-----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, A4GbGgZaW6qsQmjfNxze/j1vzFBDgVobhTUEC1XUBB4AtQXSHy/ecq7YkyE7loss tJeCyUspBUU6ZkVPE4ifpQ== 0000092122-99-000052.txt : 19990817 0000092122-99-000052.hdr.sgml : 19990817 ACCESSION NUMBER: 0000092122-99-000052 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN CO CENTRAL INDEX KEY: 0000092122 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [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: 99690420 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: ELECTRIC SERVICES [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: 99690421 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: ELECTRIC SERVICES [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: 99690422 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: ELECTRIC SERVICES [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: 99690423 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: ELECTRIC SERVICES [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: 99690424 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: ELECTRIC SERVICES [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: 99690425 BUSINESS ADDRESS: STREET 1: 600 BAY ST EAST CITY: SAVANNAH STATE: GA ZIP: 31401 BUSINESS PHONE: 9122327171 10-Q 1 SECOND QUARTER FORM 10-Q 1999 =================================================================================================================== 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 June 30, 1999 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 32520-0102 (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 July 31, 1999 The Southern Company Par Value $5 Per Share 683,159,074 Alabama Power Company Par Value $40 Per Share 5,608,955 Georgia Power Company No Par Value 7,761,500 Gulf Power Company No Par Value 992,717 Mississippi Power Company Without Par Value 1,121,000 Savannah Electric and Power Company Par Value $5 Per Share 10,844,635
This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company and Savannah Electric and Power Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies.
INDEX TO QUARTERLY REPORT ON FORM 10-Q June 30, 1999 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........................................................ 6 Condensed Consolidated Statements of Cash Flows.................................................... 7 Condensed Consolidated Balance Sheets.............................................................. 8 Condensed Consolidated Statements of Comprehensive Income and Accumulated Other Comprehensive Income.......................................................... 10 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 11 Alabama Power Company Condensed Statements of Income..................................................................... 21 Condensed Statements of Cash Flows................................................................. 22 Condensed Balance Sheets........................................................................... 23 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 25 Exhibit 1 - Report of Independent Public Accountants............................................... 29 Georgia Power Company Condensed Statements of Income..................................................................... 31 Condensed Statements of Cash Flows................................................................. 32 Condensed Balance Sheets........................................................................... 33 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 35 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..................................................................... 60 Condensed Statements of Cash Flows................................................................. 61 Condensed Balance Sheets........................................................................... 62 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 64 Notes to the Condensed Financial Statements........................................................... 67 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 68 PART II - OTHER INFORMATION Item 1. Legal Proceedings......................................................................................... 73 Item 2. Changes in Securities..................................................................................... Inapplicable Item 3. Defaults Upon Senior Securities........................................................................... Inapplicable Item 4. Submission of Matters to a Vote of Security Holders....................................................... 73 Item 5. Other Information......................................................................................... Inapplicable Item 6. Exhibits and Reports on Form 8-K.......................................................................... 75 Signatures ............................................................................................... 76
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DEFINITIONS TERM MEANING affiliates.................................. ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH ALABAMA..................................... Alabama Power Company BEWAG....................................... Berliner Kraft und Licht AG CEPA........................................ Consolidated Electric Power Asia Limited Clean Air Act............................... Clean Air Act Amendments of 1990 ECO Plan.................................... Environmental Compliance Overview Plan Energy Act.................................. Energy Policy Act of 1992 EWG......................................... Exempt wholesale generator FASB........................................ Financial Accounting Standards Board FERC........................................ Federal Energy Regulatory Commission Form 10-K................................... Combined Annual Report on Form 10-K of SOUTHERN, ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH for the year ended December 31, 1998 FUCO........................................ Foreign utility company GEORGIA..................................... Georgia Power Company GULF........................................ Gulf Power Company MISSISSIPPI................................. Mississippi Power Company Mobile Energy............................... Mobile Energy Services Company, L.L.C. and Mobile Energy Services Holdings, Inc. OPC......................................... Oglethorpe Power Corporation operating affiliates........................ see affiliates operating companies......................... see affiliates PEP......................................... Performance Evaluation Plan PSC......................................... Public Service Commission SAVANNAH.................................... Savannah Electric and Power Company SEC......................................... Securities and Exchange Commission SOUTHERN.................................... The Southern Company Southern Energy............................. Southern Energy, Inc. including SOUTHERN subsidiaries managed or controlled by Southern Energy SOUTHERN system............................. SOUTHERN, affiliates, Southern Energy, and other subsidiaries SWEB........................................ South Western Electricity plc (United Kingdom) TVA......................................... Tennessee Valley Authority
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-Q includes forward-looking statements in addition to historical information. 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 legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry; the extent and timing of the entry of additional competition in the markets of SOUTHERN's subsidiaries; challenges related to Year 2000 readiness; potential business strategies, including acquisitions or dispositions of assets or internal restructuring, that may be pursued by the registrants; state and federal rate regulation in the United States; changes in or application of environmental and other laws and regulations to which SOUTHERN and its subsidiaries are subject; 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; 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. 4 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES 5
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------------- ------------------------------ 1999 1998 1999 1998 -------------- --------------- -------------- -------------- OPERATING REVENUES $2,791,080 $2,913,381 $5,232,645 $5,408,258 -------------- --------------- -------------- -------------- OPERATING EXPENSES: Operation-- Fuel 656,890 616,504 1,169,356 1,090,832 Purchased power 244,152 302,978 518,578 610,977 Other 518,564 533,114 1,005,633 993,683 Maintenance 233,945 234,681 455,231 434,669 Depreciation and amortization 325,163 434,201 640,244 766,286 Taxes other than income taxes 145,060 143,159 291,322 290,491 Income taxes 159,895 158,070 268,503 293,992 -------------- --------------- -------------- -------------- Total operating expenses 2,283,669 2,422,707 4,348,867 4,480,930 -------------- --------------- -------------- -------------- OPERATING INCOME 507,411 490,674 883,778 927,328 OTHER INCOME: Equity in earnings of unconsolidated subsidiaries 48,242 10,640 142,923 45,136 Interest income 40,142 113,508 69,628 151,413 Other, net 10,954 (11,409) 37,666 1,782 Income taxes applicable to other income 7,306 (6,102) (8,854) 922 -------------- --------------- -------------- -------------- INCOME BEFORE INTEREST CHARGES 614,055 597,311 1,125,141 1,126,581 -------------- --------------- -------------- -------------- INTEREST CHARGES AND OTHER: Interest on long-term debt 164,355 178,472 330,708 352,749 Interest on notes payable 44,058 32,534 71,515 61,436 Amortization of debt discount, premium and expense, net 9,991 33,515 19,011 40,472 Other interest charges 16,056 26,900 29,253 46,008 Minority interests in subsidiaries 14,841 13,123 36,184 29,710 Distributions on capital and preferred securities of subsidiary companies 46,181 35,569 89,948 70,666 Preferred dividends of subsidiary companies 4,588 6,425 10,221 13,065 -------------- --------------- -------------- -------------- Interest charges and other, net 300,070 326,538 586,840 614,106 -------------- --------------- -------------- -------------- CONSOLIDATED NET INCOME $ 313,985 $ 270,773 $ 538,301 $ 512,475 ============== =============== ============== ============== AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (Thousands) 693,465 697,659 695,996 696,355 BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK $0.45 $0.39 $0.77 $0.74 CASH DIVIDENDS PAID PER SHARE $0.335 $0.335 $0.67 $0.67 OF COMMON STOCK The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements.
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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Six Months Ended June 30, ----------------------------------- 1999 1998 --------------- --------------- OPERATING ACTIVITIES: Consolidated net income $538,301 $512,475 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 701,860 880,545 Deferred income taxes and investment tax credits 79,902 (25,900) Gain on asset sales (9,278) (32,168) Equity in earnings of unconsolidated subsidiaries (142,910) (43,571) Other, net 62,301 64,349 Changes in certain current assets and liabilities excluding effects from acquisitions -- Receivables, net (67,533) (147,655) Special deposits-other 2,746 2,897 Fossil fuel stock (94,238) (57,242) Materials and supplies (4,456) 6,481 Prepayments (21,383) (49,494) Accounts payable (287,931) (214,387) Taxes accrued 74,338 165,187 Other (3,749) 35,139 --------------- --------------- Net cash provided from operating activities 827,970 1,096,656 --------------- --------------- INVESTING ACTIVITIES: Gross property additions (1,060,446) (957,924) Southern Energy business acquisitions, net of cash acquired (1,476,990) (199,526) Sales of property 9,586 186,577 Other (95,875) (21,407) --------------- --------------- Net cash used for investing activities (2,623,725) (992,280) --------------- --------------- FINANCING ACTIVITIES: Proceeds-- Common stock 23,748 111,872 Capital and preferred securities 250,000 245,000 Pollution control obligations 339,650 210,300 Other long-term debt 585,265 1,073,532 Notes receivable 195,000 182,792 Retirements/repurchases-- Common stock repurchased (250,921) - Preferred stock (85,732) (40,771) First mortgage bonds (524,800) (502,795) Pollution control obligations (51,000) (102,990) Other long-term debt (347,281) (173,989) Notes receivable (64,634) (79,000) Special deposits-redemption funds (288,564) (90,707) Notes payable, net 2,117,626 (323,463) Payment of common stock dividends (467,324) (466,072) Miscellaneous (57,861) (61,808) --------------- --------------- Net cash provided from (used for) financing activities 1,373,172 (18,099) --------------- --------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (422,583) 86,277 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 871,353 600,820 =============== =============== CASH AND CASH EQUIVALENTS AT END OF PERIOD $448,770 $687,097 =============== =============== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $489,072 $503,311 Income taxes $139,130 $238,014 Southern Energy business acquisitions-- Fair value of assets acquired $1,509,815 $199,526 Less cash paid for common stock 1,476,990 199,526 =============== =============== Liabilities assumed $32,825 - =============== =============== The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements.
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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At June 30, 1999 At December 31, (Unaudited) 1998 ---------------- ---------------- UTILITY PLANT: Plant in service $36,201,673 $35,185,013 Less accumulated provision for depreciation 13,703,547 13,239,140 ---------------- ---------------- 22,498,126 21,945,873 Nuclear fuel, at amortized cost 207,407 216,744 Construction work in progress 2,187,583 1,782,482 ---------------- ---------------- Total 24,893,116 23,945,099 ---------------- ---------------- OTHER PROPERTY AND INVESTMENTS: Equity investments in unconsolidated subsidiaries 1,518,768 1,548,951 Property rights, net of accumulated amortization of $188,552 at June 30, 1999 and $169,339 at December 31, 1998 1,199,509 1,184,734 Goodwill, net of accumulated amortization of $130,156 at June 30, 1999 and $105,755 at December 31, 1998 1,943,362 1,949,213 Other Intangibles, net of accumulated amortization of $8,122 at June 30, 1999 and $791 at December 31, 1998 601,881 308,009 Nuclear decommissioning trusts 598,148 516,719 Miscellaneous 729,222 643,280 ---------------- ---------------- Total 6,590,890 6,150,906 ---------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 448,770 871,353 Special deposits 326,104 86,592 Receivables, less accumulated provisions for uncollectible accounts of $93,306 at June 30, 1999 and $112,511 at December 31, 1998 1,731,996 1,797,913 Fossil fuel stock, at average cost 379,071 251,974 Materials and supplies, at average cost 539,442 515,715 Prepayments 126,348 101,843 Vacation pay deferred 79,829 80,752 ---------------- ---------------- Total 3,631,560 3,706,142 ---------------- ---------------- DEFERRED CHARGES AND OTHER ASSETS: Deferred charges related to income taxes 1,016,448 1,035,724 Prepaid pension costs 539,808 489,572 Debt expense, being amortized 134,348 129,257 Premium on reacquired debt, being amortized 301,290 294,055 Miscellaneous 462,304 440,754 ---------------- ---------------- Total 2,454,198 2,389,362 ---------------- ---------------- TOTAL ASSETS $37,569,764 $36,191,509 ================ ================ The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements.
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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At June 30, 1999 At December 31, (Unaudited) 1998 ---------------- ---------------- CAPITALIZATION: Common stock, par value $5 per share -- Authorized -- 1 billion shares Issued -- June 30, 1999: 700,617,076 shares; -- December 31, 1998: 699,772,723 shares $3,503,085 $3,498,864 Paid-in capital 2,480,150 2,462,116 Treasury, at cost -- June 30, 1999: 11,105,556 shares; -- December 31, 1998: 2,025,536 shares (307,595) (57,863) Retained earnings 3,949,201 3,878,332 Accumulated other comprehensive income (100,294) 15,400 ---------------- ---------------- 9,524,547 9,796,849 Preferred stock of subsidiaries 369,008 369,084 Company or subsidiary obligated mandatorily redeemable capital and preferred securities 2,425,120 2,179,440 Long-term debt 10,264,011 10,471,692 ---------------- ---------------- Total 22,582,686 22,817,065 ---------------- ---------------- CURRENT LIABILITIES: Amount of securities due within one year 1,144,605 1,525,596 Notes payable 4,001,233 1,827,808 Accounts payable 698,153 1,026,869 Customer deposits 129,558 125,078 Taxes accrued-- Income taxes 147,458 49,923 Other 256,074 299,051 Interest accrued 232,400 233,355 Vacation pay accrued 112,751 111,611 Miscellaneous 481,387 542,836 ---------------- ---------------- Total 7,203,619 5,742,127 ---------------- ---------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 4,429,055 4,480,970 Deferred credits related to income taxes 690,286 714,665 Accumulated deferred investment tax credits 708,403 723,393 Employee benefits provisions 516,081 473,734 Minority interests in subsidiaries 580,783 535,145 Prepaid capacity revenues 88,400 96,080 Department of Energy assessments 64,191 64,191 Disallowed Plant Vogtle capacity buyback costs 53,705 54,458 Storm damage reserves 25,586 23,980 Miscellaneous 626,969 465,701 ---------------- ---------------- Total 7,783,459 7,632,317 ---------------- ---------------- TOTAL CAPITALIZATION AND LIABILITIES $37,569,764 $36,191,509 ================ ================ The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements.
