-----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, NhAHnuUlrmY5tIrv54fG4BTbsg23ZbVEficW9z3dlUxXeyRZv5Uskt2DTdwA9sUd 1w1Ii2VSUVRFJcTqD6z4lA== 0000092122-01-500095.txt : 20010815 0000092122-01-500095.hdr.sgml : 20010815 ACCESSION NUMBER: 0000092122-01-500095 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 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: 1934 Act SEC FILE NUMBER: 001-03526 FILM NUMBER: 1709984 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: 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: 1934 Act SEC FILE NUMBER: 001-05072 FILM NUMBER: 1709985 BUSINESS ADDRESS: STREET 1: 600 BAY ST EAST CITY: SAVANNAH STATE: GA ZIP: 31401 BUSINESS PHONE: 9122327171 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: 1934 Act SEC FILE NUMBER: 001-11229 FILM NUMBER: 1709986 BUSINESS ADDRESS: STREET 1: 2992 W BEACH CITY: GULFPORT STATE: MS ZIP: 39501 BUSINESS PHONE: 2288641211 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: 1934 Act SEC FILE NUMBER: 000-02429 FILM NUMBER: 1709987 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: 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: 1934 Act SEC FILE NUMBER: 001-06468 FILM NUMBER: 1709988 BUSINESS ADDRESS: STREET 1: 241 RALPH MCGILL BOULEVARD CITY: ATLANTA STATE: GA ZIP: 30308 BUSINESS PHONE: 4045066526 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: 1934 Act SEC FILE NUMBER: 001-03164 FILM NUMBER: 1709989 BUSINESS ADDRESS: STREET 1: 600 N 18TH ST STREET 2: P O BOX 2641 CITY: BIRMINGHAM STATE: AL ZIP: 35291 BUSINESS PHONE: 2052571000 10-Q 1 secondq2001.txt SOUTHERN COMPANY FORM 10Q SECOND QUARTER 2001 ============================================================================== 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, 2001 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _____to_____ Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. 1-3526 The Southern Company 58-0690070 (A Delaware Corporation) 270 Peachtree Street, N.W. Atlanta, Georgia 30303 (404) 506-5000 1-3164 Alabama Power Company 63-0004250 (An Alabama Corporation) 600 North 18th Street Birmingham, Alabama 35291 (205) 257-1000 1-6468 Georgia Power Company 58-0257110 (A Georgia Corporation) 241 Ralph McGill Boulevard, N.E. Atlanta, Georgia 30308 (404) 506-6526 0-2429 Gulf Power Company 59-0276810 (A Maine Corporation) One Energy Place Pensacola, Florida 32520 (850) 444-6111 0-6849 Mississippi Power Company 64-0205820 (A Mississippi Corporation) 2992 West Beach Gulfport, Mississippi 39501 (228) 864-1211 1-5072 Savannah Electric and Power Company 58-0418070 (A Georgia Corporation) 600 East Bay Street Savannah, Georgia 31401 (912) 644-7171 ================= =========================================== ================= Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No____
Description of Shares Outstanding Registrant Common Stock at July 31, 2001 The Southern Company Par Value $5 Per Share 689,744,563 Alabama Power Company Par Value $40 Per Share 6,000,000 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, 2001 Page Number DEFINITIONS............................................................................................................... 4 PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition The Southern Company and Subsidiary Companies Condensed Consolidated Statements of Income........................................................ 7 Condensed Consolidated Statements of Cash Flows.................................................... 8 Condensed Consolidated Balance Sheets.............................................................. 9 Condensed Consolidated Statements of Comprehensive Income and Accumulated Other Comprehensive Income.......................................................... 11 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 12 Alabama Power Company Condensed Statements of Income..................................................................... 20 Condensed Statements of Cash Flows................................................................. 21 Condensed Balance Sheets........................................................................... 22 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 24 Georgia Power Company Condensed Statements of Income..................................................................... 29 Condensed Statements of Cash Flows................................................................. 30 Condensed Balance Sheets........................................................................... 31 Condensed Statements of Comprehensive Income and Accumulated Other Comprehensive Income..................................................................... 33 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 34 Gulf Power Company Condensed Statements of Income..................................................................... 40 Condensed Statements of Cash Flows................................................................. 41 Condensed Balance Sheets........................................................................... 42 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 44 Mississippi Power Company Condensed Statements of Income..................................................................... 49 Condensed Statements of Cash Flows................................................................. 50 Condensed Balance Sheets........................................................................... 51 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 53 Savannah Electric and Power Company Condensed Statements of Income..................................................................... 58 Condensed Statements of Cash Flows................................................................. 59 Condensed Balance Sheets........................................................................... 60 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 62 Notes to the Condensed Financial Statements........................................................... 66 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings......................................................................................... 72 Item 2. Changes in Securities and Use of Proceeds................................................................. Inapplicable Item 3. Defaults Upon Senior Securities........................................................................... Inapplicable Item 4. Submission of Matters to a Vote of Security Holders....................................................... 72 Item 5. Other Information......................................................................................... 74 Item 6. Exhibits and Reports on Form 8-K.......................................................................... 74 Signatures ............................................................................................... 75
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DEFINITIONS TERM MEANING ALABAMA..................................... Alabama Power Company Clean Air Act .............................. Clean Air Act Amendments of 1990 ECO Plan.................................... Environmental Compliance Overview Plan Energy Act.................................. Energy Policy Act of 1992 EPA......................................... U. S. Environmental Protection Agency FASB........................................ Financial Accounting Standards Board FERC........................................ Federal Energy Regulatory Commission Form 10-K................................... Combined Annual Report on Form 10-K of SOUTHERN, ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH for the year ended December 31, 2000 GEORGIA..................................... Georgia Power Company GULF........................................ Gulf Power Company integrated Southeast utilities.............. ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH Mirant...................................... Mirant Corporation (formerly Southern Energy, Inc.) MISSISSIPPI................................. Mississippi Power Company Mobile Energy............................... Mobile Energy Services Company, L.L.C. and Mobile Energy Services Holdings, Inc. PEP......................................... Performance Evaluation Plan PSC......................................... Public Service Commission RTO......................................... Regional Transmission Organization SAVANNAH.................................... Savannah Electric and Power Company SCS......................................... Southern Company Services, Inc. SEC......................................... Securities and Exchange Commission SOUTHERN.................................... The Southern Company SOUTHERN system............................. SOUTHERN, the integrated Southeast utilities and other subsidiaries TVA......................................... Tennessee Valley Authority
4 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-Q contains forward-looking and historical information. In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other comparable terminology. The registrants caution that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include the impact of recent and future federal and state regulatory change, including legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry and also changes in environmental and other laws and regulations to which SOUTHERN and its subsidiaries are subject, as well as changes in application of existing laws and regulations; current and future litigation, including the pending EPA civil action against certain of the integrated Southeast utilities and the race discrimination litigation against certain of SOUTHERN's subsidiaries; the effects, extent and timing of additional competition in the markets of SOUTHERN's subsidiaries; potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial; internal restructuring or other restructuring options that may be pursued by SOUTHERN; state and federal rate regulation in the United States; political, legal and economic conditions and developments in the United States; financial market conditions and the results of financing efforts; the impact of fluctuations in commodity prices, interest rates and customer demand; weather and other natural phenomena; the performance of projects undertaken by the non-traditional business and the success of efforts to invest in and develop new opportunities; the timing and acceptance of SOUTHERN's new product and service offerings; the ability of SOUTHERN to obtain additional generating capacity at competitive prices; and other factors discussed elsewhere herein and in other reports (including Form 10-K) filed from time to time with the SEC. 5 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES 6
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Six Months Ended June 30, Ended June 30, 2001 2000 2001 2000 -------------- ----------------- ------------------ ----------------- (in thousands) (in thousands) Operating Revenues: Retail sales $2,145,856 $2,188,285 $4,028,334 $3,970,993 Sales for resale 286,994 229,188 547,040 407,117 Other revenues 128,954 105,269 255,948 196,235 -------------- ----------------- ------------------ ----------------- Total operating revenues 2,561,804 2,522,742 4,831,322 4,574,345 -------------- ----------------- ------------------ ----------------- Operating Expenses: Operation -- Fuel 654,906 644,380 1,262,387 1,168,453 Purchased power 197,331 156,405 311,357 230,834 Other operations 476,821 465,782 882,712 853,145 Maintenance 229,641 214,772 455,498 425,714 Depreciation and amortization 283,387 311,401 587,053 603,075 Taxes other than income taxes 134,904 131,837 272,213 267,016 -------------- ----------------- ------------------ ----------------- Total operating expenses 1,976,990 1,924,577 3,771,220 3,548,237 -------------- ----------------- ------------------ ----------------- Operating Income 584,814 598,165 1,060,102 1,026,108 Other Income: Interest income 7,506 11,791 12,962 20,758 Equity in earnings of unconsolidated subsidiaries (16,039) (5,677) (18,736) (11,455) Other, net 25,228 15,443 27,802 26,873 -------------- ----------------- ------------------ ----------------- Earnings From Continuing Operations Before Interest and Income Taxes 601,509 619,722 1,082,130 1,062,284 -------------- ----------------- ------------------ ----------------- Interest and Other: Interest expense, net 145,650 169,286 290,538 322,233 Distributions on capital and preferred securities of subsidiaries 42,099 42,278 84,340 84,520 Preferred dividends of subsidiaries 4,614 4,763 9,419 9,458 -------------- ----------------- ------------------ ----------------- Total interest and other 192,363 216,327 384,297 416,211 -------------- ----------------- ------------------ ----------------- Earnings From Continuing Operations Before Income Taxes 409,146 403,395 697,833 646,073 Income taxes 138,758 147,825 248,703 239,572 -------------- ----------------- ------------------ ----------------- Earnings From Continuing Operations Before Cumulative Effect of Accounting Change 270,388 255,570 449,130 406,501 Cumulative effect of accounting change -- less income taxes of $477 - - 771 - -------------- ----------------- ------------------ ----------------- Earnings From Continuing Operations 270,388 255,570 449,901 406,501 Earnings from discontinued operations, net of income taxes of $961 and $819 for the three months and $92,713 and ($29,418) for the six months ended 2001 and 2000, respectively 2,185 86,334 142,217 180,847 -------------- ----------------- ------------------ ----------------- Consolidated Net Income $272,573 $341,904 $592,118 $587,348 ============== ================= ================== ================= Common Stock Data: Basic and diluted earnings per share of common stock -- Earnings per share from continuing operations $0.40 $0.39 $0.66 $0.62 Earnings per share from discontinued operations ($0.01) $0.13 $0.20 $0.28 -------------- ----------------- ------------------ ----------------- Consolidated Basic and Diluted Earnings Per Share $0.39 $0.52 $0.86 $0.90 ============== ================= ================== ================= Average number of shares of common stock outstanding (in thousands) 686,702 648,696 684,638 650,915 Cash dividends paid per share of common stock $0.335 $0.335 $0.67 $0.67 The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six Months Ended June 30, 2001 2000 ----------------- ----------------- (in thousands) Operating Activities: Consolidated net income $592,118 $587,348 Adjustments to reconcile consolidated net income to net cash provided from operating activities -- Less income from discontinued operations 142,217 180,847 Depreciation and amortization 663,396 701,721 Deferred income taxes and investment tax credits (40,739) 19,858 Equity in earnings of unconsolidated subsidiaries 3,101 11,294 Other, net (414,045) (181,173) Changes in certain current assets and liabilities -- Receivables, net 93,448 (88,582) Fossil fuel stock (193,386) (1,704) Materials and supplies (84) (4,096) Accounts payable (158,122) (23,557) Other 112,761 (82,412) ----------------- ----------------- Net cash provided from operating activities of continuing operations 516,231 757,850 ----------------- ----------------- Investing Activities: Gross property additions (1,411,839) (977,908) Other (124,786) (122,114) ----------------- ----------------- Net cash used for investing activities of continuing operations (1,536,625) (1,100,022) ----------------- ----------------- Financing Activities: Increase (decrease) in notes payable, net 822,266 197,145 Proceeds -- Other long-term debt 689,877 668,331 Common stock 195,329 299 Redemptions -- First mortgage bonds (396,166) (200,000) Other long-term debt (111,828) (77,844) Preferred stock - (383) Common stock repurchased - (414,475) Payment of common stock dividends (457,931) (437,846) Other (24,969) (8,228) ----------------- ----------------- Net cash provided from (used for) financing activities of continuing operations 716,578 (273,001) ----------------- ----------------- Cash provided by discontinued operations 304,853 587,970 ----------------- ----------------- Net Increase (Decrease) in Cash and Cash Equivalents 1,037 (27,203) Cash and Cash Equivalents at Beginning of Year 199,191 153,955 ----------------- ----------------- Cash and Cash Equivalents at End of Year $200,228 $126,752 ================= ================= Supplemental Cash Flow Information From Continuing Operations: Cash paid during the period for -- Interest (net of amount capitalized) $313,843 $404,470 Income taxes (net of refunds) $227,632 $103,963 The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS At June 30, 2001 At December 31, Assets (Unaudited) 2000 - ------ ------------------- ------------------- (in thousands) Current Assets: Cash and cash equivalents $ 200,228 $ 199,191 Special deposits 45,488 5,895 Receivables, less accumulated provisions for uncollectible accounts of $24,506 at June 30, 2001 and $21,799 at December 31, 2000 1,245,045 1,311,457 Under recovered retail fuel clause revenue 367,857 418,077 Fossil fuel stock, at average cost 388,591 195,206 Materials and supplies, at average cost 507,509 507,425 Other 284,859 187,948 ------------------- ------------------- Total current assets 3,039,577 2,825,199 ------------------- ------------------- Property, Plant, and Equipment: In service 34,968,164 34,187,808 Less accumulated depreciation 14,721,062 14,348,763 ------------------- ------------------- 20,247,102 19,839,045 Nuclear fuel, at amortized cost 196,272 214,620 Construction work in progress 2,007,786 1,568,737 ------------------- ------------------- Total property, plant, and equipment 22,451,160 21,622,402 ------------------- ------------------- Other Property and Investments: Nuclear decommissioning trusts, at fair value 693,621 689,561 Net assets of discontinued operations - 3,320,497 Leveraged leases 626,154 595,952 Other 244,655 165,332 ------------------- ------------------- Total other property and investments 1,564,430 4,771,342 ------------------- ------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 945,709 956,673 Prepaid pension costs 562,213 498,279 Debt expense, being amortized 75,875 99,442 Premium on reacquired debt, being amortized 272,794 280,239 Other 355,423 308,082 ------------------- ------------------- Total deferred charges and other assets 2,212,014 2,142,715 ------------------- ------------------- Total Assets $29,267,181 $31,361,658 =================== =================== The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS At June 30, 2001 At December 31, Liabilities and Stockholders' Equity (Unaudited) 2000 - ------------------------------------ ------------------- ------------------- (in thousands) Current Liabilities: Securities due within one year $ 562,095 $ 67,324 Notes payable 2,501,909 1,679,643 Accounts payable 705,203 870,032 Customer deposits 146,519 139,798 Taxes accrued -- Income taxes 175,411 87,731 Other 194,658 208,143 Interest accrued 144,828 120,770 Vacation pay accrued 119,247 118,710 Other 460,975 444,600 ------------------- ------------------- Total current liabilities 5,010,845 3,736,751 ------------------- ------------------- Long-term debt 7,531,212 7,842,491 ------------------- ------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 4,108,393 4,074,265 Deferred credits related to income taxes 525,930 551,259 Accumulated deferred investment tax credits 648,887 663,579 Employee benefits provisions 502,145 478,414 Prepaid capacity revenues 46,743 58,377 Other 743,594 651,805 ------------------- ------------------- Total deferred credits and other liabilities 6,575,692 6,477,699 ------------------- ------------------- Company or subsidiary obligated mandatorily redeemable capital and preferred securities 2,246,250 2,246,250 ------------------- ------------------- Cumulative preferred stock of subsidiaries 368,126 368,126 ------------------- ------------------- Common Stockholders' Equity: Common stock, par value $5 per share -- Authorized -- 1 billion shares Issued -- June 30, 2001: 700,622,308 shares; -- December 31, 2000: 700,622,308 shares 3,503,112 3,503,112 Paid-in capital 9,558 3,153,461 Treasury, at cost -- June 30, 2001: 11,791,284 shares; -- December 31, 2000: 19,464,122 shares (331,278) (544,515) Retained earnings 4,352,900 4,671,881 Accumulated other comprehensive income 764 (93,598) ------------------- ------------------- Total common stockholders' equity 7,535,056 10,690,341 ------------------- ------------------- Total Liabilities and Stockholders' Equity $29,267,181 $31,361,658 =================== =================== The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
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THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------------ -------------------------------- 2001 2000 2001 2000 ------------- --------------- -------------- -------------- (in thousands) (in thousands) Consolidated net income $272,573 $341,904 $ 592,118 $587,348 Other comprehensive income - continuing operations: Cumulative effect of accounting change - - 466 - Current period changes in fair value (960) - 364 - Related income tax benefits 368 - (315) - -------------- --------------- -------------- -------------- Total other comprehensive income - Continuing operations (592) - 515 - -------------- --------------- -------------- -------------- Other comprehensive income - discontinued operations: Cumulative effect of accounting change, net of income tax - - (249,246) - Current period changes in fair value, net of income tax - - (103,962) - Current period reclassifications to net income, net of income tax - - 59,857 - Foreign currency translation adjustments and other, - - net of income tax - - (21,199) (18,585) ------------- --------------- -------------- -------------- Total other comprehensive income - discontinued operations - - (314,550) (18,585) ------------- --------------- -------------- -------------- CONSOLIDATED COMPREHENSIVE INCOME $271,981 $341,904 $ 278,083 $568,763 ============= =============== ============== ==============
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME At June 30, At 2001 December 31, (Unaudited) 2000 -------------------------------- (in thousands) Balance at beginning of period - continuing operations $ 249 $ - Change in current period - continuing operations 515 249 -------------- -------------- BALANCE AT END OF PERIOD - Continuing Operations 764 249 -------------- -------------- Balance at beginning of period - discontinued operations (93,598) (92,395) Change in current period - discontinued operations - (1,452) Impact of spin-off 93,598 - -------------- -------------- BALANCE AT END OF PERIOD - Discontinued Operations - (93,847) -------------- -------------- TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME $ 764 ($93,598) ============== ============== The accompanying notes as they relate to SOUTHERN are an integral part of these statements.
