiaries (115,478) (150,849) Other, net 144,840 (144,154) Changes in certain current assets and liabilities excluding effects from acquisitions -- Receivables, net (974,202) (442,855) Risk management activities, net 85,654 - Fossil fuel stock 60,301 21,310 Materials and supplies (16,483) (8,123) Accounts payable 366,297 (296,444) Other 229,361 535,508 ----------------- ------------------ Net cash provided from operating activities 2,307,909 1,941,441 ----------------- ------------------ Investing Activities: Gross property additions (1,918,577) (1,695,779) Southern Energy business acquisitions, net of cash acquired (291,713) (1,472,217) Other (41,841) 214,575 ----------------- ------------------ Net cash used for investing activities (2,252,131) (2,953,421) ----------------- ------------------ Financing Activities: Increase (decrease) in notes payable, net 1,602,577 1,569,554 Proceeds -- Other long-term debt 1,031,848 2,081,778 Capital and preferred securities - 250,000 Common stock 60,470 23,793 Retirements/repurchases -- First mortgage bonds (211,009) (889,800) Other long-term debt (640,204) (754,137) Preferred stock (383) (85,980) Common stock repurchased (414,643) (648,764) Payment of common stock dividends (655,135) (696,014) Other (447,612) 59,690 ----------------- ------------------ Net cash provided from financing activities 325,909 910,120 ----------------- ------------------ Effect of exchange rate changes on cash (13,429) (1,872) ----------------- ------------------ Net Increase (Decrease) in Cash and Cash Equivalents 368,258 (103,732) Cash and Cash Equivalents at Beginning of Year 466,416 871,353 ----------------- ------------------ Cash and Cash Equivalents at End of Year $834,674 $767,621 ================= ================== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $1,034,023 $764,750 Income taxes (net of refunds) $326,385 $311,336 Southern Energy business acquisitions -- Fair value of assets acquired $2,544,722 $1,505,042 Less cash paid for common stock 291,713 1,472,217 ----------------- ------------------ Liabilities assumed $2,253,009 $32,825 ================= ================== The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS At September 30, 2000 At December 31, Assets (Unaudited) 1999 ------------------- ------------------ (in thousands) Current Assets: Cash and cash equivalents $ 834,674 $ 466,416 Special deposits 73,743 72,490 Receivables, less accumulated provisions for uncollectible accounts of $62,526 at September 30, 2000 and $65,420 at December 31, 1999 3,896,731 1,645,325 Under recovered retail fuel clause revenue 449,395 243,791 Assets from risk management activities, current 950,299 - Fossil fuel stock, at average cost 330,969 310,635 Materials and supplies, at average cost 601,272 585,080 Other 329,993 198,823 ------------------- ------------------ Total current assets 7,467,076 3,522,560 ------------------- ------------------ Property, Plant, and Equipment: In service 38,123,219 36,763,700 Less accumulated provision for depreciation 14,803,574 14,075,044 ------------------- ------------------ 23,319,645 22,688,656 Nuclear fuel, at amortized cost 198,807 226,124 Construction work in progress 1,600,914 1,629,701 ------------------- ------------------ Total property, plant, and equipment 25,119,366 24,544,481 ------------------- ------------------ Other Property and Investments: Equity investments in unconsolidated subsidiaries 1,244,175 1,376,357 Property rights, net of accumulated amortization of $201,263 at September 30, 2000 and $226,866 at December 31, 1999 1,845,931 2,202,206 Goodwill, net of accumulated amortization of $201,620 at September 30, 2000 and $163,560 at December 31, 1999 2,256,330 2,105,859 Other intangibles, net of accumulated amortization of $28,262 at September 30, 2000 and $13,308 at December 31, 1999 515,639 446,927 Nuclear decommissioning trusts 727,690 658,567 Leveraged leases 580,973 556,419 Assets from risk management activities, noncurrent 534,593 - Other 693,791 578,231 ------------------- ------------------ Total other property and investments 8,399,122 7,924,566 ------------------- ------------------ Deferred Charges and Other Assets: Deferred charges related to income taxes 944,541 987,144 Prepaid pension costs 692,098 590,274 Debt expense, being amortized 144,528 145,092 Premium on reacquired debt, being amortized 284,896 217,125 Other 480,282 457,770 ------------------- ------------------ Total deferred charges and other assets 2,546,345 2,397,405 ------------------- ------------------ Total Assets $43,531,909 $38,389,012 =================== ================== The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS At September 30, 2000 At December 31, Liabilities and Stockholders' Equity (Unaudited) 1999 ------------------- ------------------ (in thousands) Current Liabilities: Securities due within one year $ 342,291 $ 576,299 Notes payable 5,517,798 3,915,258 Accounts payable 2,260,873 895,456 Liabilities from risk management activities, current 1,070,447 - Customer deposits 142,901 132,555 Taxes accrued -- Income taxes 588,923 155,326 Other 323,376 263,899 Interest accrued 231,215 281,272 Vacation pay accrued 122,169 120,360 Other 655,158 793,334 ------------------- ------------------ Total current liabilities 11,255,151 7,133,759 ------------------- ------------------ Long-term debt 11,947,225 11,746,596 ------------------- ------------------ Deferred Credits and Other Liabilities: Accumulated deferred income taxes 4,524,911 4,504,896 Deferred credits related to income taxes 591,255 639,921 Accumulated deferred investment tax credits 671,033 693,422 Employee benefits provisions 547,754 513,395 Liabilities from risk management activities, noncurrent 439,555 - Prepaid capacity revenues 63,914 79,703 Other 748,136 453,034 ------------------- ------------------ Total deferred credits and other liabilities 7,586,558 6,884,371 ------------------- ------------------ Minority interests in subsidiaries 674,987 724,610 ------------------- ------------------ Company or subsidiary obligated mandatorily redeemable capital and preferred securities 2,320,175 2,326,835 ------------------- ------------------ Cumulative preferred stock of subsidiaries 368,126 368,509 ------------------- ------------------ Common Stockholders' Equity: Common stock, par value $5 per share -- Authorized -- 1 billion shares Issued -- September 30, 2000: 700,622,308 shares; -- December 31, 1999: 700,620,486 shares 3,503,112 3,503,102 Paid-in capital 2,490,083 2,480,198 Treasury, at cost -- September 30, 2000: 50,076,315 shares; -- December 31, 1999: 34,824,901 shares (1,284,349) (918,972) Retained earnings 4,777,956 4,232,399 Accumulated other comprehensive income (107,115) (92,395) ------------------- ------------------ Total common stockholders' equity 9,379,687 9,204,332 ------------------- ------------------ Total Liabilities and Stockholders' Equity $43,531,909 $38,389,012 =================== ================== The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Nine Months Ended September 30, ---------------------------------------- 2000 1999 ---------------------------------------- (in thousands) Consolidated net income $1,200,881 $1,153,484 Other comprehensive income: Foreign currency translation adjustments (22,837) (158,245) Unrealized Gain/Loss on Investments 190 - Related income tax benefits 7,927 55,386 ------------------ ------------------ CONSOLIDATED COMPREHENSIVE INCOME $1,186,161 $1,050,625 ================== ==================
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME At September 30, 2000 At December 31, (Unaudited) 1999 ------------------ ------------------ (in thousands) Balance at beginning of period ($92,395) $15,400 Change in current period (14,720) (107,795) ------------------ ------------------ BALANCE AT END OF PERIOD ($107,115) ($92,395) ================== ================== The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
11 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 2000 vs. THIRD QUARTER 1999 AND YEAR-TO-DATE 2000 vs. YEAR-TO-DATE 1999 RESULTS OF OPERATIONS SOUTHERN's traditional business is primarily represented by its five integrated Southeast utilities, which provide electric service in four states. Another significant portion of SOUTHERN's business is represented by Southern Energy, which develops and manages domestic and international electricity and other energy-related 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 result from such acquisitions. Effective August 10, 2000, Southern Energy acquired the remaining outstanding 40% interest in SCEM for $250 million. As a result of this transaction, SCEM became a wholly owned indirect subsidiary and is consolidated in the accompanying financial statements as of the effective date. Prior to August 10, 2000, SOUTHERN's investment in SCEM was accounted for under the equity method of accounting. Reference is made to Note (J) in the "Notes to the Condensed Financial Statements" herein for additional information on the SCEM acquisition. On October 2, 2000, the initial public offering ("IPO") of 19.7% of Southern Energy's shares was completed; therefore, effective as of that date, SOUTHERN's financial statements will exclude the minority share sold in the IPO. Reference is made to Note (N) in the "Notes to the Condensed Financial Statements" herein for additional information relating to the IPO and the planned spin-off of Southern Energy. Earnings SOUTHERN's reported consolidated net income for the third quarter and year-to-date 2000 was $614 million ($0.95 per share) and $1.2 billion ($1.85 per share), respectively, compared to $615 million ($0.90 per share) and $1.2 billion ($1.67 per share) for the corresponding periods of 1999. Excluding charges related to Southern Energy's transition to becoming a public company and other non-operating items, SOUTHERN's earnings from operations for the third quarter and year-to-date 2000 would have been $668 million ($1.03 per share) and $1.25 billion ($1.92 per share), respectively, compared to $622 million ($0.91 per share) and $1.16 billion ($1.68 per share) for the corresponding periods of 1999. The transition costs amounted to $45 million ($0.07 per share), including a charge of $17 million ($0.03 per share) related to Southern Energy's tax planning strategies, which changed as a result of the IPO and planned spin-off. This change involves the repatriation of cash from Asia and will have an impact on SOUTHERN in each quarter until the planned spin-off is completed. Southern Energy's consolidated net income for the third quarter and year-to-date 2000 was $98 million and $292 million, respectively, compared to $156 million and $305 million for the corresponding periods of 1999. Earnings decreased by $58 million, or 37.2%, and $13 million, or 4.3%, for the third quarter and year-to-date 2000, respectively, when compared to the same periods of the previous year, primarily due to the sale of the SWEB supply business in the third quarter of 1999, which increased prior year net income by $78 million, and transition costs related to Southern Energy becoming a publicly traded company. These decreases in earnings were partially offset by increased market demand and strong performance from Southern Energy's assets and marketing and risk management operations in California and New York as well as the commercial operation of new plants in North America. 12 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION For the integrated Southeast utilities, earnings were down by $7 million, or 1.2%, for the third quarter and up by $17 million, or 1.7%, year-to-date 2000 when compared to the same periods in 1999. The third quarter decrease is primarily attributed to higher operating expenses which fully offset increases in operating revenues. The year-to-date 2000 increase is primarily attributed to increased operating revenues which were in large part offset by higher operating expenses. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Operating revenues............................... $3,742,328 100.2 $4,277,919 47.7 Fuel expense..................................... 1,539,677 172.3 1,882,319 91.3 Purchased power expense.......................... 1,542,800 439.9 1,309,081 150.6 Other operation expense.......................... 485,050 77.8 528,830 32.4 Maintenance expense.............................. 13,755 7.0 52,324 8.0 Depreciation and amortization expense............ 40,569 12.1 171,764 17.6 Equity in earnings of unconsolidated subsidiaries.................................. 56,618 714.3 (35,490) (23.5) Other, net....................................... (249,962) (90.5) (221,916) (70.6) Interest on long-term debt....................... 47,957 29.1 126,166 25.5 Interest on notes payable........................ 27,428 51.1 101,230 80.9 Minority interest in subsidiaries................ (101,625) (85.7) (94,832) (61.3)
Operating revenues. The increases in the operating revenues for the third quarter and year-to-date 2000 are primarily attributed to Southern Energy. Southern Energy's revenues were up by $3.6 billion and $3.8 billion, respectively, for the current quarter and year-to-date 2000, when compared to the same periods in 1999. These increases are primarily related to Southern Energy's acquisition, effective August 10, 2000, of the remaining 40% of SCEM which is now consolidated in Southern Energy's financial statements. Reference is made to Note (J) in the "Notes to the Condensed Financial Statements" contained herein for additional information regarding this acquisition. For the integrated Southeast utilities, operating revenues were up by $151 million, or 5.0%, for the third quarter 2000 and $503 million, or 7.1%, year-to-date 2000 due primarily to increased energy sales to SOUTHERN's customers in the Southeast. Fuel expense. For the third quarter and year-to-date 2000, fuel expense increases are mainly attributed to Southern Energy's acquisition of SCEM, as mentioned previously, higher natural gas prices and increased electricity market demand at Southern Energy's plants in California, as well as commencement of commercial operation of new plants in North America, partially offset by a decrease due to the sale of the SWEB supply business, when compared to the corresponding periods in 1999. For the integrated Southeast utilities, fuel expense was up by $50 million, or 6.9%, for the current quarter 2000 and $157 million, or 8.8%, year-to-date 2000 as a result of higher energy demands and higher natural gas and oil prices when compared to the same periods in 1999. 13 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Purchased power expense. During the third quarter and year-to-date 2000, this expense increased due primarily to Southern Energy's acquisition of SCEM, partially offset by a decrease due to the sale of the SWEB supply business. For the integrated Southeast utilities, purchased power expense increased for both the current quarter by $116 million, or 56.6%, and year-to-date 2000 by $215 million, or 63.9%, due mainly to increased demand for energy. Other operation expense. The third quarter and year-to-date 2000 increases are primarily attributed to Southern Energy. Increases in Southern Energy's other operation expense result from the commencement of commercial operations of new plants in North America and the Philippines, additional variable marketing costs, increased market demand associated with Southern Energy's generating plants in North America, the acquisition of the remaining 40% of SCEM, and provisions taken related to revenues of the California operations under reliability-must-run contracts. For additional information on the matter in California, see Note (O) in the "Notes to the Condensed Financial Statements" contained herein. Maintenance expense. For the integrated Southeast utilities, maintenance expense was up $9 million, or 5.5%, and $28 million, or 5.1%, for the third quarter and year-to-date 2000, respectively. These increases are attributed to higher costs related to scheduled maintenance on steam and other power generation facilities. Southern Energy's maintenance expenses increased during third quarter and year-to-date 2000 by $4 million and $23 million, respectively, when compared to the same periods in 1999 due primarily to the acquisitions in 1999 of generating assets in California and New York. Depreciation and amortization expense. For the integrated Southeast utilities, this item increased $12 million, or 4.5%, in the third quarter of 2000 and $82 million, or 10.4%, year-to-date 2000 primarily as a result of increased property, plant and equipment and accelerated amortization and depreciation by GEORGIA in accordance with the three-year rate order approved by the Georgia PSC. See Note (F) in the "Notes to the Condensed Financial Statements" herein for further details regarding the retail rate order. Southern Energy's depreciation and amortization expense was higher for the current quarter by $22 million and $66 million year-to-date 2000 due to the commencement of commercial operations of new plants in North America and the Philippines. Southern Energy's year-to-date 2000 increase is also attributed to the acquisitions of plants in California and New York. Equity in earnings of unconsolidated subsidiaries. The changes for both the current quarter and year-to-date 2000 are attributed to Southern Energy. The third quarter 2000 increase is mainly due to increased income from Southern Energy's equity investments in China and in SCEM, prior to the acquisition of the remaining 40% of SCEM in August 2000. The year-to-date 2000 decrease when compared to the same period in 1999 is primarily related to the successful resolution in 1999 of a dispute related to Southern Energy's operations in China. Other, net. The decreases in this item for the third quarter and year-to-date 2000, when compared to the same periods in 1999, are primarily related to Southern Energy's gain on the sale of the SWEB supply business in 1999, which resulted in a gain of $286 million prior to taxes and other expenses. 