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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------------ ------------------------------ 1999 1998 1999 1998 -------------- -------------- -------------- -------------- Consolidated net income $313,985 $270,773 $538,301 $512,475 Other comprehensive income: Foreign currency translation adjustments (13,853) (124) (177,991) 2,998 Less applicable income taxes (4,848) (43) (62,297) 1,049 -------------- -------------- -------------- -------------- CONSOLIDATED COMPREHENSIVE INCOME $304,980 $270,692 $422,607 $514,424 ============== ============== ============== ==============
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (Stated in Thousands of Dollars) At June 30, At December 31, 1999 1998 ---------------- -------------- (Unaudited) Balance at beginning of period $ 15,400 $ 7,176 Change in current period (115,694) 8,224 -------------- -------------- BALANCE AT END OF PERIOD $(100,294) $15,400 ============== ==============
10 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1999 vs. SECOND QUARTER 1998 AND YEAR-TO-DATE 1999 vs. YEAR-TO-DATE 1998 RESULTS OF OPERATIONS SOUTHERN's traditional business is primarily represented by its five domestic electric utility operating companies, which provide electric service in four Southeastern states. Another significant portion of SOUTHERN's business is its non-traditional business primarily represented by Southern Energy, which owns and manages international and domestic businesses for SOUTHERN. Businesses acquired by Southern Energy have been included in the consolidated statements of income since the date of acquisition. Certain changes in operating revenues and expenses from the prior period result from such acquisitions. Earnings SOUTHERN's consolidated net income for the second quarter and year-to-date 1999 was $314 million ($0.45 per share) and $538 million ($0.77 per share), respectively, compared to $270 million ($0.39 per share) and $512 million ($0.74 per share) for the corresponding periods of 1998. Earnings for the traditional business were relatively flat in the second quarter. Year-to-date earnings for the traditional business were down due primarily to mild weather. Earnings for the non-traditional business rose primarily due to profits from significant new investments in power-generation businesses in New England and California, improved performance and continued growth of Southern Company Energy Marketing's trading business and increased profitability from Southern Energy's Asian business units.
Significant income statement items appropriate for discussion include the following: Increase (Decrease) --------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Operating revenues............................... $(122,301) (4.2) $(175,613) (3.2) Fuel expense..................................... 40,386 6.6 78,524 7.2 Purchased power expense.......................... (58,826) (19.4) (92,399) (15.1) Depreciation and amortization expense............ (109,038) (25.1) (126,042) (16.4) Equity in earnings of unconsolidated subsidiaries.................................. 37,602 353.4 97,787 216.6 Interest income.................................. (73,366) (64.6) (81,785) (54.0) Other, net....................................... 22,363 196.0 35,884 N/M Interest on notes payable........................ 11,524 35.4 10,079 16.4 Amortization of debt discount, premium and expense, net.................................. (23,524) (70.2) (21,461) (53.0) Other interest charges........................... (10,844) (40.3) (16,755) (36.4)
N/M - Not meaningful 11 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Operating revenues. Operating revenues for the traditional business for the second quarter and year-to-date 1999 decreased $188 million or 7.7% and $260 million or 5.9%, respectively, when compared to the corresponding periods of 1998. Traditional business revenues decreased for this second quarter and year-to-date 1999 due primarily to mild weather which affected retail energy sales and a retail rate reduction ordered by the Georgia PSC which affected GEORGIA's revenues. Retail revenues, excluding fuel and any demand-side program revenues which generally do not affect income, decreased $147 million for the second quarter and $192 million year-to-date 1999. Operating revenues for Southern Energy increased approximately $59 million or 13.3% and $72 million or 7.6%, respectively, during the second quarter and year-to-date 1999 when compared to the corresponding periods in 1998. The increases in Southern Energy's operating revenues are primarily attributed to its recent investments in power-generation businesses in New England and California, which were partially offset by a decrease in revenues at SWEB and the deconsolidation of Mobile Energy. Effective with the bankruptcy filing in January 1999, Mobile Energy is accounted for under the equity method, rather than being consolidated as before. See Note (O) in the "Notes to the Condensed Financial Statements" herein for further information regarding Mobile Energy. Reference is also made to Item 1 - BUSINESS - "Non-Traditional Business" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN in the Form 10-K. Fuel expense. The increases in this expense for the current quarter and year-to-date 1999 are attributed to the acquisitions of power-generating businesses in New England and California. Purchased power expense. Purchased power expense for the traditional business fell approximately $19 million or 18.1% and $45 million or 25.6%, respectively, for the second quarter and year-to-date 1999. The decrease in these expenses for the traditional business is mainly attributed to a decrease in energy purchases related to power marketing activities during this second quarter and year-to-date 1999 when compared to the same periods in 1998. For the non-traditional business, these expenses decreased $40 million or 20.1% for the quarter and $47 million or 10.8% year-to-date due mainly to a decrease in purchased power at SWEB. Depreciation and amortization expense. These decreases for the second quarter and year-to-date 1999 when compared to the corresponding periods in 1998 are primarily attributed to higher depreciation charges recognized in 1998 under the prior accounting order and the completion in 1998 of the amortization of deferred Plant Vogtle costs. Under GEORGIA's new order, fixed rate reductions and accelerated amortization are being recognized ratably throughout 1999. During 1998, variable accelerated depreciation recorded under the previous accounting order was primarily recognized during the higher revenue months. Equity in earnings of unconsolidated subsidiaries. The second quarter increase resulted from the continued improved profitability of Shajiao C operations in China and Southern Company Energy Marketing. The year-to-date increase in this item also reflects the $54 million settlement of Southern Energy's claims against a contractor relating to the Shajiao C construction project and the improvement in profitability of the Shajiao C operations. The amount of the settlement of contractor claims was partially offset by other related expenses and income taxes included in other income accounts. Interest income. Second quarter and year-to-date decreases are directly related to the 1998 settlement of tax issues between SOUTHERN and the Internal Revenue Service. Other, net. The changes in this item for the second quarter and year-to-date are mainly due to reduced donations and contributions in these periods when compared to the same periods in 1998. 12 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Interest on notes payable. The second quarter and year-to-date 1999 increases are attributed to the non-traditional business. These amounts increased due to higher outstanding debt associated with Southern Energy's acquisitions in late-1998 and the first half of 1999. Amortization of debt discount, premium and expense, net. These decreases are related to accelerated amortization in 1998 of premiums incurred to refinance high-cost debt. Other interest charges. These charges decreased in the second quarter and year-to-date 1999 when compared to the same periods in 1998 due to the recognition in 1998 of increased interest related to tax issues. 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 non-traditional business becoming more significant. For additional information relating to non-traditional business activities, see Item 1 - BUSINESS - "Non-Traditional Business" in the Form 10-K. 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. The U.S. Environmental Protection Agency is conducting an industry-wide investigation concerning the compliance status of certain coal-fired generating facilities, including certain units of the SOUTHERN system, under the new source review provisions of the Clean Air Act. Although the outcome of this matter cannot now be determined, if adverse it could result in substantial penalties and additional capital costs. In April 1999, SOUTHERN, through its subsidiary Southern Energy, completed the purchase of 3,065 megawatts of generating assets in California from Pacific Gas & Electric for approximately $801 million. In June 1999, SOUTHERN, through its subsidiary Southern Energy, completed its $484 million acquisition of 1,776 megawatts of generating capacity from Orange and Rockland Utilities, Inc. and Consolidated Edison Company of New York. Also, in June 1999, Southern Energy announced that it signed an agreement to sell SWEB's supply business to London Electricity for $256 million or (pound)160 million and the assumption of certain liabilities. Further, Southern Energy acquired a 9.99% interest in Shandong International Power Development Company Limited for $104 million. For information relating to Year 2000 readiness, see "YEAR 2000 READINESS" below. 13 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which was originally to be adopted by the year 2000. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which amends FASB Statement No. 133 to be effective for all fiscal years beginning after June 15, 2000 (January 1, 2001 for companies with calendar-year fiscal years). SOUTHERN has not yet quantified the impact of adopting this statement on its financial statements; however, the adoption could increase volatility in earnings and other comprehensive income. Reference is made to Notes (B) through (F), (H) through (M), (O) and (P) 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. YEAR 2000 READINESS Year 2000 Challenge In recent decades, computer programmers shortened the year portion of date entries to two digits to save processing time and storage space. Computers assumed, in effect, that all years began with "19." This practice was widely adopted and hard-coded into computer chips and processors found in some equipment. This approach was used until the mid-1990s. Unless corrected before the Year 2000, affected systems and devices containing a chip or microprocessor with date and time functions could incorrectly process dates or the systems may cease to function. SOUTHERN depends on complex computer systems for many aspects of its operations, which include generation, transmission, and distribution of electricity, as well as other business support activities. SOUTHERN met its Year 2000 readiness goal, when in June 1999 it announced that systems critical to generating and delivering electricity to its customers in the Southeast are ready for 2000. Year 2000 ready means that a system or application is determined suitable for continued use through the Year 2000 and beyond. Critical systems include, but are not limited to, reactor control systems, safe shutdown systems, turbine generator systems, control center computer systems, customer service systems, energy management systems, and telephone switches and equipment. Year 2000 Program and Status SOUTHERN's executive management recognizes the seriousness of the Year 2000 challenge and has dedicated what it believes to be adequate resources to address the issue. The Millennium Project is a team of employees, IBM consultants, and other contractors whose progress is reviewed regularly by a steering committee of SOUTHERN executives. 14 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SOUTHERN's traditional business refers to the integrated utility services within Alabama, Florida, Georgia, and Mississippi. For this traditional business, the work was divided into two phases. Phase 1 began in 1996 and consisted of identifying and assessing corporate assets related to software systems and devices that contain a computer chip or clock. The first phase was completed in June 1997. Phase 2 consisted of testing and remediating high priority systems and devices. Also, contingency planning is included in this phase. The second phase was completed on schedule in June 1999. The Millennium Project will continue to monitor the affected computer systems, devices, and applications into the Year 2000. For the traditional business, SOUTHERN completed the activities contained in its work plan by function as follows: Work Plan ----------------------------------------------------- Remediation Completion Inventory Assessment and Testing Date Generation 100% 100% 100% 6/99 Energy Management 100 100 100 6/99 Transmission and Distribution 100 100 100 1/99 Telecommunications 100 100 100 6/99 Corporate Applications 100 100 100 3/99 - ------------------------------------------------------------------------------- For the non-traditional business, Southern Energy has adopted a three-phase plan to address the Year 2000 challenge at its North American and international business units in which they have management control. The first phase consists of awareness and planning, inventory and assessment, and it includes the identification of potentially impacted systems and an assessment of their individual Year 2000 readiness. The second phase, which includes testing, remediation, and validation, consists of modification or replacement of impacted equipment, and verification that those modifications have addressed the issue. Contingency planning is the third phase, and it includes backup plans for unexpected events with critical systems, staffing plans for critical date rollovers, and plans to address external dependencies. Business units are using Year 2000 readiness information received from suppliers, including fuel suppliers, to determine if inventory adjustments are needed for the transition period. The following three tables summarize the status of progress of Southern Energy's North American and international business units as of June 30, 1999. North American Business Units: Phase Status Completion Date - ------------------------------------------ ---------------- ------------------- Awareness and planning, inventory and Complete November 30, 1998 assessment Testing, remediation, and validation Complete June 30, 1999 Contingency planning Complete June 30, 1999 - ------------------------------------------ ---------------- ------------------- 15 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION International Business Units where Southern Energy has management control: Phase Status Projected Completion - ------------------------------------------- -------------- -------------------- Awareness and planning, inventory and assessment Complete February 22, 1999 Testing, remediation, and validation In progress September 30, 1999 Contingency planning In progress August 31, 1999 - ------------------------------------------- -------------- -------------------- Other International Business Units: Phase Status Projected Completion - ------------------------------------------ --------------- -------------------- Awareness and planning, inventory and assessment Complete May 31, 1999 Testing, remediation, and validation In progress October 31, 1999 Contingency planning In progress September 30, 1999 - ------------------------------------------ --------------- -------------------- In a number of the international business units, Southern Energy is neither the majority owner nor the managing concern. In these circumstances, Southern Energy is providing technical assistance but does not control the schedule or progress. Year 2000 Costs For the traditional business, current projected total costs for Year 2000 readiness are approximately $91 million, which includes $6 million of cost billed to non-affiliated companies. These costs include labor necessary to identify, test, and renovate affected devices and systems. From its inception through June 30, 1999, the Year 2000 program costs, recognized primarily as expense, amounted to $81 million based on SOUTHERN's ownership interest. In addition to the traditional business costs, current projections for Year 2000 program costs are approximately $20 million for the non-traditional business - based on SOUTHERN's ownership interest of which $14 million has been spent through June 30, 1999. Year 2000 Risks SOUTHERN has implemented a detailed process to minimize the possibility of service interruptions related to the Year 2000. Based on tests we have conducted, we believe service interruptions related to Year 2000 challenges are unlikely. These tests increase confidence, but do not guarantee error-free operations. The company has taken what it believes to be prudent steps to prepare for the Year 2000, and it expects any interruptions in service that may occur within the traditional business service territory to be isolated and short in duration, similar to service loss during a storm. 