10-Q 1 form10q2ndqtr-02.txt FORM 10-Q FOR QUARTER ENDING 6-30-02 =============================================================================== 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, 2002 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 001-11229 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, 2002 ---------- ------------ ------------------ The Southern Company Par Value $5 Per Share 708,661,642 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. 2
INDEX TO QUARTERLY REPORT ON FORM 10-Q June 30, 2002 Page Number DEFINITIONS......................................................................................................... 4 PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition The Southern Company and Subsidiary Companies Condensed Consolidated Statements of Income........................................................ 7 Condensed Consolidated Statements of Cash Flows.................................................... 8 Condensed Consolidated Balance Sheets.............................................................. 9 Condensed Consolidated Statements of Comprehensive Income and Accumulated Other Comprehensive Income.......................................................... 11 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 12 Alabama Power Company Condensed Statements of Income..................................................................... 22 Condensed Statements of Cash Flows................................................................. 23 Condensed Balance Sheets........................................................................... 24 Condensed Statements of Comprehensive Income and Accumulated Other Comprehensive Income......................................................... 26 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 27 Georgia Power Company Condensed Statements of Income..................................................................... 34 Condensed Statements of Cash Flows................................................................. 35 Condensed Balance Sheets........................................................................... 36 Condensed Statements of Comprehensive Income and Accumulated Other Comprehensive Income......................................................... 38 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 39 Gulf Power Company Condensed Statements of Income..................................................................... 46 Condensed Statements of Cash Flows................................................................. 47 Condensed Balance Sheets........................................................................... 48 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 50 Mississippi Power Company Condensed Statements of Income..................................................................... 57 Condensed Statements of Cash Flows................................................................. 58 Condensed Balance Sheets........................................................................... 59 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 61 Savannah Electric and Power Company Condensed Statements of Income..................................................................... 69 Condensed Statements of Cash Flows................................................................. 70 Condensed Balance Sheets........................................................................... 71 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 73 Notes to the Condensed Financial Statements........................................................... 79 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 20 PART II - OTHER INFORMATION Item 1. Legal Proceedings......................................................................................... 85 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....................................................... 85 Item 5. Other Information......................................................................................... Inapplicable Item 6. Exhibits and Reports on Form 8-K.......................................................................... 87 Signatures ............................................................................................... 88
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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, 2001 GEORGIA..................................... Georgia Power Company GULF........................................ Gulf Power Company ISA......................................... Independent System Administrator Mirant...................................... Mirant Corporation MISSISSIPPI................................. Mississippi Power Company Mobile Energy .............................. Mobile Energy Services Company, L.L.C. and Mobile Energy Services Holdings, Inc. Moody's..................................... Moody's Investors Service, Inc. operating companies......................... ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH PEP......................................... Performance Evaluation Plan PSC ........................................ Public Service Commission RTO......................................... Regional Transmission Organization S&P......................................... Standard and Poor's Ratings Services SAVANNAH.................................... Savannah Electric and Power Company SCS......................................... Southern Company Services, Inc. SEC......................................... Securities and Exchange Commission SeTrans .................................... A proposed regional transmission organization consisting of eleven public and private companies, including SOUTHERN, located in eight southeastern states SOUTHERN.................................... The Southern Company Southern Gas................................ Southern Company Gas LLC Southern Power.............................. Southern Power Company SOUTHERN system............................. SOUTHERN, the operating companies 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," "would," "will," "could," "should," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential" or "continue" or the negative of these terms or other comparable terminology. SOUTHERN cautions 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 SOUTHERN subsidiaries and the diversity litigation against certain SOUTHERN subsidiaries; the effect, extent and timing of the entry of additional competition in the markets in which SOUTHERN's subsidiaries operate; the impact of fluctuations in commodity prices, interest rates, and customer demand; state and federal rate regulations; political, legal, and economic conditions and developments in the United States; the performance of projects undertaken by the non-traditional business and the success of efforts to invest in and develop new opportunities; internal restructuring or other restructuring options that may be pursued; potential business strategies, including acquisitions or dispositions of assets or businesses, which cannot be assured to be completed or beneficial to SOUTHERN or its subsidiaries; the effects of, and changes in, economic conditions in the areas in which SOUTHERN's subsidiaries operate; the direct and indirect effects on SOUTHERN's business resulting from the terrorist incidents on September 11, 2001, or any similar such incidents or responses to such incidents; financial market conditions and the results of financing efforts; the timing and acceptance of SOUTHERN's new product and service offerings; the ability of SOUTHERN to obtain additional generating capacity at competitive prices; weather and other natural phenomena; and other factors discussed elsewhere herein and in other reports (including the 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, 2002 2001 2002 2001 ----------- ----------- ----------- ----------- (in thousands) (in thousands) Operating Revenues: Retail sales $2,185,048 $2,148,173 $4,028,767 $4,033,918 Sales for resale 293,475 286,994 526,154 547,040 Other revenues 152,249 126,637 289,439 250,364 ---------- ---------- ---------- ---------- Total operating revenues 2,630,772 2,561,804 4,844,360 4,831,322 ---------- ---------- ---------- ---------- Operating Expenses: Fuel 686,544 654,906 1,260,737 1,262,387 Purchased power 123,644 197,331 191,261 311,357 Other operations 522,704 476,410 967,956 881,841 Maintenance 247,019 229,641 475,809 455,498 Depreciation and amortization 254,271 283,387 499,906 587,053 Taxes other than income taxes 137,877 134,904 277,724 272,213 ---------- ---------- ---------- ---------- Total operating expenses 1,972,059 1,976,579 3,673,393 3,770,349 ---------- ---------- ---------- ---------- Operating Income 658,713 585,225 1,170,967 1,060,973 Other Income: Interest income 4,141 6,665 8,944 12,475 Equity in losses of subsidiaries (25,751) (16,039) (41,655) (18,736) Other, net 20,434 26,145 22,166 28,749 ---------- ---------- ---------- ---------- Earnings From Continuing Operations Before Interest and Income Taxes 657,537 601,996 1,160,422 1,083,461 ---------- ---------- ---------- ---------- Interest and Other: Interest expense, net 123,219 146,137 243,772 291,869 Distributions on capital and preferred securities of subsidiaries 43,649 42,099 86,176 84,340 Preferred dividends of subsidiaries 4,396 4,614 8,777 9,419 ---------- ---------- ---------- ---------- Total interest and other 171,264 192,850 338,725 385,628 ---------- ---------- ---------- ---------- Earnings From Continuing Operations Before Income Taxes 486,273 409,146 821,697 697,833 Income taxes 154,881 138,758 266,019 248,702 ---------- ---------- ---------- ---------- Earnings From Continuing Operations Before Cumulative Effect of Accounting Change 331,392 270,388 555,678 449,131 Cumulative effect of accounting change -- less income taxes of $477 - - - 770 ---------- ---------- ---------- ---------- Earnings From Continuing Operations 331,392 270,388 555,678 449,901 Earnings from discontinued operations, net of income taxes of $961 for the three months and $92,713 for the six months ended 2001 - 2,185 - 142,217 ---------- ---------- ---------- ---------- Consolidated Net Income $ 331,392 $ 272,573 $ 555,678 $ 592,118 ========== ========== ========== ========== Common Stock Data: Basic earnings per share of common