14 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Interest on long-term debt. The third quarter and year-to-date 2000 increases are primarily attributed to interest on higher borrowings by Southern Energy used to finance acquisitions, fund dividends paid to SOUTHERN and commence commercial operations of new plants in North America and the Philippines. The integrated Southeast utilities also contributed to these increases due primarily to the issuances of senior notes by ALABAMA, during the last half of 1999 and the second quarter of 2000, and GEORGIA and MISSISSIPPI during the first quarter of 2000. Interest on notes payable. The increases for the third quarter and year-to-date 2000 are mainly due to Southern Energy's increased borrowings to finance business activities, as mentioned above. SOUTHERN also contributed to the year-to-date 2000 increase due to a higher average short-term debt outstanding and higher interest rates on these borrowings. Minority interests in subsidiaries. For the third quarter and year-to-date 2000, these items were lower due primarily to the sale of the SWEB supply business in 1999, as mentioned previously. The year-to-date 2000 decrease was partially offset by increased minority interest in income from operations in the Philippines and South America. 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 weather to energy sales growth to a less regulated, more competitive environment. For additional information relating to Southern Energy and other businesses, see Item 1 - BUSINESS - "Southern Energy" and "Other Business" in the Form 10-K. Also, reference is made to Note (N) in the "Notes to the Condensed Financial Statements" herein for information relating to Southern Energy's IPO and the planned spin-off of Southern Energy. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, SOUTHERN 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 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. In December 1999, the FERC issued its final rule on RTOs and on October 16, 2000, SOUTHERN and its five integrated Southeast utilities filed with the FERC a proposal for the creation of a RTO. The proposal calls for the formation of a for-profit company that would have control of the bulk power transmission system of participating utilities, which will have the option to divest, sell or lease their assets to the RTO. If the FERC accepts the proposal as filed, the creation of the RTO is not expected to have a material impact on the financial statements of ALABAMA, GEORGIA, GULF, MISSISSIPPI, SAVANNAH or SOUTHERN. However, the ultimate outcome of this matter is uncertain. For more information on the FERC's rule, reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN in the Form 10-K. Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Protection Agency Litigation" and Note 3 to the financial statements of SOUTHERN in the Form 10-K for information on EPA litigation. 15 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In June 2000, Southern Energy announced an agreement with Potomac Electric Power Company ("PEPCO") to purchase PEPCO's generating business in Maryland and Virginia, assume PEPCO's entitlements under various power purchase agreements, operate two power stations in Washington, D.C. retained by PEPCO and supply PEPCO with power required to meet its retail obligations for up to four years pursuant to transition power agreements. The purchase price of this transaction is $2.65 billion plus amounts to be determined for working capital and reimbursement of capital expenditures, and approximately $260 million in the event a certain power purchase agreement is not transferred to Southern Energy. This transaction is expected to close later this year. On October 30, 2000, Southern Energy and PPL Global, through a jointly-owned subsidiary, finalized the acquisition of Hyder plc. Hyder plc provides water and sewerage, electricity distribution and other services to customers in Wales. For additional information, reference is made to Note (R) to the "Notes to the Condensed Financial Statements" contained herein. Reference is made to Notes (B) through (G) and (J) through (S) 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. New Accounting Standard In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 138, an amendment of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that certain derivative instruments be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in the fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SOUTHERN intends to adopt the provisions of SFAS No. 133 on January 1, 2001. SOUTHERN utilizes financial instruments to reduce its exposure to changes in interest rates and foreign currency exchange rates. SOUTHERN also enters into commodity related derivatives to limit exposure to changing prices on certain inventory purchases and electricity purchases and sales. Upon adoption, these instruments will qualify as cash flow hedges under SFAS No. 133, resulting in the deferral of related gains and losses in other comprehensive income until the hedged transactions occur. Any ineffectiveness will be recognized currently in net income. Substantially all of SOUTHERN's bulk energy purchases and sales meet the definition of a derivative under SFAS No. 133. In many cases, such transactions will meet the normal purchase and sale exception and the related contracts will continue to be accounted for under the accrual method. However, others will be required to be marked to market through current period income. The majority of such contracts are used by Southern Energy in its trading and marketing business and are already being marked to market in accordance with existing accounting requirements. Management continues to assess the effects of adopting SFAS No. 133, but currently expects the impact to be immaterial to SOUTHERN's financial statements. The application of SFAS No. 133 is still evolving and further guidance from the FASB is expected. When established, this further guidance may have additional impacts on SOUTHERN's financial statements. 16 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL CONDITION Overview Major changes in SOUTHERN's financial condition during the first nine months of 2000 included $1.9 billion used for gross property additions to utility plant. The funds for these additions and other capital requirements were from operations, short-term borrowings and other long-term debt. See SOUTHERN's Condensed Consolidated Statements of Cash Flows for further details. Reference is made to SOUTHERN's Condensed Consolidated Statements of Comprehensive Income herein for information relating to other comprehensive income. Financing Activities During the first nine months of 2000, maturities of the integrated Southeast utilities' first mortgage bonds totaled $200 million. In February 2000, GEORGIA issued $300 million of floating rate senior notes due February 22, 2002. The proceeds of the sale were used to repay a portion of GEORGIA's outstanding short-term indebtedness. In March 2000, MISSISSIPPI issued $100 million of floating rate senior notes due March 28, 2002. The proceeds were used to prepay bank loans of $45 million maturing in November 2001 and $5 million maturing in October 2002. The balance was used to repay a portion of MISSISSIPPI's outstanding short-term indebtedness. In May 2000, ALABAMA issued $250 million of 7.85% senior notes due May 15, 2003. The proceeds of the sale were used to repay a portion of ALABAMA's outstanding short-term indebtedness. In August 2000, GEORGIA sold, through public authorities, $78.725 million of 4.53% pollution control revenue bonds due September 1, 2030. The initial interest rate is effective through March 1, 2002, at which time the bonds will bear interest at either a variable rate or a new fixed rate. The proceeds were used to refund $28.725 million aggregate principal amount of 6 5/8% pollution control revenue bonds which were called for redemption in October 2000 and $50 million aggregate principal amount of 4 3/8% pollution control revenue bonds which matured on November 1, 2000. Reference is made to "Future Earnings Potential" herein for the discussion of the agreement between SOUTHERN, through its subsidiary Southern Energy, and PEPCO. To fund the purchase price of this transaction, Southern Energy plans to enter into lease financing arrangements for a significant portion of the PEPCO assets, which are expected to provide $1.5 billion; to issue $1.02 billion of debt through one of its subsidiaries, of which approximately $938 million will be drawn at closing; and to provide the balance from committed credit lines. See Note (K) in the "Notes to the Condensed Financial Statements" herein for discussion of certain financial derivative contracts entered into by SOUTHERN. In April 1999, SOUTHERN's board approved the repurchase of up to 50 million shares of SOUTHERN's common stock over the next two years through open market or privately negotiated transactions. The repurchase program was completed during the first quarter 2000. The market price of SOUTHERN's common stock at September 30, 2000 was $32.46 per share and the book value was $14.42 per share, representing a market-to-book ratio of 225%, compared to $23.50, $13.82 and 170%, respectively, at the end of 1999. The dividend for the third quarter of 2000 was $0.335 per share. 17 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Capital Requirements for Construction", "Other Capital Requirements" and "Environmental Matters" of SOUTHERN in the Form 10-K for a description of the SOUTHERN system's capital requirements for its construction program, sinking fund requirements and maturing debt, and environmental compliance efforts. Approximately $342 million will be required by September 30, 2001 for redemptions and maturities of long-term debt. Also, the integrated Southeast utilities 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 2000, as well as in subsequent years, will be contingent on SOUTHERN's investment opportunities. The integrated Southeast utilities 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. 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, 2000 approximately $835 million of cash and cash equivalents and approximately $5.9 billion of unused credit arrangements with banks. These unused credit arrangements also provide liquidity support to variable rate pollution control bonds and commercial paper programs. At September 30, 2000, the SOUTHERN system had outstanding approximately $3.5 billion of short-term notes payable and $2.0 billion of commercial paper. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 18 PART I Item 3. Quantitative And Qualitative Disclosures About Market Risk. As part of its energy marketing activities, Southern Energy enters into a variety of contractual commitments, such as swaps, swap options, cap and floor agreements, futures contracts, forward purchase and sale agreements, and option contracts. These contracts generally require future settlement and are either executed on an exchange or traded as over-the-counter instruments. Contractual commitments have widely varying terms and have durations that range from a few days to a number of years, depending on the instrument. Southern Energy records all contractual commitments used for trading purposes, including those used to hedge trading positions, at fair value. Consequently, changes in the amounts recorded in the accompanying consolidated balance sheets resulting from movements in fair value are included in revenues in the period in which they occur. Contractual commitments expose Southern Energy to both market risk and credit risk. Market Risk Market risk is the potential loss that Southern Energy may incur as a result of changes in the fair value of a particular instrument or commodity. All financial and commodities-related instruments, including derivatives, are subject to market risk. Southern Energy's exposure to market risk is determined by a number of factors, including the size, duration, composition, and diversification of positions held and the absolute and relative levels of interest rates, as well as market volatility and liquidity. For instruments such as options, the time period during which the option may be exercised and the relationship between the current market price of the underlying instrument and the option's contractual strike or exercise price also affects the level of market risk. The most significant factor influencing the overall level of market risk to which Southern Energy is exposed is its use of various risk management techniques. Southern Energy manages market risk by actively monitoring compliance with stated risk management policies as well as monitoring the effectiveness of its hedging policies and strategies. Southern Energy's risk management policies limit the amount of total net exposure and rolling net exposure during the stated periods. These policies, including related risk limits, are approved by regional boards and are regularly assessed by management to ensure their appropriateness given Southern Energy's objectives. Net notional amounts of electricity, natural gas and crude oil at September 30, 2000 are as follows: Net Notional Amounts Unit of Measure Electricity 5,050,659 MwH Natural gas 16,872,820 MmBTUs Crude oil (1,027,319) Barrels The determination of net notional amounts does not consider any of the market risk factors discussed above. Net notional amounts are indicative only of the volume of activity and are not a measure of market risk. Market risk is also influenced by the relationship among the various off-balance sheet categories, as well as by the relationship between off-balance sheet items and items recorded in the accompanying consolidated balance sheets. For all of these reasons, the interpretation of notional amounts as a measure of market risk could be misleading. The net notional amounts of Southern Energy's other commodity positions were immaterial at September 30, 2000. 19 Item 3. Quantitative And Qualitative Disclosures About Market Risk. (Continued) The fair values of Southern Energy's assets from risk management activities recorded in the accompanying consolidated balance sheets at September 30, 2000 were comprised primarily of approximately 43% electricity and 48% natural gas. The fair values of the liabilities from risk management activities recorded in the accompanying consolidated balance sheets at September 30, 2000 were comprised primarily of approximately 48% electricity and 44% natural gas. Credit Risk In conducting its energy marketing and risk management activities, Southern Energy regularly transacts business with a broad range of entities and a wide variety of end users, trading companies, and financial institutions. Credit risk is measured by the loss Southern Energy would record if its counterparties failed to perform pursuant to the terms of their contractual obligations and the value of collateral held, if any, were not adequate to cover such losses. Southern Energy has established controls to determine and monitor the creditworthiness of counterparties, as well as the quality of pledged collateral, and uses master netting agreements whenever possible to mitigate Southern Energy's exposure to counterparty credit risk. Master netting agreements enable Southern Energy to net certain assets and liabilities by counterparty. Southern Energy also nets across product lines and against cash collateral, provided such provisions are established in the master netting and cash collateral agreements. Additionally, Southern Energy may require counterparties to pledge additional collateral when deemed necessary. Concentrations of credit risk from financial instruments, including contractual commitments, exist when groups of counterparties have similar business characteristics or are engaged in like activities that would cause their ability to meet their contractual commitments to be adversely affected, in a similar manner, by changes in the economy or other market conditions. Southern Energy monitors credit risk on both an individual basis and a group counterparty basis. No single counterparty represents 10% or more of Southern Energy's credit exposure at September 30, 2000. Southern Energy's overall exposure to credit risk may be impacted, either positively or negatively, because its counterparties may be similarly affected by changes in economic, regulatory, or other conditions. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Derivative Financial Instruments" and Note 1 to the financial statements of SOUTHERN in Item 8 of the Form 10-K. Additional reference is made to Note (K) in the "Notes to the Condensed Financial Statements" contained herein for additional information regarding commodity-related marketing and price risk management activities. 20 ALABAMA POWER COMPANY 21
ALABAMA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 ---------------- ---------------- ---------------- --------------- (in thousands) (in thousands) Operating Revenues: Retail sales $945,964 $950,428 $2,299,660 $2,208,371 Sales for resale -- Non-affiliates 140,726 136,562 350,542 315,135 Affiliates 25,954 14,192 73,046 83,476 Other revenues 24,651 14,793 60,682 45,933 ---------------- ---------------- ---------------- --------------- Total operating revenues 1,137,295 1,115,975 2,783,930 2,652,915 ---------------- ---------------- ---------------- --------------- Operating Expenses: Operation -- Fuel 285,316 256,249 698,711 656,083 Purchased power -- Non-affiliates 75,066 53,476 130,939 79,051 Affiliates 53,798 82,404 134,585 145,922 Other 126,654 139,956 374,263 392,454 Maintenance 60,021 59,922 220,617 205,735 Depreciation and amortization 92,760 86,286 274,458 261,102 Taxes other than income taxes 53,773 50,153 160,013 153,815 ---------------- ---------------- ---------------- --------------- Total operating expenses 747,388 728,446 1,993,586 1,894,162 ---------------- ---------------- ---------------- --------------- Operating Income 389,907 387,529 790,344 758,753 Other Income (Expense): Interest income 8,943 21,215 23,420 44,983 Equity in earnings of unconsolidated subsidiaries 847 589 2,344 2,066 Other, net 1,298 (7,939) 109 (16,238) ---------------- ---------------- ---------------- --------------- Earnings Before Interest and Income Taxes 400,995 401,394 816,217 789,564 ---------------- ---------------- ---------------- --------------- Interest Charges and Other: Interest on long-term debt 56,685 48,260 163,199 139,286 Interest on notes payable 1,681 3,348 8,857 8,908 Amortization of debt discount, premium and expense, net 3,037 2,816 8,762 8,306 Other interest charges, net 2,171 14,896 5,661 31,774 Distributions on preferred securities of subsidiary 6,418 6,253 19,125 18,286 ---------------- ---------------- ---------------- --------------- Total interest charges and other, net 69,992 75,573 205,604 206,560 ---------------- ---------------- ---------------- --------------- Earnings Before Income Taxes 331,003 325,821 610,613 583,004 Income taxes 118,201 120,272 219,120 213,616 ---------------- ---------------- ---------------- --------------- Net Income 212,802 205,549 391,493 369,388 Dividends on Preferred Stock 4,076 4,728 12,080 12,455 ---------------- ---------------- ---------------- --------------- Net Income After Dividends on Preferred Stock $208,726 $200,821 $379,413 $356,933 ================ ================ ================ =============== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