16 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SOUTHERN expects the risks associated with Year 2000 to be no more severe than the scenarios that its electric system is routinely prepared to handle. The most likely worst case scenario consists of the service loss of one of the largest generating units and/or the service loss of any single bulk transmission element in its traditional business service territory. There is a smaller risk of sporadic and temporary fluctuations of power levels that would be aggravated in the event of rapid and unscheduled changes to load patterns that resulted from the activity of third parties. SOUTHERN has followed a proven methodology for identifying and assessing software and devices containing potential Year 2000 challenges. Remediation and testing of those devices is complete. SOUTHERN has prepared contingency plans as appropriate and has participated and will continue to participate in North American Electric Reliability Council-coordinated national drills during 1999. SOUTHERN continues to review the Year 2000 readiness of material third parties that provide goods and services crucial to SOUTHERN's operations. Among such critical third parties are fuel, transportation, telecommunications, water, chemical, and other suppliers. There is some risk associated with representations by third parties regarding their readiness and completion of their own Year 2000 related work. Contingency plans based on the assessment of each third party's ability to continue supplying critical goods and services to SOUTHERN have been developed and are being reviewed. There is a potential for some earnings erosion caused by reduced electrical demand by customers because of their own Year 2000 challenges. The risk associated with the progress of some operations outside the United States is a function of the local regulatory environment and the priorities of the entities with management control. Year 2000 challenges are included in the list of due diligence activities associated with acquisitions; there is some risk associated with the subsequent validation of any given seller's representations. Contingency Plans Because of experience with hurricanes and other storms, the traditional business is skilled at developing and using contingency plans in unusual circumstances. As part of Year 2000 business continuity and contingency planning, SOUTHERN has drawn on that experience to make risk assessments and develop additional plans to deal specifically with Year 2000 challenges. SOUTHERN is identifying critical operational locations, and scheduling key employees to be on duty at those locations during the Year 2000 transition. SOUTHERN has already participated in one of two North American Electric Reliability Council-coordinated national drills during 1999, and has/is conducting additional drills to validate its contingency plans. A successful drill focused on SOUTHERN's ability to maintain critical voice and data exchange during partial loss of primary voice and data communications systems. Because of the level of detail of the contingency planning process, management feels that the contingency plans will keep any service interruptions that may occur within the traditional business service territory isolated and short in duration, similar to service loss during a storm. Contingency planning efforts for the non-traditional business are complete for North American assets and are underway for international assets. These contingency plans are being developed by utilizing consistent formats and guidelines. The material in this section constitutes forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. There can be no assurance that the actual results of SOUTHERN, its suppliers, or other third party dependencies will not materially differ from expectations. 17 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 six months of 1999 included $1.1 billion used for gross property additions to utility plant, and $1.5 billion used for Southern Energy acquisitions. The funds for these additions and other capital requirements were from operations and sales of securities. See SOUTHERN's Condensed Consolidated Statements of Cash Flows for further details. Reference is made to the SOUTHERN's Condensed Consolidated Statements of Comprehensive Income herein for information relating to other comprehensive income. During the first six months, Southern Energy recognized $116 million of after-tax foreign exchange translation losses in other comprehensive income which were principally related to shifts in exchange rates between the U.S. dollar and the pound sterling and the Deutschemark, and to the 50% devaluation of the Brazilian Real. Financing Activities During the first six months of 1999, retirements and redemptions of the operating companies' first mortgage bonds and preferred stock totaled $525 million and $86 million, respectively. In February 1999, Alabama Power Capital Trust III, a statutory business trust established for the purpose of holding ALABAMA's junior subordinated notes and issuing trust preferred securities and common securities, sold $50 million of its capital auction preferred securities which are guaranteed by ALABAMA. Also, in February 1999, Georgia Power Capital Trust IV, a statutory business trust established for the purpose of holding GEORGIA's junior subordinated notes and issuing trust preferred securities and common securities, sold $200 million of its 6.85% trust preferred securities, which are guaranteed by GEORGIA. Additionally, in March 1999, GEORGIA issued $100 million of 6 5/8% senior notes due March 31, 2039. The proceeds from this issuance were used to repay a portion of GEORGIA's outstanding short-term indebtedness. In May 1999, ALABAMA issued $200 million of 6.75% senior notes due June 30, 2039. The proceeds were used to repay a portion of its outstanding short-term indebtedness and for other general corporate purposes. Also, in May 1999, GEORGIA sold, through public authorities, $53 million of 5.45% pollution control revenue bonds due May 1, 2034; $85 million of 5.40% pollution control revenue bonds due May 1, 2034; and $100 million of 5.25% pollution control revenue bonds due May 1, 2034. The proceeds of these sales were used to redeem $50 million aggregate principal amount of 6.35% pollution control revenue bonds in June 1999; $125 million aggregate principal amount of 6.60% pollution control revenue bonds in July 1999; and $60 million aggregate principal amount of 6 3/8% pollution control revenue bonds in August 1999. In June 1999, ALABAMA sold, through public authorities, $101.6 million aggregate principal amount of variable rate pollution control revenue refunding bonds due June 1, 2022. The proceeds from the sale will be applied to the full redemption of the Series 1994 6 1/2% pollution control revenue refunding bonds on or about September 1, 1999. In July 1999, Southern Energy issued $700 million aggregate principal amount of senior notes which consisted of $200 million of 7.40% senior notes due 2004 and $500 million of 7.90% senior notes due 2009. Proceeds received from the sales of these notes are being used for general corporate purposes, including repayment of short-term debt. 18 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION During the first six months of 1999, SOUTHERN raised $24 million from the issuance of 885 thousand shares of common stock under SOUTHERN's various stock plans. See Note (P) in the "Notes to the Condensed Financial Statements" herein for discussion of programs to repurchase SOUTHERN's common stock. The market price of SOUTHERN's common stock at June 30, 1999 was $26.50 per share and the book value was $13.81 per share, representing a market-to-book ratio of 192%, compared to $29.0625, $14.04 and 207%, respectively, at the end of 1998. The dividend for the second quarter of 1999 was $0.335 per share. 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 electric system's capital requirements for its construction program, sinking fund requirements and maturing debt, and environmental compliance efforts. Approximately $1.1 billion will be required by June 30, 2000, for redemptions and maturities of long-term debt. Also, the operating companies plan to continue, to the extent possible, a program to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital. Sources of Capital In addition to the financing activities previously described, SOUTHERN may require additional equity capital during the remainder of the year. The amounts and timing of additional equity capital to be raised in 1999, as well as in subsequent years, will be contingent on SOUTHERN's investment opportunities. The operating companies plan to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. 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 June 30, 1999, approximately $449 million of cash and cash equivalents and approximately $6.1 billion of unused credit arrangements with banks of which $124.7 million expired on July 14, 1999. Of the remaining $5.9 billion, $1.4 billion of such arrangements provide liquidity support to variable rate pollution control bonds. At June 30, 1999, the system companies had outstanding approximately $1.2 billion of short-term notes payable and $2.8 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. See Note (D) in the "Notes to the Condensed Financial Statements" herein for discussion of financial derivative contracts entered into by SOUTHERN. 19 ALABAMA POWER COMPANY 20
ALABAMA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------------- ------------------------------- 1999 1998 1999 1998 ------------- --------------- -------------- --------------- OPERATING REVENUES: Revenues $ 800,433 $ 850,330 $1,467,656 $1,524,625 Revenues from affiliates 22,183 13,385 69,284 55,595 ------------- --------------- -------------- --------------- Total operating revenues 822,616 863,715 1,536,940 1,580,220 ------------- --------------- -------------- --------------- OPERATING EXPENSES: Operation-- Fuel 211,820 215,623 399,834 408,645 Purchased power from non-affiliates 17,995 25,150 25,575 42,685 Purchased power from affiliates 36,091 43,617 63,518 62,249 Other 134,602 125,442 252,498 240,255 Maintenance 75,039 86,803 145,813 150,336 Depreciation and amortization 87,634 86,141 174,816 172,380 Taxes other than income taxes 50,601 46,121 103,662 95,560 Federal and state income taxes 55,880 56,096 94,580 98,653 ------------- --------------- -------------- --------------- Total operating expenses 669,662 684,993 1,260,296 1,270,763 ------------- --------------- -------------- --------------- OPERATING INCOME 152,954 178,722 276,644 309,457 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction 2,445 610 4,433 895 Equity in earnings of subsidiaries 709 1,882 1,477 3,405 Interest income 14,322 24,828 23,768 38,498 Other, net (5,241) (8,090) (12,732) (17,007) Income taxes applicable to other income 312 (4,493) 1,236 (2,316) ------------- --------------- -------------- --------------- INCOME BEFORE INTEREST CHARGES AND OTHER 165,501 193,459 294,826 332,932 ------------- --------------- -------------- --------------- INTEREST CHARGES AND OTHER: Interest on long-term debt 45,966 47,713 91,026 92,431 Allowance for debt funds used during construction (3,592) (900) (5,333) (1,552) Interest on interim obligations 2,885 2,941 5,560 7,347 Amortization of debt discount, premium and expense, net 2,772 27,457 5,490 29,881 Other interest charges 14,379 12,615 22,211 26,235 Distributions on preferred securities of subsidiary companies 6,202 5,589 12,033 11,177 ------------- --------------- -------------- --------------- Interest charges and other, net 68,612 95,415 130,987 165,519 ------------- --------------- -------------- --------------- NET INCOME 96,889 98,044 163,839 167,413 DIVIDENDS ON PREFERRED STOCK 3,852 3,294 7,727 6,622 ------------- --------------- -------------- --------------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $93,037 $94,750 $ 156,112 $ 160,791 ============= =============== ============== =============== 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) (Stated in Thousands of Dollars) For the Six Months Ended June 30, ------------------------------- 1999 1998 ------------- ------------- OPERATING ACTIVITIES: Net income $ 163,839 $ 167,413 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 204,381 226,381 Deferred income taxes and investment tax credits, net 15,517 (5,789) Allowance for equity funds used during construction (4,433) (895) Other, net 42,999 12,129 Changes in certain current assets and liabilities-- Receivables, net (20,610) (35,656) Inventories (37,859) (20,149) Prepayments (27,540) (19,814) Payables (71,378) (33,027) Taxes accrued 49,419 46,385 Energy cost recovery, retail 4,653 (17,097) Other (30,321) (28,146) ------------- ------------- Net cash provided from operating activities 288,667 291,735 ------------- ------------- INVESTING ACTIVITIES: Gross property additions (321,236) (301,276) Other (46,039) (37,307) ------------- ------------- Net cash used for investing activities (367,275) (338,583) ------------- ------------- FINANCING ACTIVITIES: Proceeds-- Capital contributions - 30,000 Company obligated mandatorily redeemable preferred securities 50,000 - Pollution control bonds 101,650 106,790 Other long-term debt 200,000 390,000 Retirements-- Preferred stock (50,000) - Pollution control bonds (1,000) - First mortgage bonds (300,000) (198,500) Other long-term debt (640) (510) Interim obligations, net 276,751 30,638 Special deposits (101,650) (106,790) Payment of preferred stock dividends (7,997) (6,705) Payment of common stock dividends (196,400) (180,900) Miscellaneous (10,653) (20,529) ------------- ------------- Net cash provided from (used for) financing activities (39,939) 43,494 ------------- ------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (118,547) (3,354) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 134,248 23,957 ============= ============= CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,701 $ 20,603 ============= ============= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $114,401 $112,584 Income taxes 41,660 98,756 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 (Stated in Thousands of Dollars) ASSETS At June 30, 1999 At December 31, (Unaudited) 1998 --------------- ---------------- UTILITY PLANT: Plant in service, at original cost $11,484,932 $11,352,838 Less accumulated provision for depreciation 4,844,978 4,666,513 --------------- ---------------- 6,639,954 6,686,325 Nuclear fuel, at amortized cost 87,476 95,575 Construction work in progress 673,678 525,359 --------------- ---------------- --------------- ---------------- Total 7,401,108 7,307,259 --------------- ---------------- OTHER PROPERTY AND INVESTMENTS: Equity investments in subsidiaries 34,346 34,298 Nuclear decommissioning trusts, at market 267,113 232,183 Miscellaneous 11,943 12,915 --------------- ---------------- Total 313,402 279,396 --------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 15,701 134,248 Special deposits 101,650 - Receivables -- Customer accounts receivable 366,575 343,630 Other accounts and notes receivable 39,347 32,394 Affiliated companies 45,447 39,981 Accumulated provision for uncollectible accounts (1,262) (1,855) Refundable income taxes 32,117 52,117 Fossil fuel stock, at average cost 115,292 83,238 Materials and supplies, at average cost 155,474 149,669 Prepayments 44,700 17,160 Vacation pay deferred 28,390 28,390 --------------- ---------------- Total 943,431 878,972 --------------- ---------------- DEFERRED CHARGES AND OTHER ASSETS: Deferred charges related to income taxes 354,378 362,953 Debt expense, being amortized 9,554 8,602 Premium on reacquired debt, being amortized 84,008 83,440 Prepaid pension costs 191,728 169,393 Department of Energy assessments 31,088 31,088 Miscellaneous 98,813 104,595 --------------- ---------------- Total 769,569 760,071 --------------- ---------------- TOTAL ASSETS $9,427,510 $9,225,698 =============== ================ 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 (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At June 30, 1999 At December 31, (Unaudited) 1998 --------------- ---------------- CAPITALIZATION: Common stock equity -- Common stock (par value $40 per share) -- authorized 6,000,000 shares; outstanding 5,608,955 shares $ 224,358 $ 224,358 Paid-in capital 1,334,645 1,334,645 Premium on preferred stock 99 99 Retained earnings 1,184,854 1,224,965 --------------- ---------------- 2,743,956 2,784,067 Preferred stock 317,512 317,512 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding Company Junior Subordinated Notes 347,000 297,000 Long-term debt 2,741,504 2,646,566 --------------- ---------------- Total 6,149,972 6,045,145 --------------- ---------------- CURRENT LIABILITIES: Preferred stock due within one year - 50,000 Long-term debt due within one year 372,649 471,209 Commercial paper 276,751 - Accounts payable -- Affiliated companies 86,313 79,844 Other 106,166 188,074 Customer deposits 30,039 29,235 Taxes accrued-- Federal and state income 78,694 82,219 Other 50,810 17,559 Interest accrued 28,709 38,166 Vacation pay accrued 28,390 28,390 Miscellaneous 56,979 79,095 --------------- ---------------- Total 1,115,500 1,063,791 --------------- ---------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 1,240,163 1,202,971 Accumulated deferred investment tax credits 265,988 271,611 Prepaid capacity revenues, net 88,400 96,080 Department of Energy assessments 27,202 27,202 Deferred credits related to income taxes 305,176 315,735 Natural disaster reserve 17,466 19,385 Miscellaneous 217,643 183,778 --------------- ---------------- Total 2,162,038 2,116,762 --------------- ---------------- TOTAL CAPITALIZATION AND LIABILITIES $9,427,510 $9,225,698 =============== ================ The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