stock -- Earnings per share from continuing operations $0.47 $0.40 $0.79 $0.66 Earnings per share from discontinued operations $0.00 ($0.01) $0.00 $0.20 ---------- ---------- ---------- ---------- Consolidated Basic Earnings Per Share $0.47 $0.39 $0.79 $0.86 ========== ========== ========== ========== Diluted earnings per share of common stock -- Earnings per share from continuing operations $0.46 $0.40 $0.78 $0.66 Earnings per share from discontinued operations $0.00 ($0.01) $0.00 $0.20 ---------- ---------- ---------- ---------- Consolidated Diluted Earnings Per Share $0.46 $0.39 $0.78 $0.86 ========== ========== ========== ========== Average number of basic shares of common stock outstanding (in thousands) 706,181 686,702 703,596 684,638 Average number of diluted shares of common stock outstanding (in thousands) 712,165 691,404 709,137 690,941 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, 2002 2001 ----------- ----------- (in thousands) Operating Activities: Consolidated net income $ 555,678 $ 592,118 Adjustments to reconcile consolidated net income to net cash provided from operating activities -- Less income from discontinued operations - 142,217 Depreciation and amortization 551,663 663,396 Deferred income taxes and investment tax credits 22,729 (40,739) Equity in losses of subsidiaries 41,655 18,736 Other, net (48,906) (124,827) Changes in certain current assets and liabilities -- Receivables, net (38,478) 78,216 Fossil fuel stock 20,027 (193,386) Materials and supplies 12,806 (84) Accounts payable (67,922) (158,122) Other (7,858) 127,993 ----------- ----------- Net cash provided from operating activities of continuing operations 1,041,394 821,084 ----------- ----------- Investing Activities: Gross property additions (1,409,984) (1,411,839) Other (171,759) (124,786) ----------- ----------- Net cash used for investing activities of continuing operations (1,581,743) (1,536,625) ----------- ----------- Financing Activities: Increase (decrease) in notes payable, net (247,899) 822,266 Proceeds -- Other long-term debt 1,477,291 689,877 Capital and preferred securities 475,000 - Common stock 247,830 195,329 Redemptions -- First mortgage bonds (7,444) (396,166) Other long-term debt (541,692) (111,828) Capital and preferred securities (35,000) - Payment of common stock dividends (470,426) (457,931) Other (36,618) (24,969) ----------- -------- Net cash provided from financing activities of continuing operations 861,042 716,578 ----------- -------- Net Increase in Cash and Cash Equivalents 320,693 1,037 Cash and Cash Equivalents at Beginning of Period 354,015 199,191 ----------- ----------- Cash and Cash Equivalents at End of Period $ 674,708 $ 200,228 =========== =========== Supplemental Cash Flow Information From Continuing Operations: Cash paid during the period for -- Interest (net of amount capitalized) $213,496 $313,843 Income taxes (net of refunds) $241,385 $227,632 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 (UNAUDITED) At June 30, At December 31, Assets 2002 2001 ------ ----------------- ---------------- (in thousands) Current Assets: Cash and cash equivalents $ 674,708 $ 354,015 Receivables, less accumulated provisions for uncollectible accounts of $21,498 at June 30, 2002 and $24,383 at December 31, 2001 1,305,382 1,146,263 Under recovered retail fuel clause revenue 165,968 280,003 Fossil fuel stock, at average cost 374,429 394,457 Materials and supplies, at average cost 537,366 550,217 Other 286,776 231,425 ----------- ----------- Total current assets 3,344,629 2,956,380 ----------- ----------- Property, Plant, and Equipment: In service 37,240,419 35,813,369 Less accumulated depreciation 15,375,873 15,020,415 ----------- ----------- 21,864,546 20,792,954 Nuclear fuel, at amortized cost 202,908 201,548 Construction work in progress 1,887,549 2,089,259 ----------- ----------- Property, plant, and equipment 23,955,003 23,083,761 ----------- ----------- Other Property and Investments: Nuclear decommissioning trusts, at fair value 680,851 681,688 Leveraged leases 684,762 655,308 Other 194,754 193,055 ----------- ----------- Total other property and investments 1,560,367 1,530,051 ----------- ----------- Deferred Charges and Other Assets: Deferred charges related to income taxes 909,609 924,139 Prepaid pension costs 714,021 641,099 Debt expense, being amortized 113,187 102,768 Premium on reacquired debt, being amortized 269,722 279,800 Other 443,934 389,867 ----------- ----------- Total deferred charges and other assets 2,450,473 2,337,673 ----------- ----------- Total Assets $31,310,472 $29,907,865 =========== =========== 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 (UNAUDITED) At June 30, At December 31, Liabilities and Stockholders' Equity 2002 2001 ------------------------------------ -------------- ----------------- (in thousands) Current Liabilities: Securities due within one year $ 1,625,936 $ 428,671 Notes payable 1,669,866 1,902,312 Accounts payable 683,622 833,860 Customer deposits 163,900 152,579 Taxes accrued -- Income taxes 231,010 159,764 Other 193,410 193,735 Interest accrued 199,776 117,959 Vacation pay accrued 125,251 124,608 Other 386,765 473,369 ----------- ----------- Total