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ALABAMA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 2000 1999 ----------------- ------------------ (in thousands) Operating Activities: Net income $391,493 $369,388 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 309,042 306,408 Deferred income taxes and investment tax credits, net 48,140 57,901 Other, net (19,326) 24,653 Changes in certain current assets and liabilities -- Receivables, net (115,011) (51,759) Fossil fuel stock 9,362 3,981 Materials and supplies (5,995) (15,315) Accounts payable (16,369) (69,441) Energy cost recovery, retail (71,436) (83,174) Other 128,000 33,767 ----------------- ------------------ Net cash provided from operating activities 657,900 576,409 ----------------- ------------------ Investing Activities: Gross property additions (622,469) (563,946) Other (47,449) (44,503) ----------------- ------------------ Net cash used for investing activities (669,918) (608,449) ----------------- ------------------ Financing Activities: Increase in notes payable, net 45,527 88,421 Proceeds -- Other long-term debt 250,000 751,650 Preferred securities - 50,000 Capital contributions from parent company 167,004 - Redemptions -- First mortgage bonds (111,009) (470,000) Other long-term debt (4,141) (104,457) Preferred stock - (50,000) Payment of preferred stock dividends (11,988) (11,921) Payment of common stock dividends (313,200) (296,100) Other (951) (15,425) ----------------- ------------------ Net cash provided from (used for) financing activities 21,242 (57,832) ----------------- ------------------ Net Change in Cash and Cash Equivalents 9,224 (89,872) Cash and Cash Equivalents at Beginning of Period 19,475 134,248 ----------------- ------------------ Cash and Cash Equivalents at End of Period $ 28,699 $ 44,376 ================= ================== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $163,022 $167,163 Income taxes (net of refunds) $60,777 $94,202 The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
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ALABAMA POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2000 At December 31, Assets (Unaudited) 1999 ------------------- -------------------- (in thousands) Current Assets: Cash and cash equivalents $ 28,699 $ 19,475 Receivables -- Customer accounts receivable 364,811 265,900 Under recovered retail fuel clause revenue 240,063 168,627 Other accounts and notes receivable 57,547 42,137 Affiliated companies 59,272 40,083 Accumulated provision for uncollectible accounts (6,764) (4,117) Refundable income taxes 2,145 17,997 Fossil fuel stock, at average cost 75,220 84,582 Materials and supplies, at average cost 173,632 167,637 Other 61,529 46,011 ------------------- -------------------- Total current assets 1,056,154 848,332 ------------------- -------------------- Property, Plant, and Equipment: In service 12,267,485 11,783,078 Less accumulated provision for depreciation 5,099,351 4,901,384 ------------------- -------------------- 7,168,134 6,881,694 Nuclear fuel, at amortized cost 85,940 106,836 Construction work in progress 737,912 715,153 ------------------- -------------------- Total property, plant, and equipment 7,991,986 7,703,683 ------------------- -------------------- Other Property and Investments: Equity investments in unconsolidated subsidiaries 37,549 34,891 Nuclear decommissioning trusts 321,313 286,653 Other 11,794 12,156 ------------------- -------------------- Total other property and investments 370,656 333,700 ------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 325,720 330,405 Prepaid pension costs 254,687 213,971 Debt expense, being amortized 8,951 9,563 Premium on reacquired debt, being amortized 77,997 83,895 Department of Energy assessments 27,685 27,685 Other 110,847 97,470 ------------------- -------------------- Total deferred charges and other assets 805,887 762,989 ------------------- -------------------- Total Assets $10,224,683 $9,648,704 =================== ==================== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
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ALABAMA POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2000 At December 31, Liabilities and Stockholders' Equity (Unaudited) 1999 ------------------- -------------------- (in thousands) Current Liabilities: Securities due within one year $ 844 $100,943 Notes payable 142,351 96,824 Accounts payable -- Affiliated 93,061 91,315 Other 118,102 140,842 Customer deposits 35,597 31,704 Taxes accrued -- Income taxes 233,376 100,569 Other 69,592 18,295 Interest accrued 46,288 26,365 Vacation pay accrued 30,022 30,112 Other 57,695 84,267 ------------------- -------------------- Total current liabilities 826,928 721,236 ------------------- -------------------- Long-term debt 3,426,643 3,190,378 ------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 1,259,277 1,240,344 Deferred credits related to income taxes 252,164 265,102 Accumulated deferred investment tax credits 252,052 260,367 Employee benefits provisions 83,650 82,298 Prepaid capacity revenues 63,914 79,703 Other 173,653 155,901 ------------------- -------------------- Total deferred credits and other liabilities 2,084,710 2,083,715 ------------------- -------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding company junior subordinated notes 347,000 347,000 ------------------- -------------------- Cumulative preferred stock 317,512 317,512 ------------------- -------------------- Common Stockholder's Equity: Common stock, par value $40 per share -- Authorized - 6,000,000 shares Outstanding - 5,608,955 shares Par value 224,358 224,358 Paid-in capital 1,705,996 1,538,992 Premium on preferred stock 99 99 Retained earnings 1,291,437 1,225,414 ------------------- -------------------- Total common stockholder's equity 3,221,890 2,988,863 ------------------- -------------------- Total Liabilities and Stockholder's Equity $10,224,683 $9,648,704 =================== ==================== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
25 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 2000 vs. THIRD QUARTER 1999 AND YEAR-TO-DATE 2000 vs. YEAR-TO-DATE 1999 RESULTS OF OPERATIONS Earnings ALABAMA's net income after dividends on preferred stock for the third quarter and year-to-date 2000 was $208.7 million and $379.4 million, respectively, compared to $200.8 million and $356.9 million for the corresponding periods of 1999. Earnings for the current quarter 2000 increased $7.9 million, or 3.9%, due primarily to a decrease in non-fuel operation expenses. Year-to-date, earnings increased $22.5 million, or 6.3%, due primarily to an increase in retail sales. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Retail sales..................................... $(4,464) (0.5) $91,289 4.1 Sales for resale - affiliates.................... 11,762 82.9 (10,430) (12.5) Fuel expense..................................... 29,067 11.3 42,628 6.5 Purchased power - non-affiliates................. 21,590 40.4 51,888 65.6 Purchased power - affiliates..................... (28,606) (34.7) (11,337) (7.8) Other operation expense.......................... (13,302) (9.5) (18,191) (4.6) Depreciation and amortization.................... 6,474 7.5 13,356 5.1 Interest income.................................. (12,272) (57.8) (21,563) (47.9) Other, net....................................... 9,237 116.3 16,347 100.7 Interest on long-term debt....................... 8,425 17.5 23,913 17.2 Other interest charges, net...................... (12,725) (85.4) (26,113) (82.2)
Retail sales. Excluding fuel revenues, which generally do not affect net income, retail sales revenues were relatively unchanged for the third quarter 2000 when compared to the same period in 1999. The increase in year-to-date 2000 retail sales revenue, excluding fuel revenue, is primarily due to increased energy sales of 2.9%. Sales for resale - affiliates and Purchased power - affiliates. Revenues from sales for resale to affiliated companies within the SOUTHERN 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 did not have a significant impact on earnings. 26 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Fuel expense. Increased generation from gas-fueled plants at a time of increased natural gas prices resulted in higher fuel expense for the third quarter and year-to-date 2000 when compared to the same periods in 1999. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on earnings. Purchased power - non-affiliates. Purchased power from non-affiliates increased for the current quarter 2000 due primarily to higher costs associated with these energy purchases and to offset decreased hydro power generation. Hydro power generation was lower as a result of hot, dry weather in ALABAMA's service territory. The year-to-date 2000 increase was to offset decreased nuclear and hydro power generation related to a refueling and steam generator replacement outage and lower stream flows, respectively. Other operation expense. These costs were lower for the current quarter and year-to-date 2000, when compared to the corresponding periods in 1999, due primarily to a decrease in administrative and general expenses. Lower administrative and general expenses for the third quarter and year-to-date 2000 are due to a reduction in computer-related expenses and a decrease in expenses associated with employee benefits. The year-to-date 2000 decrease in administrative and general expenses also includes a nuclear insurance refund. Depreciation and amortization. The third quarter and year-to-date 2000 increases are attributed to increased property, plant and equipment when compared to the same periods in 1999. Interest income. The current quarter and year-to-date 2000 decreases are primarily due to gains recognized in 1999 on investments held by the nuclear decommissioning trusts which were offset by a concurrent reduction of other interest charges in accordance with FERC requirements. Other, net. Third quarter and year-to-date 2000 increases are primarily attributed to an increase in Allowance for Funds Used During Construction and a gain on disposition of property. Interest on long-term debt. Interest on long-term debt increased in the third quarter and year-to-date 2000 primarily due to the issuances of $450 million of senior notes in the last half of 1999 and $250 million in the second quarter of 2000. Other interest charges, net. The third quarter and year-to-date 2000 decreases result from an increase in Allowance for Funds Used During Construction resulting in a larger credit to interest expense than was recorded in the corresponding periods for 1999. Additionally, there was a decrease in interest charges related to the nuclear decommissioning trusts, which was offset by a concurrent reduction of interest income in accordance with FERC requirements. 27 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 weather to 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, ALABAMA 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 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. In December 1999, the FERC issued its final rule on RTOs and on October 16, 2000, SOUTHERN and its five integrated Southeast utilities filed with the FERC a proposal for the creation of a RTO. The proposal calls for the formation of a for-profit company that would have control of the bulk power transmission system of participating utilities, which will have the option to divest, sell or lease their assets to the RTO. If the FERC accepts the proposal as filed, the creation of the RTO is not expected to have a material impact on the financial statements of ALABAMA. However, the ultimate outcome of this matter is uncertain. For more information on the FERC's rule, reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of ALABAMA in the Form 10-K. Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of ALABAMA in the Form 10-K for information on EPA litigation. Reference is made to Notes (B), (C), (D) and (E) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. New Accounting Standard In June 2000, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 138, an amendment of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that certain derivative instruments be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in the fair value be recognized currently in earnings unless specific hedge accounting criteria are met. ALABAMA intends to adopt the provisions of SFAS No. 133 on January 1, 2001. Substantially all of ALABAMA's bulk energy purchases and sales meet the definition of a derivative under SFAS No. 133. In most cases, such transactions will meet the normal purchase and sale exception and the related contracts will continue to be accounted for under the accrual method. However, a limited number of contracts will be required to be accounted for as derivatives in accordance with SFAS No. 133. Upon adoption, certain of these contracts will qualify as cash flow hedges, resulting in the deferral of related gains and losses in other comprehensive income until the hedged transactions occur. Any ineffectiveness will be recognized currently in net income. 28 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Management continues to assess the effects of adopting SFAS No. 133, but currently expects the impact to be immaterial to ALABAMA's financial statements. The application of SFAS No. 133 is still evolving and further guidance from the FASB is expected. When established, this further guidance may have additional impacts on ALABAMA's financial statements. FINANCIAL CONDITION Overview Major changes in ALABAMA's financial condition during the first nine months of 2000 included the addition of approximately $622.5 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities and capital contributions from SOUTHERN. See ALABAMA's Condensed Statements of Cash Flows for further details. Financing Activities During the first nine months of 2000, maturities of first mortgage bonds by ALABAMA totaled $100 million. In May 2000, ALABAMA issued $250 million of 7.85% senior notes due May 15, 2003. The proceeds of the sale were used to repay a portion of ALABAMA's outstanding short-term indebtedness. 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. See Item 1 - - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, ALABAMA had at September 30, 2000 approximately $28.7 million of cash and cash equivalents, had unused committed lines of credit of approximately $924 million (including $418 million of such lines under which borrowings may be made only to fund purchase obligations relating to variable rate pollution control bonds) and an extendible commercial note program. ALABAMA has regulatory authority for up to $750 million of short-term borrowings. At September 30, 2000, ALABAMA had outstanding $142.4 million of commercial paper. 29 ARTHUR ANDERSEN 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, 2000, and the related condensed statements of income for the three-month and nine-month periods ended September 30, 2000 and 1999 and cash flows for the nine-month periods ended September 30, 2000 and 1999. 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 auditing standards generally accepted in the United States, 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 accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the balance sheet of ALABAMA POWER COMPANY as of December 31, 1999 (not presented herein), and, in our report dated February 16, 2000, 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, 1999, 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 7, 2000 30 GEORGIA POWER COMPANY 31
GEORGIA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 ---------------- ---------------- ----------------- ----------------- (in thousands) (in thousands) Operating Revenues: Retail sales $1,361,515 $1,291,275 $3,365,826 $3,143,387 Sales for resale -- Non-affiliates 112,899 97,023 218,698 192,639 Affiliates 35,617 42,217 78,770 64,605 Other revenues 35,273 35,492 94,326 87,854 ---------------- ---------------- ----------------- ----------------- Total operating revenues 1,545,304 1,466,007 3,757,620 3,488,485 ---------------- ---------------- ----------------- ----------------- Operating Expenses: Operation -- Fuel 320,827 299,684 801,130 715,470 Purchased power -- Non-affiliates 158,999 90,284 287,539 170,194 Affiliates 49,153 39,051 138,621 137,822 Other 193,885 200,575 554,397 553,178 Maintenance 83,777 81,445 270,318 263,918 Depreciation and amortization 144,411 140,538 475,981 412,262 Taxes other than income taxes 57,094 56,974 158,603 155,127 ---------------- ---------------- ----------------- ----------------- Total operating expenses 1,008,146 908,551 2,686,589 2,407,971 ---------------- ---------------- ----------------- ----------------- Operating Income 537,158 557,456 1,071,031 1,080,514 Other Income (Expense): Interest income 815 1,151 2,001 3,516 Equity in earnings of unconsolidated subsidiaries 747 651 2,276 2,115 Other, net (4,593) (7,734) (8,863) (17,760) ---------------- ---------------- ----------------- ----------------- Earnings Before Interest and Income Taxes 534,127 551,524 1,066,445 1,068,385 ---------------- ---------------- ----------------- ----------------- Interest Charges and Other: Interest on long-term debt 43,521 40,050 125,795 124,033 Interest on notes payable 5,672 4,399 21,747 14,233 Amortization of debt discount, premium and expense, net 3,602 3,835 10,818 11,435 Other interest charges, net 2,035 (43) (3,419) 684 Distributions on preferred securities of subsidiary 14,776 17,026 44,328 49,023 ---------------- ---------------- ----------------- ----------------- Total interest charges and other, net 69,606 65,267 199,269 199,408 ---------------- ---------------- ----------------- ----------------- Earnings Before Income Taxes 464,521 486,257 867,176 868,977 Income taxes 180,861 189,704 340,945 340,893 ---------------- ---------------- ----------------- ----------------- Net Income 283,660 296,553 526,231 528,084 Dividends on Preferred Stock 168 177 507 1,556 ---------------- ---------------- ----------------- ----------------- Net Income After Dividends on Preferred Stock $ 283,492 $ 296,376 $ 525,724 $ 526,528 ================ ================ ================= ================= The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