24 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1999 vs. SECOND QUARTER 1998 AND YEAR-TO-DATE 1999 vs. YEAR-TO-DATE 1998 RESULTS OF OPERATIONS Earnings ALABAMA's net income after dividends on preferred stock for the second quarter and year-to-date 1999 was $93.0 million and $156.1 million, respectively, compared to $94.8 million and $160.8 million for the corresponding periods of 1998. Earnings for the current quarter and year-to-date decreased $1.7 million or 1.8% and $4.7 million or 2.9%, respectively, due primarily to decreases in operating revenues. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Revenues......................................... $(49,897) (5.9) $(56,969) (3.7) Revenues from affiliates......................... 8,798 65.7 13,689 24.6 Purchased power from non-affiliates.............. (7,155) (28.4) (17,110) (40.1) Purchased power from affiliates.................. (7,526) (17.3) 1,269 2.0 Other operation expense.......................... 9,160 7.3 12,243 5.1 Maintenance expense.............................. (11,764) (13.6) (4,523) (3.0) Interest income.................................. (10,506) (42.3) (14,730) (38.3) Amortization of debt discount, premium and expense, net (24,685) (89.9) (24,391) (81.6)
Revenues. Including fuel revenues, revenues for the second quarter and year-to-date 1999 were down from the corresponding periods in 1998 due primarily to decreases in retail energy sales and revenues from unit power sales. Retail energy sales for the current quarter and year-to-date 1999 decreased by 3.6% and 1.1%, respectively, due to milder weather in the second quarter of 1999 as compared to extremely hot weather in the second quarter of 1998 and lower industrial sales. Revenues from unit power sales for the current quarter and year-to-date 1999 decreased 22.3% and 18.4%, respectively, as a result of lower energy sales and a lowering of the equity return under formula rate contracts. See Note (F) in the "Notes to the Condensed Financial Statements" herein for further details. Retail revenues, excluding those revenues which represent the recovery of fuel expense and certain other expenses and do not affect income, decreased $12.7 million for the current quarter and $10.6 million year-to-date. Revenues from affiliates and Purchased power from affiliates. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions did not have a significant impact on earnings. 25 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Purchased power from non-affiliates. These expenses dropped during this quarter and year-to-date 1999 when compared to the corresponding periods of 1998 due primarily to increased purchases in 1998 related to power marketing activities, a majority of which were resold to non-affiliated third parties. These transactions had no significant effect on net income. Other operation expense. Current quarter and year-to-date 1999 increases are due primarily to higher administrative and general expenses. Maintenance expense. These expenses decreased for the current quarter and year-to-date 1999 due mainly to decreases in steam and distribution expenses. For year-to-date 1999, the effect of these decreases was partially offset by an increase in transmission expenses. Interest income. The decreases for the current quarter and year-to-date 1999 are primarily attributed to the recording by ALABAMA during the second quarter of 1998 of its portion of the tax settlement between SOUTHERN and the Internal Revenue Service. For additional information, see Note 3 to the financial statements of ALABAMA under the caption "Tax Litigation" in Item 8 of the Form 10-K. Amortization of debt discount, premium and expense, net. The decreases for the current quarter and year-to-date when compared to the same periods in 1998 are directly related to accelerated amortization in 1998 of premiums incurred to refinance high-cost debt. For additional information, see Note 3 to the financial statements of ALABAMA under the caption "Retail Rate Adjustment Procedures" in Item 8 of the Form 10-K. 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, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of 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. The U.S. Environmental Protection Agency is conducting an industry-wide investigation concerning the compliance status of certain coal-fired generating facilities, including certain of ALABAMA's units, under the new source review provisions of the Clean Air Act. Although the outcome of this matter cannot now be determined, if adverse it could result in substantial penalties and additional capital costs. 26 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ALABAMA's plans to achieve Year 2000 readiness have been implemented and are included in the SOUTHERN system's Year 2000 Program. The costs related to ALABAMA's Year 2000 program, including ALABAMA's share of costs of Southern Nuclear Operating Company, are expected to be $37.0 million. From its inception through June 30, 1999, the Year 2000 program costs, recognized primarily as expense, amounted to $32.5 million. For additional information, see SOUTHERN's MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL Condition - "Future Earnings Potential" herein. The FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which was originally to be adopted by the year 2000. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which amends FASB Statement No. 133 to be effective for all fiscal years beginning after June 15, 2000 (January 1, 2001 for companies with calendar-year fiscal years). ALABAMA has not yet quantified the impact of adopting this statement on its financial statements; however, the adoption could increase volatility in reported earnings. Reference is made to Notes (B), (C), and (F) through (J) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. FINANCIAL CONDITION Overview Major changes in ALABAMA's financial condition during the first six months of 1999 included the addition of approximately $321.2 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities. See ALABAMA's Condensed Statements of Cash Flows for further details. Financing Activities During the first six months of 1999, redemptions of first mortgage bonds and preferred stock by ALABAMA totaled $300 million and $50 million, respectively. In February 1999, Alabama Power Capital Trust III (the "Trust"), a statutory business trust established for the purpose of holding ALABAMA's junior subordinated notes and issuing trust preferred securities and common securities, sold $50 million of its capital auction preferred securities which are guaranteed by ALABAMA. The Trust invested the proceeds in Series C junior subordinated notes. The net proceeds received by ALABAMA were used to repay a portion of ALABAMA's outstanding short-term indebtedness. See Note (G) in the " Notes to the Condensed Financial Statements" herein for additional information. In May 1999, ALABAMA issued $200 million of 6.75% senior notes due June 30, 2039. The proceeds were used to repay a portion of its outstanding short-term indebtedness and for other general corporate purposes. In June 1999, ALABAMA sold, through public authorities, $101.6 million aggregate principal amount of variable rate pollution control revenue refunding bonds due June 1, 2022. The proceeds from the sale will be applied to the full redemption of the Series 1994 6 1/2% pollution control revenue refunding bonds on or about September 1, 1999. 27 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 June 30, 1999, approximately $15.7 million of cash and cash equivalents and had unused committed lines of credit of approximately $1 billion of which $124.7 million expired on July 14, 1999. Of the remaining $899.7 million of committed lines, $418.7 million may be borrowed upon only to fund purchase obligations relating to variable rate pollution control bonds. Additionally, in July 1999, ALABAMA entered into an Extendible Commercial Note program. ALABAMA has regulatory authority for up to $750 million of short-term borrowings. At June 30, 1999, ALABAMA had outstanding $276.8 million of commercial paper. 28 ARTHUR ANDERSEN LLP Exhibit 1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO ALABAMA POWER COMPANY: We have reviewed the accompanying condensed balance sheet of ALABAMA POWER COMPANY as of June 30, 1999, and the related condensed statements of income for the three-month and six-month periods ended June 30, 1999 and 1998 and cash flows for the six-month periods ended June 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of ALABAMA POWER COMPANY as of December 31, 1998 (not presented herein) and, in our report dated February 10, 1999, 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, 1998 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 August 9, 1999 29 GEORGIA POWER COMPANY 30
GEORGIA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------------- ------------------------------- 1999 1998 1999 1998 --------------- -------------- -------------- -------------- OPERATING REVENUES: Revenues $1,077,066 $1,206,151 $2,000,090 $2,185,485 Revenues from affiliates 14,482 20,163 22,388 24,972 --------------- -------------- -------------- -------------- Total operating revenues 1,091,548 1,226,314 2,022,478 2,210,457 --------------- -------------- -------------- -------------- OPERATING EXPENSES: Operation-- Fuel 237,574 248,030 415,786 424,661 Purchased power from non-affiliates 47,752 58,754 79,910 104,228 Purchased power from affiliates 43,850 36,677 98,771 80,362 Other 184,321 194,267 352,603 363,692 Maintenance 90,937 91,089 182,473 172,038 Depreciation and amortization 139,289 255,840 271,724 414,434 Taxes other than income taxes 49,151 55,239 98,153 107,434 Federal and state income taxes 90,765 97,994 154,145 178,643 --------------- -------------- -------------- -------------- Total operating expenses 883,639 1,037,890 1,653,565 1,845,492 --------------- -------------- -------------- -------------- OPERATING INCOME 207,909 188,424 368,913 364,965 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction - - - 178 Equity in earnings of unconsolidated subsidiary 731 758 1,464 1,840 Interest income 2,115 64,358 2,365 64,911 Other, net (3,389) (23,376) (10,026) (28,499) Income taxes applicable to other income 397 (15,755) 2,956 (13,212) --------------- -------------- -------------- -------------- INCOME BEFORE INTEREST CHARGES 207,763 214,409 365,672 390,183 --------------- -------------- -------------- -------------- INTEREST CHARGES AND OTHER: Interest on long-term debt 42,872 45,252 83,983 90,308 Allowance for debt funds used during construction (3,128) (2,174) (5,310) (4,002) Interest on interim obligations 5,618 4,767 9,834 8,513 Amortization of debt discount, premium and expense, net 3,900 3,320 7,600 6,651 Other interest charges 2,726 11,120 6,037 15,134 Distributions on preferred securities of subsidiary companies 17,026 13,601 31,997 27,125 --------------- -------------- -------------- -------------- Interest charges and other, net 69,014 75,886 134,141 143,729 --------------- -------------- -------------- -------------- NET INCOME 138,749 138,523 231,531 246,454 DIVIDENDS ON PREFERRED STOCK 178 1,837 1,379 3,864 --------------- -------------- -------------- -------------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 138,571 $ 136,686 $ 230,152 $ 242,590 =============== ============== ============== ============== 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) (Stated in Thousands of Dollars) For the Six Months Ended June 30, ------------------------------- 1999 1998 ------------- ------------- OPERATING ACTIVITIES: Net income $ 231,531 $ 246,454 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 280,856 450,537 Deferred income taxes and investment tax credits, net 6,396 (23,316) Other, net 33,791 27,946 Changes in certain current assets and liabilities-- Receivables, net 9,255 (293,473) Inventories (37,670) (5,854) Payables (66,228) (1,764) Taxes accrued 24,785 108,327 Energy cost recovery, retail (4,262) (11,196) Other 16,133 19,240 ------------- ------------- Net cash provided from operating activities 494,587 516,901 ------------- ------------- INVESTING ACTIVITIES: Gross property additions (353,516) (207,796) Other (44,126) 15,641 ------------- ------------- Net cash used for investing activities (397,642) (192,155) ------------- ------------- FINANCING ACTIVITIES: Proceeds-- Preferred securities 200,000 - Pollution control bonds 238,000 89,990 Senior notes 100,000 145,000 Retirements-- Preferred stock (35,732) (40,679) First mortgage bonds (209,000) (220,460) Pollution control bonds (50,000) (89,990) Capital leases (215) - Special deposits - redemption funds (186,785) - Interim obligations, net 147,701 9,655 Payment of preferred stock dividends (378) (6,628) Payment of common stock dividends (266,800) (264,400) Miscellaneous (25,429) (6,703) ------------- ------------- Net cash used for financing activities (88,638) (384,215) ------------- ------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 8,307 (59,469) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,272 83,333 ============= ============= CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,579 $ 23,864 ============= ============= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $126,412 $137,345 Income taxes (net of refunds) 88,524 98,165 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 (Stated in Thousands of Dollars) ASSETS At June 30, 1999 At December 31, (Unaudited) 1998 --------------- ---------------- UTILITY PLANT: Plant in service $15,590,726 $15,441,146 Less accumulated provision for depreciation 6,327,358 6,109,331 --------------- ---------------- 9,263,368 9,331,815 Nuclear fuel, at amortized cost 119,931 121,169 Construction work in progress 315,163 189,849 --------------- ---------------- Total 9,698,462 9,642,833 --------------- ---------------- OTHER PROPERTY AND INVESTMENTS: Southern Electric Generating Company, at equity 24,394 24,360 Nuclear decommissioning trusts, at market 331,035 284,536 Miscellaneous 32,333 34,781 --------------- ---------------- Total 387,762 343,677 --------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 24,579 16,272 Receivables -- Customer accounts receivable 442,173 439,420 Other accounts and notes receivable 255,838 99,574 Affiliated companies 24,159 16,817 Accumulated provision for uncollectible accounts (5,000) (5,500) Fossil fuel stock, at average cost 138,449 104,133 Materials and supplies, at average cost 246,831 243,477 Prepayments 23,025 29,670 Vacation pay deferred 42,687 43,610 --------------- ---------------- Total 1,192,741 987,473 --------------- ---------------- DEFERRED CHARGES: Deferred charges related to income taxes 595,630 604,488 Premium on reacquired debt, being amortized 181,644 173,858 Prepaid pension costs 124,931 103,606 Debt expense, being amortized 61,872 51,261 Miscellaneous 137,013 126,422 --------------- ---------------- Total 1,101,090 1,059,635 --------------- ---------------- TOTAL ASSETS $12,380,055 $12,033,618 =============== ================ 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 (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At June 30, 1999 At December 31, (Unaudited) 1998 --------------- ---------------- CAPITALIZATION: Common stock equity -- Common stock (without par value) -- authorized 15,000,000 shares; outstanding 7,761,500 shares $ 344,250 $ 344,250 Paid-in capital 1,660,223 1,660,206 Premium on preferred stock 40 158 Retained earnings 1,742,907 1,779,558 --------------- ---------------- 3,747,420 3,784,172 Preferred stock 15,451 15,527 Company obligated mandatorily redeemable preferred securities of subsidiaries substantially all of whose assets are junior subordinated debentures or notes 889,250 689,250 Long-term debt 2,743,575 2,744,362 --------------- ---------------- Total 7,395,696 7,233,311 --------------- ---------------- CURRENT LIABILITIES: Preferred stock due within one year - 35,656 Long-term debt due within one year 480,550 399,429 Notes payable to banks 318,216 117,634 Commercial paper 170,337 223,218 Accounts payable -- Affiliated companies 66,576 75,774 Other 242,067 326,317 Customer deposits 72,968 69,584 Taxes accrued-- Federal and state income 72,069 15,801 Other 90,876 122,359 Interest accrued 60,315 60,187 Miscellaneous 109,554 100,793 --------------- ---------------- Total 1,683,528 1,546,752 --------------- ---------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 2,248,726 2,249,613 Accumulated deferred investment tax credits 374,514 381,914 Deferred credits related to income taxes 273,911 284,017 Employee benefits provisions 187,659 177,148 Miscellaneous 216,021 160,863 --------------- ---------------- Total 3,300,831 3,253,555 --------------- ---------------- TOTAL CAPITALIZATION AND LIABILITIES $12,380,055 $12,033,618 =============== ================ The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