11 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2001 vs. SECOND QUARTER 2000 AND YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000 RESULTS OF OPERATIONS Effective April 2, 2001, SOUTHERN completed a spin off of its remaining ownership of 272 million Mirant shares to SOUTHERN's shareholders in a tax free distribution. Shares from the spin off were distributed at a rate of approximately 0.4 share of Mirant common stock for every share of SOUTHERN common stock held at the record date. As a result of the spin off, SOUTHERN's financial statements reflect Mirant as discontinued operations. SOUTHERN is now focusing on three main businesses in the Southeast: its traditional business, represented by its five integrated Southeast utilities providing electric service in four states; a growing competitive generation business in the eight state "Super Southeast" region; and energy-related products and services for its retail customers. Earnings SOUTHERN's second quarter and year-to-date 2001 earnings from continuing operations were $270 million ($0.40 per share) and $450 million ($0.66 per share), respectively, compared with $256 million ($0.39 per share) and $407 million ($0.62 per share) in the second quarter and year-to-date 2000. The increases in earnings for the second quarter and year-to-date 2001 are primarily due to several factors, including growth in the competitive wholesale generation business, higher other operating revenues and lower interest expense, partially offset by the impact of unusually mild weather in the Southeast.
Significant income statement items appropriate for discussion include the following: Increase (Decrease) --------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Retail sales..................................... $ (42,429) (1.9) $ 57,341 1.4 Sales for resale................................. 57,806 25.2 139,923 34.4 Other revenues................................... 23,685 22.5 59,713 30.4 Fuel expense..................................... 10,526 1.6 93,934 8.0 Purchased power expense.......................... 40,926 26.2 80,523 34.9 Maintenance expense.............................. 14,869 6.9 29,784 7.0 Depreciation and amortization.................... (28,014) (9.0) (16,022) (2.7) Equity in earnings of unconsolidated subsidiaries (10,362) 182.5 (7,281) 63.6 Interest expense, net............................ (23,636) (14.0) (31,695) (9.8)
12 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Retail sales. Excluding fuel revenues, which generally do not affect net income, retail sales revenue was down by $44 million or 2.9% in the second quarter of 2001 and up by approximately $4 million or 0.1% year-to-date 2001 compared to the same periods in the prior year. The second quarter 2001 decrease is primarily due to milder weather in this period as compared to the second quarter 2000. Total retail energy sales were down by 3.1% in the second quarter of 2001. The year-to-date 2001 increase is primarily due to increased energy sales to residential and commercial customers due to a 1.7% growth in the average number of customers served when compared to the same period in the prior year. Sales for resale. The second quarter and year-to-date 2001 increases are mostly due to increased demand for energy by non-affiliated companies. Also reflected in these revenues are sales from Plant Dahlberg which went into service in the second quarter of 2000. Other revenues. During the second quarter and year-to-date 2001, other revenues increased due to several factors including increased revenues from gas-fueled cogeneration steam facilities, transmission of electricity for others, pole attachments and distribution systems equipment rentals, as well as fuel clause adjustments. However, cogeneration revenues and fuel clause adjustments generally have no material effect on net income since they are generally equal to related fuel expenses. Fuel expense. For the second quarter 2001, fuel expense increased when compared to the same period in 2000 primarily due to higher natural gas prices. The increase in the second quarter 2001 was partially offset by decreased generation resulting from lower demand for energy in some of the areas served by the integrated Southeast utilities due in part to the unusually mild weather. The year-to-date 2001 increase in fuel expense is mainly attributed to increased generation resulting from higher demand for energy and higher natural gas prices. Since energy expenses are usually offset by energy revenues, these expenses do not have a significant impact on earnings. Purchased power expense. In the second quarter and year-to-date 2001, this expense increased above amounts recorded in the corresponding periods of 2000 due in large part to increased demand for energy by wholesale customers and increased prices for natural gas. Since energy expenses are usually offset by energy revenues, these expenses do not have a significant impact on earnings. Maintenance expense. These expenses were higher in the second quarter and year-to-date 2001 when compared to the same periods in 2000 due mostly to scheduled work performed on power generating facilities and transmission and distribution facilities. Depreciation and amortization. This item was lower in the second quarter and year-to-date 2001 as compared to the same periods in 2000 in accordance with GEORGIA's 1998 rate plan, as authorized by the Georgia PSC. Reference is made to Note (G) 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. Equity in earnings of unconsolidated subsidiaries. The second quarter and year-to-date 2001 decreases in this item primarily relate to the investment by SOUTHERN, in April 2001, in a partnership producing alternative fuel products. Interest expense, net. During the second quarter and year-to-date 2001, interest on long-term debt and interest on notes payable decreased when compared to the same periods in 2000. Reasons for these decreases include the redemption of first mortgage bonds and the repayment of other long-term debt in the first half of 2001 and declining short-term debt and lower interest rates on outstanding notes payable. 13 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES 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. The two major factors are the ability of the integrated Southeast utilities to achieve energy sales growth while containing cost in a more competitive environment; and the profitability of the new competitive market-based wholesale generating facilities being added. For additional information relating to the other businesses, see Item 1 - BUSINESS - "Other Business" in the Form 10-K. Also, reference is made to Note (B) in the "Notes to the Condensed Financial Statements" herein for information relating to the spin off of Mirant. 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. On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO proposal. For additional information on the FERC's response to SOUTHERN's proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, SOUTHERN explained that it has entered into memoranda of understanding to develop an RTO with eight non-jurisdictional cooperative and public power entities. In addition, SOUTHERN has entered into a memorandum of understanding with TVA to address coordination issues between their transmission systems. On July 12, 2001, the FERC issued an order on the status reports of SOUTHERN, as well as GridSouth and Entergy/Southwest Power Pool. In those orders, the FERC indicated that it favored a single RTO for the Southeast. The FERC initiated a mediation process, directed the parties to participate in the mediation for 45 days and ordered the mediator to file a report within 10 days following the end of the mediation. These discussions are ongoing and it is expected that the mediator will make a report by mid-September 2001. Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of SOUTHERN in the Form 10-K for information on EPA litigation. Reference is made to Notes (B) through (K), (N) and (O) 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. 14 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION New Accounting Standards Effective January 1, 2001, SOUTHERN and its subsidiaries adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. All derivatives are now reflected on the Condensed Consolidated Balance Sheet at fair market value. Reference is made to Note (C) in the "Notes to the Condensed Financial Statements" herein for additional information on the adoption of Statement No. 133. In June 2001, the FASB issued Statement No. 141, "Business Combinations," which establishes new accounting and reporting standards for business combinations and supersedes Accounting Principles Board (APB) Opinion No. 16. All business combinations initiated after June 30, 2001 must now be accounted for using the purchase method of accounting. Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting standards for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for upon acquisition and on an ongoing basis. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, which are no longer limited to 40 years. The provisions of Statement No. 142 must be adopted in 2002. SOUTHERN has not yet quantified the impact of adopting Statement No. 142 on its financial statements; however, the impact is not expected to be material. Additionally in June 2001, the FASB issued Statement No. 143, "Asset Retirement Obligations," which establishes new accounting and reporting standards for legal obligations associated with retiring assets, including decommissioning nuclear plants. The fair value of a liability for an asset retirement obligation must be recorded in the period in which it is incurred, with the cost capitalized as part of the related long-lived asset and depreciated over the asset's useful life. Changes in the liability resulting from the passage of time will be recognized as operating expenses. Statement No. 143 must be adopted by 2003. SOUTHERN has not yet quantified the impact of adopting Statement No. 143 on its financial statements. 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. FINANCIAL CONDITION Overview Major changes in SOUTHERN's financial condition during the first six months of 2001 included $1.4 billion used for gross property additions to utility plant. The funds for these additions and other capital requirements were from operations and other long-term debt. See SOUTHERN's Condensed Consolidated Statements of Cash Flows for further details. 15 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Financing Activities In February 2001, GEORGIA issued $350 million aggregate principal amount of senior notes consisting of $200 million of Series F 5.75% Senior Notes due January 31, 2003 and $150 million Series G 6.20% Senior Notes due February 1, 2006. The proceeds of the sale were applied to redeem $200 million of GEORGIA's First Mortgage Bonds, 6 5/8% Series due April 2003 and to repay a portion of GEORGIA's outstanding short-term indebtedness. Also in February 2001, GEORGIA issued $100 million of Series H 6.70% Senior Insured Quarterly Notes due March 1, 2011. The proceeds of this sale were used to repay an additional portion of GEORGIA's outstanding short-term indebtedness. In April 2001, ALABAMA sold, through a public authority, $10 million of variable rate demand revenue bonds due April 1, 2031. In May 2001, GEORGIA issued $150 million of Series I 5.25% Senior Notes due May 8, 2003. The proceeds of this sale were used in May 2001 to repurchase $47 million aggregate principal amount of GEORGIA's First Mortgage Bonds, 7.70% Series due May 1, 2025, $1.9 million aggregate principal amount of GEORGIA's First Mortgage Bonds, 6 7/8% Series due April 1, 2008 and $8.1 million aggregate principal amount of GEORGIA's First Mortgage Bonds, 6.07% Series due December 1, 2005, and to redeem in June 2001 $75 million outstanding principal amount of GEORGIA's First Mortgage Bonds, 6.35% Series due August 1, 2003. The remainder was used to repay a portion of GEORGIA's outstanding short-term indebtedness. Also in May 2001, SAVANNAH issued $65 million aggregate principal amount of senior notes consisting of $20 million of Series B 5.12% Senior Notes due May 15, 2003 and $45 million of Series C 6.55% Senior Notes due May 15, 2008. The proceeds of the sale were used to redeem in June 2001 the $20 million outstanding principal amount of SAVANNAH's First Mortgage Bonds, 6 3/8% Series due July 1, 2003 and to repay $30 million in bank loans and a portion of SAVANNAH's outstanding short-term indebtedness. In July 2001, GEORGIA sold, through public authorities, an aggregate principal amount of $58,845,000 of pollution control revenue bonds due July 1, 2031. Also in July 2001, GEORGIA sold, through public authorities, $67 million of pollution control revenue bonds due July 1, 2016. The proceeds of these sales will be used to redeem various series of outstanding pollution control revenue bonds. On August 3, 2001, GULF issued $60 million of Series C 4.69% Senior Notes due August 1, 2003. The proceeds of the sale will be used to redeem $30 million outstanding principal amount of GULF's First Mortgage Bonds, 6 1/8% Series due July 1, 2003 and to repay a portion of GULF's short-term indebtedness. The market price of SOUTHERN's common stock at June 30, 2001 was $23.25 per share and the book value was $10.94 per share, representing a market-to-book ratio of 213%, compared to $33.25, $15.69 and 212%, respectively, at the end of 2000. The decreases in market price and book value per share reflect the impact of the Mirant spin off. The dividend for the second quarter of 2001 was $0.335 per share. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Capital Requirements", "Other Capital Requirements" and "Environmental Matters" of SOUTHERN in the Form 10-K for a description of the SOUTHERN system's capital requirements for its construction program, sinking fund requirements, maturing debt and environmental compliance efforts. Approximately $562 million will be required by June 30, 2002 for redemptions and maturities of long-term debt. Also, the integrated Southeast utilities plan to continue, to the extent possible, a program to retire higher-cost debt and replace these securities with lower-cost capital. 16 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 2001, as well as in subsequent years, will be contingent on SOUTHERN's investment opportunities. The integrated Southeast utilities plan to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon market conditions and regulatory approval. 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, 2001 approximately $200 million of cash and cash equivalents and approximately $5.1 billion of unused credit arrangements with banks. These unused credit arrangements also provide liquidity support to variable rate pollution control bonds and commercial paper programs. SOUTHERN's integrated Southeast utilities may also meet short-term cash needs through a SOUTHERN subsidiary organized to issue and sell commercial paper at the request and for the benefit of each of the integrated Southeast utilities. At June 30, 2001, the SOUTHERN system had short-term notes payable outstanding of $324 million and commercial paper outstanding of $2.2 billion. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 17 PART I Item 3. Quantitative And Qualitative Disclosures About Market Risk. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Market Price Risk" and Note 1 to the financial statements of SOUTHERN in Item 8 of the Form 10-K. Additional reference is made to Notes (C), (D) and (I) in the "Notes to the Condensed Financial Statements" contained herein for additional information regarding commodity-related marketing and price risk management activities. 18 ALABAMA POWER COMPANY 19
ALABAMA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Six Months Ended June 30, Ended June 30, 2001 2000 2001 2000 ---------------- ---------------- ---------------- ---------------- (in thousands) (in thousands) Operating Revenues: Retail sales $712,507 $747,570 $1,347,279 $1,353,696 Sales for resale -- Non-affiliates 122,484 113,685 232,946 209,816 Affiliates 44,990 18,423 120,123 47,092 Other revenues 23,886 20,780 53,521 36,031 ---------------- ---------------- ---------------- ---------------- Total operating revenues 903,867 900,458 1,753,869 1,646,635 ---------------- ---------------- ---------------- ---------------- Operating Expenses: Operation -- Fuel 233,308 218,321 492,763 413,395 Purchased power -- Non-affiliates 41,691 37,001 76,000 55,873 Affiliates 51,023 53,922 87,009 80,787 Other 144,000 135,363 255,002 247,609 Maintenance 88,209 83,762 164,569 160,596 Depreciation and amortization 97,087 91,226 192,604 181,698 Taxes other than income taxes 54,335 52,088 111,681 106,240 ---------------- ---------------- ---------------- ---------------- Total operating expenses 709,653 671,683 1,379,628 1,246,198 ---------------- ---------------- ---------------- ---------------- Operating Income 194,214 228,775 374,241 400,437 Other Income (Expense): Interest income 3,957 8,551 7,443 14,477 Equity in earnings of unconsolidated subsidiaries 944 638 1,999 1,497 Other, net (1,961) (107) (5,091) (1,189) ---------------- ---------------- ---------------- ---------------- Earnings Before Interest and Income Taxes 197,154 237,857 378,592 415,222 ---------------- ---------------- ---------------- ---------------- Interest and Other: Interest expense, net 62,317 63,997 120,138 122,905 Distributions on preferred securities of subsidiary 6,214 6,371 12,570 12,707 ---------------- ---------------- ---------------- ---------------- Total interest and other, net 68,531 70,368 132,708 135,612 ---------------- ---------------- ---------------- ---------------- Earnings Before Income Taxes 128,623 167,489 245,884 279,610 Income taxes 49,305 60,278 92,915 100,919 ---------------- ---------------- ---------------- ---------------- Net Income Before Cumulative Effect of Accounting Change 79,318 107,211 152,969 178,691 Cumulative effect of accounting change -- less income taxes of $215 thousand - - 353 - ---------------- ---------------- ---------------- ---------------- Net Income 79,318 107,211 153,322 178,691 Dividends on Preferred Stock 3,890 4,036 7,942 8,004 ---------------- ---------------- ---------------- ---------------- Net Income After Dividends on Preferred Stock $75,428 $103,175 $145,380 $170,687 ================ ================ ================ ================ The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