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GEORGIA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 2000 1999 ---------------- --------------- (in thousands) Operating Activities: Net income $526,231 $528,084 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 409,514 405,738 Deferred income taxes and investment tax credits, net (12,955) (45,534) Other, net 193,014 167,383 Changes in certain current assets and liabilities -- Receivables, net (129,937) (102,460) Fossil fuel stock 25,852 (20,304) Materials and supplies (5,287) (11,213) Accounts payable (6,112) (34,894) Energy cost recovery, retail (113,011) (6,116) Other 147,355 292,086 ---------------- --------------- Net cash provided from operating activities 1,034,664 1,172,770 ---------------- --------------- Investing Activities: Gross property additions (728,116) (516,767) Other (26,399) (30,043) ---------------- --------------- Net cash used for investing activities (754,515) (546,810) ---------------- --------------- Financing Activities: Increase (decrease) in notes payable, net (238,842) (23,413) Proceeds -- Other long-term debt 378,725 338,000 Preferred securities - 200,000 Capital contributions from parent company 268,799 - Retirements -- First mortgage bonds (100,000) (404,000) Other long-term debt (78,725) (235,000) Preferred stock (383) (35,980) Payment of preferred stock dividends (508) (707) Payment of common stock dividends (412,700) (402,300) Other (87,848) (29,500) ---------------- --------------- Net cash used for financing activities (271,482) (592,900) ---------------- --------------- Net Change in Cash and Cash Equivalents 8,667 33,060 Cash and Cash Equivalents at Beginning of Period 34,660 16,272 ---------------- --------------- Cash and Cash Equivalents at End of Period $ 43,327 $ 49,332 ================ =============== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $169,221 $191,792 Income taxes (net of refunds) $195,055 $210,944 The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
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GEORGIA POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2000 At December 31, Assets (Unaudited) 1999 ------------------- -------------------- (in thousands) Current Assets: Cash and cash equivalents $ 43,327 $ 34,660 Receivables -- Customer accounts receivable 524,431 401,773 Under recovered retail fuel clause revenue 149,399 36,388 Other accounts and notes receivable 112,548 102,544 Affiliated companies 10,854 16,006 Accumulated provision for uncollectible accounts (5,100) (7,000) Fossil fuel stock, at average cost 100,446 126,298 Materials and supplies, at average cost 259,181 253,894 Other 61,180 63,990 ------------------- -------------------- Total current assets 1,256,266 1,028,553 ------------------- -------------------- Property, Plant, and Equipment: In service 16,336,967 15,798,624 Less accumulated provision for depreciation 6,864,909 6,538,574 ------------------- -------------------- 9,472,058 9,260,050 Nuclear fuel, at amortized cost 112,867 119,288 Construction work in progress 505,686 425,975 ------------------- -------------------- Total property, plant, and equipment 10,090,611 9,805,313 ------------------- -------------------- Other Property and Investments: Equity investments in unconsolidated subsidiaries 28,642 25,024 Nuclear decommissioning trusts 406,377 371,914 Other 32,097 33,766 ------------------- -------------------- Total other property and investments 467,116 430,704 ------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 572,019 590,893 Prepaid pension costs 188,685 145,801 Debt expense, being amortized 54,424 55,824 Premium on reacquired debt, being amortized 175,578 99,331 Other 119,836 120,441 ------------------- -------------------- Total deferred charges and other assets 1,110,542 1,012,290 ------------------- -------------------- Total Assets $12,924,535 $12,276,860 =================== ==================== The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
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GEORGIA POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2000 At December 31, Liabilities and Stockholder's Equity (Unaudited) 1999 ------------------- -------------------- (in thousands) Current Liabilities: Securities due within one year $ 1,524 $155,772 Notes payable and commercial paper 397,399 636,241 Accounts payable -- Affiliated 88,966 76,591 Other 307,887 346,785 Customer deposits 77,605 74,695 Taxes accrued -- Income taxes 166,758 7,914 Other 145,769 127,414 Interest accrued 77,896 58,665 Vacation pay accrued 37,927 38,143 Other 100,231 153,767 ------------------- -------------------- Total current liabilities 1,401,962 1,675,987 ------------------- -------------------- Long-term debt 3,042,476 2,688,358 ------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 2,177,256 2,202,565 Deferred credits related to income taxes 253,124 267,083 Accumulated deferred investment tax credits 355,982 367,114 Employee benefits provisions 193,211 181,529 Other 376,672 151,812 ------------------- -------------------- Total deferred credits and other liabilities 3,356,245 3,170,103 ------------------- -------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding company junior subordinated notes 789,250 789,250 ------------------- -------------------- Preferred stock 14,569 14,952 ------------------- -------------------- Common Stockholder's Equity Common stock, without par value-- Authorized - 15,000,000 shares Outstanding - 7,761,500 shares 344,250 344,250 Paid-in capital 2,084,782 1,815,983 Premium on preferred stock 40 40 Retained earnings 1,890,961 1,777,937 ------------------- -------------------- Total common stockholder's equity 4,320,033 3,938,210 ------------------- -------------------- Total Liabilities and Stockholder's Equity $12,924,535 $12,276,860 =================== ==================== The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
35 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 2000 vs. THIRD QUARTER 1999 AND YEAR-TO-DATE 2000 vs. YEAR-TO-DATE 1999 RESULTS OF OPERATIONS Earnings GEORGIA's net income after dividends on preferred stock for the third quarter and year-to-date 2000 was $283.5 million and $525.7 million, respectively, compared to $296.4 million and $526.5 million for the corresponding periods in 1999. Earnings decreased during the third quarter due primarily to lower retail revenues excluding fuel revenues, which generally represent the direct recovery of fuel expense and do not affect net income. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Retail sales..................................... $70,240 5.4 $222,439 7.1 Sales for resale - non-affiliates............... 15,876 16.4 26,059 13.5 Sales for resale - affiliates.................... (6,600) (15.6) 14,165 21.9 Fuel expense..................................... 21,143 7.1 85,660 12.0 Purchased power - non-affiliates................. 68,715 76.1 117,345 68.9 Purchased power - affiliates..................... 10,102 25.9 799 0.6 Depreciation and amortization.................... 3,873 2.8 63,719 15.5
Retail sales. Retail sales revenue increased for the third quarter and year-to-date 2000 due primarily to higher fuel revenues, which generally do not affect net income. Non-fuel revenues for the third quarter 2000 decreased $22.2 million primarily due to changes in pricing for large commercial and industrial customers partially offset by increased sales of 1.1%. Year-to-date 2000 non-fuel revenues increased by $54.4 million primarily due to increased energy sales of 4.2% partially offset by changes in pricing, as mentioned above. Sales for resale - non-affiliates. The third quarter and year-to-date 2000 increases in these sales to non-affiliates resulted from higher demand for energy by non-affiliates. These transactions did not have a significant impact on earnings. Sales for resale - affiliates and Purchased power - affiliates. Revenues from sales for resale to affiliated companies, as well as purchases of energy, within the SOUTHERN system will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions did not have a significant impact on earnings. 36 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Fuel expense. Increased generation from fossil-fueled plants to meet higher energy demands at a time of increased natural gas and oil prices resulted in higher fuel expense for the third quarter and year-to-date 2000 when compared to the same periods in 1999. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on earnings. Purchased power from non-affiliates. For the third quarter and year-to-date 2000, this expense increased due primarily to increased demand for energy as well as the drought in GEORGIA's service area, and increased prices for natural gas and oil. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues. Depreciation and amortization. For the third quarter and year-to-date 2000, the increases in this expense were attributable to accelerated amortization and depreciation required by the three-year rate order which became effective January 1, 1999 and increased in-service property, plant and equipment. See Note (F) in the "Notes to the Condensed Financial Statements" herein for further details regarding the retail rate order. 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 including weather, regulatory matters and energy sales. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, GEORGIA 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, 1999, GEORGIA began operating under a new three-year retail rate order. Under the order, GEORGIA's earnings are evaluated against a retail return on common equity range of 10% to 12.5%. In compliance with the order, retail rates were decreased by $24 million on an annual basis effective January 1, 2000. Reference is made to Note (F) in the "Notes to the Condensed Financial Statements" herein and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form 10-K for additional information. In December 1999, the FERC issued its final rule on RTOs and on October 16, 2000, SOUTHERN and its five integrated Southeast utilities filed with the FERC a proposal for the creation of a RTO. The proposal calls for the formation of a for-profit company that would have control of the bulk power transmission system of participating utilities, which will have the option to divest, sell or lease their assets to the RTO. If the FERC accepts the proposal as filed, the creation of the RTO is not expected to have a material impact on the financial statements of GEORGIA. However, the ultimate outcome of this matter is uncertain. For more information on the FERC's rule, reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form 10-K. 37 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Compliance costs related to the Clean Air Act and other environmental issues could affect earnings. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Issues" of GEORGIA in the Form 10-K. Reference is made to Notes (B), (C), (D), (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. New Accounting Standard In June 2000, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 138, an amendment of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that certain derivative instruments be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in the fair value be recognized currently in earnings unless specific hedge accounting criteria are met. GEORGIA intends to adopt the provisions of SFAS No. 133 on January 1, 2001. Substantially all of GEORGIA's bulk energy purchases and sales meet the definition of a derivative under SFAS No. 133. In most cases, such transactions will meet the normal purchase and sale exception and the related contracts will continue to be accounted for under the accrual method. However, a limited number of contracts will be required to be accounted for as derivatives in accordance with SFAS No. 133. Upon adoption, certain of these contracts will qualify as cash flow hedges, resulting in the deferral of related gains and losses in other comprehensive income until the hedged transactions occur. Any ineffectiveness will be recognized currently in net income. Management continues to assess the effects of adopting SFAS No. 133, but currently expects the impact to be immaterial to GEORGIA's financial statements. The application of SFAS No. 133 is still evolving and further guidance from the FASB is expected. When established, this further guidance may have additional impacts on GEORGIA's financial statements. FINANCIAL CONDITION Overview The major change in GEORGIA's financial condition during the first nine months of 2000 was the addition of approximately $728.1 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations and capital contributions from SOUTHERN. See GEORGIA's Condensed Statements of Cash Flows for further details. Financing Activities During the first nine months of 2000, maturities of first mortgage bonds by GEORGIA totaled $100 million. In February 2000, GEORGIA issued $300 million of floating rate senior notes due February 22, 2002. The proceeds of the sale were used to repay a portion of GEORGIA's outstanding short-term indebtedness. In August 2000, GEORGIA sold, through public authorities, $78.725 million of 4.53% pollution control revenue bonds due September 1, 2030. The initial interest rate is effective through March 1, 2002, at which time the 38 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION bonds will bear interest at either a variable rate or a new fixed rate. The proceeds were used to refund $28.725 million aggregate principal amount of 6 5/8% pollution control revenue bonds which were called for redemption in October 2000 and $50 million aggregate principal amount of 4 3/8% pollution control revenue bonds which matured on November 1, 2000. 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. 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, 2000 approximately $43.3 million of cash and cash equivalents and approximately $1.8 billion of unused credit arrangements with banks. The credit arrangements provide liquidity support to GEORGIA's obligations with respect to variable rate pollution control bonds and its commercial paper program. At September 30, 2000, GEORGIA had outstanding $397.4 million of commercial paper. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 39 Arthur Andersen 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, 2000, and the related condensed statements of income for the three-month and nine-month periods ended September 30, 2000 and 1999 and cash flows for the nine-month periods ended September 30, 2000 and 1999. 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 auditing standards generally accepted in the United States, 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 accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the balance sheet of GEORGIA POWER COMPANY as of December 31, 1999 (not presented herein), and, in our report dated February 16, 2000, 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, 1999, 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 7, 2000 40 GULF POWER COMPANY 41
GULF POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 ---------------- ---------------- --------------- --------------- (in thousands) (in thousands) Operating Revenues: Retail sales $169,975 $160,196 $429,142 $395,691 Sales for resale -- Non-affiliates 21,480 19,698 49,067 45,824 Affiliates 18,602 25,485 47,835 46,166 Other revenues 22,476 12,885 27,107 31,904 ---------------- ---------------- --------------- --------------- Total operating revenues 232,533 218,264 553,151 519,585 ---------------- ---------------- --------------- --------------- Operating Expenses: Operation -- Fuel 63,767 64,223 162,430 156,184 Purchased power -- Non-affiliates 40,144 26,009 62,539 39,303 Affiliates 5,217 3,309 11,953 9,984 Other 27,671 29,055 84,838 83,977 Maintenance 10,527 10,203 40,049 42,699 Depreciation and amortization 16,489 16,198 49,299 48,310 Taxes other than income taxes 16,104 14,838 42,917 39,781 ---------------- ---------------- --------------- --------------- Total operating expenses 179,919 163,835 454,025 420,238 ---------------- ---------------- --------------- --------------- Operating Income 52,614 54,429 99,126 99,347 Other Income (Expense): Interest income 164 427 891 928 Other, net (1,731) 3 (3,169) (900) ---------------- ---------------- --------------- --------------- Earnings Before Interest and Income Taxes 51,047 54,859 96,848 99,375 ---------------- ---------------- --------------- --------------- Interest Charges and Other: Interest on long-term debt 5,680 5,598 17,026 15,580 Interest on notes payable 662 649 2,445 2,005 Amortization of debt discount, premium and expense, net 508 499 1,543 1,488 Other interest charges, net 200 223 600 834 Distributions on preferred securities of subsidiary 1,550 1,550 4,650 4,650 ---------------- ---------------- --------------- --------------- Total interest charges and other, net 8,600 8,519 26,264 24,557 ---------------- ---------------- --------------- --------------- Earnings Before Income Taxes 42,447 46,340 70,584 74,818 Income taxes 15,955 17,704 26,404 28,049 ---------------- ---------------- --------------- --------------- Net Income 26,492 28,636 44,180 46,769 Dividends on Preferred Stock 54 54 162 162 ---------------- ---------------- --------------- --------------- Net Income After Dividends on Preferred Stock $26,438 $28,582 $44,018 $46,607 ================ ================ =============== =============== The accompanying notes as they relate to GULF are an integral part of these condensed statements.