34 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1999 vs. SECOND QUARTER 1998 AND YEAR-TO-DATE 1999 vs. YEAR-TO-DATE 1998 RESULTS OF OPERATIONS Earnings GEORGIA's net income after dividends on preferred stock for the second quarter and year-to-date 1999 was $138.6 million and $230.2 million, respectively, compared to $136.7 million and $242.6 million for the same periods in 1998. Second quarter 1999 earnings increased slightly by $1.9 million or 1.4% while year-to-date 1999 earnings decreased by $12.4 million or 5.1% due primarily to lower operating revenues. Operating revenues were affected by fixed rate reductions ordered by the 1998 Georgia PSC rate order and milder temperatures as compared to 1998. Under the new order, fixed rate reductions and accelerated amortization are being recognized ratably throughout 1999. During 1998, variable accelerated depreciation recorded under the previous accounting order was primarily recognized during the higher revenue months. See Note (K) in the "Notes to the Condensed Financial Statements" herein for further details regarding the retail rate order. Significant income statement items appropriate for discussion include the following: Increase (Decrease) --------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Revenues......................................... $(129,085) (10.7) $(185,395) (8.5) Purchased power from non-affiliates.............. (11,002) (18.7) (24,318) (23.3) Depreciation and amortization.................... (116,551) (45.6) (142,710) (34.4) Interest income.................................. (62,243) (96.7) (62,546) (96.4) Other, net....................................... 19,987 85.5 18,473 64.8 Income taxes applicable to other income.......... 16,152 102.5 16,168 122.4 Other interest charges........................... (8,394) (75.5) (9,097) (60.1) Distributions on preferred securities of subsidiary companies 3,425 25.2 4,872 18.0
Revenues. Revenues within the service area decreased by $149.7 million and $190.6 million, for the second quarter and year-to-date 1999, respectively, when compared to the same periods in 1998. Retail revenues, excluding fuel revenues which generally do not affect income, decreased $129.4 million and $176.8 million, respectively, for the second quarter and year-to-date 1999 when compared to the corresponding periods in 1998 primarily due to retail rate reductions ordered by the Georgia PSC and milder weather in 1999 compared to 1998. Energy sales in the second quarter and year-to-date 1999 decreased by 2.9% for each of these periods when compared to the same periods in 1998 due to mild temperatures. In particular, residential energy sales were down by 10.4% and 5.5%, respectively, for the second quarter and year-to-date. 35 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Wholesale revenues within the service area decreased $12.3 million and $22.1 million, respectively, during the second quarter and year-to-date 1999 primarily as a result of a scheduled reduction in capacity revenues under a power supply agreement with OPC and a decrease in energy sales. Wholesale revenues outside the service area increased by $10.0 million for the second quarter of 1999 and decreased by $3.9 million year-to-date 1999 when compared to the corresponding periods in 1998. The second quarter increase in wholesale revenues outside the service area is attributed to capacity adjustments under long-term contracts recorded during the second quarter of 1998. The year-to-date decrease was mainly due to lower energy sales. Purchased power from non-affiliates. The decreases for this second quarter and year-to-date 1999 when compared to the same periods in 1998 were mainly due to higher demand in 1998 for energy and higher energy purchases in 1998 related to power marketing activities, a majority of which were resold to non-affiliated third parties. These transactions had no significant effect on net income. Depreciation and amortization expense. This item decreased in the second quarter and year-to-date 1999 when compared to the corresponding periods in 1998 due mainly to higher depreciation charges recognized in 1998 under the prior accounting order and the completion in 1998 of the amortization of deferred Plant Vogtle costs. Interest income. The decreases in this item for the current quarter and year-to-date 1999 are related to the recognition, in the corresponding periods of 1998, of increased interest income resulting from the resolution of tax issues between SOUTHERN and the Internal Revenue Service. Other, net. The changes for the second quarter and year-to-date 1999 are attributed to reduced donations and contributions in these periods when compared to the corresponding periods in 1998. Income taxes applicable to other income. The second quarter and year-to-date 1999 decreases are attributed to taxes in 1998 on the additional interest income discussed above. Other interest charges. For the current quarter and year-to-date 1999, these charges were lower when compared to the same periods in 1998 due to the recognition in 1998 of increased interest related to tax issues. Distributions on preferred securities of subsidiary companies. Second quarter and year-to-date 1999 increases are attributed to the issuance of additional mandatorily redeemable preferred securities in February 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 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, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form 10-K. 36 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 $262 million on an annual basis effective January 1, 1999. Reference is made to Note (K) 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 September 1998, OPC decreased its purchases of capacity under a power supply agreement by 250 megawatts, resulting in a $16 million reduction in 1999 revenues. The resources associated with the decreased purchases in 1998 will be used to meet the needs of GEORGIA's retail customers through 2004. As a result of additional reduction notices given by OPC under its agreement with GEORGIA, GEORGIA's capacity revenues received from OPC were estimated to decrease by an additional $7 million in 1999, $18 million in 2000 and $4 million in 2001. Effective April 1, 1999, GEORGIA and OPC entered into a new agreement which will delay, in part, planned purchase reductions by OPC. The new agreement has been filed with the FERC under SOUTHERN's market-based rate authority. Based on the above, GEORGIA's capacity revenues received from OPC are now estimated to decrease by approximately $6 million in 1999, $15 million in 2000 and $7 million in 2001. 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. The U.S. Environmental Protection Agency is conducting an industry-wide investigation concerning the compliance status of certain coal-fired generating facilities, including certain of GEORGIA's units, under the new source review provisions of the Clean Air Act. Although the outcome of this matter cannot now be determined, if adverse it could result in substantial penalties and additional capital costs. GEORGIA's plans to achieve Year 2000 compliance have been implemented and are included in the SOUTHERN system's Year 2000 Program. The costs related to GEORGIA's Year 2000 program, including GEORGIA's share of costs of Southern Nuclear Operating Company, are expected to be approximately $41 million. From its inception through June 30, 1999, the Year 2000 program costs, recognized as expense, amounted to $37 million. For additional information, see SOUTHERN's MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL Condition - "Future Earnings Potential" herein. The FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which was originally to be adopted by the year 2000. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which amends FASB Statement No. 133 to be effective for all fiscal years beginning after June 15, 2000 (January 1, 2001 for companies with calendar-year fiscal years). GEORGIA has not yet quantified the impact of adopting this statement on its financial statements; however, the adoption could increase volatility in earnings. Reference is made to Notes (B), (C), (F), (G), and (K) through (M) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. 37 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL CONDITION Overview The major change in GEORGIA's financial condition during the first six months of 1999 was the addition of approximately $353.5 million to gross plant. The funds for these additions and other capital requirements were derived primarily from operations. See GEORGIA's Condensed Statements of Cash Flows for further details. Financing Activities During the first six months of 1999, redemptions of first mortgage bonds and preferred stock by GEORGIA totaled $209 million and $35.7 million, respectively. In February 1999, Georgia Power Capital Trust IV, a statutory business trust established for the purpose of holding GEORGIA's junior subordinated notes and issuing trust preferred securities and common securities, sold $200 million of its 6.85% trust preferred securities, which are guaranteed by GEORGIA. (See Note (G) in the " Notes to the Condensed Financial Statements" herein and Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS - "Financing Activities" of GEORGIA in the Form 10-K for further details.) In March 1999, GEORGIA issued $100 million of 6 5/8% senior notes due March 31, 2039. The proceeds from this issuance were used to repay a portion of GEORGIA's outstanding short-term indebtedness. In May 1999, GEORGIA sold, through public authorities, $53 million of 5.45% pollution control revenue bonds due May 1, 2034; $85 million of 5.40% pollution control revenue bonds due May 1, 2034; and $100 million of 5.25% pollution control revenue bonds due May 1, 2034. The proceeds of these sales were used to redeem $50 million aggregate principal amount of 6.35% pollution control revenue bonds in June 1999; $125 million aggregate principal amount of 6.60% pollution control revenue bonds in July 1999; and $60 million aggregate principal amount of 6 3/8% pollution control revenue bonds in August 1999. GEORGIA plans to continue, to the extent possible, a program to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GEORGIA under "Liquidity and Capital Requirements" and "Environmental Issues" in the Form 10-K for a description of GEORGIA's capital requirements for its construction program and environmental compliance efforts. Sources of Capital In addition to the financing activities previously described herein, GEORGIA plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - - BUSINESS - "Financing Programs" in the Form 10-K for additional information. 38 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION To meet short-term cash needs and contingencies, GEORGIA had at June 30, 1999, approximately $24.6 million of cash and cash equivalents and approximately $1.3 billion of unused credit arrangements with banks. Of the $1.3 billion, $980 million provides liquidity support to GEORGIA's variable rate pollution control bonds. At June 30, 1999, GEORGIA had $318.2 million and $170.3 million outstanding in short-term notes payable to banks and commercial paper, respectively. 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 LLP Exhibit 1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO GEORGIA POWER COMPANY: We have reviewed the accompanying condensed balance sheet of GEORGIA POWER COMPANY (a Georgia corporation) as of June 30, 1999, and the related condensed statements of income for the three-month and six-month periods ended June 30, 1999 and 1998 and cash flows for the six-month periods ended June 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of GEORGIA POWER COMPANY as of December 31, 1998 (not presented herein), and, in our report dated February 10, 1999, 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, 1998, 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 August 9, 1999 40 GULF POWER COMPANY 41
GULF POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Six Months Ended June 30, Ended June 30, --------------------------- --------------------------- 1999 1998 1999 1998 ------------- ------------ ------------- ------------ OPERATING REVENUES: Revenues $153,205 $160,061 $280,640 $294,614 Revenues from affiliates 13,610 17,069 20,681 23,466 ------------- ------------ ------------- ------------ Total operating revenues 166,815 177,130 301,321 318,080 ------------- ------------ ------------- ------------ OPERATING EXPENSES: Operation-- Fuel 53,208 55,443 91,961 96,886 Purchased power from non-affiliates 9,138 8,256 13,294 12,989 Purchased power from affiliates 3,100 2,545 6,675 6,433 Other 27,780 34,169 54,922 65,450 Maintenance 15,903 14,591 32,496 27,487 Depreciation and amortization 16,034 16,409 32,112 31,112 Taxes other than income taxes 12,399 12,485 24,943 25,104 Federal and state income taxes 7,695 9,490 10,336 13,640 ------------- ------------ ------------- ------------ Total operating expenses 145,257 153,388 266,739 279,101 ------------- ------------ ------------- ------------ OPERATING INCOME 21,558 23,742 34,582 38,979 OTHER INCOME (EXPENSE): Interest income 260 194 501 317 Other, net (91) (203) (903) (1,406) Income taxes applicable to other income (170) (57) (9) 300 ------------- ------------ ------------- ------------ INCOME BEFORE INTEREST CHARGES 21,557 23,676 34,171 38,190 ------------- ------------ ------------- ------------ INTEREST CHARGES AND OTHER: Interest on long-term debt 5,032 4,725 9,982 9,602 Other interest charges 333 2,825 611 3,100 Interest on notes payable 871 481 1,356 819 Amortization of debt discount, premium and expense, net 491 522 989 1,100 Distributions on preferred securities of subsidiary companies 1,550 1,550 3,100 2,934 ------------- ------------ ------------- ------------ Interest charges and other, net 8,277 10,103 16,038 17,555 ------------- ------------ ------------- ------------ NET INCOME 13,280 13,573 18,133 20,635 DIVIDENDS ON PREFERRED STOCK 54 209 108 418 ------------- ------------ ------------- ------------ NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $13,226 $13,364 $18,025 $20,217 ============= ============ ============= ============ The accompanying notes as they relate to GULF are an integral part of these condensed statements.
42
GULF POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Six Months Ended June 30, ---------------------------- 1999 1998 ------------ ----------- OPERATING ACTIVITIES: Net income $ 18,133 $ 20,635 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 34,100 35,747 Deferred income taxes (1,952) (6,173) Other, net 5,824 10,570 Changes in certain current assets and liabilities-- Receivables, net (12,514) (10,355) Inventories (23,700) (10,615) Payables (4,082) (1,610) Taxes accrued 15,425 16,894 Current costs of 1995 coal contract renegotiation - 812 Other (8,716) (5,662) ------------ ----------- Net cash provided from operating activities 22,518 50,243 ------------ ----------- INVESTING ACTIVITIES: Gross property additions (33,242) (26,091) Other (10,221) (3,114) ------------ ----------- Net cash used for investing activities (43,463) (29,205) ------------ ----------- FINANCING ACTIVITIES: Proceeds-- Preferred securities - 45,000 Other long-term debt - 50,000 Retirements-- Preferred stock - (5) First mortgage bonds - (15,000) Other long-term debt - (8,327) Notes payable, net 53,500 (33,000) Payment of preferred stock dividends (117) (419) Payment of common stock dividends (30,100) (38,200) Miscellaneous (4) (4,026) ------------ ----------- Net cash provided from (used for) financing activities 23,279 (3,977) ------------ ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS 2,334 17,061 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 969 4,707 ============ =========== CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,303 $ 21,768 ============ =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $13,089 $12,463 Income taxes 2,412 5,442 The accompanying notes as they relate to GULF are an integral part of these condensed statements.
43
GULF POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At June 30, 1999 At December 31, (Unaudited) 1998 --------------------------------- UTILITY PLANT: Plant in service $1,836,916 $1,809,901 Less accumulated provision for depreciation 801,855 784,111 -------------- -------------- 1,035,061 1,025,790 Construction work in progress 26,669 34,863 -------------- -------------- Total 1,061,730 1,060,653 -------------- -------------- OTHER PROPERTY AND INVESTMENTS: 1,586 588 -------------- -------------- CURRENT ASSETS: Cash and cash equivalents 3,303 969 Receivables -- Customer accounts receivable 59,853 49,067 Other accounts and notes receivable 3,276 3,514 Affiliated companies 5,413 3,442 Accumulated provision for uncollectible accounts (1,001) (996) Fossil fuel stock, at average cost 47,082 24,213 Materials and supplies, at average cost 28,856 28,025 Regulatory clauses under recovery 12,767 9,737 Prepayments 2,780 5,690 Vacation pay deferred 4,035 4,035 -------------- -------------- Total 166,364 127,696 -------------- -------------- DEFERRED CHARGES: Deferred charges related to income taxes 25,286 25,308 Debt expense, being amortized 20,620 21,448 Prepaid pension costs 15,775 13,770 Miscellaneous 19,009 18,438 -------------- -------------- Total 80,690 78,964 -------------- -------------- TOTAL ASSETS $1,310,370 $1,267,901 ============== ============== The accompanying notes as they relate to GULF are an integral part of these condensed statements.