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ALABAMA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six Months Ended June 30, 2001 2000 ----------------- ----------------- (in thousands) Operating Activities: Net income $153,322 $178,691 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 215,388 202,909 Deferred income taxes and investment tax credits, net 25,070 14,557 Other, net (59,034) (37,992) Changes in certain current assets and liabilities -- Receivables, net 56,338 (66,654) Fossil fuel stock (33,496) (10,377) Materials and supplies 2,391 (5,790) Accounts payable (145,497) (6,326) Energy cost recovery, retail 39,611 (7,502) Other (7,927) 24,476 ----------------- ----------------- Net cash provided from operating activities 246,166 285,992 ----------------- ----------------- Investing Activities: Gross property additions (341,226) (391,398) Other (22,296) (26,371) ----------------- ----------------- Net cash used for investing activities (363,522) (417,769) ----------------- ----------------- Financing Activities: Increase in notes payable, net 224,351 123,418 Proceeds -- Common stock 15,642 - Other long-term debt 10,000 250,000 Capital contributions from parent company 84,366 84,000 Redemptions -- First mortgage bonds (7,484) (100,000) Other long-term debt (2,232) (3,078) Payment of preferred stock dividends (7,590) (7,984) Payment of common stock dividends (198,800) (208,800) Other (11) (894) ----------------- ----------------- Net cash provided from financing activities 118,242 136,662 ----------------- ----------------- Net Change in Cash and Cash Equivalents 886 4,885 Cash and Cash Equivalents at Beginning of Period 14,247 19,475 ----------------- ----------------- Cash and Cash Equivalents at End of Period $ 15,133 $ 24,360 ================= ================= Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $121,607 $114,885 Income taxes (net of refunds) $69,526 $42,604 The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
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ALABAMA POWER COMPANY CONDENSED BALANCE SHEETS At June 30, 2001 At December 31, Assets (Unaudited) 2000 - ------ ------------------- -------------------- (in thousands) Current Assets: Cash and cash equivalents $ 15,133 $ 14,247 Receivables -- Customer accounts receivable 327,337 337,870 Under recovered retail fuel clause revenue 198,206 237,817 Other accounts and notes receivable 44,722 60,315 Affiliated companies 64,590 95,704 Accumulated provision for uncollectible accounts (5,335) (6,237) Fossil fuel stock, at average cost 94,111 60,615 Materials and supplies, at average cost 175,908 178,299 Other 104,562 52,624 ------------------- -------------------- Total current assets 1,019,234 1,031,254 ------------------- -------------------- Property, Plant, and Equipment: In service 12,864,156 12,431,575 Less accumulated provision for depreciation 5,227,302 5,107,822 ------------------- -------------------- 7,636,854 7,323,753 Nuclear fuel, at amortized cost 93,345 94,050 Construction work in progress 532,386 744,974 ------------------- -------------------- Total property, plant, and equipment 8,262,585 8,162,777 ------------------- -------------------- Other Property and Investments: Equity investments in unconsolidated subsidiaries 40,926 38,623 Nuclear decommissioning trusts 321,276 313,895 Other 12,989 13,612 ------------------- -------------------- Total other property and investments 375,191 366,130 ------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 344,101 345,550 Prepaid pension costs 296,344 268,259 Debt expense, being amortized 8,568 8,758 Premium on reacquired debt, being amortized 72,107 76,020 Department of Energy assessments 24,588 24,588 Other 113,432 95,772 ------------------- -------------------- Total deferred charges and other assets 859,140 818,947 ------------------- -------------------- Total Assets $10,516,150 $10,379,108 =================== ==================== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
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ALABAMA POWER COMPANY CONDENSED BALANCE SHEETS At June 30, 2001 At December 31, Liabilities and Stockholders' Equity (Unaudited) 2000 - ------------------------------------ ------------------- -------------------- (in thousands) Current Liabilities: Securities due within one year $ 132,353 $ 844 Notes payable 505,694 281,343 Accounts payable -- Affiliated 103,306 124,534 Other 83,999 209,205 Customer deposits 39,657 36,814 Taxes accrued -- Income taxes 65,353 65,505 Other 55,746 19,471 Interest accrued 34,615 33,186 Vacation pay accrued 31,711 31,711 Other 84,388 97,743 ------------------- -------------------- Total current liabilities 1,136,822 900,356 ------------------- -------------------- Long-term debt 3,295,744 3,425,527 ------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 1,433,412 1,401,424 Deferred credits related to income taxes 213,304 222,485 Accumulated deferred investment tax credits 243,753 249,280 Employee benefits provisions 88,656 84,816 Prepaid capacity revenues 46,743 58,377 Other 150,575 176,559 ------------------- -------------------- Total deferred credits and other liabilities 2,176,443 2,192,941 ------------------- -------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding company junior subordinated notes 347,000 347,000 ------------------- -------------------- Cumulative preferred stock 317,512 317,512 ------------------- -------------------- Common Stockholder's Equity: Common stock, par value $40 per share -- Authorized - 6,000,000 shares Outstanding - 6,000,000 shares (5,608,955 at December 31, 2000) Par value 240,000 224,358 Paid-in capital 1,827,729 1,743,363 Premium on preferred stock 99 99 Retained earnings 1,174,801 1,227,952 ------------------- -------------------- Total common stockholder's equity 3,242,629 3,195,772 ------------------- -------------------- Total Liabilities and Stockholder's Equity $10,516,150 $10,379,108 =================== ==================== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
23 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2001 vs. SECOND QUARTER 2000 AND YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000 RESULTS OF OPERATIONS Earnings ALABAMA's net income after dividends on preferred stock for the second quarter and year-to-date 2001 was $75.4 million and $145.4 million, respectively, compared to $103.2 million and $170.7 million for the corresponding periods of 2000. The decreases in the second quarter and year-to-date 2001 of $27.8 million or 26.9% and $25.3 million or 14.8%, respectively, were primarily due to lower retail sales revenue and higher operating expenses. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Retail sales..................................... $(35,063) (4.7) $(6,417) (0.5) Sales for resale - non-affiliates................ 8,799 7.7 23,130 11.0 Sales for resale - affiliates.................... 26,567 144.2 73,031 155.1 Other revenues................................... 3,106 15.0 17,490 48.5 Fuel expense..................................... 14,987 6.9 79,368 19.2 Purchased power - non-affiliates................. 4,690 12.7 20,127 36.0 Purchased power - affiliates..................... (2,899) (5.4) 6,222 7.7 Maintenance expense.............................. 4,447 5.3 3,973 2.5 Depreciation and amortization.................... 5,861 6.4 10,906 6.0
Retail sales. Excluding fuel revenues, which generally do not affect net income, retail sales revenue was lower by $19.8 million or 3.7% for the second quarter 2001 and $15.5 million or 1.6% year-to-date 2001 when compared to the corresponding periods in 2000 due mainly to decreased energy sales to retail customers. As a result of milder weather, energy sales to residential customers decreased 4.2% during the second quarter of 2001. Energy sales to industrial customers were down for the second quarter and year-to-date 2001 by 4.2% and 8.0%, respectively, due to a slower economy. Sales for resale - non-affiliates. Increased demand for energy by non-affiliates during the second quarter and year-to-date 2001 translated to higher revenues from sales for resale to non-affiliates. These transactions did not have a significant impact on earnings since the energy is usually sold at variable cost. Sales for resale - affiliates and Purchased power - affiliates. Revenues from sales for resale to affiliated companies within the SOUTHERN system, as well as purchases of energy, will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions did not have a significant impact on earnings. Other revenues. Increased steam sales in conjunction with the operation of cogeneration facilities was the primary reason for the increase in other revenues for the second quarter and year-to-date 2001 when compared to the same periods in 2000. Since cogeneration steam revenues are generally offset by fuel expenses, these revenues did not have a significant impact on earnings. 24 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Fuel expense. Increased generation by gas-fueled plants resulted in higher fuel expense for the second quarter and year-to-date 2001 when compared to the corresponding periods in 2000. Since energy expenses are generally offset by energy revenues, these expenses did not have a significant impact on earnings. Purchased power - non-affiliates. Increases in purchased power from non-affiliates in the second quarter and year-to-date 2001 when compared to the same periods in 2000 are primarily due to higher costs associated with these energy purchases. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues. Maintenance expense. These increases during the second quarter and year-to-date 2001 as compared to the corresponding periods in 2000 are a result of higher expenses related to the maintenance of transmission and distribution lines. Depreciation and amortization. The increases for the second quarter and year-to-date 2001 as compared to the same periods in 2000 are primarily due to increased depreciation expenses associated with recent generating capacity additions. 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 regulatory matters and the effect of weather and the economy on energy sales. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, ALABAMA is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of ALABAMA in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of ALABAMA in the Form 10-K. On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO proposal. For additional information on the FERC's response to SOUTHERN's proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, SOUTHERN explained that it has entered into memoranda of understanding to develop an RTO with eight non-jurisdictional cooperative and public power entities. In addition, SOUTHERN has entered into a memorandum of understanding with TVA to address coordination issues between their transmission systems. On July 12, 2001, the FERC issued an order on the status reports of SOUTHERN, as well as GridSouth and Entergy/Southwest Power Pool. In those orders, the FERC indicated that it favored a single RTO for the Southeast. The FERC initiated a mediation process, directed the parties to participate in the mediation for 45 days and ordered the mediator to file a report within 10 days following the end of the mediation. These discussions are ongoing and it is expected that the mediator will make a report by mid-September 2001. 25 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of ALABAMA in the Form 10-K for information on EPA litigation. Reference is made to Notes (C) through (F), (K) 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. New Accounting Standards Effective January 1, 2001, ALABAMA adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. All derivatives are now reflected on the Condensed Consolidated Balance Sheet at fair market value. Reference is made to Note (C) in the "Notes to the Condensed Financial Statements" herein for additional information on the adoption of Statement No. 133. In June 2001, the FASB issued Statement No. 141, "Business Combinations," which establishes new accounting and reporting standards for business combinations and supersedes Accounting Principles Board (APB) Opinion No. 16. All business combinations initiated after June 30, 2001 must now be accounted for using the purchase method of accounting. Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting standards for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for upon acquisition and on an ongoing basis. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, which are no longer limited to 40 years. The provisions of Statement No. 142 must be adopted in 2002. ALABAMA has not yet quantified the impact of adopting Statement No. 142 on its financial statements; however, the impact is not expected to be material. Additionally in June 2001, the FASB issued Statement No. 143, "Asset Retirement Obligations," which establishes new accounting and reporting standards for legal obligations associated with retiring assets, including decommissioning nuclear plants. The fair value of a liability for an asset retirement obligation must be recorded in the period in which it is incurred, with the cost capitalized as part of the related long-lived asset and depreciated over the asset's useful life. Changes in the liability resulting from the passage of time will be recognized as operating expenses. Statement No. 143 must be adopted by 2003. ALABAMA has not yet quantified the impact of adopting Statement No. 143 on its financial statements. 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. FINANCIAL CONDITION Overview Major changes in ALABAMA's financial condition during the first six months of 2001 included the addition of approximately $341 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities and the sale of additional common stock to and capital contributions from SOUTHERN. See ALABAMA's Condensed Statements of Cash Flows for further details. 26 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Financing Activities In April 2001, ALABAMA sold, through a public authority, $10 million of variable rate demand revenue bonds due April 1, 2031. The proceeds of the sale were used to pay certain costs incurred in connection with the acquisition, construction, installation and equipping of certain local district heating and cooling facilities and sewage and solid waste facilities at ALABAMA's Theodore Congeneration Plant. ALABAMA has called for redemption in August 2001 the $131.5 million outstanding principal amount of its First Mortgage Bonds, 9% Series due February 1, 2024. ALABAMA plans to continue, to the extent possible, a program to retire higher-cost debt and replace these obligations with lower-cost capital. 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, 2001 approximately $15 million of cash and cash equivalents, unused committed lines of credit of approximately $962 million (including $429 million of such lines under which borrowings may be made only to fund purchase obligations relating to variable rate pollution control bonds) and an extendible commercial note program. ALABAMA may also meet short-term cash needs through a SOUTHERN subsidiary organized to issue and sell commercial paper at the request and for the benefit of ALABAMA and other SOUTHERN subsidiaries. ALABAMA has regulatory authority for up to $750 million of short-term borrowings. At June 30, 2001, ALABAMA had outstanding $136 million in notes payable, $309 million of commercial paper and $61 million of extendible commercial notes. 27 GEORGIA POWER COMPANY 28
GEORGIA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Six Months Ended June 30, Ended June 30, 2001 2000 2001 2000 --------------- ---------------- ----------------- ---------------- (in thousands) (in thousands) Operating Revenues: Retail sales $1,093,733 $1,095,283 $2,042,878 $2,004,311 Sales for resale -- Non-affiliates 92,760 62,110 180,351 105,799 Affiliates 35,281 31,220 71,058 43,153 Other revenues 37,509 32,064 73,025 59,053 --------------- ---------------- ----------------- ---------------- Total operating revenues 1,259,283 1,220,677 2,367,312 2,212,316 --------------- ---------------- ----------------- ---------------- Operating Expenses: Operation -- Fuel 252,438 269,396 481,130 480,303 Purchased power -- Non-affiliates 118,991 85,430 173,096 128,540 Affiliates 73,285 41,728 152,580 89,468 Other 196,528 201,529 372,102 360,512 Maintenance 104,941 88,408 211,606 186,541 Depreciation and amortization 139,679 173,803 303,928 331,570 Taxes other than income taxes 51,747 49,896 101,848 101,509 --------------- ---------------- ----------------- ---------------- Total operating expenses 937,609 910,190 1,796,290 1,678,443 --------------- ---------------- ----------------- ---------------- Operating Income 321,674 310,487 571,022 533,873 Other Income (Expense): Interest income 1,206 778 1,808 1,186 Equity in earnings of unconsolidated subsidiaries 947 676 1,956 1,529 Other, net 8,210 1,955 (156) (4,270) --------------- ---------------- ----------------- ---------------- Earnings Before Interest and Income Taxes 332,037 313,896 574,630 532,318 --------------- ---------------- ----------------- ---------------- Interest Charges and Other: Interest expense, net 50,290 53,134 101,189 100,111 Distributions on preferred securities of subsidiaries 14,776 14,776 29,552 29,552 --------------- ---------------- ----------------- ---------------- Total interest charges and other, net 65,066 67,910 130,741 129,663 --------------- ---------------- ----------------- ---------------- Earnings Before Income Taxes 266,971 245,986 443,889 402,655 Income taxes 103,698 97,284 173,031 160,084 -------------- ---------------- ----------------- ---------------- Net Income Before Cumulative Effect of Accounting Change 163,273 148,702 270,858 242,571 Cumulative effect of accounting change -- less income taxes of $162 thousand - - 257 - --------------- ---------------- ----------------- ---------------- Net Income 163,273 148,702 271,115 242,571 Dividends on Preferred Stock 167 169 335 339 --------------- ---------------- ----------------- ---------------- Net Income After Dividends on Preferred Stock $ 163,106 $ 148,533 $ 270,780 $ 242,232 =============== ================ ================= ================ The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
29
GEORGIA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six Months Ended June 30, 2001 2000 --------------- ---------------- (in thousands) Operating Activities: Net income $271,115 $242,571 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 341,607 392,426 Deferred income taxes and investment tax credits, net (68,186) (15,964) Other, net (492) (3,429) Changes in certain current assets and liabilities -- Receivables, net 43,215 (10,306) Fossil fuel stock (101,637) 3,870 Materials and supplies 385 (3,836) Accounts payable (110,312) (21,728) Energy cost recovery, retail 12,386 (62,437) Other 92,336 27,948 --------------- ---------------- Net cash provided from operating activities 480,417 549,115 --------------- ---------------- Investing Activities: Gross property additions (740,218) (456,786) Other (43,712) (66,152) --------------- ---------------- Net cash used for investing activities (783,930) (522,938) --------------- ---------------- Financing Activities: Increase (decrease) in notes payable, net 93,568 (238,082) Proceeds -- Other long-term debt 600,000 300,000 Capital contributions from parent company 200,433 269,000 Retirements -- First mortgage bonds (332,040) (100,000) Preferred stock - (383) Payment of preferred stock dividends (240) (318) Payment of common stock dividends (265,400) (275,100) Other (7,111) (183) --------------- ---------------- Net cash provided from (used for) financing activities 289,210 (45,066) --------------- ---------------- Net Change in Cash and Cash Equivalents (14,303) (18,889) Cash and Cash Equivalents at Beginning of Period 29,370 34,660 --------------- ---------------- Cash and Cash Equivalents at End of Period $ 15,067 $ 15,771 =============== ================ Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $100,945 $133,263 Income taxes (net of refunds) $140,690 $54,164 The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