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GULF POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 2000 1999 ---------------- ---------------- (in thousands) Operating Activities: Net income $44,180 $46,769 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 52,317 51,368 Deferred income taxes and investment tax credits, net (3,492) (3,133) Other, net 7,925 4,803 Changes in certain current assets and liabilities -- Receivables, net (3,443) (14,063) Fossil fuel stock 11,403 (6,585) Materials and supplies 1,508 (1,934) Accounts payable 3,635 (8,403) Other 13,792 24,007 ---------------- ---------------- Net cash provided from operating activities 127,825 92,829 ---------------- ---------------- Investing Activities: Gross property additions (67,119) (48,442) Other (9,832) (12,753) ---------------- ---------------- Net cash used for investing activities (76,951) (61,195) ---------------- ---------------- Financing Activities: Increase (decrease) in notes payable, net (27,500) (31,500) Proceeds -- Other long-term debt - 49,950 Capital contributions from parent company 8,683 - Retirements -- Other long-term debt (1,442) - Payment of preferred stock dividends (162) (162) Payment of common stock dividends (44,300) (45,400) Other (22) (233) ---------------- ---------------- Net cash used for financing activities (64,743) (27,345) ---------------- ---------------- Net Change in Cash and Cash Equivalents (13,869) 4,289 Cash and Cash Equivalents at Beginning of Period 15,753 969 ---------------- ---------------- Cash and Cash Equivalents at End of Period $1,884 $5,258 ================ ================ Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $25,851 $20,197 Income taxes (net of refunds) 20,222 12,754 The accompanying notes as they relate to GULF are an integral part of these condensed statements.
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GULF POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2000 At December 31, Assets (Unaudited) 1999 ---------------- -------------------- (in thousands) Current Assets: Cash and cash equivalents $ 1,884 $ 15,753 Receivables -- Customer accounts receivable 64,141 55,108 Other accounts and notes receivable 3,271 4,325 Affiliated companies 3,126 7,104 Accumulated provision for uncollectible accounts (1,584) (1,026) Fossil fuel stock, at average cost 18,466 29,869 Materials and supplies, at average cost 28,580 30,088 Regulatory clauses under recovery 15,687 11,611 Other 5,833 5,354 ---------------- -------------------- Total current assets 139,404 158,186 ---------------- -------------------- Property, Plant, and Equipment: In service 1,884,030 1,853,664 Less accumulated provision for depreciation 864,214 821,970 ---------------- -------------------- 1,019,816 1,031,694 Construction work in progress 62,956 34,164 ---------------- -------------------- Total property, plant, and equipment 1,082,772 1,065,858 ---------------- -------------------- Other Property and Investments 4,485 1,481 ---------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 16,234 25,264 Prepaid pension costs 22,051 17,734 Debt expense, being amortized 2,431 2,526 Premium on reacquired debt, being amortized 16,234 17,360 Other 12,967 20,086 ---------------- -------------------- Total deferred charges and other assets 69,917 82,970 ---------------- -------------------- Total Assets $1,296,578 $1,308,495 ================ ==================== The accompanying notes as they relate to GULF are an integral part of these condensed statements.
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GULF POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2000 At December 31, Liabilities and Stockholder's Equity (Unaudited) 1999 ---------------- -------------------- (in thousands) Current Liabilities: Notes payable $ 27,500 $ 55,000 Accounts payable -- Affiliated 16,433 14,878 Other 19,755 22,581 Customer deposits 13,375 12,778 Taxes accrued -- Income taxes 14,461 4,889 Other 17,637 7,707 Interest accrued 7,344 9,255 Vacation pay accrued 4,199 4,199 Other 5,209 4,961 ---------------- -------------------- Total current liabilities 125,913 136,248 ---------------- -------------------- Long-term debt 366,307 367,449 ---------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 161,015 162,776 Deferred credits related to income taxes 39,039 49,693 Accumulated deferred investment tax credits 26,272 27,712 Employee benefits provisions 33,988 31,735 Other 24,094 21,333 ---------------- -------------------- Total deferred credits and other liabilities 284,408 293,249 ---------------- -------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding company junior subordinated notes 85,000 85,000 ---------------- -------------------- Preferred stock 4,236 4,236 ---------------- -------------------- Common Stockholder's Equity Common stock, without par value-- Authorized - 992,717 shares Outstanding - 992,717 shares 38,060 38,060 Paid-in capital 229,937 221,254 Premium on preferred stock 12 12 Retained earnings 162,705 162,987 ---------------- -------------------- Total common stockholder's equity 430,714 422,313 ---------------- -------------------- Total Liabilities and Stockholder's Equity $1,296,578 $1,308,495 ================ ==================== The accompanying notes as they relate to GULF are an integral part of these condensed statements.
45 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 2000 vs. THIRD QUARTER 1999 AND YEAR-TO-DATE 2000 vs. YEAR-TO-DATE 1999 RESULTS OF OPERATIONS Earnings GULF's net income after dividends on preferred stock for the third quarter and year-to-date 2000 was $26.4 million and $44 million, respectively, compared to $28.6 million and $46.6 million for the same periods in 1999. Earnings were down for both the current quarter and year-to-date 2000 primarily due to expenses related to the discontinuance of GULF's appliance sales division. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Retail sales..................................... $9,779 6.1 $33,451 8.5 Sales for resale - non-affiliates................ 1,782 9.0 3,243 7.1 Sales for resale - affiliates.................... (6,883) (27.0) 1,669 3.6 Other revenues................................... 9,591 74.4 (4,797) (15.0) Purchased power - non-affiliates................. 14,135 54.3 23,236 59.1 Purchased power - affiliates..................... 1,908 57.7 1,969 19.7 Taxes other than income taxes.................... 1,266 8.5 3,136 7.9 Other, net....................................... (1,734) N/M (2,269) (252.1) Interest on long-term debt....................... 82 1.5 1,446 9.3
N/M - Not meaningful Retail sales. Excluding the recovery of fuel expense and certain other expenses that do not affect net income, retail sales increased 2.1% during the third quarter and 3.9% year-to-date 2000 when compared to the same periods of 1999. The main reason for the increase in retail energy sales is the growth in the number of residential customers served by GULF. Sales for resale - non-affiliates. In the third quarter and year-to-date 2000, increased unit power energy sales were the primary cause of the increases in sales for resale to non-affiliates when compared to the same periods in 1999. This energy is usually sold at variable cost and has no significant impact on net income. 46 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Sales for resale - affiliates and Purchased power - affiliates. Revenues from sales for resale to affiliated companies, as well as purchases of energy, within the SOUTHERN 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 revenues. The third quarter 2000 increase in other revenues is primarily attributed to higher revenues associated with the fuel, conservation and capacity clauses. For the year-to-date 2000, these revenues were down due mainly to a decrease in fuel, conservation and capacity clause revenues. The changes in these revenues were a result of adjustments to reflect differences between recoverable costs and the amounts actually reflected in current rates. The recovery provisions generally equal the related expenses and have no material effect on net income. Purchased power from non-affiliates. The increases during the third quarter and year-to-date 2000 are primarily attributed to an increase in capacity and energy purchases to meet territorial and non-affiliated third party demand. These transactions had no significant effect on net income. Taxes other than income taxes. Third quarter and year-to-date 2000 increases result from higher franchise fees and gross receipt taxes related to increases in GULF's billed revenues. These collections are also included in retail sales and other revenues and have no impact on earnings. Other, net. Decreases for the third quarter and year-to-date 2000, when compared to the corresponding periods in 1999, result from expenses related to the discontinuance of GULF's appliance sales division. Interest on long-term debt. The year-to-date 2000 increase, when compared to the corresponding period in 1999, was mainly due to the issuance of senior notes during the last half of 1999. 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 weather to 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, GULF is positioning the business to meet the challenge of increasing competition. 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. 47 GULF 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 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. On November 4, 1999, the Florida PSC approved GULF's plan to reduce its authorized rate of return, reduce retail base rates and share revenues with its customers. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GULF in the Form 10-K. In December 1999, the FERC issued its final rule on RTOs and on October 16, 2000, SOUTHERN and its five integrated Southeast utilities filed with the FERC a proposal for the creation of a RTO. The proposal calls for the formation of a for-profit company that would have control of the bulk power transmission system of participating utilities, which will have the option to divest, sell or lease their assets to the RTO. If the FERC accepts the proposal as filed, the creation of the RTO is not expected to have a material impact on the financial statements of GULF. However, the ultimate outcome of this matter is uncertain. For more information on the FERC's rule, reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GULF in the Form 10-K. Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Protection Agency Litigation" and Note 3 to the financial statements of GULF in the Form 10-K for information on EPA litigation. Reference is made to Notes (B) and (D) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. New Accounting Standard In June 2000, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 138, an amendment of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that certain derivative instruments be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in the fair value be recognized currently in earnings unless specific hedge accounting criteria are met. GULF intends to adopt the provisions of SFAS No. 133 on January 1, 2001. Substantially all of GULF's bulk energy purchases and sales meet the definition of a derivative under SFAS No. 133. In most cases, such transactions will meet the normal purchase and sale exception and the related contracts will continue to be accounted for under the accrual method. However, a limited number of contracts will be required to be accounted for as derivatives in accordance with SFAS No. 133. Upon adoption, certain of these contracts will qualify as cash flow hedges, resulting in the deferral of related gains and losses in other comprehensive income until the hedged transactions occur. Any ineffectiveness will be recognized currently in net income. 48 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Management continues to assess the effects of adopting SFAS No. 133, but currently expects the impact to be immaterial to GULF's financial statements. The application of SFAS No. 133 is still evolving and further guidance from the FASB is expected. When established, this further guidance may have additional impacts on GULF's financial statements. FINANCIAL CONDITION Overview Major changes in GULF's financial condition during the first nine months of 2000 included the addition of approximately $67.1 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 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. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GULF under "Capital Requirements for Construction" and "Environmental Matters" in the Form 10-K for a description of GULF's capital requirements for its construction program, environmental compliance efforts and maturing 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. See Item 1 - - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, GULF had at September 30, 2000 approximately $1.9 million of cash and cash equivalents and $61.5 million of unused committed lines of credit with banks in addition to $61.9 million of liquidity support for GULF's obligations with respect to variable rate pollution control bonds. At September 30, 2000, GULF had $27.5 million outstanding of notes payable to banks. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 49 MISSISSIPPI POWER COMPANY 50
MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 ---------------- ---------------- ---------------- --------------- (in thousands) (in thousands) Operating Revenues: Retail sales $159,862 $141,519 $393,573 $353,584 Sales for resale -- Non-affiliates 48,058 43,194 110,407 102,501 Affiliates 8,022 13,154 16,906 17,446 Other revenues 4,177 3,727 9,966 9,088 ---------------- ---------------- ---------------- --------------- Total operating revenues 220,119 201,594 530,852 482,619 ---------------- ---------------- ---------------- --------------- Operating Expenses: Operation -- Fuel 56,878 54,224 146,451 132,452 Purchased power -- Non-affiliates 32,578 26,457 49,738 35,964 Affiliates 12,948 8,609 36,003 25,008 Other 27,531 30,479 82,216 85,209 Maintenance 10,732 5,741 40,916 31,607 Depreciation and amortization 12,537 11,884 37,758 35,453 Taxes other than income taxes 12,972 12,591 37,104 35,906 ---------------- ---------------- ---------------- --------------- Total operating expenses 166,176 149,985 430,186 381,599 ---------------- ---------------- ---------------- --------------- Operating Income 53,943 51,609 100,666 101,020 Other Income: Interest income 117 53 257 203 Other, net 530 704 1,321 1,925 ---------------- ---------------- ---------------- --------------- Earnings Before Interest and Income Taxes 54,590 52,366 102,244 103,148 ---------------- ---------------- ---------------- --------------- Interest Charges and Other: Interest on long-term debt 6,432 5,072 18,260 15,116 Interest on notes payable 535 751 2,204 2,037 Amortization of debt discount, premium and expense, net 366 358 1,089 1,075 Other interest charges, net (587) 581 (364) 759 Distributions on preferred securities of subsidiary 636 699 2,034 2,097 ---------------- ---------------- ---------------- --------------- Total interest charges and other, net 7,382 7,461 23,223 21,084 ---------------- ---------------- ---------------- --------------- Earnings Before Income Taxes 47,208 44,905 79,021 82,064 Income taxes 17,943 17,089 29,795 31,095 ---------------- ---------------- ---------------- --------------- Net Income 29,265 27,816 49,226 50,969 Dividends on Preferred Stock 503 503 1,510 1,510 ---------------- ---------------- ---------------- --------------- Net Income After Dividends on Preferred Stock $28,762 $ 27,313 $47,716 $ 49,459 ================ ================ ================ =============== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
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MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 2000 1999 -------------- -------------- (in thousands) Operating Activities: Net income $49,226 $50,969 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 41,118 38,592 Deferred income taxes and investment tax credits, net 797 3,853 Other, net 6,502 (6,115) Changes in certain current assets and liabilities -- Receivables, net (20,436) (28,547) Fossil fuel stock 9,821 (4,013) Materials and supplies (950) (1,362) Accounts payable (8,091) (6,018) Other 17,887 19,737 -------------- -------------- Net cash provided from operating activities 95,874 67,096 -------------- -------------- Investing Activities: Gross property additions (60,282) (52,099) Other (10,602) (2,827) -------------- -------------- Net cash used for investing activities (70,884) (54,926) -------------- -------------- Financing Activities: Increase (decrease) in notes payable, net (40,500) 30,200 Proceeds -- Other long-term debt 100,000 - Capital contributions from parent company 9,770 - Retirements -- Other long-term debt (51,176) (184) Payment of preferred stock dividends (1,510) (1,510) Payment of common stock dividends (41,100) (41,600) Other (465) (242) -------------- -------------- Net cash used for financing activities (24,981) (13,336) -------------- -------------- Net Change in Cash and Cash Equivalents 9 (1,166) Cash and Cash Equivalents at Beginning of Period 173 1,327 -------------- -------------- Cash and Cash Equivalents at End of Period $182 $161 ============== ============== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $20,679 $19,310 Income taxes (net of refunds) $3,425 $7,207 The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