44
GULF POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At June 30, 1999 At December 31, (Unaudited) 1998 --------------------------------- CAPITALIZATION: Common stock equity -- Common stock (without par value) -- authorized and outstanding -- 992,717 shares $ 38,060 $ 38,060 Paid-in capital 218,960 218,960 Premium on preferred stock 12 12 Retained earnings 158,546 170,620 -------------- -------------- 415,578 427,652 Preferred stock 4,236 4,236 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding Company Junior Subordinated Notes 85,000 85,000 Long-term debt 317,497 317,341 -------------- -------------- Total 822,311 834,229 -------------- -------------- CURRENT LIABILITIES: Long-term debt due within one year 27,000 27,000 Notes payable 85,000 31,500 Accounts payable -- Affiliated companies 11,989 19,756 Other 20,032 23,697 Customer deposits 12,677 12,560 Taxes accrued 18,551 7,432 Interest accrued 5,938 5,184 Regulatory clauses over recovery 3,460 6,037 Vacation pay accrued 4,035 4,035 Dividends declared 45 54 Miscellaneous 1,577 3,960 -------------- -------------- Total 190,304 141,215 -------------- -------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 165,330 166,118 Deferred credits related to income taxes 51,079 52,465 Accumulated provision for property damage 4,956 1,605 Accumulated deferred investment tax credits 28,672 29,632 Accumulated provision for postretirement benefits 25,525 23,534 Miscellaneous 22,193 19,103 -------------- -------------- Total 297,755 292,457 -------------- -------------- TOTAL CAPITALIZATION AND LIABILITIES $1,310,370 $1,267,901 ============== ============== 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 SECOND QUARTER 1999 vs. SECOND QUARTER 1998 AND YEAR-TO-DATE 1999 vs. YEAR-TO-DATE 1998 RESULTS OF OPERATIONS Earnings GULF's net income after dividends on preferred stock for the second quarter and year-to-date 1999 was $13.2 million and $18.0 million, respectively, compared to $13.4 million and $20.2 million for the corresponding periods of 1998. While earnings for the current quarter remained relatively flat when compared to the same period in 1998, earnings year-to-date declined by 10.8%, primarily due to higher maintenance expenses incurred during the first quarter of 1999. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Revenues......................................... $(6,856) (4.3) $(13,974) (4.7) Revenues from affiliates......................... (3,459) (20.3) (2,785) (11.9) Fuel expense..................................... (2,235) (4.0) (4,925) (5.1) Other operation expense.......................... (6,389) (18.7) (10,528) (16.1) Maintenance expense.............................. 1,312 9.0 5,009 18.2 Other interest charges........................... (2,492) (88.2) (2,489) (80.3)
Revenues. The decreases in revenues for the second quarter and year-to-date 1999 reflect, for the most part, the recovery of lower fuel costs. The price per ton of coal, which is GULF's primary fuel source, was lower in the second quarter and year-to-date 1999 compared to the same periods in 1998 due to full amortization, by March 1998, of costs related to prior year coal contract renegotiations and the reduction of a major coal contract price. Excluding recovery of fuel expense and certain other expenses that do not affect income, retail revenues decreased $6.6 million for the quarter and $5.5 million year-to-date, primarily due to a decrease in energy sales to residential customers reflecting the impact of milder-than-normal temperatures during the first half of 1999 as compared to hotter-than-normal temperatures recorded in the same periods in 1998. Revenues from non-territorial wholesale energy sales decreased $1.3 million and $4.0 million for the second quarter and year-to-date 1999, respectively, when compared to the corresponding periods of 1998. The decreases in non-territorial wholesale energy sales were primarily due to decreased sales through power marketing activities. Revenues from affiliates. Revenues from sales to affiliated companies within the Southern electric system will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Fuel expense. The decreases in fuel expense reflect lower fuel costs, resulting from the reduction of a major coal contract price. 46 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Other operation expense. This item decreased in this quarter when compared to the same period in 1998 due to lower administrative and general expenses. Year-to-date 1999, this cost decreased due to lower administrative and general expenses as well as prior year payments related to renegotiations of coal supply contracts being fully amortized in 1998. Maintenance expense. The increases in these expenses for the second quarter and year-to-date 1999 reflect scheduled maintenance on steam plant facilities. Other interest charges. The decreases for the current quarter and year-to-date 1999 are primarily attributed to the recognition, in 1998, of interest related to tax issues. 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, the Southern electric system 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. 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. The U.S. Environmental Protection Agency is conducting an industry-wide investigation concerning the compliance status of certain coal-fired generating facilities, including certain of GULF's units, under the new source review provisions of the Clean Air Act. Although the outcome of this matter cannot now be determined, if adverse it could result in substantial penalties and additional capital costs. GULF's plans to achieve Year 2000 readiness have been implemented and are included in the SOUTHERN system's Year 2000 Program. The costs related to GULF's Year 2000 program are expected to be $5.2 million. From its inception through June 30, 1999, the Year 2000 program costs, recognized as expense, amounted to $4.2 million. For additional information, see SOUTHERN's MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - "Future Earnings Potential" herein. In reference to the ongoing matters with the Florida PSC concerning GULF's authorized return on equity (ROE) and the outstanding balances of certain regulatory assets, GULF filed a revised plan on April 6, 1999. The staff of the Florida PSC countered with another proposal on April 8, 1999. Both were presented to the Commission at the April 20, 1999, agenda conference. The Florida PSC approved the staff's proposal with several modifications. The changes approved by the Florida PSC included the following: a reduction in the authorized return mid-point from 12.0% to 11.5%, the sharing of revenues for a period of 3 years above an earnings level of 12.5% ROE up to 14% ROE, revenue credits to customers and the write-off of regulatory 47 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION assets totaling $7.1 million per year from 1999 through 2001. The Commission issued an order establishing the changes associated with earnings, revenue sharing, and other regulatory issues on May 24, 1999. On June 14, 1999, the Coalition for Equitable Rates filed a protest requesting a formal proceeding to review the plan proposed by the Florida PSC order. Hearings in the docket are expected later this year or early in 2000. On July 22, 1999, the Office of Public Counsel petitioned the Florida PSC to initiate and conduct a full revenue requirements base rate proceeding for GULF. No action has been taken by the Florida PSC on the Office of Public Counsel's petition. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" and Item 1 - Business - "Regulation - State Commissions" of GULF in the Form 10-K. The FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which was originally to be adopted by the year 2000. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which amends FASB Statement No. 133 to be effective for all fiscal years beginning after June 15, 2000 (January 1, 2001 for companies with calendar-year fiscal years). Adoption of this statement is not expected to have a material impact on GULF's financial statements. Reference is made to Notes (B) and (F) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. FINANCIAL CONDITION Overview Major changes in GULF's financial condition during the first six months of 1999 included the addition of approximately $33.2 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," "Environmental Matters" and "Other Capital Requirements" in the Form 10-K for a description of GULF's capital requirements for its construction program, environmental compliance efforts and maturing debt. 48 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 June 30, 1999, approximately $3.3 million of cash and cash equivalents and $31.5 million of unused committed lines of credit with banks in addition to $61.9 million liquidity support for variable rate pollution control bonds. At June 30, 1999, GULF had $85.0 million of short-term 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) (Stated in Thousands of Dollars) For the Three Months For the Six Months Ended June 30, Ended June 30, --------------------------- --------------------------- 1999 1998 1999 1998 ------------- ------------ ------------- ------------ OPERATING REVENUES: Revenues $155,333 $148,064 $276,733 $269,345 Revenues from affiliates 3,257 8,548 4,292 9,423 ------------- ------------ ------------- ------------ Total operating revenues 158,590 156,612 281,025 278,768 ------------- ------------ ------------- ------------ OPERATING EXPENSES: Operation-- Fuel 46,706 45,113 78,228 72,401 Purchased power from non-affiliates 7,162 8,988 9,507 13,288 Purchased power from affiliates 7,497 5,118 16,399 16,414 Other 27,683 33,102 54,730 56,948 Maintenance 14,265 11,564 25,866 22,958 Depreciation and amortization 11,780 11,441 23,569 23,094 Taxes other than income taxes 12,208 11,160 23,315 23,240 Federal and state income taxes 9,101 10,003 13,374 14,935 ------------- ------------ ------------- ------------ Total operating expenses 136,402 136,489 244,988 243,278 ------------- ------------ ------------- ------------ OPERATING INCOME 22,188 20,123 36,037 35,490 OTHER INCOME (EXPENSE): Interest income 69 213 150 263 Other, net 587 630 1,221 863 Income taxes applicable to other income (323) (41) (632) (354) ------------- ------------ ------------- ------------ INCOME BEFORE INTEREST CHARGES 22,521 20,925 36,776 36,262 ------------- ------------ ------------- ------------ INTEREST AND OTHER CHARGES: Interest on long-term debt 5,034 5,123 10,044 9,921 Interest on notes payable 874 490 1,286 918 Amortization of debt discount, premium and expense, net 361 335 717 723 Other interest charges 96 62 178 203 Distributions on preferred securities of subsidiary companies 699 699 1,398 1,398 ------------- ------------ ------------- ------------ Interest and other charges, net 7,064 6,709 13,623 13,163 ------------- ------------ ------------- ------------ NET INCOME 15,457 14,216 23,153 23,099 DIVIDENDS ON PREFERRED STOCK 504 504 1,007 999 ------------- ------------ ------------- ------------ NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $14,953 $13,712 $22,146 $22,100 ============= ============ ============= ============ The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
51
MISSISSIPPI POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Six Months Ended June 30, ---------------------------- 1999 1998 ------------ ----------- OPERATING ACTIVITIES: Net income $ 23,153 $ 23,099 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 25,637 25,112 Deferred income taxes 1,747 (1,687) Other, net (1,226) 1,891 Changes in certain current assets and liabilities-- Receivables, net (15,694) (7,444) Inventories (13,605) (9,047) Payables (7,287) 1,682 Taxes accrued (161) 3,671 Other (3,329) (2,352) ------------ ----------- Net cash provided from operating activities 9,235 34,925 ------------ ----------- INVESTING ACTIVITIES: Gross property additions (26,700) (31,755) Other (6,879) (5,131) ------------ ----------- Net cash used for investing activities (33,579) (36,886) ------------ ----------- FINANCING ACTIVITIES: Proceeds-- Pollution control bonds - 13,520 Other long-term debt - 90,000 Retirements-- Preferred stock - (87) First mortgage bonds - (35,000) Pollution control bonds - (13,000) Senior Notes (57) - Notes payable, net 56,000 - Payment of preferred stock dividends (1,007) (999) Payment of common stock dividends (27,600) (25,500) Miscellaneous (243) (276) ------------ ----------- Net cash provided from financing activities 27,093 28,658 ------------ ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS 2,749 26,697 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,327 4,432 ============ =========== CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,076 $ 31,129 ============ =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $12,722 $11,482 Income taxes 97 (534) The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
52
MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At June 30, 1999 At December 31, (Unaudited) 1998 --------------------------------- UTILITY PLANT: Plant in service, at original cost $1,571,317 $1,553,112 Less accumulated provision for depreciation 604,047 583,957 -------------- -------------- 967,270 969,155 Construction work in progress 58,019 51,517 -------------- -------------- Total 1,025,289 1,020,672 -------------- -------------- OTHER PROPERTY AND INVESTMENTS: 1,400 979 -------------- -------------- CURRENT ASSETS: Cash and cash equivalents 4,076 1,327 Receivables -- Customer accounts receivable 40,279 29,829 Regulatory clauses under recovery 8,803 8,042 Other accounts and notes receivable 15,523 12,495 Affiliated companies 12,409 10,946 Accumulated provision for uncollectible accounts (500) (621) Fossil fuel stock, at average cost 28,871 16,418 Materials and supplies, at average cost 19,887 18,735 Current portion of accumulated deferred income taxes 1,210 4,248 Prepayments 4,301 1,651 Vacation pay deferred 4,717 4,717 -------------- -------------- Total 139,576 107,787 -------------- -------------- DEFERRED CHARGES: Debt expense and loss, being amortized 13,167 13,713 Deferred charges related to income taxes 21,313 22,697 Long-term notes receivable 1,660 2,072 Work force reduction plan 7,672 12,748 Miscellaneous 12,139 8,937 -------------- -------------- Total 55,951 60,167 -------------- -------------- TOTAL ASSETS $1,222,216 $1,189,605 ============== ============== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
53
MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At June 30, 1999 At December 31, (Unaudited) 1998 --------------------------------- CAPITALIZATION: Common stock equity -- Common stock (without par value) -- authorized 1,130,000 shares; outstanding 1,121,000 shares $ 37,691 $ 37,691 Paid-in capital 179,474 179,474 Premium on preferred stock 326 326 Retained earnings 168,286 173,740 -------------- -------------- 385,777 391,231 Preferred stock 31,809 31,809 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding Company Junior Subordinated Notes 35,000 35,000 Long-term debt 292,744 292,744 -------------- -------------- Total 745,330 750,784 -------------- -------------- CURRENT LIABILITIES: Long-term debt due within one year 50,020 50,020 Notes payable 69,000 13,000 Accounts payable -- Affiliated companies 11,120 8,788 Regulatory clauses over recovery - 4,412 Other 36,818 47,113 Customer deposits 3,477 3,272 Taxes accrued-- Federal and state income 11,518 1,124 Other 20,824 31,379 Interest accrued 3,133 2,955 Miscellaneous 10,494 11,753 -------------- -------------- Total 216,404 173,816 -------------- -------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 143,406 143,852 Accumulated deferred investment tax credits 25,301 25,913 Deferred credits related to income taxes 35,619 37,277 Postretirement benefits other than pension 26,255 25,869 Accumulated provision for property damage 334 910 Work force reduction plan 12,067 13,051 Miscellaneous 17,500 18,133 -------------- -------------- Total 260,482 265,005 -------------- -------------- TOTAL CAPITALIZATION AND LIABILITIES $1,222,216 $1,189,605 ============== ============== 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 SECOND QUARTER 1999 vs. SECOND QUARTER 1998 AND YEAR-TO-DATE 1999 vs. YEAR-TO-DATE 1998 RESULTS OF OPERATIONS Earnings MISSISSIPPI's net income after dividends on preferred stock for the second quarter and year-to-date 1999 was $14.9 million and $22.1 million, respectively, compared to $13.7 million and $22.1 million for the corresponding periods of 1998. Earnings for the current quarter increased $1.2 million or 9.1% due primarily to an increase in operating revenues. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Revenues......................................... $7,269 4.9 $7,388 2.7 Revenues from affiliates......................... (5,291) (61.9) (5,131) (54.5) Purchased power from non-affiliates.............. (1,826) (20.3) (3,781) (28.5) Purchased power from affiliates.................. 2,379 46.5 (15) (0.1) Other operation expense.......................... (5,419) (16.4) (2,218) (3.9) Maintenance expense.............................. 2,701 23.4 2,908 12.7