30
GEORGIA POWER COMPANY CONDENSED BALANCE SHEETS At June 30, 2001 At December 31, Assets (Unaudited) 2000 - ------ ------------------- -------------------- (in thousands) Current Assets: Cash and cash equivalents $ 15,067 $ 29,370 Receivables -- Customer accounts receivable 442,546 465,249 Under recovered retail fuel clause revenue 119,237 131,623 Other accounts and notes receivable 129,640 156,143 Affiliated companies 13,550 13,312 Accumulated provision for uncollectible accounts (9,250) (5,100) Fossil fuel stock, at average cost 201,100 99,463 Materials and supplies, at average cost 263,224 263,609 Other 163,276 97,515 ------------------- -------------------- Total current assets 1,338,390 1,251,184 ------------------- -------------------- Property, Plant, and Equipment: In service 16,711,457 16,469,706 Less accumulated provision for depreciation 7,085,416 6,914,512 ------------------- -------------------- 9,626,041 9,555,194 Nuclear fuel, at amortized cost 102,927 120,570 Construction work in progress 1,079,992 652,264 ------------------- -------------------- Total property, plant, and equipment 10,808,960 10,328,028 ------------------- -------------------- Other Property and Investments: Equity investments in unconsolidated subsidiaries 27,309 25,485 Nuclear decommissioning trusts 372,345 375,666 Other 41,719 33,829 ------------------- -------------------- Total other property and investments 441,373 434,980 ------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 555,529 565,982 Prepaid pension costs 236,058 205,113 Debt expense, being amortized 56,709 53,748 Premium on reacquired debt, being amortized 171,263 173,610 Other 114,823 120,964 ------------------- -------------------- Total deferred charges and other assets 1,134,382 1,119,417 ------------------- -------------------- Total Assets $13,723,105 $13,133,609 =================== ==================== The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
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GEORGIA POWER COMPANY CONDENSED BALANCE SHEETS At June 30, 2001 At December 31, Liabilities and Stockholder's Equity (Unaudited) 2000 - ------------------------------------ ------------------- -------------------- (in thousands) Current Liabilities: Securities due within one year $ 315,661 $ 1,808 Notes payable and commercial paper 797,407 703,839 Accounts payable -- Affiliated 97,588 117,168 Other 280,227 397,550 Customer deposits 81,019 78,540 Taxes accrued -- Income taxes 105,840 5,151 Other 98,060 137,511 Interest accrued 72,907 47,244 Vacation pay accrued 39,501 38,865 Other 177,214 153,400 ------------------- -------------------- Total current liabilities 2,065,424 1,681,076 ------------------- -------------------- Long-term debt 2,995,914 3,041,939 ------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 2,156,778 2,182,783 Deferred credits related to income taxes 237,973 247,067 Accumulated deferred investment tax credits 344,882 352,282 Employee benefits provisions 185,612 177,444 Other 477,033 397,655 ------------------- -------------------- Total deferred credits and other liabilities 3,402,278 3,357,231 ------------------- -------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding company junior subordinated notes 789,250 789,250 ------------------- -------------------- Preferred stock 14,569 14,569 ------------------- -------------------- Common Stockholder's Equity: Common stock, without par value-- Authorized - 15,000,000 shares Outstanding - 7,761,500 shares 344,250 344,250 Paid-in capital 2,317,931 2,117,497 Premium on preferred stock 40 40 Retained earnings 1,793,136 1,787,757 Accumulated other comprehensive income 313 - ------------------- -------------------- Total common stockholder's equity 4,455,670 4,249,544 ------------------- -------------------- Total Liabilities and Stockholder's Equity $13,723,105 $13,133,609 =================== ==================== 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 COMPREHENSIVE INCOME (UNAUDITED) For the Three Months For the Six Months Ended June 30, Ended June 30, ---------------------------------- ----------------------------------- 2001 2000 2001 2000 -------------- ------------------ -------------- -------------- (in thousands) (in thousands) Net Income After Dividends on Preferred Stock $163,106 $148,533 $270,780 $242,232 Other comprehensive income: Cumulative effect of accounting change - - 466 - Current period changes in fair value (776) - (34) - Related income tax benefit (expense) 297 - (119) - -------------- ------------------ -------------- -------------- COMPREHENSIVE INCOME $162,627 $148,533 $271,093 $242,232 ============== ================== ============== ==============
GEORGIA POWER COMPANY CONDENSED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (UNAUDITED) At June 30, At December 31, 2001 2000 ----------------------------------- (in thousands) Balance at beginning of period $ - $ - Change in current period 313 - -------------- -------------- BALANCE AT END OF PERIOD $ 313 $ - ============== ============== The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
33 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2001 vs. SECOND QUARTER 2000 AND YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000 RESULTS OF OPERATIONS Earnings GEORGIA's net income after dividends on preferred stock for the second quarter and year-to-date 2001 was $163.1 million and $270.8 million, respectively, compared to $148.5 million and $242.2 million for the corresponding periods in 2000. Earnings increased by $14.6 million or 9.8% for the second quarter 2001 and $28.5 million or 11.8% year-to-date 2001 when compared to the same periods in 2000 due primarily to increased operating revenues that were partially offset by increased operating expenses. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Retail sales..................................... $(1,550) (0.1) $38,567 1.9 Sales for resale - non-affiliates................ 30,650 49.3 74,552 70.5 Sales for resale - affiliates.................... 4,061 13.0 27,905 64.7 Other revenues................................... 5,445 17.0 13,972 23.7 Fuel expense..................................... (16,958) (6.3) 827 0.2 Purchased power - non-affiliates................. 33,561 39.3 44,556 34.7 Purchased power - affiliates..................... 31,557 75.6 63,112 70.5 Maintenance expense.............................. 16,533 18.7 25,065 13.4 Depreciation and amortization.................... (34,124) (19.6) (27,642) (8.3)
Retail sales. Excluding fuel revenues, which generally do not affect net income, retail sales revenue decreased in the second quarter of 2001 by $22.1 million or 2.8% and increased year-to-date 2001 by $12.1 million or 0.8% when compared to the respective periods in 2000. The decrease for the second quarter 2001 is primarily due to a 5% decrease in energy sales to residential customers as a result of milder weather in this quarter compared to the same period in the prior year and an 8.8% decrease in energy sales to industrial customers due to a continued slowdown in manufacturing activity that is occurring in the State of Georgia, partially offset by a 2.4% increase in commercial energy sales due to increased number of commercial customers. The year-to-date 2001 retail sales revenue was higher due primarily to a 4.9% increase in energy sales to commercial customers partially offset by the milder weather in the second quarter. Sales for resale - non-affiliates. During the second quarter and year-to-date 2001, sales for resale to non-affiliates was higher when compared to the corresponding periods in 2000 primarily due to increased demand for energy which was in large part offset by energy expenses. Also, reflected in these revenues are sales from Plant Dahlberg which went into service in the second quarter of 2000. 34 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Sales for resale - affiliates and Purchased power - affiliates. Revenues from sales for resale to affiliated companies, as well as purchases of energy, within the SOUTHERN system will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions did not have a significant impact on earnings. Other revenues. For the second quarter and year-to-date 2001, other revenues increased when compared to the same periods in 2000 due mainly to higher revenues from transmission of electricity for others and distribution systems equipment rentals. Fuel expense. During the second quarter of 2001, fuel expense went down when compared to the same period in 2000 due primarily to decreased generation due to reduced demand for energy by retail customers. Fuel costs year-to-date 2001 remained relatively flat when compared to the corresponding period in 2000. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on earnings. Purchased power - non-affiliates. For the second quarter and year-to-date 2001, the costs associated with purchased power from non-affiliates were higher due to increased demand for energy by wholesale customers and increased prices for natural gas and oil. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues. Maintenance expense. The primary reason for the second quarter and year-to-date 2001 increases when compared to the corresponding periods in 2000 is work performed on power generating facilities and transmission and distribution facilities. Depreciation and amortization. The second quarter and year-to-date 2001 decreases result from lower depreciation charges under the 1998 rate plan. Reference is made to Note (G) 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. 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 regulatory matters and the effect of weather and the economy on energy sales. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, GEORGIA is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form 10-K. Pursuant to GEORGIA's existing rate order approved by the Georgia PSC, GEORGIA was required to file a general rate case with the Georgia PSC by July 1, 2001. Accordingly, on June 29, 2001, GEORGIA filed a rate plan with the Georgia PSC. Reference is made to Note (G) 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. 35 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On July 31, 2001, GEORGIA transferred ownership of the Plant Dahlberg generating units at net book value to Southern Power Company, an affiliated company. On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO proposal. For additional information on the FERC's response to SOUTHERN's proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, SOUTHERN explained that it has entered into memoranda of understanding to develop an RTO with eight non-jurisdictional cooperative and public power entities. In addition, SOUTHERN has entered into a memorandum of understanding with TVA to address coordination issues between their transmission systems. On July 12, 2001, the FERC issued an order on the status reports of SOUTHERN, as well as GridSouth and Entergy/Southwest Power Pool. In those orders, the FERC indicated that it favored a single RTO for the Southeast. The FERC initiated a mediation process, directed the parties to participate in the mediation for 45 days and ordered the mediator to file a report within 10 days following the end of the mediation. These discussions are ongoing and it is expected that the mediator will make a report by mid-September 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. Reference is made to Notes (C) through (H), (K) and (M) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. New Accounting Standards Effective January 1, 2001, GEORGIA adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. All derivatives are now reflected on the Condensed Consolidated Balance Sheet at fair market value. Reference is made to Note (C) in the "Notes to the Condensed Financial Statements" herein for additional information on the adoption of Statement No. 133. In June 2001, the FASB issued Statement No. 141, "Business Combinations," which establishes new accounting and reporting standards for business combinations and supersedes Accounting Principles Board (APB) Opinion No. 16. All business combinations initiated after June 30, 2001 must now be accounted for using the purchase method of accounting. Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting standards for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for upon acquisition and on an ongoing basis. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, which are no longer limited to 40 years. The provisions of Statement No. 142 must be adopted in 2002. GEORGIA has not yet quantified the impact of adopting Statement No. 142 on its financial statements; however, the impact is not expected to be material. 36 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Additionally in June 2001, the FASB issued Statement No. 143, "Asset Retirement Obligations," which establishes new accounting and reporting standards for legal obligations associated with retiring assets, including decommissioning nuclear plants. The fair value of a liability for an asset retirement obligation must be recorded in the period in which it is incurred, with the cost capitalized as part of the related long-lived asset and depreciated over the asset's useful life. Changes in the liability resulting from the passage of time will be recognized as operating expenses. Statement No. 143 must be adopted by 2003. GEORGIA has not yet quantified the impact of adopting Statement No. 143 on its financial statements. 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. FINANCIAL CONDITION Overview The major change in GEORGIA's financial condition during the first six months of 2001 was the addition of approximately $740.2 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations and capital contributions from SOUTHERN. See GEORGIA's Condensed Statements of Cash Flows for further details. Financing Activities In February 2001, GEORGIA issued $350 million aggregate principal amount of senior notes consisting of $200 million of Series F 5.75% Senior Notes due January 31, 2003 and $150 million of Series G 6.20% Senior Notes due February 1, 2006. The proceeds of the sale were applied to redeem $200 million outstanding principal amount of First Mortgage Bonds, 6 5/8% Series due April 2003 and to repay a portion of GEORGIA's outstanding short-term indebtedness. Also in February 2001, GEORGIA issued $100 million of Series H 6.70% Senior Insured Quarterly Notes due March 1, 2011. The proceeds of this sale were used to repay an additional portion of GEORGIA's outstanding short-term indebtedness. In May 2001, GEORGIA issued $150 million of Series I 5.25% Senior Notes due May 8, 2003. The proceeds of this sale were used in May 2001 to repurchase $47 million aggregate principal amount of First Mortgage Bonds, 7.70% Series due May 1, 2025, $1.9 million aggregate principal amount of First Mortgage Bonds, 6 7/8% Series due April 1, 2008 and $8.1 million aggregate principal amount of First Mortgage Bonds, 6.07% Series due December 1, 2005, and to redeem in June 2001 $75 million outstanding principal amount of GEORGIA's First Mortgage Bonds, 6.35% Series due August 1, 2003. The remainder was used to repay a portion of GEORGIA's outstanding short-term indebtedness. In July 2001, GEORGIA sold, through public authorities, an aggregate principal amount of $58.8 million of pollution control revenue bonds due July 1, 2031. Also in July 2001, GEORGIA sold, through public authorities, $67 million of pollution control revenue bonds due July 1, 2016. The proceeds of these sales are being used to redeem various series of outstanding pollution control revenue bonds. 37 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GEORGIA under "Liquidity and Capital Requirements" and "Environmental Issues" in the Form 10-K for a description of GEORGIA's capital requirements for its construction program and environmental compliance efforts. Sources of Capital In addition to the financing activities previously described herein, GEORGIA plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, GEORGIA had at June 30, 2001 approximately $15.1 million of cash and cash equivalents and approximately $1.765 billion of unused credit arrangements with banks. The credit arrangements provide liquidity support to GEORGIA's obligations with respect to variable rate pollution control bonds and its commercial paper program. GEORGIA may also meet short-term cash needs through a SOUTHERN subsidiary organized to issue and sell commercial paper at the request and for the benefit of GEORGIA and other SOUTHERN subsidiaries. At June 30, 2001, GEORGIA had outstanding $86.2 million of notes payable and $711.2 million of commercial paper. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 38 GULF POWER COMPANY 39
GULF POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Six Months Ended June 30, Ended June 30, 2001 2000 2001 2000 ---------------- ---------------- --------------- -------------- (in thousands) (in thousands) Operating Revenues: Retail sales $141,098 $142,360 $266,661 $259,167 Sales for resale -- Non-affiliates 20,297 16,609 40,444 27,587 Affiliates 9,056 20,566 17,666 29,233 Other revenues 9,979 2,585 20,688 4,631 ---------------- ---------------- --------------- -------------- Total operating revenues 180,430 182,120 345,459 320,618 ---------------- ---------------- --------------- -------------- Operating Expenses: Operation -- Fuel 53,138 57,020 102,470 98,663 Purchased power -- Non-affiliates 16,537 15,781 25,038 22,395 Affiliates 6,014 3,578 17,580 6,736 Other 29,009 29,979 56,235 57,167 Maintenance 14,376 15,346 27,835 29,522 Depreciation and amortization 16,932 16,443 33,607 32,810 Taxes other than income taxes 13,722 13,468 27,207 26,813 ---------------- ---------------- --------------- -------------- Total operating expenses 149,728 151,615 289,972 274,106 ---------------- ---------------- --------------- -------------- Operating Income 30,702 30,505 55,487 46,512 Other Income (Expense): Interest income 337 289 507 727 Other, net 222 (934) (577) (1,438) ---------------- ---------------- --------------- -------------- Earnings Before Interest and Income Taxes 31,261 29,860 55,417 45,801 ---------------- ---------------- --------------- -------------- Interest and Other: Interest expenses, net 6,423 7,496 12,696 14,564 Distributions on preferred securities of subsidiary 1,550 1,550 3,100 3,100 ---------------- ---------------- --------------- -------------- Total interest charges and other, net 7,973 9,046 15,796 17,664 ---------------- ---------------- --------------- -------------- Earnings Before Income Taxes 23,288 20,814 39,621 28,137 Income taxes 8,464 7,833 14,615 10,449 ---------------- ---------------- --------------- -------------- Net Income Before Cumulative Effect of Accounting Change 14,824 12,981 25,006 17,688 Cumulative effect of accounting change -- less income taxes of $42 thousand - - 68 - ---------------- ---------------- --------------- -------------- Net Income 14,824 12,981 25,074 17,688 Dividends on Preferred Stock 54 54 108 108 ---------------- ---------------- --------------- -------------- Net Income After Dividends on Preferred Stock $14,770 $12,927 $24,966 $17,580 ================ ================ =============== ============== The accompanying notes as they relate to GULF are an integral part of these condensed statements.