current liabilities 5,279,536 4,386,857 ----------- ----------- Long-term debt 8,026,795 8,296,878 ----------- ----------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 4,099,261 4,097,403 Deferred credits related to income taxes 478,428 500,151 Accumulated deferred investment tax credits 620,311 634,020 Employee benefits provisions 554,664 532,515 Prepaid capacity revenues 37,422 40,730 Other 842,063 790,961 ----------- ----------- Total deferred credits and other liabilities 6,632,149 6,595,780 ----------- ----------- Company or subsidiary obligated mandatorily redeemable capital and preferred securities 2,716,250 2,276,250 ----------- ----------- 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, 2002: 708,224,282 shares; -- December 31, 2001: 700,622,308 shares 3,541,121 3,503,112 Paid-in capital 175,543 14,380 Treasury, at cost -- June 30, 2002: 118,445 shares; -- December 31, 2001: 2,278,240 shares (2,204) (57,309) Retained earnings 4,595,370 4,516,642 Accumulated other comprehensive income (22,214) 7,149 ----------- ----------- Total common stockholders' equity 8,287,616 7,983,974 ----------- ----------- Total Liabilities and Stockholders' Equity $31,310,472 $29,907,865 =========== =========== 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, --------------------- ---------------------- 2002 2001 2002 2001 ----- ------ ----- ----- (in thousands) (in thousands) Consolidated net income $331,392 $272,573 $ 555,678 $ 592,118 Other comprehensive income - continuing operations: Change in fair value of marketable securities 431 (113) 291 202 Cumulative effect of accounting change for qualifying - - - 286 hedges, net of tax of $180 Changes in fair value of qualifying hedges, net of tax of (35,941) (479) (29,692) 27 $(22,483), $(297), $(18,439), and $(61), respectively Less: Reclassification adjustment for amounts included in 38 - 38 - net income, net of tax of $24 -------- ------ -------- --------- Total other comprehensive income - Continuing operations (35,472) (592) (29,363) 515 -------- ------ -------- --------- Other comprehensive income - discontinued operations: Cumulative effect of accounting change for qualifying - - - (249,246) hedges, net of tax of $(121,326) Changes in fair value of qualifying hedges, net of tax of - - - (103,962) $(50,606) Less: Reclassification adjustment for amounts included in - - - 59,857 net income, net of tax of $29,137 Foreign currency translation adjustments, net of tax of $(10,319) - (21,199) -------- ------ --------- ---------- Total other comprehensive income - discontinued operations - - - (314,550) -------- ------ --------- ---------- CONSOLIDATED COMPREHENSIVE INCOME $295,920 $271,981 $ 526,315 $ 278,083 ======== ======== ========= ==========
SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (UNAUDITED) At At June 30, December 31, 2002 2001 ------------- -------------- (in thousands) Balance at beginning of period - continuing operations $7,149 $ 249 Change in current period - continuing operations (29,363) 6,900 -------- -------- BALANCE AT END OF PERIOD - Continuing Operations (22,214) 7,149 --------- -------- Balance at beginning of period - discontinued operations - (93,847) Change in current period - discontinued operations - 93,847 -------- -------- BALANCE AT END OF PERIOD - Discontinued Operations - - -------- -------- TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME ($22,214) $ 7,149 ======== ======== 11 The accompanying notes as they relate to SOUTHERN are an integral part of these statments.
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2002 vs. SECOND QUARTER 2001 AND YEAR-TO-DATE 2002 vs. YEAR-TO-DATE 2001 RESULTS OF OPERATIONS SOUTHERN is focusing on three main businesses in the Southeast: its traditional business, represented by its five operating companies 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 2002 and year-to-date 2002 earnings from continuing operations were $331 million ($0.47 per share) and $555.7 million ($0.79 per share), respectively, compared with $270.4 million ($0.40 per share) and $449.9 million ($0.66 per share) in the second quarter and year-to-date 2001. The increases in earnings for the second quarter and year-to-date 2002 are due to several positive factors, including increased demand for electricity, continued customer growth, lower interest rates and the overall impact of regulatory rate proceedings at each of the operating companies, partially offset by the impact of higher operation and maintenance costs associated with new generation units that have come on line in the past year. Contributing significantly to the increased demand for electricity was the warmer weather experienced in the second quarter 2002 contrasted with the unusually mild temperatures that dampened demand in 2001. In July 2002, SOUTHERN raised its annual dividend by 3 cents to $1.37 per share, or $0.3425 per quarter. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) ----------------------------------------------------------------- Second Quarter Year-To-Date ----------------------------------------------------------------- (in thousands) % (in thousands) % Retail sales $ 36,875 1.7 $ (5,151) (0.1) Other revenues 25,612 20.2 39,075 15.6 Fuel expense 31,638 4.8 (1,650) (0.1) Purchased power expense (73,687) (37.3) (120,096) (38.6) Other operations expense 46,294 9.7 86,115 9.8 Maintenance expense 17,378 7.6 20,311 4.5 Depreciation and amortization (29,116) (10.3) (87,147) (14.8) Equity in losses of subsidiaries (9,712) (60.6) (22,919) (122.3) Interest expense, net (22,918) (15.7) (48,097) (16.5) ----------------------------------------------------------------