Revenues. Revenue increases for the second quarter and year-to-date 1999 result primarily from increased energy sales to territorial wholesale customers and year-to-date, to a lesser extent, from increased retail energy sales. These revenue increases were partially offset by decreases in non-territorial wholesale energy sales for the quarter and year-to-date of 21.8% and 40.7%, respectively. Territorial wholesale energy sales were up 11.6% for the quarter and 11.4% year-to-date due to strong growth in the wholesale service areas. In addition, for the quarter, retail energy sales to industrial customers were up 3.9%, while energy sales to residential and commercial customers were down by 6.9% and 0.2%. Year-to-date, retail energy sales to commercial and industrial customers were up 4.3% and 2.2%, respectively, while energy sales to residential customers were down 6.1%. Industrial energy sales were positively impacted by increased production by several larger industrial customers, while commercial energy sales were positively impacted by increased tourism and strong growth in this sector. Residential energy sales were lower due to milder temperatures during the current quarter and year-to-date when compared same periods in 1998. Retail revenues, excluding those revenues which represent the recovery of fuel expense and certain other expenses and do not affect income, increased $1.3 million for the current quarter and $0.6 million year-to-date. Wholesale territorial revenues, excluding fuel revenues which do not affect income, increased $2.6 million for the current quarter and $5.7 million year-to-date. 55 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Revenues from affiliates and Purchased power from affiliates. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Purchased power from non-affiliates. This item decreased for the quarter and year-to-date 1999 when compared to the corresponding periods in 1998 reflecting the decrease in the demand for energy. Other operation expense. These costs decreased for the current quarter and year-to-date due primarily to a decrease in administrative and general expenses. Administrative and general expenses were down due to higher amortization of the work force reduction plan in 1998. Maintenance expense. These expenses were up for the quarter and year-to-date due to increased maintenance on distribution lines. 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. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be recovered. MISSISSIPPI's 1999 ECO Plan filing was approved, as filed, by the Mississippi PSC on March 18, 1999 and resulted in a slight increase 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. The U.S. Environmental Protection Agency is conducting an industry-wide investigation concerning the compliance status of certain coal-fired generating facilities, including certain of MISSISSIPPI's units, under the new source review provisions of the Clean Air Act. Although the outcome of this matter cannot now be determined, if adverse it could result in substantial penalties and additional capital costs. MISSISSIPPI's plans to achieve Year 2000 readiness have been implemented and are included in the SOUTHERN system's Year 2000 Program. The costs related to MISSISSIPPI's Year 2000 program are expected to be $4.9 million. From its inception through June 30, 1999, the Year 2000 program costs, recognized as expense, amounted to $4.6 million. For additional information, see SOUTHERN's MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - "Future Earnings Potential" herein. 56 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which was to be adopted by the year 2000. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133 - an amendment of FASB Statement No. 133, which delayed adoption until the year 2001. MISSISSIPPI has not yet quantified the impact of adopting this statement on its financial statements; however, the adoption could increase volatility in earnings. Reference is made to Notes (B) and (F) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. FINANCIAL CONDITION Overview Major changes in MISSISSIPPI's financial condition during the first six months of 1999 included the addition of approximately $26.7 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations. See MISSISSIPPI's Condensed Statements of Cash Flows for further details. Financing Activities 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 In April 1999, MISSISSIPPI and Escatawpa Funding, Limited Partnership ("Escatawpa"), entered into a lease agreement whereby MISSISSIPPI will design and construct, as agent for Escatawpa, a 1,064 megawatt natural gas combined cycle facility. It is expected that the project will cost approximately $406 million, and upon completion of the facility, MISSISSIPPI will lease the facility from Escatawpa for an initial term of approximately 10 years. For additional information, reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Capital Requirements for Construction" of MISSISSIPPI and Notes 3 and 4 to the financial statements of MISSISSIPPI in Item 8 of the Form 10-K. Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of MISSISSIPPI under "Capital Requirements for Construction," "Environmental Matters" and "Other Capital Requirements" in the Form 10-K for a description of MISSISSIPPI's capital requirements for its construction program, environmental compliance efforts, sinking fund requirements and maturities of long-term debt. 57 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. To meet short-term cash needs and contingencies, MISSISSIPPI had at June 30, 1999, approximately $4.1 million of cash and cash equivalents and approximately $76.3 million of unused committed credit arrangements with banks (including $10.8 million of such arrangements under which borrowings may be made only to fund purchase obligations relating to variable rate pollution control bonds). At June 30, 1999, MISSISSIPPI had short-term notes payable outstanding of $69.0 million. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 58 SAVANNAH ELECTRIC AND POWER COMPANY 59
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Six Months Ended June 30, Ended June 30, --------------------------- --------------------------- 1999 1998 1999 1998 ------------- ------------ ------------- ------------ OPERATING REVENUES: Revenues $ 61,114 $ 68,482 $107,846 $116,691 Revenues from Affiliates 578 1,134 944 1,306 ------------- ------------ ------------- ------------ Total operating revenues 61,692 69,616 108,790 117,997 ------------- ------------ ------------- ------------ OPERATING EXPENSES: Operation-- Fuel 10,951 15,446 17,544 21,254 Purchased power from non-affiliates 2,361 2,723 3,453 3,936 Purchased power from affiliates 10,276 9,216 19,453 19,380 Other 11,961 11,692 23,240 22,837 Maintenance 4,759 4,884 9,198 8,562 Depreciation and amortization 5,966 5,258 11,943 10,516 Taxes other than income taxes 2,923 3,128 5,827 5,966 Federal and state income taxes 3,383 5,663 4,103 7,726 ------------- ------------ ------------- ------------ Total operating expenses 52,580 58,010 94,761 100,177 ------------- ------------ ------------- ------------ OPERATING INCOME 9,112 11,606 14,029 17,820 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction (8) 24 13 45 Interest income 27 67 63 135 Other, net (488) (441) (932) (870) Income taxes applicable to other income 178 145 336 278 ------------- ------------ ------------- ------------ INCOME BEFORE INTEREST CHARGES 8,821 11,401 13,509 17,408 ------------- ------------ ------------- ------------ INTEREST AND OTHER CHARGES: Interest on long-term debt 2,463 2,608 4,938 5,318 Allowance for debt funds used during construction (101) (22) (127) (48) Interest on notes payable 177 112 198 138 Amortization of debt discount, premium and expense, net 235 220 468 407 Distributions on preferred securities of subsidiary trust 685 - 1,370 - Other interest charges 94 95 185 198 ------------- ------------ ------------- ------------ Interest and other charges, net 3,553 3,013 7,032 6,013 ------------- ------------ ------------- ------------ NET INCOME 5,268 8,388 6,477 11,395 DIVIDENDS ON PREFERRED STOCK - 581 - 1,162 ------------- ------------ ------------- ------------ NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 5,268 $ 7,807 $ 6,477 $10,233 ============= ============ ============= ============ 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) (Stated in Thousands of Dollars) For the Six Months Ended June 30, ----------------------------- 1999 1998 ------------ ------------ OPERATING ACTIVITIES: Net income $ 6,477 $ 11,395 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 12,757 11,348 Deferred income taxes and investment tax credits, net (775) 3,171 Allowance for equity funds used during construction (13) (45) Other, net 559 (866) Changes in certain current assets and liabilities-- Receivables, net (12,533) (17,467) Inventories (2,173) 505 Payables 4,177 10,238 Taxes accrued (362) (950) Other 1,032 (1,956) ------------ ------------ Net cash provided from operating activities 9,146 15,373 ------------ ------------ INVESTING ACTIVITIES: Gross property additions (17,019) (8,126) Other (1,926) (832) ------------ ------------ Net cash used for investing activities (18,945) (8,958) ------------ ------------ FINANCING ACTIVITIES: Proceeds-- Other long-term debt - 50,000 Retirements-- First mortgage bonds (15,800) (30,000) Other long-term debt (254) (20,340) Notes payable, net 35,400 10,000 Payment of preferred stock dividends - (1,162) Payment of common stock dividends (12,400) (11,600) Miscellaneous 319 (2,232) ------------ ------------ Net cash provided from (used for) financing activities 7,265 (5,334) ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS (2,534) 1,081 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,962 6,144 ============ ============ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,428 $ 7,225 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $6,670 $6,718 Income taxes 224 1,786 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 (Stated in Thousands of Dollars) ASSETS At June 30, 1999 At December 31, (Unaudited) 1998 ------------------------------ UTILITY PLANT: Plant in service, at original cost $794,676 $781,964 Less accumulated provision for depreciation 352,435 341,930 ------------ ------------- 442,241 440,034 Construction work in progress 6,488 2,908 ------------ ------------- Total 448,729 442,942 ------------ ------------- OTHER PROPERTY AND INVESTMENTS: 1,420 1,420 ------------ ------------- CURRENT ASSETS: Cash and cash equivalents 3,428 5,962 Receivables -- Customer accounts receivable 24,501 18,030 Other accounts and notes receivable 3,748 3,543 Affiliated companies 8,089 1,388 Accumulated provision for uncollectible accounts (239) (284) Fuel cost under recovery 16,739 17,628 Fossil fuel stock, at average cost 6,902 4,984 Materials and supplies, at average cost 6,751 6,496 Prepayments 1,207 4,772 ------------ ------------- Total 71,126 62,519 ------------ ------------- DEFERRED CHARGES: Deferred charges related to income taxes 16,751 17,130 Debt issue expense, being amortized 3,162 3,554 Premium on reacquired debt, being amortized 8,791 8,570 Prepaid pension costs 2,410 3,281 Cash surrender value of life insurance for deferred compensation plans 14,179 14,179 Miscellaneous 3,966 2,204 ------------ ------------- Total 49,259 48,918 ------------ ------------- TOTAL ASSETS $570,534 $555,799 ============ ============= The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
62
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At June 30, 1999 At December 31, (Unaudited) 1998 ------------------------------ CAPITALIZATION: Common stock equity -- Common stock (par value value $5 per share) -- authorized 16,000,000 shares; outstanding 10,844,635 shares $54,223 $54,223 Paid-in capital 8,688 8,688 Retained earnings 107,031 112,954 ------------ ------------- 169,942 175,865 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding Company Junior Subordinated Notes 40,000 40,000 Long-term debt 147,410 163,443 ------------ ------------- Total 357,352 379,308 ------------ ------------- CURRENT LIABILITIES: Long-term debt due within one year 668 689 Notes payable 35,400 - Accounts payable -- Affiliated companies 4,860 5,014 Other 13,614 10,833 Customer deposits 5,461 5,224 Taxes accrued-- Federal and state income 1,502 2,467 Other 2,071 2,891 Interest accrued 3,725 3,815 Vacation pay accrued 2,038 1,978 Miscellaneous 3,960 6,700 ------------ ------------- Total 73,299 39,611 ------------ ------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 83,621 82,778 Accumulated deferred investment tax credits 11,611 11,943 Deferred credits related to income taxes 20,775 21,349 Deferred compensation plans 10,042 9,788 Postretirement benefits 7,214 6,434 Miscellaneous 6,620 4,588 ------------ ------------- Total 139,883 136,880 ------------ ------------- TOTAL CAPITALIZATION AND LIABILITIES $570,534 $555,799 ============ ============= The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
63 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1999 vs. SECOND QUARTER 1998 AND YEAR-TO-DATE 1999 vs. YEAR-TO-DATE 1998 RESULTS OF OPERATIONS Earnings SAVANNAH's net income after dividends on preferred stock for the second quarter and year-to-date 1999 was $5.3 million and $6.5 million, respectively, as compared to $7.8 million and $10.2 million for the corresponding periods of 1998. Earnings decreased due to lower operating revenues primarily reflecting the Georgia PSC's accounting order and, to a lesser extent, mild weather. For additional information, see Note (N) in the "Notes to the Condensed Financial Statements" herein for details regarding the accounting order. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Revenues......................................... $(7,368) (10.8) $(8,845) (7.6) Fuel expense..................................... (4,495) (29.1) (3,710) (17.5) Depreciation and amortization.................... 708 13.5 1,427 13.6 Maintenance expense.............................. (125) (2.6) 636 7.4
Revenues. Revenues for the quarter and year-to-date 1999 fell primarily due to lower total energy sales, particularly to the retail sector, and tariff reductions implemented as a part of the Georgia PSC accounting order. Retail energy sales to residential, commercial and industrial customers for the quarter were down 8.3%, 1.8% and 9.2%, respectively. Year-to-date, retail energy sales to these same customers were down 3.2%, 0.5% and 20.6%, respectively. Residential and commercial energy sales were affected by the mild temperatures while industrial energy sales were affected by reduced demand from one industrial customer and the shut-down of another industrial customer's facilities. In the second quarter and year-to-date 1999, the impacts on SAVANNAH's revenues from this shut-down were $0.2 million and $0.4 million, respectively. For additional information, see "Future Earnings Potential" herein. Fuel expenses. The decreases in these costs from the corresponding periods in 1998 are attributed to lower demand for energy and lower coal prices. Depreciation and amortization expense. This item increased during the current quarter and year-to-date 1999 when compared to the corresponding periods in 1998 due primarily to additional depreciation charges pursuant to the Georgia PSC accounting order. Maintenance expense. The year-to-date increase is primarily attributed to increased distribution line clearance expenses and a turbine dismantle inspection of SAVANNAH's largest coal unit. 64 SAVANNAH ELECTRIC AND 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. In June 1998, the Georgia PSC approved a four-year accounting order for SAVANNAH. Reference is made to Note (N) in the "Notes to the Condensed Financial Statements" herein and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SAVANNAH in the Form 10-K for additional information. In mid-1998, one of SAVANNAH's largest industrial customers added an additional steam turbine unit. The impact of this on SAVANNAH's revenues had been planned for, and the customer is under contract for a minimum of 5 megawatts per year. In October 1998, another of SAVANNAH's largest customers closed its Savannah operations. Base revenues from this customer had averaged $2 million annually. Under the terms of its contract with SAVANNAH, this customer is obligated to pay $1 million annually through 2001. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SAVANNAH in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of SAVANNAH in the Form 10-K. The U.S. Environmental Protection Agency is conducting an industry-wide investigation concerning the compliance status of certain coal-fired generating facilities, including certain of SAVANNAH's units, under the new source review provisions of the Clean Air Act. Although the outcome of this matter cannot now be determined, if adverse it could result in substantial penalties and additional capital costs. SAVANNAH's plans to achieve Year 2000 readiness have been implemented and are included in the SOUTHERN system's Year 2000 Program. The costs related to SAVANNAH's Year 2000 program are expected to be $1.2 million. From its inception through June 30, 1999, the Year 2000 program costs, recognized as expense, amounted to $1.0 million. For additional information, see SOUTHERN's MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - "Future Earnings Potential" herein. The FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which was originally to be adopted by the year 2000. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which amends FASB Statement No. 133 to be effective for all fiscal years beginning after June 15, 2000 (January 1, 2001 for companies with calendar-year fiscal years). SAVANNAH has not yet quantified the impact of adopting this statement on its financial statements; however, the adoption could increase volatility in earnings. 65 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Reference is made to Notes (B) and (N) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. FINANCIAL CONDITION Overview Major changes in SAVANNAH's financial condition during the first six months of 1999 included the addition of approximately $17 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 In June 1999, SAVANNAH purchased on the open market all $15 million outstanding of its 7 7/8% Series First Mortgage Bonds due May 1, 2025. This purchase was financed with short-term debt. SAVANNAH plans to continue, to the extent possible, a program to retire higher-cost debt and replace these obligations with lower-cost capital. 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 June 30, 1999, approximately $3.4 million of cash and cash equivalents and approximately $25.1 million of unused credit arrangements with banks. At June 30, 1999, SAVANNAH had $35.4 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. 66 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, H, I, J, K, L, M, O, P ALABAMA A, B, C, F, G, H, I, J GEORGIA A, B, C, F, G, K, L, M GULF A, B, F MISSISSIPPI A, B, F SAVANNAH A, B, N 67 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 for the periods ended June 30, 1999 and 1998. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. It is suggested that these condensed financial statements 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. The condensed financial statements of ALABAMA and GEORGIA included herein have been reviewed by ALABAMA's and GEORGIA's independent public accountants as set forth in their reports included herein as Exhibit 1 to ALABAMA's and GEORGIA's condensed financial statements. (B) SOUTHERN's operating affiliates are subject to the provisions of FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation. In the event that a portion of a company's operations is no longer subject to these provisions, the company would be required to write off related 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) 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 that are employed to mitigate SOUTHERN's risk related to interest rate and foreign currency exchange rate fluctuations. At June 30, 1999, the status of outstanding non-trading related derivative contracts was as follows: 68 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Year of Maturity or Notional Unrealized Type Termination Amount Gain (Loss) (in thousands) Interest rate swaps 2002-2016 $773,523 $(23,882) 2001-2012 (pound)600,000 $(82,904) 2002-2007 DM691,000 $(19,449) Cross currency swaps 2001-2007 (pound)413,800 $20,765 Cross currency swaption 2003 DM510,000 $6,456 (pound) - Denotes British pounds sterling. DM - Denotes Deutschemark.