40
GULF POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six Months Ended June 30, 2001 2000 --------------- --------------- (in thousands) Operating Activities: Net income $25,074 $17,688 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 35,554 34,793 Deferred income taxes and investment tax credits, net (1,737) (8,245) Other, net 547 5,202 Changes in certain current assets and liabilities -- Receivables, net 5,791 (11,728) Fossil fuel stock (24,143) (1,914) Materials and supplies (279) 1,335 Accounts payable (36,430) 5,789 Other 17,730 27,476 --------------- --------------- Net cash provided from operating activities 22,107 70,396 --------------- --------------- Investing Activities: Gross property additions (163,048) (48,452) Other 22,471 (9,289) --------------- --------------- Net cash used for investing activities (140,577) (57,741) --------------- --------------- Financing Activities: Increase (decrease) in notes payable, net 73,225 3,000 Proceeds -- Capital contributions from parent company 70,000 - Retirements -- Other long-term debt (71) (924) Payment of preferred stock dividends (108) (108) Payment of common stock dividends (26,800) (29,500) Other - (22) --------------- --------------- Net cash provided from (used for) financing activities 116,246 (27,554) --------------- --------------- Net Change in Cash and Cash Equivalents (2,224) (14,899) Cash and Cash Equivalents at Beginning of Period 4,381 15,753 --------------- --------------- Cash and Cash Equivalents at End of Period $ 2,157 $854 =============== =============== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $14,734 $16,335 Income taxes (net of refunds) 7,748 5,207 The accompanying notes as they relate to GULF are an integral part of these condensed statements.
41
GULF POWER COMPANY CONDENSED BALANCE SHEETS At June 30, 2001 At December 31, Assets (Unaudited) 2000 - ------ ------------------- -------------------- (in thousands) Current Assets: Cash and cash equivalents $ 2,157 $ 4,381 Receivables -- Customer accounts receivable 69,799 69,820 Other accounts and notes receivable 6,914 2,179 Affiliated companies 4,137 15,026 Accumulated provision for uncollectible accounts (1,226) (1,302) Fossil fuel stock, at average cost 40,911 16,768 Materials and supplies, at average cost 29,312 29,033 Regulatory clauses under recovery 7,694 2,112 Other 10,356 6,543 ------------------- -------------------- Total current assets 170,054 144,560 ------------------- -------------------- Property, Plant, and Equipment: In service 1,908,958 1,892,023 Less accumulated provision for depreciation 889,298 867,260 ------------------- -------------------- 1,019,660 1,024,763 Construction work in progress 205,428 71,008 ------------------- -------------------- Total property, plant, and equipment 1,225,088 1,095,771 ------------------- -------------------- Other Property and Investments 6,770 4,510 ------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 16,365 15,963 Prepaid pension costs 26,356 23,491 Debt expense, being amortized 2,315 2,392 Premium on reacquired debt, being amortized 15,130 15,866 Other 15,164 12,943 ------------------- -------------------- Total deferred charges and other assets 75,330 70,655 ------------------- -------------------- Total Assets $1,477,242 $1,315,496 =================== ==================== The accompanying notes as they relate to GULF are an integral part of these condensed statements.
42
GULF POWER COMPANY CONDENSED BALANCE SHEETS At June 30, 2001 At December 31, Liabilities and Stockholder's Equity (Unaudited) 2000 - ------------------------------------ ------------------- -------------------- (in thousands) Current Liabilities: Notes payable $ 116,225 $ 43,000 Accounts payable -- Affiliated 16,240 17,558 Other 32,872 38,153 Customer deposits 13,980 13,474 Taxes accrued -- Income taxes 12,552 3,864 Other 12,667 8,749 Interest accrued 7,895 8,324 Provision for rate refund 4,039 7,203 Vacation pay accrued 4,512 4,512 Regulatory clauses over recovery 7,123 6,848 Other 15,964 1,584 ------------------- -------------------- Total current liabilities 244,069 153,269 ------------------- -------------------- Long-term debt 366,094 365,993 ------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 158,463 155,074 Deferred credits related to income taxes 33,274 38,255 Accumulated deferred investment tax credits 25,016 25,792 Employee benefits provisions 36,487 34,507 Other 29,059 25,992 ------------------- -------------------- Total deferred credits and other liabilities 282,299 279,620 ------------------- -------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding company junior subordinated notes 85,000 85,000 ------------------- -------------------- Preferred stock 4,236 4,236 ------------------- -------------------- Common Stockholder's Equity: Common stock, without par value-- Authorized - 992,717 shares Outstanding - 992,717 shares 38,060 38,060 Paid-in capital 303,476 233,476 Premium on preferred stock 12 12 Retained earnings 153,996 155,830 ------------------- -------------------- Total common stockholder's equity 495,544 427,378 ------------------- -------------------- Total Liabilities and Stockholder's Equity $1,477,242 $1,315,496 =================== ==================== The accompanying notes as they relate to GULF are an integral part of these condensed statements.
43 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2001 vs. SECOND QUARTER 2000 AND YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000 RESULTS OF OPERATIONS Earnings GULF's net income after dividends on preferred stock for the second quarter and year-to-date 2001 was $14.8 million and $25.0 million, respectively, compared to $12.9 million and $17.6 million for the same periods in 2000. The second quarter 2001 earnings were higher by $1.8 million or 14.3% due primarily to a reduction in interest expense, an increase in allowance for equity funds used during construction and the discontinuance of the appliance sales division. Year-to-date 2001 earnings increased by $7.4 million or 42% due primarily to higher operating revenues. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Retail sales..................................... $(1,262) (0.9) $7,494 2.9 Sales for resale - non-affiliates................ 3,688 22.2 12,857 46.6 Sales for resale - affiliates.................... (11,510) (56.0) (11,567) (39.6) Other revenues................................... 7,394 286.0 16,057 346.7 Fuel expense..................................... (3,882) (6.8) 3,807 3.9 Purchased power - non-affiliates................. 756 4.8 2,643 11.8 Purchased power - affiliates..................... 2,436 68.1 10,844 161.0 Maintenance expense.............................. (970) (6.3) (1,687) (5.7) Other, net....................................... 1,156 123.8 861 59.9
Retail sales. Excluding the recovery of fuel expense and certain other expenses that do not affect net income, retail sales decreased slightly $0.2 million or 0.2% for the second quarter 2001 and increased $6.3 million or 4.1% year-to-date 2001. The year-to-date 2001 increase in retail sales revenue was primarily due to a 6.2% increase in retail energy sales which is attributed to favorable weather conditions and growth in the number of customers served by GULF. Sales for resale - non-affiliates. In the second quarter and year-to-date 2001, sales for resale to non-affiliates increased primarily as a result of increased unit power energy sales. These transactions do not have a significant impact on earnings since the energy is usually sold at variable cost. Sales for resale - affiliates and Purchased power - affiliates. Revenues from sales for resale to affiliated companies, as well as purchases of energy, within the SOUTHERN system will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. 44 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Other revenues. The second quarter and year-to-date 2001 increases resulted from fuel clause adjustments made to other operating revenues to reflect the difference between recoverable costs and the amounts actually reflected in current rates. The recovery provisions generally equal the related expenses and have no material effect on net income. Fuel expense. Fuel expense in the second quarter of 2001 was down due to less generation related to reduced demand for energy by retail customers when compared to the same period in 2000. The year-to-date 2001 fuel expense increase is a result of increased fuel prices for the first half of 2001 compared to 2000 and increased generation during the first quarter 2001 that was partially offset in the second quarter 2001 by reduced generation. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on net income. Purchased power - non-affiliates. The increases for the second quarter and year-to-date 2001 when compared to the corresponding periods in 2000 are primarily attributed to an increase in energy purchases to meet the demand for energy by wholesale customers. Since energy expenses are generally offset by energy revenues, these expenses do not have a significant impact on net income. Maintenance expense. For the second quarter and year-to-date 2001, maintenance expense was down when compared to the same periods in 2000 due primarily to higher turbine outage expenses and special projects performed in the first half of 2000. Other, net. The second quarter and year-to-date 2001 increases when compared to the corresponding periods in 2000 are mainly due to higher allowance for equity funds used during construction for the current year related to the construction of GULF's new combined cycle unit, partially offset by higher expenses related to the discontinuance of GULF's appliance sales division for the same periods in 2000. 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 regulatory matters and the effect of weather and the economy on energy sales. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, GULF is positioning the business to meet the challenge of increasing competition. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GULF and Item 1 - BUSINESS - "Competition" in the Form 10-K. 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. In 1999, the Florida PSC approved GULF's plan to reduce its authorized rate of return, reduce retail base rates and share revenues with its customers. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GULF in the Form 10-K. 45 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO proposal. For additional information on the FERC's response to SOUTHERN's proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, SOUTHERN explained that it has entered into memoranda of understanding to develop an RTO with eight non-jurisdictional cooperative and public power entities. In addition, SOUTHERN has entered into a memorandum of understanding with TVA to address coordination issues between their transmission systems. On July 12, 2001, the FERC issued an order on the status reports of SOUTHERN, as well as GridSouth and Entergy/Southwest Power Pool. In those orders, the FERC indicated that it favored a single RTO for the Southeast. The FERC initiated a mediation process, directed the parties to participate in the mediation for 45 days and ordered the mediator to file a report within 10 days following the end of the mediation. These discussions are ongoing and it is expected that the mediator will make a report by mid-September 2001. Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of GULF in the Form 10-K for information on EPA litigation. Reference is made to Notes (C) through (F) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. New Accounting Standards Effective January 1, 2001, GULF adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. All derivatives are now reflected on the Condensed Consolidated Balance Sheet at fair market value. Reference is made to Note (C) in the "Notes to the Condensed Financial Statements" herein for additional information on the adoption of Statement No. 133. In June 2001, the FASB issued Statement No. 141, "Business Combinations," which establishes new accounting and reporting standards for business combinations and supersedes Accounting Principles Board (APB) Opinion No. 16. All business combinations initiated after June 30, 2001 must now be accounted for using the purchase method of accounting. Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting standards for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for upon acquisition and on an ongoing basis. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, which are no longer limited to 40 years. The provisions of Statement No. 142 must be adopted in 2002. GULF has not yet quantified the impact of adopting Statement No. 142 on its financial statements; however, the impact is not expected to be material. Additionally in June 2001, the FASB issued Statement No. 143, "Asset Retirement Obligations," which establishes new accounting and reporting standards for legal obligations associated with retiring assets, including decommissioning nuclear plants. The fair value of a liability for an asset retirement obligation must be recorded in the period in which it is incurred, with the cost capitalized as part of the related long-lived asset and depreciated over the asset's useful life. Changes in the liability resulting from the passage of time will be 46 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION recognized as operating expenses. Statement No. 143 must be adopted by 2003. GULF has not yet quantified the impact of adopting Statement No. 143 on its financial statements. FINANCIAL CONDITION Overview Major changes in GULF's financial condition during the first six months of 2001 included the addition of approximately $163 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations, capital contributions from SOUTHERN and short-term indebtedness. See GULF's Condensed Statements of Cash Flows for further details. Financing Activities On August 3, 2001, GULF issued $60 million of Series C 4.69% Senior Notes due August 1, 2003. The proceeds of the sale will be used to redeem $30 million outstanding principal amount of GULF's First Mortgage Bonds, 6 1/8% Series due July 1, 2003 and to repay a portion of GULF's short-term indebtedness. GULF plans to continue, to the extent possible, a program to retire higher-cost debt and replace these securities with lower-cost capital. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GULF under "Capital Requirements for Construction" and "Environmental Matters" in the Form 10-K for a description of GULF's capital requirements for its construction program and environmental compliance efforts. 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, 2001 approximately $2.2 million of cash and cash equivalents and $123 million of unused committed lines of credit with banks. The credit arrangements provide liquidity support to GULF's obligations with respect to variable rate pollution control bonds and commercial paper. GULF may also meet short-term cash needs through a SOUTHERN subsidiary organized to issue and sell commercial paper at the request and for the benefit of GULF and other SOUTHERN subsidiaries. At June 30, 2001, GULF had $58 million of notes payable to banks and $58.2 million of commercial paper. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 47 MISSISSIPPI POWER COMPANY 48
MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Six Months Ended June 30, Ended June 30, 2001 2000 2001 2000 ---------------- ---------------- ---------------- -------------- (in thousands) (in thousands) Operating Revenues: Retail sales $127,802 $132,749 $242,381 $233,711 Sales for resale -- Non-affiliates 49,437 35,787 89,725 62,349 Affiliates 23,604 4,303 35,592 8,884 Other revenues 3,106 3,189 7,563 5,789 ---------------- ---------------- ---------------- -------------- Total operating revenues 203,949 176,028 375,261 310,733 ---------------- ---------------- ---------------- -------------- Operating Expenses: Operation -- Fuel 73,064 52,513 110,548 89,573 Purchased power -- Non-affiliates 14,183 13,152 28,806 17,160 Affiliates 13,167 11,433 44,703 23,055 Other 32,764 27,954 59,133 54,685 Maintenance 13,441 17,247 27,289 30,184 Depreciation and amortization 13,962 13,508 25,878 25,221 Taxes other than income taxes 10,728 12,091 22,649 24,132 ---------------- ---------------- ---------------- -------------- Total operating expenses 171,309 147,898 319,006 264,010 ---------------- ---------------- ---------------- -------------- Operating Income 32,640 28,130 56,255 46,723 Other Income: Interest income 79 41 223 140 Other, net 1,856 437 2,063 791 ---------------- ---------------- ---------------- -------------- Earnings Before Interest and Income Taxes 34,575 28,608 58,541 47,654 ---------------- ---------------- ---------------- -------------- Interest Expense and Other: Interest expense, net 6,218 7,489 13,164 14,443 Distributions on preferred securities of subsidiary 678 699 1,356 1,398 ---------------- ---------------- ---------------- -------------- Total interest charges and other, net 6,896 8,188 14,520 15,841 ---------------- ---------------- ---------------- -------------- Earnings Before Income Taxes 27,679 20,420 44,021 31,813 Income taxes 10,605 7,684 16,729 11,852 ---------------- ---------------- ---------------- -------------- Net Income Before Cumulative Effect of Accounting Change 17,074 12,736 27,292 19,961 Cumulative effect of accounting change -- less income taxes of $43 thousand - - 70 - ---------------- ---------------- ---------------- -------------- Net Income 17,074 12,736 27,362 19,961 Dividends on Preferred Stock 503 504 1,034 1,007 ---------------- ---------------- ---------------- -------------- Net Income After Dividends on Preferred Stock $16,571 $ 12,232 $26,328 $ 18,954 ================ ================ ================ ============== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
49
MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six Months Ended June 30, 2001 2000 -------------- --------------- (in thousands) Operating Activities: Net income $27,362 $19,961 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 27,836 27,444 Deferred income taxes and investment tax credits, net (239) (2,669) Other, net 2,086 6,407 Changes in certain current assets and liabilities -- Receivables, net (10,692) 245 Fossil fuel stock (30,500) 6,623 Materials and supplies (1,153) (391) Accounts payable 6,861 (8,686) Other 231 (4,035) -------------- --------------- Net cash provided from operating activities 21,792 44,899 -------------- --------------- Investing Activities: Gross property additions (23,032) (44,921) Other (5,358) (9,297) -------------- --------------- Net cash used for investing activities (28,390) (54,218) -------------- --------------- Financing Activities: Increase (decrease) in notes payable, net 22,724 (10,500) Proceeds -- Other long-term debt - 100,000 Capital contributions from parent company 70,000 10,000 Retirements -- First mortgage bonds (36,000) - Other long-term debt (20,547) (50,681) Payment of preferred stock dividends (1,034) (1,007) Payment of common stock dividends (25,300) (27,400) Other (78) (253) -------------- --------------- Net cash provided from financing activities 9,765 20,159 -------------- --------------- Net Change in Cash and Cash Equivalents 3,167 10,840 Cash and Cash Equivalents at Beginning of Period 7,531 173 -------------- --------------- Cash and Cash Equivalents at End of Period $10,698 $11,013 ============== =============== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $14,616 $13,776 Income taxes (net of refunds) $1,472 $104 The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