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MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2000 At December 31, Assets (Unaudited) 1999 -------------------- -------------------- (in thousands) Current Assets: Cash and cash equivalents $ 182 $ 173 Receivables -- Customer accounts receivable 58,251 40,233 Under recovered regulatory clauses 33,467 21,041 Other accounts and notes receivable 19,401 23,490 Affiliated companies 10,062 16,097 Accumulated provision for uncollectible accounts (604) (697) Fossil fuel stock, at average cost 15,976 25,797 Materials and supplies, at average cost 21,588 20,638 Other 9,265 10,013 -------------------- -------------------- Total current assets 167,588 156,785 -------------------- -------------------- Property, Plant, and Equipment: In service 1,661,517 1,601,399 Less accumulated provision for depreciation 658,615 626,841 -------------------- -------------------- 1,002,902 974,558 Construction work in progress 63,473 68,721 -------------------- -------------------- Total property, plant, and equipment 1,066,375 1,043,279 -------------------- -------------------- Other Property and Investments 2,290 1,389 -------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 14,097 21,557 Prepaid pension costs 5,546 2,488 Debt expense, being amortized 4,685 4,355 Premium on reacquired debt, being amortized 7,309 8,154 Other 8,650 13,129 -------------------- -------------------- Total deferred charges and other assets 40,287 49,683 -------------------- -------------------- Total Assets $1,276,540 $1,251,136 ==================== ==================== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
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MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2000 At December 31, Liabilities and Stockholders' Equity (Unaudited) 1999 -------------------- -------------------- (in thousands) Current Liabilities: Securities due within one year $ 30,020 $ 30,020 Notes payable 17,000 57,500 Accounts payable -- Affiliated 13,558 17,002 Other 33,560 43,105 Customer deposits 4,878 3,749 Taxes accrued -- Income taxes 35,899 6,865 Other 29,876 35,534 Interest accrued 5,940 6,733 Vacation pay accrued 5,218 5,218 Other 6,161 7,497 -------------------- -------------------- Total current liabilities 182,110 213,223 -------------------- -------------------- Long-term debt 370,712 321,802 -------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 135,527 139,564 Deferred credits related to income taxes 26,213 34,765 Accumulated deferred investment tax credits 23,785 24,695 Employee benefits provisions 34,909 34,268 Workforce reduction plan 10,113 11,272 Other 18,008 12,770 -------------------- -------------------- Total deferred credits and other liabilities 248,555 257,334 -------------------- -------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trust holding company junior subordinated notes 35,000 35,000 -------------------- -------------------- Preferred stock 31,809 31,809 -------------------- -------------------- Common Stockholder's Equity Common stock equity -- Authorized - 1,130,000 shares Outstanding - 1,121,000 shares Par value 37,691 37,691 Paid-in capital 191,272 181,502 Premium on preferred stock 326 326 Retained earnings 179,065 172,449 -------------------- -------------------- Total common stockholder's equity 408,354 391,968 -------------------- -------------------- Total Liabilities and Stockholder's Equity $1,276,540 $1,251,136 ==================== ==================== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
54 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 2000 vs. THIRD QUARTER 1999 AND YEAR-TO-DATE 2000 vs. YEAR-TO-DATE 1999 RESULTS OF OPERATIONS Earnings MISSISSIPPI's net income after dividends on preferred stock for the third quarter and year-to-date 2000 was $28.8 million and $47.7 million, respectively, compared to $27.3 million and $49.5 million for the corresponding periods of 1999. Earnings for the third quarter 2000 were positively impacted by the $18.5 million, or 9.2%, increase in operating revenues which were partially offset by increased operating expenses of $16.2 million, or 10.8%. Despite higher operating revenues, year-to-date 2000 earnings were down due to an even greater increase in operating expenses. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Retail sales..................................... $18,343 13.0 $39,989 11.3 Sales for resale - non-affiliates................ 4,864 11.3 7,906 7.7 Sales for resale - affiliates.................... (5,132) (39.0) (540) (3.1) Fuel expense..................................... 2,654 4.9 13,999 10.6 Purchased power - non-affiliates................. 6,121 23.1 13,774 38.3 Purchased power - affiliates..................... 4,339 50.4 10,995 44.0 Other operation expense.......................... (2,948) (9.7) (2,993) (3.5) Maintenance expense.............................. 4,991 86.9 9,309 29.5 Depreciation and amortization expense............ 653 5.5 2,305 6.5 Interest on long-term debt....................... 1,360 26.8 3,144 20.8 Other interest charges, net...................... (1,168) (201.0) (1,123) (148.0)
Retail sales. The increases in retail sales revenue for the current quarter and year-to-date 2000 when compared to the corresponding periods in 1999 reflect increased total retail energy sales of 1.5% and 5.2%, respectively. These increases for the quarter and year-to-date 2000 are primarily due to growth in the number of residential and commercial customers. Sales for resale - non-affiliates. Third quarter and year-to-date 2000 increases reflect the continued economic growth in the areas served by rural cooperatives in Mississippi. Sales for resale - affiliates and Purchased power - affiliates. Revenues from sales for resale to affiliated companies, as well as purchases of energy, within the SOUTHERN 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. 55 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Fuel expense. Fuel expense increased during the third quarter and year-to-date 2000 due mainly to the higher unit cost of fuel when compared to the same periods in 1999. Purchased power - non-affiliates. During the third quarter and year-to-date 2000, purchased power from non-affiliates increased as a result of increased demand for energy when compared to the corresponding periods of 1999. These transactions do not have a significant impact on net income. Other operation expense. The decreases for the third quarter and year-to-date 2000 primarily represent reductions in sales and production expenses. Maintenance expense. For the third quarter and year-to-date 2000, these costs increased primarily due to scheduled maintenance performed on steam and other power generation facilities. Depreciation and amortization expense. This item increased for the current quarter and year-to-date 2000 when compared to the same periods in 1999 as a result of additional distribution facilities and a new higher depreciation rate approved by the Mississippi PSC. Interest on long-term debt. These interest payments were higher in the third quarter and year-to-date 2000 due mainly to higher interest rates being charged on a variable rate long-term debt outstanding. Other interest charges, net. The third quarter and year-to-date 2000 decreases, when compared to the corresponding periods in 1999, are primarily attributed to lower interest related to tax assessments. 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 weather to 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. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI in the Form 10-K. See Note (H) in the "Notes to the Condensed Financial Statements" herein for information regarding an agreement between MISSISSIPPI and certain of its wholesale customers to reduce rates and Note (I) for information on ratemaking and the allocation of costs between wholesale and retail customers for both new and existing generating facilities. 56 MISSISSIPPI 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, MISSISSIPPI 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. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be recovered. MISSISSIPPI's 2000 ECO Plan filing was approved, as filed, by the Mississippi PSC on March 22, 2000 and resulted in a slight decrease in customer prices. 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. In December 1999, the FERC issued its final rule on RTOs and on October 16, 2000, SOUTHERN and its five integrated Southeast utilities filed with the FERC a proposal for the creation of a RTO. The proposal calls for the formation of a for-profit company that would have control of the bulk power transmission system of participating utilities, which will have the option to divest, sell or lease their assets to the RTO. If the FERC accepts the proposal as filed, the creation of the RTO is not expected to have a material impact on the financial statements of MISSISSIPPI. However, the ultimate outcome of this matter is uncertain. For more information on the FERC's rule, reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI in the Form 10-K. Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of MISSISSIPPI in the Form 10-K for information on EPA litigation. In May 2000, the Mississippi PSC ordered that its docket reviewing restructuring of the electric industry in the State of Mississippi be suspended. The Mississippi PSC found that retail competition may not be in the public interest at this time and ordered that no further formal hearings would be held on this subject. It found that the current regulatory structure had produced reliable low cost power and "should not be changed without clear and convincing demonstration that change would be in the public interest." The Mississippi PSC will continue to monitor retail and wholesale restructuring activities throughout the United States and reserved "its right to order further formal hearings on the matter should new evidence demonstrate that retail competition would be in the public interest and all customers could receive a reduction in the total cost of their electric service." Reference is made to Notes (B), (D), (H) and (I) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. New Accounting Standard In June 2000, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 138, an amendment of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that certain derivative instruments be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in the fair value be recognized currently in earnings unless specific hedge accounting criteria are met. MISSISSIPPI intends to adopt the provisions of SFAS No. 133 on January 1, 2001. 57 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Substantially all of MISSISSIPPI's bulk energy purchases and sales meet the definition of a derivative under SFAS No. 133. In most cases, such transactions will meet the normal purchase and sale exception and the related contracts will continue to be accounted for under the accrual method. However, a limited number of contracts will be required to be accounted for as derivatives in accordance with SFAS No. 133. Upon adoption, certain of these contracts will qualify as cash flow hedges, resulting in the deferral of related gains and losses in other comprehensive income until the hedged transactions occur. Any ineffectiveness will be recognized currently in net income. Management continues to assess the effects of adopting SFAS No. 133, but currently expects the impact to be immaterial to MISSISSIPPI's financial statements. The application of SFAS No. 133 is still evolving and further guidance from the FASB is expected. When established, this further guidance may have additional impacts on MISSISSIPPI's financial statements. FINANCIAL CONDITION Overview Major changes in MISSISSIPPI's financial condition during the first nine months of 2000 included the addition of approximately $60.3 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations and capital contributions from SOUTHERN. See MISSISSIPPI's Condensed Statements of Cash Flows for further details. Financing Activities In March 2000, MISSISSIPPI issued $100 million of floating rate senior notes due March 28, 2002. The proceeds were used to prepay bank loans of $45 million maturing in November 2001 and $5 million maturing in October 2002. The balance was used to repay a portion of MISSISSIPPI's outstanding short-term indebtedness. MISSISSIPPI plans to continue, to the extent possible, a program to retire higher-cost debt 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" and Note 3 to the financial statements 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. 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. See Item 1 - - BUSINESS - "Financing Programs" in the Form 10-K for additional information. 58 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, 2000 approximately $182 thousand of cash and cash equivalents and approximately $82.3 million of unused committed credit arrangements with banks. At September 30, 2000, MISSISSIPPI had short-term notes payable outstanding of $17 million. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 59 SAVANNAH ELECTRIC AND POWER COMPANY 60
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 ---------------- ---------------- --------------- --------------- (in thousands) (in thousands) Operating Revenues: Retail sales $94,979 $87,613 $215,087 $193,226 Sales for resale -- Non-affiliates 1,973 1,184 3,539 2,416 Affiliates 1,297 2,283 4,051 3,227 Other revenues 600 769 1,342 1,770 ---------------- ---------------- --------------- --------------- Total operating revenues 98,849 91,849 224,019 200,639 ---------------- ---------------- --------------- --------------- Operating Expenses: Operation -- Fuel 19,676 20,998 46,186 38,542 Purchased power -- Non-affiliates 14,510 8,842 22,103 12,295 Affiliates 12,518 9,184 29,138 28,637 Other 13,538 13,460 38,186 37,344 Maintenance 4,653 3,016 14,797 12,214 Depreciation and amortization 6,309 5,950 18,927 17,893 Taxes other than income taxes 3,585 3,640 9,939 9,467 ---------------- ---------------- --------------- --------------- Total operating expenses 74,789 65,090 179,276 156,392 ---------------- ---------------- --------------- --------------- Operating Income 24,060 26,759 44,743 44,247 Other Income (Expense): Interest income 51 62 130 125 Other, net (124) (489) (528) (764) ---------------- ---------------- --------------- --------------- Earnings Before Interest and Income Taxes 23,987 26,332 44,345 43,608 ---------------- ---------------- --------------- --------------- Interest Charges and Other: Interest on long-term debt 2,323 2,110 6,935 7,048 Interest on notes payable 666 334 1,700 532 Amortization of debt discount, premium and expense, net 241 241 722 709 Other interest charges, net (40) 722 33 780 Distributions on preferred securities of subsidiary 685 685 2,055 2,055 ---------------- ---------------- --------------- --------------- Total interest charges and other, net 3,875 4,092 11,445 11,124 ---------------- ---------------- --------------- --------------- Earnings Before Income Taxes 20,112 22,240 32,900 32,484 Income taxes 7,761 8,535 12,619 12,302 ---------------- ---------------- --------------- --------------- Net Income $ 12,351 $ 13,705 $ 20,281 $ 20,182 ================ ================ =============== =============== The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
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SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Nine Months Ended September 30, 2000 1999 ---------------- ---------------- (in thousands) Operating Activities: Net income $20,281 $20,182 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 20,161 19,027 Deferred income taxes and investment tax credits, net 235 1,881 Other, net 4,602 1,980 Changes in certain current assets and liabilities -- Receivables, net (22,257) (19,828) Fossil fuel stock 770 (2,450) Materials and supplies (802) (320) Accounts payable (266) 5,501 Other 4,006 6,261 ---------------- ---------------- Net cash provided from operating activities 26,730 32,234 ---------------- ---------------- Investing Activities: Gross property additions (20,325) (21,536) Other, net (2,504) (3,205) ---------------- ---------------- Net cash used for investing activities (22,829) (24,741) ---------------- ---------------- Financing Activities: Increase (decrease) in notes payable, net 15,800 26,100 Retirements -- First mortgage bonds - (15,800) Other long-term debt (374) (288) Payment of common stock dividends (18,300) (18,700) Other (12) 251 ---------------- ---------------- Net cash used for financing activities (2,886) (8,437) ---------------- ---------------- Net Change in Cash and Cash Equivalents 1,015 (944) Cash and Cash Equivalents at Beginning of Period 6,553 5,962 ---------------- ---------------- Cash and Cash Equivalents at End of Period $7,568 $5,018 ================ ================ Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $9,036 $10,126 Income taxes (net of refunds) 10,955 3,925 The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