In January 1998, Southern Energy and Vastar Resources, Inc. combined their energy trading and marketing activities to form a joint venture. Southern Energy's investment in the joint venture is accounted for under the equity method of accounting. SOUTHERN and Vastar have made guarantees to certain counterparties regarding performance of contractual commitments by the joint venture. At June 30, 1999, outstanding guarantees related to the estimated fair value of net contractual commitments were approximately $115 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. (E) SOUTHERN's principal business segment -- or its traditional business -- is the five regulated electric utility operating companies that provide electric service in four southeastern 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:
Regulated Domestic Southern Energy All Electric Non-Traditional Services Other Reconciling Utilities International Domestic Total (Note) Eliminations Consolidated ------------ -------------------------------- --------- ------------- --------------- Three Months Ended June 30, 1999: (in millions) Operating revenues $ 2,243 $ 378 $ 125 $ 503 $ 55 $ (10) $ 2,791 Segment net income (loss) 264 58 19 77 (11) (16) 314 Six Months Ended June 30, 1999: Operating revenues 4,125 840 185 1,025 97 (14) 5,233 Segment net income (loss) 432 146 19 165 (44) (15) 538 Total assets at June 30, 1999 25,077 9,236 4,045 13,281 1,466 (2,254) 37,570 ----------------------------------------- ------------ ---------- ---------- ---------- --------- ------------- --------------- Three Months Ended June 30, 1998: Operating revenues $ 2,431 $ 411 $ 33 $ 444 $ 42 $ (4) $ 2,913 Segment net income (loss) 267 34 1 35 (30) (2) 270 Six Months Ended June 30, 1998: Operating revenues 4,385 886 67 953 77 (7) 5,408 Segment net income (loss) 456 91 7 98 (37) (5) 512 Total assets at December 31, 1998 24,421 9,578 2,869 12,447 1,438 (2,114) 36,192 ------------------------------------------ ----------- ----------- -------- ---------- --------- -------------- ---------------
69 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. Non-traditional services exclude interest expense to parent SOUTHERN. (F) Reference is made to Notes 3 and 7 to each of the registrant's financial statements, except SAVANNAH'S, in Item 8 of the Form 10-K for a discussion of the FERC orders in proceedings regarding the reasonableness of the return on common equity on certain of the Southern electric system's wholesale rate schedules and contracts and a discussion of the long-term power sales agreements. A settlement agreement relating to the proceedings pending at the FERC which provides for an equity return of 11% under the formula rates has been filed with the FERC for its approval. If approved, these rates will be effective as of January 5, 1999 for three unit power sales contracts, and as of July 1, 1999 for the other contracts. (G) During the first six months of 1999, statutory business trusts, formed by ALABAMA and GEORGIA of which such companies own all the common securities, issued mandatorily redeemable preferred securities as follows: (in thousands)
Maturity Date Company Date of Issue Amount Rate Notes of Notes ALABAMA 2/25/99 $50,000 Auction $51,550 2/28/2029 GEORGIA 2/25/99 $200,000 6.85% $206,186 3/31/2029
Substantially all the assets of each trust are junior subordinated notes issued by the related company in the respective approximate principal amounts set forth above. ALABAMA and GEORGIA consider that the mechanisms and obligations relating to the preferred securities issued for its benefit, taken together, constitute a full and unconditional guarantee by it of the respective trusts' payment obligations with respect to the preferred securities. (H) 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 retail rate adjustment procedures. (I) Reference is made to Note 3 to the financial statements of SOUTHERN and ALABAMA in Item 8 of the Form 10-K and to Note (I) to each registrant's quarterly report on Form 10-Q for the quarter ended March 31, 1999, for information relating to a judgment against ALABAMA arising from discharges into Lake Martin. (J) 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 class action charging ALABAMA with fraud and non-compliance with regulatory statutes relating to the offer, sale and financing of "extended service contracts" in connection with the sale of electric appliances. The class of plaintiffs has been decertified on the joint motion of the plaintiffs and ALABAMA, and it is expected that this action will be settled in the near future for an immaterial amount. 70 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (K) 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 in excess of a 12.5% retail return on common equity during the second and third years, to be applied to accelerated amortization or depreciation of assets. Two-thirds of any additional earnings in excess of the 12.5% return will be applied to rate reductions and the remaining one-third retained by GEORGIA. (L) 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. (M) In September 1998, OPC decreased its purchases of capacity under a power supply agreement by 250 megawatts, resulting in a $16 million reduction in 1999 revenues. The resources associated with the decreased purchases in 1998 will be used to meet the needs of GEORGIA's retail customers through 2004. As a result of additional reduction notices given by OPC under its agreement with GEORGIA, GEORGIA's capacity revenues received from OPC were estimated to decrease by an additional $7 million in 1999, $18 million in 2000 and $4 million in 2001. Effective April 1, 1999, GEORGIA and OPC entered into a new agreement which will delay, in part, planned purchase reductions by OPC. The new agreement has been filed with the FERC under SOUTHERN's market-based rate authority. Based on the above, GEORGIA's capacity revenues received from OPC are now estimated to decrease by approximately $6 million in 1999, $15 million in 2000 and $7 million in 2001. (N) In 1998, the Georgia PSC approved a new accounting order for SAVANNAH. Under this order, SAVANNAH will reduce electric rates to its small business customers, expense additional storm damage accruals and accrue additional depreciation on generating assets. For additional information concerning the four-year accounting order approved by the Georgia PSC in June 1998, reference is made to Note 3 to the financial statements of SAVANNAH in Item 8 of the Form 10-K. (O) 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 petitions for Chapter 11 bankruptcy relief which were filed in the U. S. Bankruptcy Court for the Southern District of Alabama. Effective with the bankruptcy filing in January 1999, Mobile Energy is accounted for under the equity method, rather than being consolidated as before. SOUTHERN's equity investment in Mobile Energy was $56 million at June 30, 1999. At June 30, 1999, Mobile Energy had total assets of $379 million and senior debt outstanding of $201 million of first mortgage bonds and $76 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. In March 1999, under an agreement with the bondholders, SOUTHERN paid $36,144,000 pursuant to the guarantees. The bondholders reserved the right to seek an additional $2,700,000, which SOUTHERN believes was satisfied by an earlier transfer of funds. The ultimate outcome of this matter cannot now be determined. 71 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (P) In 1998, SOUTHERN's Board of Directors authorized SOUTHERN to make open market purchases of its common stock in an aggregate amount not to exceed $300 million through March 31, 1999. The purpose of the program was to provide shares of common stock for the purchase requirements of SOUTHERN's various stockholder, employee and outside director stock purchase plans. Under the program, 4.4 million shares had been repurchased and 2.4 million shares were reissued through June 30, 1999. Also, 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 program does not establish a target stock price or timetable for specific repurchases. Under this program, 18,756,500 shares have been repurchased through August 10, 1999, with funding provided from SOUTHERN's commercial paper program. 72 PART II - OTHER INFORMATION Item 1. Legal Proceedings. 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 4. Submission of Matters to a Vote of Security Holders. SOUTHERN SOUTHERN held its annual meeting of stockholders on May 26, 1999. Each nominee for director of SOUTHERN received the requisite plurality of votes. The vote tabulation was as follows: Nominees Shares For Shares Withhold Vote Dorrit J. Bern 578,455,494 8,194,383 Thomas J. Chapman 574,296,381 12,353,496 A. D. Correll 579,122,020 7,529,457 A. W. Dahlberg 578,774,016 7,878,261 H. Allen Franklin 579,178,347 7,473,130 Bruce S. Gordon 578,717,346 7,934,131 L. G. Hardman III 579,123,790 7,528,487 Elmer B. Harris 578,931,587 7,719,889 David J. Lesar 574,432,727 12,219,949 Zack T. Pate 579,029,105 7,624,305 Gloria M. Shatto* 578,536,622 8,116,388 Gerald J. St. Pe 574,685,364 11,965,332 ALABAMA ALABAMA held its annual common stockholders meeting on April 23, 1999, and the following persons were elected to serve as directors of ALABAMA: Whit Armstrong Thomas C. Meredith David J. Cooper William V. Muse A. W. Dahlberg John T. Porter Elmer B. Harris Robert D. Powers Carl E. Jones, Jr. Andreas Renschler Patricia M. King C. Dowd Ritter James K. Lowder James H. Sanford Wallace D. Malone, Jr. John Cox Webb, IV All of the 5,608,955 outstanding shares of ALABAMA's common stock are owned by SOUTHERN and were voted for the election of such directors. 73 Item 4. Submission of Matters to a Vote of Security Holders.(Continued) GEORGIA By written consent, in lieu of the annual meeting of stockholders of GEORGIA, effective May 19, 1999, the following persons were elected to serve as directors of GEORGIA: Daniel P. Amos James R. Lientz, Jr. Juanita P. Baranco Zell Miller A. W. Dahlberg G. Joseph Prendergast William A. Fickling, Jr. Herman J. Russell H. Allen Franklin Gloria M. Shatto* L. G. Hardman III William Jerry Vereen Warren Y. Jobe Carl Ware All of the 7,761,500 outstanding shares of GEORGIA's common stock are owned by SOUTHERN and were voted for the election of such directors. GULF By written consent, in lieu of the annual meeting of stockholders of GULF, effective June 29, 1999, the following persons were elected to serve as directors of GULF: Travis J. Bowden W. Deck Hull, Jr. Fred C. Donovan Joseph K. Tannehill H. Allen Franklin Barbara H. Thames All of the 992,717 outstanding shares of GULF's common stock are owned by SOUTHERN and were voted for the election of such directors. MISSISSIPPI MISSISSIPPI held its annual stockholders meeting on April 6, 1999, and the following persons were elected to serve as directors of MISSISSIPPI: Paul J. DeNicola** Aubrey K. Lucas Edwin E. Downer Malcolm Portera Dwight H. Evans George A. Schloegel Robert S. Gaddis Philip J. Terrell Linda T. Howard N. Eugene Warr All of the 1,121,000 outstanding shares of MISSISSIPPI's common stock are owned by SOUTHERN and were voted for the election of such directors. 74 Item 4. Submission of Matters to a Vote of Security Holders.(Continued) SAVANNAH SAVANNAH held its annual stockholders meeting on May 18, 1999, and the following persons were elected to serve as directors of SAVANNAH: Archie H. Davis G. Edison Holland, Jr. Paul J. DeNicola** Robert B. Miller, III Walter D. Gnann Arnold M. Tenenbaum All of the 10,844,635 outstanding shares of SAVANNAH's common stock are owned by SOUTHERN and were voted for the election of such directors. * Dr. Shatto passed away on June 13, 1999. ** Mr. DeNicola resigned effective July 1, 1999. 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, 1998, 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.) - (b) Power of Attorney for GEORGIA. Exhibits 27 - Financial Data Schedule (a) SOUTHERN (b) ALABAMA (c) GEORGIA (d) GULF (e) MISSISSIPPI (f) SAVANNAH
(b) Reports on Form 8-K. ALABAMA filed a Current Report on Form 8-K dated May 19, 1999: Items reported: Item 5 Item 7 Financial statements filed: None 75 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: August 12, 1999 - ------------------------------------------------------------------------------- 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: August 12, 1999 76 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: August 12, 1999 - ------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. GULF POWER COMPANY By Travis J. Bowden President and Chief Executive Officer (Principal Executive Officer) By A. E. Scarbrough Vice President - Finance (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: August 12, 1999 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. 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: August 12, 1999 - ------------------------------------------------------------------------------- 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: August 12, 1999 78 EX-15 2 ARTHUR ANDERSEN LLP EXHIBIT 15(a) ARTHUR ANDERSEN LLP August 9, 1999 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 June 30, 1999 which includes our report on Alabama Power Company dated August 9, 1999 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 3 ARTHUR ANDERSEN LLP EXHIBIT 15(b) ARTHUR ANDERSEN LLP August 9, 1999 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 June 30, 1999 which includes our report on Georgia Power Company dated August 9, 1999 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-24 4 POWER OF ATTORNEY Exhibit 24(b) August 9, 1999 W. L. Westbrook and Wayne Boston Dear Sirs: Georgia Power Company proposes to file or join in the filing of statements under the Securities Exchange Act of 1934 with the Securities and Exchange Commission with respect to the filing of its quarterly reports on Form 10-Q during 1999. Georgia Power Company and the undersigned director and officers of said Company, individually as a director and/or as an officer of the Company, hereby make, constitute and appoint each of you our true and lawful Attorney for each of us and in each of our names, places and steads to sign and cause to be filed with the Securities and Exchange Commission in connection with the foregoing said quarterly reports on Form 10-Q and any appropriate amendment or amendments thereto and any necessary exhibits. Yours very truly, GEORGIA POWER COMPANY By /s/ David M. Ratcliffe David M. Ratcliffe President and Chief Executive Officer - 2 - /s/ David M. Ratcliffe /s/ Thomas A. Fanning - ------------------------------ ------------------------------ David M. Ratcliffe Thomas A. Fanning EX-27 5 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27(a) Financial Data Schedule
UT This schedule contains summary financial information extracted from the Form 10-Q for June 30, 1999, and is qualified in its entirety by reference to such financial statements. 0000092122 THE SOUTHERN COMPANY 1,000 6-MOS Dec-31-1999 Jun-30-1999 PER-BOOK 24,893,116 6,590,890 3,631,560 2,454,198 0 37,569,764 3,503,085 2,172,555 3,848,907 9,524,547 2,425,120 369,008 3,968,529 1,159,266 6,168,346 2,841,967 1,139,364 0 127,136 5,241 9,841,240 37,569,764 5,232,645 268,503 4,080,364 4,348,867 883,778 241,363 1,125,141 576,619 548,522 10,221 538,301 467,324 0 827,970 0.77 0.77
EX-27 6
UT This schedule contains summary financial information extracted from the Form 10-Q for June 30, 1999, and is qualified in its entirety by reference to such financial statements. 0000003153 ALABAMA POWER COMPANY 1,000 6-MOS Dec-31-1999 Jun-30-1999 PER-BOOK 7,401,108 313,402 943,431 769,569 0 9,427,510 224,358 1,334,744 1,184,854 2,743,956 347,000 317,512 987,024 0 1,749,881 276,751 371,650 0 4,599 999 2,628,138 9,427,510 1,536,940 94,580 1,165,716 1,260,296 276,644 18,182 294,826 130,987 163,839 7,727 156,112 196,400 0 288,667 0 0
EX-27 7
UT This schedule contains summary financial information extracted from the Form 10-Q for June 30, 1999, and is qualified in its entirety by reference to such financial statements. 0000041091 GEORGIA POWER COMPANY 1,000 6-MOS Dec-31-1999 Jun-30-1999 PER-BOOK 9,698,462 387,762 1,192,741 1,101,090 0 12,380,055 344,250 1,660,263 1,742,907 3,747,420 889,250 15,451 2,063,060 318,216 595,000 170,337 480,000 0 85,515 550 4,015,256 12,380,055 2,022,478 154,145 1,499,420 1,653,565 368,913 (3,241) 365,672 134,141 231,531 1,379 230,152 266,800 0 494,587 0 0
EX-27 8
UT This schedule contains summary financial information extracted from the Form 10-Q for June 30, 1999, and is qualified in its entirety by reference to such financial statements. 0000044545 GULF POWER COMPANY 1,000 6-MOS Dec-31-1999 Jun-30-1999 PER-BOOK 1,061,730 1,586 166,364 80,690 0 1,310,370 38,060 218,972 158,546 415,578 85,000 4,236 247,497 85,000 70,000 0 27,000 0 0 0 376,059 1,310,370 301,321 10,336 256,403 266,739 34,582 (411) 34,171 16,038 18,133 108 18,025 30,100 0 22,518 0 0
EX-27 9
UT This schedule contains summary financial information extracted from the Form 10-Q for June 30, 1999, and is qualified in its entirety by reference to such financial statements. 0000066904 MISSISSIPPI POWER COMPANY 1,000 6-MOS Dec-31-1999 Jun-30-1999 PER-BOOK 1,025,289 1,400 139,576 55,951 0 1,222,216 37,691 179,800 168,286 385,777 35,000 31,809 172,801 69,000 119,943 0 50,020 0 0 0 357,866 1,222,216 281,025 13,374 231,614 244,988 36,037 739 36,776 13,623 23,153 1,007 22,146 27,600 0 9,235 0 0
EX-27 10
UT This schedule contains summary financial information extracted from the Form 10-Q for June 30, 1999, and is qualified in its entirety by reference to such financial statements. 0000086940 SAVANNAH ELECTRIC AND POWER COMPANY 1,000 6-MOS Dec-31-1999 Jun-30-1999 PER-BOOK 448,729 1,420 71,126 49,259 0 570,534 54,223 8,688 107,031 169,942 40,000 0 82,155 35,400 60,000 0 0 0 5,255 668 177,114 570,534 108,790 4,103 90,658 94,761 14,029 (520) 13,509 7,032 6,477 0 6,477 12,400 0 9,146 0 0
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