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MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS At June 30, 2001 At December 31, Assets (Unaudited) 2000 - ------ -------------------- -------------------- (in thousands) Current Assets: Cash and cash equivalents $ 10,698 $ 7,531 Receivables -- Customer accounts receivable 53,676 48,001 Under recovered regulatory clauses 23,181 24,063 Other accounts and notes receivable 25,580 21,843 Affiliated companies 12,214 10,071 Accumulated provision for uncollectible accounts (691) (571) Fossil fuel stock, at average cost 41,720 11,220 Materials and supplies, at average cost 22,847 21,694 Other 14,909 8,320 -------------------- -------------------- Total current assets 204,134 152,172 -------------------- -------------------- Property, Plant, and Equipment: In service 1,704,302 1,665,879 Less accumulated provision for depreciation 675,198 652,891 -------------------- -------------------- 1,029,104 1,012,988 Construction work in progress 43,010 60,951 -------------------- -------------------- Total property, plant, and equipment 1,072,114 1,073,939 -------------------- -------------------- Other Property and Investments 2,292 2,268 -------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 13,543 13,860 Prepaid pension costs 8,579 6,724 Debt expense, being amortized 4,492 4,628 Premium on reacquired debt, being amortized 7,061 7,168 Other 17,818 14,312 -------------------- -------------------- Total deferred charges and other assets 51,493 46,692 -------------------- -------------------- Total Assets $1,330,033 $1,275,071 ==================== ==================== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
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MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS At June 30, 2001 At December 31, Liabilities and Stockholders' Equity (Unaudited) 2000 - ------------------------------------ -------------------- -------------------- (in thousands) Current Liabilities: Securities due within one year $ 80,020 $ 20 Notes payable 78,724 56,000 Accounts payable -- Affiliated 4,653 10,715 Other 57,920 48,146 Customer deposits 5,869 5,274 Taxes accrued -- Income taxes 25,943 8,769 Other 21,400 36,799 Interest accrued 3,721 4,482 Vacation pay accrued 5,701 5,701 Other 11,236 7,003 -------------------- -------------------- Total current liabilities 295,187 182,909 -------------------- -------------------- Long-term debt 234,205 370,511 -------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 141,567 139,909 Deferred credits related to income taxes 24,408 25,603 Accumulated deferred investment tax credits 22,875 23,481 Employee benefits provisions 35,126 34,671 Workforce reduction plan 8,992 9,734 Other 24,938 16,546 -------------------- -------------------- Total deferred credits and other liabilities 257,906 249,944 -------------------- -------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trust holding company junior subordinated notes 35,000 35,000 -------------------- -------------------- Preferred stock 31,809 31,809 -------------------- -------------------- Common Stockholder's Equity: Common stock equity -- Authorized - 1,130,000 shares Outstanding - 1,121,000 shares Par value 37,691 37,691 Paid-in capital 264,160 194,161 Premium on preferred stock 326 326 Retained earnings 173,749 172,720 -------------------- -------------------- Total common stockholder's equity 475,926 404,898 -------------------- -------------------- Total Liabilities and Stockholder's Equity $1,330,033 $1,275,071 ==================== ==================== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
52 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2001 vs. SECOND QUARTER 2000 AND YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000 RESULTS OF OPERATIONS Earnings MISSISSIPPI's net income after dividends on preferred stock for the second quarter and year-to-date 2001 was $16.6 million and $26.3 million, respectively, compared to $12.2 million and $18.9 million for the corresponding periods of 2000. The increases in earnings of $4.3 million or 35.5% and $7.4 million or 38.9% for the second quarter and year-to-date 2001, respectively, are attributed primarily to higher operating revenues. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Retail sales..................................... $ (4,947) (3.7) $ 8,670 3.7 Sales for resale - non-affiliates................ 13,650 38.1 27,376 43.9 Sales for resale - affiliates.................... 19,301 448.5 26,708 300.6 Fuel expense..................................... 20,551 39.1 20,975 23.4 Purchased power - non-affiliates................. 1,031 7.8 11,646 67.9 Purchased power - affiliates..................... 1,734 15.2 21,648 93.9 Other operation expense.......................... 4,810 17.2 4,448 8.1 Maintenance expense.............................. (3,806) (22.1) (2,895) (9.6) Taxes other than income taxes.................... (1,363) (11.3) (1,483) (6.1) Other income..................................... 1,457 304.8 1,355 145.5 Interest expense, net............................ (1,271) (16.9) (1,279) (8.9)
Retail sales. Excluding fuel revenues, which generally do not affect net income, retail sales revenue was down by $1.2 million or 1.6% in the second quarter 2001 and $0.3 million or 0.3% year-to-date 2001 when compared to the corresponding periods in 2000 due to lower retail energy sales. Decreases in retail energy sales of 2.7% in the second quarter of 2001 and 1.9% year-to-date 2001 are largely due to mild weather. Sales for resale - non-affiliates. This item increased during the second quarter and year-to-date 2001 when compared to the same periods in 2000 as a result of increased demand for energy by non-affiliates and additional power sales as a result of the commercial operation of Plant Daniel Units 3 and 4. Sales for resale - affiliates and Purchased power - affiliates. Revenues from sales for resale to affiliated companies, as well as purchases of energy, within the SOUTHERN system will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Fuel expense. For the second quarter and year-to-date 2001, fuel expense was higher when compared to the same periods in 2000 due mostly to increased generation to meet energy demands and higher cost of fuel. 53 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Purchased power - non-affiliates. This expense increased during the second quarter and year-to-date 2001 primarily as a result of the need to meet higher demand for energy. These transactions do not have a significant impact on net income since energy expenses are generally offset by energy revenues. Other operation expense. The second quarter and year-to-date 2001 increases are related to the commercial operation of Plant Daniel Units 3 and 4. Maintenance expense. This expense decreased in the second quarter and year-to-date 2001 due primarily to the timing of maintenance work to be performed during 2001. Taxes other than income taxes. For the second quarter and year-to-date 2001, taxes other than income taxes decreased when compared to the same periods in 2000 due primarily to lower ad valorem taxes. Other income. For the second quarter and year-to-date 2001, other, net increased when compared to the same periods in 2000 as a result of project work completed in the second quarter 2001. Interest expense, net. Interest expenses are lower for the second quarter and year-to-date as a result of lower interest rates on debt outstanding. 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 regulatory matters, the effect of weather, and the economy on energy sales. On August 3, 2001, MISSISSIPPI filed a request with the Mississippi PSC to increase annual retail rate revenues by approximately $46.4 million. The requested increase would take effect in January 2002. As a result of the filing, the Mississippi PSC suspended the operation of MISSISSIPPI's formula rate plan until an order is issued on MISSISSIPPI's request. The Mississippi PSC is required to rule on MISSISSIPPI'S request in December 2001. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI 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, MISSISSIPPI is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI in the Form 10-K. MISSISSIPPI's 2001 ECO Plan filing was approved, as filed, by the Mississippi PSC on March 7, 2001 and resulted in a slight increase in customer prices. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be recovered. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of MISSISSIPPI in the Form 10-K. On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO proposal. For additional information on the FERC's response to SOUTHERN's proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, SOUTHERN explained that it has entered into memoranda of understanding to develop an RTO with eight non-jurisdictional cooperative and public power entities. In addition, SOUTHERN 54 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION has entered into a memorandum of understanding with TVA to address coordination issues between their transmission systems. On July 12, 2001, the FERC issued an order on the status reports of SOUTHERN, as well as GridSouth and Entergy/Southwest Power Pool. In those orders, the FERC indicated that it favored a single RTO for the Southeast. The FERC initiated a mediation process, directed the parties to participate in the mediation for 45 days and ordered the mediator to file a report within 10 days following the end of the mediation. These discussions are ongoing and it is expected that the mediator will make a report by mid-September 2001. Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of MISSISSIPPI in the Form 10-K for information on EPA litigation. Reference is made to Notes (C) through (F) and (L) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. New Accounting Standards Effective January 1, 2001, MISSISSIPPI adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. All derivatives are now reflected on the Condensed Consolidated Balance Sheet at fair market value. Reference is made to Note (C) in the "Notes to the Condensed Financial Statements" herein for additional information on the adoption of Statement No. 133. In June 2001, the FASB issued Statement No. 141, "Business Combinations," which establishes new accounting and reporting standards for business combinations and supersedes Accounting Principles Board (APB) Opinion No. 16. All business combinations initiated after June 30, 2001 must now be accounted for using the purchase method of accounting. Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting standards for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for upon acquisition and on an ongoing basis. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, which are no longer limited to 40 years. The provisions of Statement No. 142 must be adopted in 2002. MISSISSIPPI has not yet quantified the impact of adopting Statement No. 142 on its financial statements; however, the impact is not expected to be material. Additionally in June 2001, the FASB issued Statement No. 143, "Asset Retirement Obligations," which establishes new accounting and reporting standards for legal obligations associated with retiring assets, including decommissioning nuclear plants. The fair value of a liability for an asset retirement obligation must be recorded in the period in which it is incurred, with the cost capitalized as part of the related long-lived asset and depreciated over the asset's useful life. Changes in the liability resulting from the passage of time will be recognized as operating expenses. Statement No. 143 must be adopted by 2003. MISSISSIPPI has not yet quantified the impact of adopting Statement No. 143 on its financial statements. 55 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL CONDITION Overview Major changes in MISSISSIPPI's financial condition during the first six months of 2001 included the addition of approximately $23 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations and financing activities. See MISSISSIPPI's Condensed Statements of Cash Flows for further details. Financing Activities Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Financing Activity" and Note 4 to the financial statements of MISSISSIPPI in the Form 10-K. Effective May 4, 2001, in connection with commercial operation of a 1,064-megawatt natural gas combined cycle facility, MISSISSIPPI entered into the initial 10-year lease term with Escatawpa Funding, Limited Partnership. The final completion cost will be approximately $370 million. Reference is made to Note (L) in the "Notes to the Condensed Financial Statements" herein for additional information. MISSISSIPPI plans to continue, to the extent possible, a program to retire higher-cost debt and replace these securities with lower-cost capital. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of MISSISSIPPI under "Capital Requirements for Construction," "Environmental Matters" and "Other Capital Requirements" and Note 3 to the financial statements in the Form 10-K for a description of MISSISSIPPI's capital requirements for its construction program, environmental compliance efforts, sinking fund requirements and maturities of long-term debt. Sources of Capital In addition to the financing activities previously described herein, MISSISSIPPI plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, MISSISSIPPI had at June 30, 2001 approximately $10.7 million of cash and cash equivalents and approximately $124.3 million of unused committed credit arrangements with banks. The credit arrangements provide liquidity support to MISSISSIPPI's obligation with respect to variable rate pollution control bonds and commercial paper. MISSISSIPPI may also meet short-term cash needs through a SOUTHERN subsidiary organized to issue and sell commercial paper at the request and for the benefit of MISSISSIPPI and other SOUTHERN subsidiaries. At June 30, 2001, MISSISSIPPI had outstanding $23.0 million of notes payable to banks and $55.7 million of commercial paper. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 56 SAVANNAH ELECTRIC AND POWER COMPANY 57
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Six Months Ended June 30, Ended June 30, 2001 2000 2001 2000 ---------------- ---------------- --------------- -------------- (in thousands) (in thousands) Operating Revenues: Retail sales $70,716 $70,323 $129,135 $120,108 Sales for resale -- Non-affiliates 2,016 997 3,574 1,566 Affiliates 651 1,033 1,878 2,754 Other revenues 587 427 1,074 742 ---------------- ---------------- --------------- -------------- Total operating revenues 73,970 72,780 135,661 125,170 ---------------- ---------------- --------------- -------------- Operating Expenses: Operation -- Fuel 13,119 16,763 22,513 26,510 Purchased power -- Non-affiliates 5,756 5,405 8,082 7,593 Affiliates 12,957 8,570 28,705 16,620 Other 13,035 12,601 25,151 24,648 Maintenance 4,949 5,478 10,997 10,144 Depreciation and amortization 6,460 6,309 12,920 12,618 Taxes other than income taxes 3,510 3,310 6,745 6,354 ---------------- ---------------- --------------- -------------- Total operating expenses 59,786 58,436 115,113 104,487 ---------------- ---------------- --------------- -------------- Operating Income 14,184 14,344 20,548 20,683 Other Income (Expense): Interest income 84 38 117 79 Other, net (138) (262) (314) (404) ---------------- ---------------- --------------- -------------- Earnings Before Interest and Income Taxes 14,130 14,120 20,351 20,358 ---------------- ---------------- --------------- -------------- Interest Charges and Other: Interest expense, net 3,264 3,179 6,540 6,200 Distributions on preferred securities of subsidiary 685 685 1,370 1,370 ---------------- ---------------- --------------- -------------- Total interest charges and other, net 3,949 3,864 7,910 7,570 ---------------- ---------------- --------------- -------------- Earnings Before Income Taxes 10,181 10,256 12,441 12,788 Income taxes 3,935 3,969 4,741 4,858 ---------------- ---------------- --------------- -------------- Net Income Before Cumulative Effect of Accounting Change 6,246 6,287 7,700 7,930 Cumulative effect of accounting change -- less income taxes of $14 thousand - - 22 - ---------------- ---------------- --------------- -------------- Net Income $ 6,246 $ 6,287 $ 7,722 $ 7,930 ================ ================ =============== ============== The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
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SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six Months Ended June 30, 2001 2000 --------------- --------------- (in thousands) Operating Activities: Net income $7,722 $7,930 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 13,945 13,495 Deferred income taxes and investment tax credits, net (5,097) (1,563) Other, net 1,955 3,326 Changes in certain current assets and liabilities -- Receivables, net (5,096) (13,588) Fossil fuel stock (3,610) 94 Materials and supplies (261) (706) Accounts payable (8,431) 8,627 Other 13,559 2,468 --------------- --------------- Net cash provided from operating activities 14,686 20,083 --------------- --------------- Investing Activities: Gross property additions (18,546) (13,325) Other, net 229 (3,279) --------------- --------------- Net cash used for investing activities (18,317) (16,604) --------------- --------------- Financing Activities: Increase (decrease) in notes payable, net 5,540 7,400 Proceeds -- Other long-term debt 65,000 - Retirements -- First mortgage bonds (20,642) - Other long-term debt (30,441) (304) Payment of common stock dividends (10,900) (12,300) Other (355) - --------------- --------------- Net cash provided from (used for) financing activities 8,202 (5,204) --------------- --------------- Net Change in Cash and Cash Equivalents 4,571 (1,725) Cash and Cash Equivalents at Beginning of Period - 6,553 --------------- --------------- Cash and Cash Equivalents at End of Period $4,571 $4,828 =============== =============== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $7,354 $5,774 Income taxes (net of refunds) (2,915) 2,867 The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
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SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS At June 30, 2001 At December 31, Assets (Unaudited) 2000 - ------ ------------------- -------------------- (in thousands) Current Assets: Cash and cash equivalents $ 4,571 $ - Receivables -- Customer accounts receivable 37,327 28,189 Under recovered retail fuel clause revenue 36,022 39,632 Other accounts and notes receivable 901 1,412 Affiliated companies 837 738 Accumulated provision for uncollectible accounts (429) (407) Fossil fuel stock, at average cost 10,749 7,140 Materials and supplies, at average cost 9,205 8,944 Prepaid Taxes - 8,651 Other 3,141 377 ------------------- -------------------- Total current assets 102,324 94,676 ------------------- -------------------- Property, Plant, and Equipment: In service 842,903 829,270 Less accumulated provision for depreciation 393,608 382,030 ------------------- -------------------- 449,295 447,240 Construction work in progress 10,847 6,782 ------------------- -------------------- Total property, plant, and equipment 460,142 454,022 ------------------- -------------------- Other Property and Investments 2,192 2,066 ------------------- -------------------- Deferred Charges and Other Assets: Deferred charges related to income taxes 13,097 12,404 Cash surrender value of life insurance for deferred compensation plans 17,632 17,954 Debt expense, being amortized 3,268 3,003 Premium on reacquired debt, being amortized 7,233 7,575 Other 2,129 2,527 ------------------- -------------------- Total deferred charges and other assets 43,359 43,463 ------------------- -------------------- Total Assets $608,017 $594,227 =================== ==================== The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