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SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2000 At December 31, Assets (Unaudited) 1999 ------------------------ -------------------- (in thousands) Current Assets: Cash and cash equivalents $ 7,568 $ 6,553 Receivables -- Customer accounts receivable 34,637 20,752 Under recovered retail fuel clause revenue 29,911 21,089 Other accounts and notes receivable 2,860 3,505 Affiliated companies 1,500 1,195 Accumulated provision for uncollectible accounts (347) (237) Fossil fuel stock, at average cost 6,339 7,109 Materials and supplies, at average cost 9,204 8,402 Other 691 2,869 ------------------------ -------------------- Total current assets 92,363 71,237 ------------------------ -------------------- Property, Plant, and Equipment: In service 817,882 804,096 Less accumulated provision for depreciation 377,161 360,639 ------------------------ -------------------- 440,721 443,457 Construction work in progress 12,040 6,561 ------------------------ -------------------- Total property, plant, and equipment 452,761 450,018 ------------------------ -------------------- Other Property and Investments 2,035 1,506 ------------------------ -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 13,509 16,063 Cash surrender value of life insurance for deferred compensation plans 16,305 16,305 Debt expense, being amortized 3,041 3,155 Premium on reacquired debt, being amortized 7,778 8,385 Other 2,246 3,549 ------------------------ -------------------- Total deferred charges and other assets 42,879 47,457 ------------------------ -------------------- Total Assets $590,038 $570,218 ======================== ==================== The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
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SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS At September 30, 2000 At December 31, Liabilities and Stockholders' Equity (Unaudited) 1999 ------------------------ -------------------- (in thousands) Current Liabilities: Securities due within one year $ 30,711 $ 704 Notes payable 50,100 34,300 Accounts payable -- Affiliated 6,128 4,632 Other 7,851 11,118 Customer deposits 5,656 5,426 Taxes accrued -- Income taxes 1,835 3,046 Other 4,120 3,013 Interest accrued 4,489 3,237 Vacation pay accrued 2,206 2,142 Other 5,793 5,742 ------------------------ -------------------- Total current liabilities 118,889 73,360 ------------------------ -------------------- Long-term debt 116,766 147,147 ------------------------ -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 80,947 80,318 Deferred credits related to income taxes 17,073 19,687 Accumulated deferred investment tax credits 10,782 11,280 Deferred compensation plans 11,401 10,624 Employee benefits provisions 8,919 7,805 Other 8,445 5,150 ------------------------ -------------------- Total deferred credits and other liabilities 137,567 134,864 ------------------------ -------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding company junior subordinated notes 40,000 40,000 ------------------------ -------------------- Common Stockholder's Equity Common stock, par value $5 per share -- Authorized - 16,000,000 shares Outstanding - 10,844,635 shares Par value 54,223 54,223 Paid-in capital 9,776 9,787 Retained earnings 112,817 110,837 ------------------------ -------------------- Total common stockholder's equity 176,816 174,847 ------------------------ -------------------- Total Liabilities and Stockholder's Equity $590,038 $570,218 ======================== ==================== The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
64 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 2000 vs. THIRD QUARTER 1999 AND YEAR-TO-DATE 2000 vs. YEAR-TO-DATE 1999 RESULTS OF OPERATIONS Earnings SAVANNAH's net income for the third quarter and year-to-date 2000 was $12.4 million and $20.3 million, respectively, as compared to $13.7 million and $20.2 million for the corresponding periods of 1999. Earnings for the third quarter 2000 were down due primarily to an increase in maintenance expenses. Year-to-date 2000 earnings remained relatively flat reflecting an increase in operating revenues which was partially offset by increased maintenance expenses. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Retail sales..................................... $7,366 8.4 $21,861 11.3 Sales for resale - non-affiliates................ 789 66.6 1,123 46.5 Sales for resale - affiliates.................... (986) (43.2) 824 25.5 Fuel expense..................................... (1,322) (6.3) 7,644 19.8 Purchased power - non-affiliates................. 5,668 64.1 9,808 79.8 Purchased power - affiliates..................... 3,334 36.3 501 1.7 Maintenance expense.............................. 1,637 54.3 2,583 21.1 Interest on notes payable........................ 332 99.4 1,168 219.5 Other interest charges, net...................... (762) (105.5) (747) (95.8)
Retail sales. Excluding fuel revenues, which do not affect net income, retail sales revenue increased by $0.5 million for the current quarter and $6.9 million year-to-date 2000 due mainly to increases in total retail energy sales of 1.8% and 5.6%, respectively. The increases in total retail sales, when compared to the corresponding periods in 1999, are primarily attributed to growth in the number of customers served by SAVANNAH. Sales for resale - non-affiliates. The third quarter and year-to-date 2000 increases primarily represent increased demand for energy during the third quarter of 2000 when compared to the same period in 1999. Sales for resale - affiliates and Purchased power - affiliates. Revenues from sales for resale to affiliated companies, as well as purchases of energy, within the SOUTHERN 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. 65 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Fuel expense. This expense decreased during the third quarter due primarily to a decrease in the amount of energy generated as compared to the same period of 1999. For the year-to-date 2000, fuel expense increased due principally to higher gas prices and increased generation when compared to the corresponding period in 1999. Purchased power - non-affiliates. For the third quarter and year-to-date 2000, this item increased due to reduced generation by SAVANNAH and higher demand for energy and higher purchased power costs. These transactions do not have a significant impact on earnings since energy expenses are generally offset by energy revenues. Maintenance expense. The third quarter and year-to-date 2000 increases in maintenance expense were mainly due to a maintenance outage at one of SAVANNAH's older plants and a major boiler outage at one of the coal plants. Interest on notes payable. The third quarter and year-to-date 2000 increases, when compared to the same periods in 1999, result from the increased outstanding amount of short-term debt and higher interest rates in 2000. Other interest charges, net. The decreases in these charges for the third quarter and year-to-date 2000, when compared to the same periods in 1999, are related to a potential tax audit settlement accounted for in 1999. 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 weather to 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, SAVANNAH 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. In December 1999, the FERC issued its final rule on RTOs and on October 16, 2000, SOUTHERN and its five integrated Southeast utilities filed with the FERC a proposal for the creation of a RTO. The proposal calls for the formation of a for-profit company that would have control of the bulk power transmission system of participating utilities, which will have the option to divest, sell or lease their assets to the RTO. If the FERC accepts the proposal as filed, the creation of the RTO is not expected to have a material impact on the financial 66 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION statements of SAVANNAH. However, the ultimate outcome of this matter is uncertain. For more information on the FERC's rule, reference is made to Item 7 - - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SAVANNAH in the Form 10-K. Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of SAVANNAH in the Form 10-K for information on EPA litigation. Reference is made to Notes (B) and (D) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. New Accounting Standard In June 2000, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 138, an amendment of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that certain derivative instruments be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in the fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SAVANNAH intends to adopt the provisions of SFAS No. 133 on January 1, 2001. Substantially all of SAVANNAH's bulk energy purchases and sales meet the definition of a derivative under SFAS No. 133. In most cases, such transactions will meet the normal purchase and sale exception and the related contracts will continue to be accounted for under the accrual method. However, a limited number of contracts will be required to be accounted for as derivatives in accordance with SFAS No. 133. Upon adoption, certain of these contracts will qualify as cash flow hedges, resulting in the deferral of related gains and losses in other comprehensive income until the hedged transactions occur. Any ineffectiveness will be recognized currently in net income. Management continues to assess the effects of adopting SFAS No. 133, but currently expects the impact to be immaterial to SAVANNAH's financial statements. The application of SFAS No. 133 is still evolving and further guidance from the FASB is expected. When established, this further guidance may have additional impacts on SAVANNAH's financial statements. FINANCIAL CONDITION Overview Major changes in SAVANNAH's financial condition during the first nine months of 2000 included the addition of approximately $20.3 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations and credit arrangements with banks. See SAVANNAH's Condensed Statements of Cash Flows for further details. Financing Activities SAVANNAH plans to continue, to the extent possible, a program to retire higher-cost debt and replace these obligations with lower-cost capital. 67 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. 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, 2000 approximately $7.6 million of cash and cash equivalents and approximately $63.5 million of unused committed credit arrangements with banks. At September 30, 2000, SAVANNAH had $50.1 million outstanding of 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. 68 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, J, K, L, M, N, O, P, Q, R, S ALABAMA A, B, C, D, E GEORGIA A, B, C, D, F, G GULF A, B, D MISSISSIPPI A, B, D, H, I SAVANNAH A, B, D 69 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 necessary to present fairly the results of operations for the periods ended September 30, 2000 and 1999. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States 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 of each registrant be read in conjunction with the financial statements of such registrant and the notes thereto included in the Form 10-K. Certain prior period amounts have been reclassified to conform with current period presentation. Due to seasonal variations in the demand for energy, operating results for the periods presented do not necessarily indicate operating results for the entire year. 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) The integrated Southeast utilities 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 unrecoverable 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 obligations related to the retirement 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) Reference is made to Note 3 to the financial statements of SOUTHERN, ALABAMA , GEORGIA, GULF, MISSISSIPPI and SAVANNAH in Item 8 of the Form 10-K for information on EPA litigation. On August 1, 2000, the U.S. District Court granted ALABAMA's motion to dismiss for lack of jurisdiction in Georgia and granted SCS's motion to dismiss on the grounds that it neither owned nor operated the generating units involved in the proceedings. 70 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (E) Reference is made to Note 3 to the financial statements of SOUTHERN and ALABAMA in Item 8 of the Form 10-K for information relating to a judgment against ALABAMA arising from discharges into Lake Martin. On August 4, 2000, the Supreme Court of Alabama reversed the judgment against ALABAMA and the other defendants, and rendered a judgment in favor of all defendants. (F) 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 a three-year rate order approved by the Georgia PSC effective January 1, 1999. The order decreased annual retail rates by $262 million effective January 1, 1999 and by an additional $24 million effective January 1, 2000. The order further provides for $85 million each year, plus up to $50 million annually of any earnings above a 12.5% retail return on common equity during the second and third years, to be applied to accelerated amortization or depreciation of assets. In May 2000, the Georgia PSC ordered that these funds be maintained in a regulatory liability account instead of being applied to premium on reacquired debt as proposed by GEORGIA and ordered that interest be accrued on this account at the prime rate. These amounts are reflected on the balance sheets in deferred credits and other liabilities, other. Two-thirds of any additional earnings above the 12.5% return will be applied to rate reductions and the remaining one-third retained by GEORGIA. Pursuant to this provision, GEORGIA recognized accelerated amortization of $25.9 million in the third quarter and $113.8 million year-to-date 2000 and $21.3 million in the third quarter and $63.8 million year-to-date 1999. (G) 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. (H) In April 2000, MISSISSIPPI reached an agreement with certain of its wholesale customers to reduce its rates effective January 1, 2000. The agreement results in an annual rate reduction of approximately $3 million and a temporary annualized rate reduction of approximately $3 million for a period of 18 months ending June 30, 2001. In addition, MISSISSIPPI and its customers agreed that neither party would seek a unilateral change to the new rates prior to January 1, 2002, except for changes due to the operation of the fuel cost adjustment clause under the tariff. In July 2000, the FERC accepted MISSISSIPPI's settlement with its customers as filed. The new rates were placed into effect in July 2000, and approximately $3 million in revenues collected subject to refund was refunded to the wholesale customers. (I) Reference is made to Note 3 to the financial statements of MISSISSIPPI in Item 8 of the Form 10-K regarding the approval of new capacity. In September 2000, MISSISSIPPI and the Mississippi Public Utilities Staff entered, and the Mississippi PSC in October 2000 approved, a new stipulation that modifies a January 1999 stipulation and order covering cost allocation. The 1999 stipulation and Commission order would have excluded the new capacity from retail ratebase and would have assigned MISSISSIPPI's existing generating facilities entirely to the retail jurisdiction. The new stipulation and order allocates a pro-rata share of the new capacity along with MISSISSIPPI's existing generating capacity to the retail jurisdiction. 71 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (J) In January 1998, Southern Energy and Vastar Resources, Inc. ("Vastar") combined their energy trading and marketing activities to form a joint venture, SCEM. Southern Energy's 60% investment in the joint venture was accounted for under the equity method of accounting. Effective August 10, 2000, Southern Energy acquired Vastar's 40% interest in SCEM for $250 million and began consolidating the results of SCEM's operations. As part of the transaction, Southern Energy was relieved of any financial obligations to Vastar under the SCEM partnership agreement, including any guaranteed minimum cash distributions and any outstanding arbitration. (K) SOUTHERN engages in price risk management activities. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Derivative Financial Instruments" and Note 1 to the financial statements of SOUTHERN in Item 8 of the Form 10-K for a discussion of these activities. Activities for non-trading purposes consist of transactions to mitigate SOUTHERN's risk related to interest rate and foreign currency exchange rate fluctuations. At September 30, 2000, the status of outstanding non-trading related derivative contracts was as follows:
Year of Maturity or Interest Number of Notional Unrecognized Type Termination Rates Counterparties Amount Gain (Loss) ---- ------------ ----- -------------- ------ ----------- (in millions) Interest rate swaps 2002-2012 6.55%-7.12% 9 $2,150 $(13) 2001-2012 6.56%-8.17% 5 (pound)600 (52) 2002-2007 4.98%-5.79% 2 DM691 - Cross currency swaps 2001-2007 - 7 (pound)394 65 Cross currency swaption 2003 - 2 DM435 44 Currency forwards 2000-2003 - 1 CAD20 - 2000 - 3 (pound)91 (3) Currency options 2000 - 21 E35 (1) (pound) - Denotes British pounds sterling. CAD - Denotes Canadian dollars. DM - Denotes Deutschemark. E - Denotes Euro dollars.