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SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS At June 30, 2001 At December 31, Liabilities and Stockholder's Equity (Unaudited) 2000 - ------------------------------------ ------------------- -------------------- (in thousands) Current Liabilities: Securities due within one year $ 754 $ 30,698 Notes payable 50,940 45,400 Accounts payable -- Affiliated 7,621 16,153 Other 8,284 7,738 Customer deposits 5,994 5,696 Taxes accrued -- Income taxes 3,336 3,450 Other 2,542 1,435 Interest accrued 4,602 4,541 Vacation pay accrued 2,340 2,276 Other 7,990 7,973 ------------------- -------------------- Total current liabilities 94,403 125,360 ------------------- -------------------- Long-term debt 160,763 116,902 ------------------- -------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 79,154 79,756 Deferred credits related to income taxes 15,282 16,038 Accumulated deferred investment tax credits 10,284 10,616 Deferred compensation plans 12,909 11,968 Employee benefits provisions 11,629 9,236 Other 11,776 9,357 ------------------- -------------------- Total deferred credits and other liabilities 141,034 136,971 ------------------- -------------------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding company junior subordinated notes 40,000 40,000 ------------------- -------------------- Common Stockholder's Equity: Common stock, par value $5 per share -- Authorized - 16,000,000 shares Outstanding - 10,844,635 shares Par value 54,223 54,223 Paid-in capital 11,266 11,265 Retained earnings 106,328 109,506 ------------------- -------------------- Total common stockholder's equity 171,817 174,994 ------------------- -------------------- Total Liabilities and Stockholder's Equity $608,017 $594,227 =================== ==================== The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
61 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2001 vs. SECOND QUARTER 2000 AND YEAR-TO-DATE 2001 vs. YEAR-TO-DATE 2000 RESULTS OF OPERATIONS Earnings SAVANNAH's net income for the second quarter and year-to-date 2001 was $6.2 million and $7.7 million, respectively, as compared to $6.3 million and $7.9 million for the corresponding periods of 2000. Earnings were flat in the second quarter 2001 and down slightly year-to-date 2001, reflecting higher operating revenues that were fully offset by higher operating expenses. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Retail sales..................................... $ 393 0.6 $ 9,027 7.5 Sales for resale - non-affiliates................ 1,019 102.2 2,008 128.2 Sales for resale - affiliates.................... (382) (37.0) (876) (31.8) Fuel expense..................................... (3,644) (21.7) (3,997) (15.1) Purchased power - non-affiliates................. 351 6.5 489 6.4 Purchased power - affiliates..................... 4,387 51.2 12,085 72.7 Maintenance expense.............................. (529) (9.7) 853 8.4
Retail sales. Excluding fuel revenues, which do not affect net income, retail sales revenue decreased by $0.3 million or 0.8% for the second quarter of 2001 and increased by $1.1 million or 1.5% year-to-date 2001 when compared to the same periods in 2000. For the second quarter 2001, retail sales revenue decreased primarily due to a 6.6% decrease in energy sales in the industrial sector. Industrial energy sales were affected by reduced demand from one industrial customer in the second quarter of 2001. The year-to-date 2001 increase in retail sales revenue is attributed to a 2.9% increase in energy sales to retail customers spurred by growth in the number of customers served by SAVANNAH, offset somewhat by the decrease in industrial sales. Sales for resale - non-affiliates. The second quarter and year-to-date 2001 increases are primarily due to more energy sales to non-affiliated wholesale customers than were recorded in the same periods in 2000. These transactions do not have a significant impact on earnings since the energy is usually sold at variable cost. Sales for resale - affiliates and Purchased power - affiliates. Revenues from sales for resale to affiliated companies, as well as purchases of energy, within the SOUTHERN system will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Fuel expense. Fuel expense was lower in the second quarter and year-to-date 2001 when compared to the corresponding periods in 2000 as a result of reduced generation and lower average cost of fuel consumed. 62 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Purchased power - non-affiliates. The second quarter and year-to-date 2001 increases are due primarily to higher costs associated with these energy purchases. These transactions do not have a significant impact on net income since energy expenses are generally offset by energy revenues. Maintenance expense. During the second quarter of 2001, this expense was lower due mainly to an unscheduled maintenance outage and a boiler outage during the same period in 2000. The year-to-date 2001 increase is attributed to a scheduled major maintenance outage at one of SAVANNAH's plants. 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 regulatory matters and the effect of weather and the economy on energy sales. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, SAVANNAH is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SAVANNAH in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of SAVANNAH in the Form 10-K. On March 14, 2001, the FERC rejected certain elements of SOUTHERN's RTO proposal. For additional information on the FERC's response to SOUTHERN's proposal, reference is made to Item 1 - BUSINESS - "Integrated Southeast Utilities" in the Form 10-K. Following the March 14, 2001 order, SOUTHERN submitted a series of status reports informing the FERC of progress toward the development of a Southeastern RTO. In these status reports, SOUTHERN explained that it has entered into memoranda of understanding to develop an RTO with eight non-jurisdictional cooperative and public power entities. In addition, SOUTHERN has entered into a memorandum of understanding with TVA to address coordination issues between their transmission systems. On July 12, 2001, the FERC issued an order on the status reports of SOUTHERN, as well as GridSouth and Entergy/Southwest Power Pool. In those orders, the FERC indicated that it favored a single RTO for the Southeast. The FERC initiated a mediation process, directed the parties to participate in the mediation for 45 days and ordered the mediator to file a report within 10 days following the end of the mediation. These discussions are ongoing and it is expected that the mediator will make a report by mid-September 2001. Reference is also made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of SAVANNAH in the Form 10-K for information on EPA litigation. Reference is made to Notes (C) through (F), (K) and (M) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. 63 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION New Accounting Standards Effective January 1, 2001, SAVANNAH adopted FASB Statement No. 133, as amended, and changed the method of accounting for derivative instruments. All derivatives are now reflected on the Condensed Consolidated Balance Sheet at fair market value. Reference is made to Note (C) in the "Notes to the Condensed Financial Statements" herein for additional information on the adoption of Statement No. 133. In June 2001, the FASB issued Statement No. 141, "Business Combinations," which establishes new accounting and reporting standards for business combinations and supersedes Accounting Principles Board (APB) Opinion No. 16. All business combinations initiated after June 30, 2001 must now be accounted for using the purchase method of accounting. Also in June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets," which establishes new accounting and reporting standards for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for upon acquisition and on an ongoing basis. Goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite useful lives will continue to be amortized over their useful lives, which are no longer limited to 40 years. The provisions of Statement No. 142 must be adopted in 2002. SAVANNAH has not yet quantified the impact of adopting Statement No. 142 on its financial statements; however, the impact is not expected to be material. Additionally in June 2001, the FASB issued Statement No. 143, "Asset Retirement Obligations," which establishes new accounting and reporting standards for legal obligations associated with retiring assets, including decommissioning nuclear plants. The fair value of a liability for an asset retirement obligation must be recorded in the period in which it is incurred, with the cost capitalized as part of the related long-lived asset and depreciated over the asset's useful life. Changes in the liability resulting from the passage of time will be recognized as operating expenses. Statement No. 143 must be adopted by 2003. SAVANNAH has not yet quantified the impact of adopting Statement No. 143 on its financial statements. FINANCIAL CONDITION Overview Major changes in SAVANNAH's financial condition during the first six months of 2001 included the addition of approximately $18 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations, credit arrangements with banks and financings. See SAVANNAH's Condensed Statements of Cash Flows for further details. 64 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Financing Activities In May 2001, SAVANNAH issued $65 million aggregate principal amount of senior notes consisting of $20 million of Series B 5.12% Senior Notes due May 15, 2003 and $45 million of Series C 6.55% Senior Notes due May 15, 2008. The proceeds of the sale were used to redeem in June 2001 the $20 million outstanding principal amount of SAVANNAH's First Mortgage Bonds, 6 3/8% Series due July 1, 2003 and to repay $30 million in bank loans and a portion of SAVANNAH's outstanding short-term indebtedness. SAVANNAH plans to continue, to the extent possible, a program to retire higher-cost debt and replace these securities 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, 2001 approximately $4.6 million of cash and cash equivalents and approximately $65.5 million of unused committed credit arrangements with banks. The credit arrangements provide liquidity support to SAVANNAH's obligation with respect to variable rate pollution control bonds and commercial paper. SAVANNAH may also meet short-term cash needs through a SOUTHERN subsidiary organized to issue and sell commercial paper at the request and for the benefit of SAVANNAH and other SOUTHERN subsidiaries. At June 30, 2001, SAVANNAH had outstanding $20.8 million of notes payable to banks and $30.1 million of commercial paper. 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. 65 NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES ALABAMA POWER COMPANY GEORGIA POWER COMPANY GULF POWER COMPANY MISSISSIPPI POWER COMPANY SAVANNAH ELECTRIC AND POWER COMPANY INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT Registrant Applicable Notes SOUTHERN A, B, C, D, E, F, G, H, I, J, K, N, O ALABAMA A, C, D, E, F, K, N GEORGIA A, C, D, E, F, G, H, K, M GULF A, C, D, E, F MISSISSIPPI A, C, D, E, F, L SAVANNAH A, C, D, E, F, K, M 66 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES ALABAMA POWER COMPANY GEORGIA POWER COMPANY GULF POWER COMPANY MISSISSIPPI POWER COMPANY SAVANNAH ELECTRIC AND POWER COMPANY NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (A) The condensed financial statements of the registrants included herein have been prepared by each registrant, without audit, pursuant to the rules and regulations of the SEC. In the opinion of each registrant's management, the information regarding such registrant furnished herein reflects all adjustments necessary to present fairly the results of operations for the periods ended June 30, 2001 and 2000. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. It is suggested that these condensed financial statements of each registrant be read in conjunction with the financial statements of such registrant and the notes thereto included in the Form 10-K. Certain prior period amounts have been reclassified to conform with current period presentation. Due to seasonal variations in the demand for energy, operating results for the periods presented do not necessarily indicate operating results for the entire year. (B) Reference is made to Note 11 to the financial statements of SOUTHERN in Item 8 and MANAGEMENT'S DISCUSSION AND ANALYSIS - "Overview of Consolidated Earnings" and "Discontinued Operations" of SOUTHERN in Item 7 of the Form 10-K for information on the spin off of Mirant. On April 2, 2001, SOUTHERN completed the spin off of Mirant with a tax free distribution to SOUTHERN's shareholders of its remaining ownership of 272 million Mirant shares. Shares from the spin off were distributed at a ratio of approximately 0.4 share of Mirant common stock for every share of SOUTHERN common stock held at the record date. The distribution resulted in charges of approximately $3,323 million and $260 million to SOUTHERN's paid-in capital and retained earnings, respectively. As a result of the spin off, SOUTHERN's financial statements reflect Mirant as discontinued operations. All historical financial statements presented and footnotes have been reclassified to conform to this presentation, with the historical assets and liabilities of Mirant presented on the Condensed Consolidated Balance Sheet as net assets of discontinued operations. (C) On January 1, 2001, SOUTHERN and its subsidiaries adopted FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. Statement No. 133 requires that certain derivative instruments be recorded in the balance sheet as either an asset or liability measured at fair value and that changes in the fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SOUTHERN utilizes financial instruments to reduce its exposure to changes in interest rates and foreign currency exchange rates. Such financial instruments are generally structured so that their terms are substantially identical to (and their changes in market value are highly correlated to) those of SOUTHERN's recorded liabilities or unrecorded firm commitments. Thus, these instruments generally qualify as hedges under Statement No. 133. 67 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) The integrated Southeast utilities also enter into commodity related forward and option contracts to limit exposure to changing prices on certain fuel purchases and electricity purchases and sales. Substantially all of the integrated Southeast utilities' bulk energy purchases and sales meet the definition of a derivative under Statement No. 133. In many cases, these transactions meet Statement No. 133's normal purchase and sale exception and the related contracts are accounted for under the accrual method. Certain of these contracts qualify as cash flow hedges of anticipated transactions, resulting in the deferral of related gains and losses in other comprehensive income until the hedged transactions occur. Any ineffectiveness is recognized currently in net income. Certain other contracts do not meet the hedge requirements and are marked to market through current period income. The cumulative effect of adoption was a reduction of approximately $300 million in comprehensive income, which was all related to discontinued operations. The impact on net income was immaterial and less than $0.01 per share to each of the integrated Southeast utilities individually, as well as to SOUTHERN on a consolidated basis. The mark to market adjustments recorded during the second quarter of 2001 were also immaterial. However, the application and interpretation of Statement No. 133's requirements are still evolving and further guidance from the FASB is expected, which could further impact the financial statements of SOUTHERN and the integrated Southeast utilities. Also, as wholesale energy markets mature, the accounting for future transactions could be significantly impacted by Statement No. 133, resulting in more volatility in net income and comprehensive income. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Market Price Risk" of SOUTHERN and the integrated Southeast utilities in Item 7 for each of the registrants in the Form 10-K, and Note 1 to the financial statements of SOUTHERN under the caption "Financial Instruments for Non-Trading Activities" in Item 8 of the Form 10-K. (D) SOUTHERN, ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH engage in price risk management activities. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Market Price Risk" in SOUTHERN; and "Exposure to Market Risks," in ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH. Reference is also made to Note 1 to the financial statements of SOUTHERN, ALABAMA and GEORGIA in Item 8 of the Form 10-K for a discussion of these activities. In May 2001, the Georgia PSC ordered that SAVANNAH implement a natural gas/oil hedging program to become effective June 1, 2001. In June 2001, the Mississippi PSC approved MISSISSIPPI's Energy Cost Management Clause to become effective June 1, 2001. These programs have been designed as a means to mitigate the effects of volatile fuel prices and to better match the cost recovery of fuel and energy related transactions. (E) The integrated Southeast utilities are subject to the provisions of FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation. In the event that a portion of a company's operations is no longer subject to these provisions, the company would be required to write off related regulatory assets and liabilities that are not specifically recoverable, 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. (F) Reference is made to Note 3 to the financial statements of SOUTHERN, ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH in Item 8 of the Form 10-K for information on EPA litigation. 68 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (G) Reference is made to Note 3 to the financial statements of SOUTHERN and GEORGIA in Item 8 of the Form 10-K for information concerning a three-year rate order approved by the Georgia PSC effective January 1, 1999. The order decreased annual retail rates by $262 million effective January 1, 1999 and by an additional $24 million effective January 1, 2000. The order further provides for $85 million each year, plus up to $50 million annually of any earnings above a 12.5% retail return on common equity during the second and third years, to be applied to accelerated amortization or depreciation of assets. In May 2000, the Georgia PSC ordered that these funds be maintained in a regulatory liability account and that interest be accrued on the account at the prime rate. These amounts are reflected on the balance sheets in deferred credits and other liabilities, other. Two-thirds of any additional earnings above the 12.5% return will be applied to rate reductions and the remaining one-third retained by GEORGIA. Pursuant to this provision, GEORGIA recognized accelerated amortization of $11.6 million in the second quarter of 2001 and $51.3 million in the second quarter of 2000 and $49.2 million year-to-date 2001 and $87.9 million year-to-date 2000. Pursuant to GEORGIA's existing rate order, GEORGIA was required to file a general rate case with the Georgia PSC by July 1, 2001. Accordingly, on June 29, 2001, GEORGIA filed a rate plan with the Georgia PSC. GEORGIA's filing showed a base rate revenue deficiency of $103 million for the test period. GEORGIA's rate plan proposal waives the base rate increase in favor of a five-year plan that includes several modifications to the existing rate order. GEORGIA requested to continue operating within an earnings band, but requested that the mid-point of the band be increased by 100 basis points, to a range of between 11% and 13.5 % return on equity. As part of the proposal, GEORGIA also requested a continuation of the sharing mechanism that was approved in 1998. The new proposal would allow customers to keep two-thirds of any amount above the earnings range that can be attributed to weather, while GEORGIA would keep one-third. GEORGIA and its customers would each keep half of all other earnings above the range. GEORGIA also proposed a certified capacity cost recovery clause that would become effective on June 1, 2002. The Georgia PSC is expected to issue its decision by December 20, 2001 to be effective January 1, 2002. There can be no assurance that the plan, as submitted by GEORGIA, will be approved by the Georgia PSC. (H) 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. (I) SOUTHERN has made separate guarantees to certain counterparties regarding performance of contractual commitments by Mirant's trading and marketing subsidiaries. At June 30, 2001, the total notional amount of guarantees was $96 million and the estimated fair value of net contractual commitments outstanding was approximately $17.3 million. Based upon a statistical analysis of credit risk, SOUTHERN's potential exposure under these contractual commitments would not materially differ from the estimated fair value. Subsequent to the spin off, Mirant began paying SOUTHERN a monthly fee of 1 percent on the average aggregate maximum principal amount of all guarantees outstanding until they are replaced or expire. Mirant must use reasonable efforts to release SOUTHERN from all such support arrangements and will indemnify SOUTHERN for any obligations incurred. Reference is made to Note 9 to the financial statements of SOUTHERN under the caption "Guarantees" in Item 8 of the Form 10-K. 69 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (J) With respect to Mobile Energy, reference is made to Note 3 to the financial statements of SOUTHERN in Item 8 and to Legal Proceedings in Item 3 of the Form 10-K for information relating to (i) petitions for Chapter 11 bankruptcy relief which were filed in the U. S. Bankruptcy Court for the Southern District of Alabama and (ii) proposed settlement discussions among the affected parties. (K) 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 various lawsuits. (L) Effective May 4, 2001, in connection with commercial operation of the 1,064-megawatt natural gas combined cycle facility at MISSISSIPPI's Plant Daniel (the "Facility"), MISSISSIPPI entered into the initial 10-year lease term under its lease arrangement for the Facility with Escatawpa Funding, Limited Partnership. The final completion cost will be approximately $370 million. The lease provides for a residual value guarantee (approximately 71% of the acquisition cost) by MISSISSIPPI that is due upon termination of the lease in certain circumstances. The lease also includes purchase and renewal options. Upon termination of the lease, at MISSISSIPPI's option, MISSISSIPPI may either exercise its purchase option or the facility can be sold to a third party. MISSISSIPPI expects the fair market value of the leased facility to substantially reduce or eliminate MISSISSIPPI's payment under the residual value guarantee. The annual amount of future minimum operating lease payments exclusive of any payment related to this guarantee will approximate $30 million during the initial term. (M) In April 2001, SAVANNAH received an order from the Georgia PSC allowing SAVANNAH to set the fuel cost recovery rate to recover its approximately $40 million deferred fuel balance over three years and to recover approximately $137 million in projected annual fuel and purchased power costs, for a total recovery of about $150 million per year. The order "capped" energy strip purchases at $100 per megawatt. Any purchase agreement for summer energy strips priced in excess of the "cap" requires that the amount above $100 per megawatt be "imputed" as capacity and recovered through non-fuel rates. In a reconsideration of the SAVANNAH order, decided in a June 11, 2001 Administrative Session, the Georgia PSC ordered that all costs for energy purchases contracted for prior to April 30, 2001 may be recovered through the fuel clause. In May 2001, the Georgia PSC approved an increase to the retail fuel rate allowing GEORGIA to recover $87 million of unrecovered fuel costs over the next 24 months. (N) 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. Effective July 2001, retail rates were adjusted under Rate CNP, Certificated New Plant, which allows ALABAMA to begin to recover costs for a new generating plant after it goes into commercial operation. ALABAMA placed Plant Barry, Unit 7 into commercial operation on May 1, 2001. 70 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (O) SOUTHERN's reportable business segment is the five integrated Southeast utilities that provide electric service in four states. Net income and total assets for discontinued operations are included in the Reconciling Eliminations columns. The All Other category includes parent SOUTHERN, which does not allocate operating expenses to business segments, and segments below the quantitative threshold for separate disclosure. These segments include telecommunications, energy products and services, and leasing and financing services. Intersegment revenues are not material. Financial data for business segments for the periods covered in the Form 10-Q are as follows:
Integrated Southeast All Reconciling Utilities Other Eliminations Consolidated ----------------- -------------- --------------- ------------------ (in millions) Three Months Ended June 30, 2001: Operating revenues $ 2,503 $ 70 $ (12) $ 2,561 Segment net income (loss) 276 (4) - 272 Six Months Ended June 30, 2001: Operating revenues $ 4,724 $ 119 $ (12) $ 4,831 Segment net income (loss) 475 (23) 140 592 Total assets at June 30, 2001 $28,032 $ 3,307 $(2,053) $29,286 ------------------------------------------------ ----------------- -------------- --------------- ------------------ Three Months Ended June 30, 2000: Operating revenues $ 2,472 $ 62 $ (12) $ 2,522 Segment net income (loss) 281 (28) 89 342 Six Months Ended June 30, 2000: Operating revenues $ 4,477 $ 119 $ (22) $ 4,574 Segment net income (loss) 457 (51) 181 587 Total assets at December 31, 2000 $26,917 $ 2,200 $ 2,245 $31,362 ------------------------------------------------ ----------------- -------------- --------------- ------------------
71 PART II - OTHER INFORMATION Item 1. Legal Proceedings. (1) Reference is made to the Notes to the Condensed Financial Statements herein for information regarding certain legal and administrative proceedings in which SOUTHERN and its reporting subsidiaries are involved. Item 4. Submission of Matters to a Vote of Security Holders. SOUTHERN SOUTHERN held its annual meeting of shareholders on May 23, 2001. Each nominee for director of SOUTHERN received the requisite plurality of votes. The vote tabulation was as follows:
Nominees Shares For Shares Withhold Vote Daniel P. Amos 514,915,234 6,937,409 Dorrit J. Bern 514,640,987 7,211,656 Thomas J. Chapman 514,671,296 7,181,347 H. Allen Franklin 514,928,372 6,924,271 Bruce S. Gordon 514,734,568 7,118,075 L. G. Hardman III 514,775,095 7,077,548 Elmer B. Harris 514,806,224 7,046,419 Donald M. James 514,894,669 6,957,974 Zack T. Pate 515,004,974 6,847,669 Gerald J. St. Pe 514,782,135 7,070,508
ALABAMA ALABAMA held its annual meeting of common shareholders and preferred shareholders on April 27, 2001, and the following persons were elected to serve as directors of ALABAMA: Whit Armstrong Thomas C. Meredith David J. Cooper Mayer Mitchell H. Allen Franklin William V. Muse Elmer B. Harris Robert D. Powers R. Kent Henslee Andreas Renschler Carl E. Jones, Jr. C. Dowd Ritter Patricia M. King James H. Sanford James K. Lowder John Cox Webb, IV Wallace D. Malone, Jr. James W. Wright All 5,608,955 of the then outstanding shares of ALABAMA's common stock are owned by SOUTHERN and were voted in favor of the nominees for directors. None of the shares of preferred stock or Class A preferred stock were voted. 72 Item 4. Submission of Matters to a Vote of Security Holders.(Continued) GEORGIA GEORGIA held its annual meeting of common shareholders and preferred shareholders on May 16, 2001, and the following persons were elected to serve as directors of GEORGIA: Daniel P. Amos G. Joseph Prendergast Juanita P. Baranco David M. Ratcliffe William A. Fickling, Jr. William Jerry Vereen H. Allen Franklin Carl Ware L. G. Hardman III E. Jenner Wood, III James R. Lientz, Jr. All of the 7,761,500 outstanding shares of GEORGIA's common stock are owned by SOUTHERN and were voted in favor of the nominees for directors. None of the shares of preferred stock were voted. GULF GULF held its annual meeting of common shareholders and preferred shareholders on May 22, 2001, and the following persons were elected to serve as directors of GULF: Travis J. Bowden W. Deck Hull, Jr. C. LeDon Anchors Joseph K. Tannehill Fred C. Donovan Barbara H. Thames H. Allen Franklin In addition, at the annual meeting, shareholders were entitled to vote on an amendment of GULF's by-laws to allow GULF's board of directors to fill vacancies on the board under any circumstance. All of the 992,717 outstanding shares of GULF's common stock are owned by SOUTHERN and were voted in favor of the nominees for directors and the by-laws amendment. None of the shares of preferred stock were voted. MISSISSIPPI MISSISSIPPI held its annual meeting of common shareholders and preferred shareholders on May 21, 2001, and the following persons were elected to serve as directors of MISSISSIPPI: Michael D. Garrett Malcolm Portera Tommy E. Dulaney George A. Schloegel Robert S. Gaddis Philip J. Terrell Linda T. Howard N. Eugene Warr Aubrey K. Lucas All of the 1,121,000 outstanding shares of MISSISSIPPI's common stock are owned by SOUTHERN and were voted in favor of the nominees for directors. A total of 30 shares of preferred stock were voted in favor of the nominees for directors and no other shares of preferred stock were voted. 73 Item 4. Submission of Matters to a Vote of Security Holders.(Continued) SAVANNAH By written consent, in lieu of the annual meeting of stockholders of SAVANNAH, effective May 3, 2001, the following persons were elected to serve as directors of SAVANNAH: Gus H. Bell, III Anthony R. James Archie H. Davis 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 in favor of the nominees for directors. Item 5. Other Information. Historically, the price for shares purchased from SOUTHERN under the Southern Investment Plan was calculated as the average of the high and low sale prices as reported on the NYSE Composite Transactions as published by The Wall Street Journal. On April 30, 2001, The Wall Street Journal ceased reporting such high and low sales prices. Accordingly, effective April 30, 2001, the price for shares purchased under the Southern Investment Plan is calculated as the average of the high and low sales prices on the NYSE Composite Transactions as reported to SOUTHERN by the NYSENET or, if the NYSENET is unavailable to SOUTHERN for any reason, as reported to SOUTHERN by the New York Stock Exchange or by such other sources as SOUTHERN deems accurate. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. -------- Exhibit 24 - (a) Powers of Attorney and resolutions. (Designated in the Form 10-K for the year ended December 31, 2000, 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.) Exhibit 99 Important U.S. Federal Income Tax Information for Mirant spin off. (b) Reports on Form 8-K. ------------------- SOUTHERN filed a Current Report on Form 8-K dated April 2, 2001: Items reported: Items 2, 7 and 9 Financial statements filed: Pro Forma Financial Information. GEORGIA filed Current Reports on Form 8-K dated May 1, 2001 and May 14, 2001: Items reported: Items 5 and 7 Financial statements filed: None SAVANNAH filed a Current Report on Form 8-K dated May 8, 2001: Items reported: Items 5 and 7 Financial statements filed: None 74 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 H. Allen Franklin Chairman and Chief Executive Officer (Principal Executive Officer) By Gale E. Klappa Financial Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: August 14, 2001 - ------------------------------------------------------------------------------- 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 Chairman 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 14, 2001 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. 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 14, 2001 - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. GULF POWER COMPANY By Travis J. Bowden President and Chief Executive Officer (Principal Executive Officer) By Ronnie Labrato Vice President, Chief Financial Officer and Comptroller (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: August 14, 2001 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. MISSISSIPPI POWER COMPANY By Michael D. Garrett 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 14, 2001 - ------------------------------------------------------------------------------ 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 Anthony R. James 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 14, 2001 77 EX-99 3 ex99.txt IMPORTANT U.S. FEDERAL INCOME TAX INFORMATION Exhibit 99 (SOUTHERN COMPANY LOGO) April 6, 2001 IMPORTANT U. S. FEDERAL INCOME TAX INFORMATION FOR MIRANT SPIN-OFF To Southern Company Stockholders of Record as of March 21, 2001: Owners of Southern Company ("Southern Company") common stock on the March 21, 2001 Record Date received a distribution of 0.397614 shares of Mirant Corporation ("Mirant") common stock for each share of Southern Company common stock owned on the Record Date. The distribution was made on April 2, 2001, at 5:00 p.m., Eastern Time. Southern Company has received a private letter ruling from the Internal Revenue Service stating that, based on representations made by Southern Company, the distribution of whole shares of Mirant common stock will be tax-free for U. S. federal income tax purposes for Southern Company stockholders who are United States citizens or residents. The tax basis of your Southern Company common stock WILL, however, have to be apportioned between your Southern Company common stock and your Mirant common stock. TAX BASIS To properly account for the distribution, you should determine the tax basis of your current Southern Company shares, if you have not already done so. - If you acquired your Southern Company shares by purchasing them, tax basis refers to the sum of: (1) the amount of your initial purchase (including commissions); (2) the amount of dividends reinvested (including commissions); and (3) the amount of optional cash payments (including commissions). This type of information can be found on bank or brokerage statements, dividend reinvestment statements, purchase confirmations, or your personal records. - If you did not actually purchase your Southern Company shares, such as receiving the shares as a gift or an inheritance, consult with your tax advisor to determine your tax basis. TAX BASIS ALLOCATION BETWEEN SOUTHERN COMPANY AND MIRANT Your tax basis for the Mirant common stock received in the spin-off will be determined based on your tax basis in the Southern Company common stock with respect to which your distribution of Mirant common stock was made. After you determine your tax basis, you should allocate it between Southern Company common stock and the Mirant common stock received in the distribution. One such method is to allocate the tax basis in your shares of Southern Company common stock immediately prior to the spin-off between your Southern Company common stock and Mirant common stock in proportion to the fair market value of Southern Company common stock and Mirant common stock at market close on April 2, 2001, the last trading day before the distribution. The closing price per share for Southern Company WI (without the distribution) on April 2, 2001 was $21.60. The closing price per share for Mirant WI on April 2, 2001 was $34.60. Using this methodology, and the 0.397614 distribution ratio, 61.09% of your basis would be allocated to Southern Company common stock, and the remaining 38.91% would be allocated to the shares of Mirant common stock you received in the distribution (including any fractional share interest). You should consult your tax advisor regarding the application of this calculation to your particular circumstances. See the example that follows. EXAMPLE: 100 shares of Southern Company common stock were purchased at $20 per share, resulting in a tax basis of $2,000. Because the spin-off distribution ratio was 0.397614, the owner was entitled to 39.7614 Mirant shares for the 100 shares of Southern Company owned. The owner received 39 full shares of Mirant in book-entry form and a check for the sale of the 0.7614 fractional share. The tax basis of a fractional share is proportional to the basis of a whole share. Using the tax basis allocation percentages, 61.09% of the $2,000 is allocated to Southern Company common stock and 38.91% to Mirant common stock. See the chart that follows. EXAMPLE: [GRAPH] The per share tax basis would then be obtained by dividing the new tax basis by the number of shares, as follows: - ---------------------------------------------------------------------------------------------- NEW SO TAX BASIS NUMBER OF SHARES NEW SO PER SHARE BASIS $1,221.80 100 $12.22 - ---------------------------------------------------------------------------------------------- MIR TAX BASIS NUMBER OF SHARES MIR PER SHARE BASIS $778.20 39.7614 $19.57 - ----------------------------------------------------------------------------------------------
If you acquired Southern Company shares on more than one occasion, you will need to perform this calculation separately for each group of shares. FRACTIONAL SHARE SALE The receipt of cash resulting from the sale of a fractional share will result in the recognition of gain or loss for U. S. federal income tax purposes. This is measured by the difference between the cash you receive for such fractional share and your tax basis in such fractional share. The following illustration uses the information in the example above. Assume the fractional share of 0.7614 was sold for $35.00 net per share and you received a check for $26.65 (0.7614 times $35.00 = $26.65). (FRACTIONAL SHARE GRAPHIC) HOLDING PERIOD The holding period for capital gains purposes of shares of Mirant common stock received in the distribution will include the holding period of Southern Company common stock on which the distribution was made, provided the stockholder holds the Southern Company common stock as a capital asset on the Distribution Date. RETAIN THIS INFORMATION You should retain this information to support the determination of your tax basis in your Southern Company and Mirant shares. Tax regulations require that you attach to your U.S. federal income tax return for the year in which the Mirant shares were received -- 2001 -- a statement setting forth certain prescribed information about the distribution. In order to assist you in complying with this tax requirement, we are attaching a sample form of a statement to be completed by you and filed with your 2001 federal income tax return. CONSULT TAX ADVISOR The information in this letter represents our understanding of existing U.S. federal income tax law and does not constitute tax advice. It does not purport to address all tax considerations relating to the distribution or to describe tax consequences that may apply to particular categories of stockholders. You should consult your tax advisor as to the particular tax consequences to you of the distribution, including the applicability and effect of any state, local and foreign tax laws. SOUTHERN COMPANY April 6, 2001 -----END PRIVACY-ENHANCED MESSAGE-----