Southern Energy engages in commodity-related marketing and price risk management activities. Southern Energy uses a systematic approach to the evaluation and management of risk associated with its marketing and risk management related commodity contracts, including value-at-risk ("VAR"). VAR is defined as the maximum loss that is not expected to be exceeded with a given degree of confidence and within a specified holding period. Southern Energy uses a 95% confidence interval and holding periods that vary by commodity and tenor to evaluate its risks with respect to VAR. Based on a 95% confidence interval and employing a one-day holding period, Southern Energy's portfolio of positions had a VAR of $13 million at September 30, 2000. During the three-month period ended September 30, 2000, the actual daily change in fair value never exceeded this daily VAR calculation. Southern Energy also utilizes additional risk control mechanisms such as commodity position limits and stress testing SOUTHERN has extended contingent performance guarantees and trade credits on behalf of SCEM. At September 30, 2000, outstanding guarantees related to the estimated fair value of SCEM's contractual commitments were approximately $358 million. In addition, Southern Energy has outstanding guarantees to various third parties totaling approximately $279 million at September 30, 2000. 72 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) Vastar and Southern Energy have issued certain financial guarantees made in the ordinary course of business, on behalf of Southern Energy's counterparties, to financial institutions and other credit grantors. Southern Energy has agreed to indemnify Vastar against losses under such guarantees in proportion to Vastar's former ownership percentage of SCEM. At September 30, 2000, such guarantees amounted to approximately $322 million. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN in Item 7 and Notes 1 and 5 to the financial statements of SOUTHERN under the captions "Financial Instruments for Trading Activities" and "Energy Trading and Marketing Commitments", respectively, in Item 8 of the Form 10-K. (L) Reference is made to Note 3 to the financial statements of SOUTHERN in Item 8 and to Legal Proceedings in Item 3 of the Form 10-K for information relating to (i) petitions for Chapter 11 bankruptcy relief which were filed in the U. S. Bankruptcy Court for the Southern District of Alabama and (ii) proposed settlement discussions among the affected parties. At September 30, 2000, Mobile Energy had total assets of $385 million and senior debt outstanding of $190 million of first mortgage bonds and $72 million related to tax-exempt bonds. In connection with the bond financings, SOUTHERN provided certain limited guarantees, in lieu of funding debt service and maintenance reserve accounts with cash. As of September 30, 2000, under an agreement with the bondholders, SOUTHERN had paid $41 million pursuant to the guarantees. SOUTHERN continues to have guarantees outstanding of certain potential environmental and other obligations of Mobile Energy that represent a maximum contingent liability of $18.5 million at September 30, 2000. The final outcome of this matter cannot now be determined. On August 4, 2000, Mobile Energy and its immediate parent, Mobile Energy Services Holdings, Inc., filed a joint proposed plan of reorganization with the bankruptcy court. That proposed plan of reorganization was amended on September 15, 2000. If approved as proposed, that plan would result in a termination of SOUTHERN's direct and indirect ownership interests in both entities. That proposed plan of reorganization, however, would not affect SOUTHERN's ongoing guarantee obligations related to Mobile Energy that are described above. (M) In April 1999, SOUTHERN's board approved the repurchase of up to 50 million shares of SOUTHERN's common stock over the next two years through open market or privately negotiated transactions. The repurchase program was completed during the first quarter 2000. (N) On April 17, 2000, SOUTHERN announced that its board of directors approved an initial public offering of up to 19.9 percent of Southern Energy. SOUTHERN also announced that it is planning to spin-off to holders of SOUTHERN common stock the remaining ownership of Southern Energy within 12 months of the initial public offering. The spin-off will be subject to a number of market and other conditions. On October 2, 2000, the initial public offering of Southern Energy was completed. Southern Energy sold 66.7 million shares of common stock, representing 19.7% of the 338.7 million shares outstanding, for gross proceeds of approximately $1.467 billion. Concurrent with the stock offering, Southern Energy also sold 6.9 million of convertible trust preferred securities for approximately $345 million in gross proceeds. 73 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (O) In March 2000, an administrative law judge ("ALJ") held hearings in connection with a FERC proceeding to determine the percentage of a settled $158.8 million revenue requirement for Southern Energy's generation assets in California to be paid to Southern Energy under reliability must-run agreements with the California Independent System Operator (the "CAISO"). The decision in this case affects the amount the CAISO will pay for the period June 1, 1999 through December 31, 2001. Southern Energy had proposed to allocate approximately 75% of the responsibility for payment of the revenue requirement to the CAISO. On June 7, 2000, the ALJ presiding over this proceeding issued an initial decision allocating responsibility for payment of approximately 3% of the revenue requirement to the CAISO. On July 7, 2000, Southern Energy appealed the ALJ's decision to the FERC. A final FERC order in this proceeding may be appealed to the U.S. Court of Appeals. If Southern Energy is ultimately unsuccessful in its appeal of the ALJ's decision, it will be required to refund certain amounts of the revenue requirement billed to the CAISO for the period from June 1, 1999 until the final disposition of the appeal. The amount of this refund as of September 30, 2000 would have been approximately $118 million, however, there would have been no material effect on net income. This amount does not include interest that may be payable in the event of a refund. If Southern Energy is unsuccessful in its appeal, it plans to pursue other options available under the reliability must-run agreements to mitigate the impact of the ALJ's decision upon its future operations. The outcome of this appeal cannot now be determined. (P) On August 23, 2000, the FERC initiated an investigation of the California power markets after denying a complaint that sought to extend the CAISO market's $250 price cap to all California energy and ancillary service markets. On November 1, 2000, the FERC released a Staff Report detailing the results of its investigation, together with an "Order Proposing Remedies for California Wholesale Markets". The FERC concluded in this order that the California power market structure and market rules are seriously flawed, and that these flaws, together with short supply relative to demand, resulted in unusually high energy prices. The order also proposed specific remedies to the identified market flaws. While the FERC concluded that it lacked the legal authority to order retroactive refunds, it established October 2, 2000 as the "refund effective date." Rates for service after that date will remain subject to a refund condition until December 31, 2002. The FERC will receive comments on its order for a three-week period and will issue a final order by the end of the year. The ultimate outcome of this matter cannot now be determined. (Q) Reference is made to Note 13 to the financial statements of SOUTHERN in Item 8 of the Form 10-K for information concerning assets for sale by Southern Energy. In August 2000, Southern Energy completed the sale of its assets in Argentina to The AES Corporation for $205 million, including the assumption of debt and the buy-out of minority partners. As part of the sale, Southern Energy was released from $200 million of credit support obligations. The sale had no material impact on the financial statements of Southern Energy or SOUTHERN. 74 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (R) On August 23, 2000, WPD Limited ("WPDL"), through Southern Energy, made an offer to acquire all of the outstanding shares of Hyder plc ("Hyder") for a total purchase price of approximately(pound)585 million (approximately $878 million), including fees and expenses, or 365 pence (approximately $5.47) per Hyder share plus the assumption of approximately(pound)2.1 billion (approximately $3.2 billion) of gross debt as of March 31, 2000. On September 15, 2000, WPDL committed unconditionally to purchase any shares of Hyder tendered by Hyder shareholders. As of September 30, 2000, WPDL had purchased from shareholders approximately 71% of the Hyder shares. On October 30, 2000, WPDL finalized the acquisition of Hyder by making payment for the additional shares needed to bring WPDL's ownership over 90%. The acquisition of more than 90% allowed WPDL, under UK company law, to acquire the remaining shares and on October 31, 2000, WPDL sent notification to the outstanding shareholders exercising this right. WPDL has replaced Hyder's board of directors with employees of WPD, Southern Energy and PPL Global. Following the completion of the acquisition, WPD will provide management oversight for WPDL's electricity distribution business. Southern Energy will make an equity investment of (pound)56 million (approximately $84 million) and will own 40% of the economic interest in WPDL and PPL Global will own 60%, with each owning 50% of the voting interest. Southern Energy will also have a call right to acquire an additional 9% economic interest in WPDL from PPL Global. With the completion of the Hyder acquisition and with the approval of lenders, Southern Energy and PPL Global, effective December 2000, will modify their ownership of voting shares of WPD Holdings (WPD's parent) to 50% each so that neither party will have operational or management control of WPD Holdings. Therefore, the results of operations for WPD, which are currently consolidated, will be accounted for under the equity method as of that date. (S) SOUTHERN's principal business segment -- or its traditional business -- is the five integrated Southeast utilities that provide electric service in four states. The other reportable business segment is non-traditional energy services provided by Southern Energy, which develops and manages electricity and other energy-related projects both in the United States and abroad. Intersegment revenues are not material. Financial data for business segments for the periods covered in the Form 10-Q are as follows:
Integrated All Southeast Southern Other Reconciling Utilities Energy (Note) Eliminations Consolidated ------------ ---------- --------- ------------- --------------- (in millions) Three Months Ended September 30, 2000: Operating revenues $ 3,142 $ 4,281 $ 65 $ (9) $ 7,479 Segment net income (loss) 559 98 (53) 10 614 Nine Months Ended September 30, 2000: Operating revenues 7,619 5,475 184 (31) 13,247 Segment net income (loss) 1,017 292 (108) - 1,201 Total assets at September 30, 2000 26,526 17,715 489 (1,198) 43,532 ----------------------------------------- ------------ ---------- --------- ------------- --------------- Three Months Ended September 30, 1999: Operating revenues $ 2,991 $ 686 $ 66 $ (7) $3,736 Segment net income (loss) 568 157 (102) (8) 615 Nine Months Ended September 30, 1999: Operating revenues 7,116 1,711 165 (23) 8,969 Segment net income (loss) 1,000 306 (131) (22) 1,153 Total assets at December 31, 1999 25,251 13,863 455 (1,180) 38,389 ------------------------------------------ ----------- ---------- --------- ------------- ----------------
75 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (Note) The all other category includes parent SOUTHERN, which does not allocate operating expenses to business segments. Also, this category includes segments below the quantitative threshold for separate disclosure. These segments include a wireless communication company and a developmental company for energy products and services. Amounts for Southern Energy exclude interest expense to parent SOUTHERN. 76 PART II - OTHER INFORMATION Item 1. Legal Proceedings. (1) Cooper et al.vs. GEORGIA, SOUTHERN, SCS and Southern Company Energy Solutions, Inc. (Superior Court of Fulton County, Georgia) On July 28, 2000, a lawsuit alleging race discrimination was filed by three GEORGIA employees against GEORGIA, SOUTHERN and SCS. The lawsuit also raised claims on behalf of a purported class. The plaintiffs seek compensatory and punitive damages in an unspecified amount, as well as injunctive relief. On August 14, 2000, the lawsuit was amended to add four more plaintiffs and a new defendant, Southern Company Energy Solutions, Inc., a subsidiary of SOUTHERN. The final outcome of this case cannot now be determined. (2) 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. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. -------- Exhibits 15 - Letter re: unaudited interim financial information (a) ALABAMA (b) GEORGIA Exhibit 24 - (a) Powers of Attorney and resolutions. (Designated in the Form 10-K for the year ended December 31, 1999, 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 Schedule (a) SOUTHERN (b) ALABAMA (c) GEORGIA (d) GULF (e) MISSISSIPPI (f) SAVANNAH (b) Reports on Form 8-K. ------------------- SOUTHERN filed a Current Report on Form 8-K dated September 27, 2000: Items reported: Items 5 and 7 Financial statements filed: None 77 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 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 13, 2000 - ------------------------------------------------------------------------------- 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, Chief Financial Officer and Treasurer (Principal Financial Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 13, 2000 78 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 David M. Ratcliffe President and Chief Executive Officer (Principal Executive Officer) By Thomas A. Fanning Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 13, 2000 - ------------------------------------------------------------------------------- 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 Ronnie Labrato Comptroller and Chief Financial Officer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 13, 2000 79 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 13, 2000 - ------------------------------------------------------------------------------- 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 G. Edison Holland, 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 13, 2000 80 EX-15.A 2 0002.txt ARTHUR ANDERSEN LLP EXHIBIT 15(a) Arthur Andersen November 7, 2000 Alabama Power Company 600 North 18th Street Birmingham, Alabama 35291 Ladies and Gentlemen: We are aware that Alabama Power Company has incorporated by reference in Registration Statement 333-67453 its Form 10-Q for the quarter ended September 30, 2000 which includes our report on Alabama Power Company dated November 7, 2000 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933 (the "Act"), such report is not considered a part of the Registration Statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ Arthur Andersen LLP EX-15.B 3 0003.txt ARTHUR ANDERSEN LLP EXHIBIT 15(b) Arthur Andersen November 7, 2000 Georgia Power Company 241 Ralph McGill Boulevard, NE Atlanta, Georgia 30308 Ladies and Gentlemen: We are aware that Georgia Power Company has incorporated by reference in Registration Statement 333-75193 its Form 10-Q for the quarter ended September 30, 2000 which includes our report on Georgia Power Company dated November 7, 2000 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933 (the "Act"), such report is not considered a part of the Registration Statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ Arthur Andersen LLP EX-27.A 4 0004.txt FINANCIAL DATA SCHEDULE SOUTHERN COMPANY
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 2000, and is qualified in its entirety by reference to such financial statements. 0000092122 THE SOUTHERN COMPANY 1,000 9-MOS Dec-31-2000 Sep-30-2000 PER-BOOK 25,119,366 8,399,122 7,467,076 2,546,345 0 43,531,909 3,503,112 1,205,734 4,670,841 9,379,687 2,320,175 368,126 3,971,526 3,499,989 7,883,576 2,017,809 339,212 0 92,123 3,079 13,656,607 43,531,909 13,247,213 611,408 10,640,598 10,640,598 2,606,615 306,669 2,301,876 1,086,736 1,215,140 14,259 1,200,881 655,135 0 2,307,909 1.85 1.85
EX-27.B 5 0005.txt FINANCIAL DATA SCHEDULE ALABAMA POWER
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 2000, and is qualified in its entirety by reference to such financial statements. 0000003153 ALABAMA POWER COMPANY 1,000 9-MOS Dec-31-2000 Sep-30-2000 PER-BOOK 7,991,986 370,656 1,056,154 805,887 0 10,224,683 224,358 1,706,095 1,291,437 3,221,890 347,000 317,512 977,695 0 2,445,414 142,351 0 0 3,534 844 2,768,443 10,224,683 2,783,930 219,120 1,993,586 1,993,586 790,344 25,873 597,097 205,604 391,493 12,080 379,413 313,200 0 657,900 0 0
EX-27.C 6 0006.txt FINANCIAL DATA SCHEDULE GEORGIA POWER
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 2000, and is qualified in its entirety by reference to such financial statements. 0000041091 GEORGIA POWER COMPANY 1,000 9-MOS Dec-31-2000 Sep-30-2000 PER-BOOK 10,090,611 467,116 1,256,266 1,110,542 0 12,924,535 344,250 2,084,822 1,890,961 4,320,033 789,250 14,569 2,063,498 12,163 895,000 385,236 0 0 83,978 1,524 4,359,284 12,924,535 3,757,620 340,945 2,686,589 2,686,589 1,071,031 (4,586) 725,500 199,269 526,231 507 525,724 412,700 0 1,034,664 0 0
EX-27.D 7 0007.txt FINANCIAL DATA SCHEDULE GULF POWER
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 2000, and is qualified in its entirety by reference to such financial statements. 0000044545 GULF POWER COMPANY 1,000 9-MOS Dec-31-2000 Sep-30-2000 PER-BOOK 1,082,772 4,485 139,404 69,917 0 1,296,578 38,060 229,949 162,705 430,714 85,000 4,236 247,823 27,500 118,484 0 0 0 0 0 382,821 1,296,578 553,151 26,404 454,025 454,025 99,126 (2,278) 70,444 26,264 44,180 162 44,018 44,300 0 127,825 0 0
EX-27.E 8 0008.txt FINANCIAL DATA SCHEDULE MISSISSIPPI POWER
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 2000, and is qualified in its entirety by reference to such financial statements. 0000066904 MISSISSIPPI POWER COMPANY 1,000 9-MOS Dec-31-2000 Sep-30-2000 PER-BOOK 1,066,375 2,290 167,588 40,287 0 1,276,540 37,691 191,598 179,065 408,354 35,000 31,809 182,324 17,000 188,388 0 30,020 0 0 0 383,645 1,276,540 530,852 29,795 430,186 430,186 100,666 1,578 72,449 23,223 49,226 1,510 47,716 41,100 0 95,874 0 0
EX-27.F 9 0009.txt FINANCIAL DATA SCHEDULE SAVANNAH ELECTRIC
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 2000, and is qualified in its entirety by reference to such financial statements. 0000086940 SAVANNAH ELECTRIC AND POWER COMPANY 1,000 9-MOS Dec-31-2000 Sep-30-2000 PER-BOOK 452,761 2,035 92,363 42,879 0 590,038 54,223 9,776 112,817 176,816 40,000 0 82,155 50,100 30,000 0 30,000 0 4,611 711 175,645 590,038 224,019 12,619 179,276 179,276 44,743 (398) 31,726 11,445 20,281 0 20,281 18,300 0 26,730 0 0
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