Retail sales. Excluding fuel revenues, which generally do not affect net income, retail sales revenue was up by $63 million, or 4.2%, in the second quarter 2002 and $59 million, or 2.1%, year-to-date 2002 when compared to the same periods in the prior year. Energy sales to residential, commercial and industrial customers for the second quarter 2002 increased by 7.8%, 3.1% and 1.5%, respectively, as compared to the comparable reporting period in 2001. For year-to-date 2002 as compared to 2001, energy sales to residential and commercial customers increased by 5.3% and 2.3%, respectively, while sales to industrial customers declined by 0.3%. As indicated above, energy sales in the residential and commercial sectors for both reporting periods benefited from the warmer weather experienced this year as compared to the milder than normal 12 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIE MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION temperatures experienced in 2001 and from an approximate 1.5% increase in the number of residential customers served. Energy sales to industrial customers continue to be negatively affected by the sluggish economic conditions. Other revenues. The increase in other revenues for the second quarter 2002 compared to 2001 is primarily due to a $10 million increase in revenues from SOUTHERN's wireless communications subsidiary related to increases in subscribers. Additional increases of $5.0 million related to a purchase power contract settlement, $3.5 million in transmission revenues and $2.5 million in customer account fees also contributed. A significant portion of the remaining year-to-date increase is due to revenues from the operations of a subsidiary formed in April 2001 that provides services related to alternative fuel products. Fuel expense. As a result of increased energy sales caused by warmer temperatures, fuel expense was higher in the second quarter 2002. A significant portion of this increase relates to a new 574 megawatt generating unit (Plant Smith Unit 3) placed in service by GULF in April 2002 and to increased fuel expenses incurred by Southern Power, SOUTHERN's competitive wholesale generating subsidiary. In June 2002, Southern Power placed in service three new combined-cycle generating units, Plant Franklin Unit No. 1 (previously known as Plant Goat Rock) and Plant Wansley Units No. 6 and No. 7 (aggregating 1,705 megawatts). For year-to-date 2002, fuel expense decreased slightly, primarily due to the lower price of natural gas during the first quarter 2002 compared to 2001. Purchased power expense. In the second quarter 2002 and year-to-date 2002, purchased power expense decreased mainly due to lower costs associated with these energy purchases and commercial operation of new units at MISSISSIPPI's Plant Daniel in May 2001, GULF's Plant Smith in April 2002 and Southern Power's units as described above when compared to the corresponding periods in 2001. Since energy expenses are usually offset by energy revenues through the operating companies' cost recovery mechanisms, these expenses do not have a significant impact on earnings. Other operations expense. For the second quarter 2002 compared to 2001, the increase in other operations expense is primarily related to a $33 million increase in administrative and general expenses and an $11 million increase in operation expenses due to increased fossil steam production. The increase in administrative and general expenses primarily relates to increases of $8 million in transportation expenses and $10 million in other operating expenses for the alternative fuel products subsidiary formed in April 2001; $8 million for SOUTHERN's wireless communications subsidiary as a result of its customer growth; and $5 million for Southern Power due to the operation of its generating plants beginning in August 2001. Similar increases in administrative and general expenses are reflected in the total year-to-date increase for other operations expense. Maintenance expense. These expenses were higher in each reporting period when compared to the same periods in 2001 because of scheduled work performed on power generating, transmission and distribution facilities. Depreciation and amortization. While depreciation and amortization expense varied among the individual subsidiaries in the current reporting periods due to changes in utility plant in service, there was an overall decrease primarily as a result of GEORGIA's discontinuing accelerated depreciation and beginning amortization of the regulatory liability for accelerated cost recovery in January 2002 in accordance with its new retail rate order. For the second quarter 2002 and year-to-date 2002, the decrease in depreciation and amortization related to GEORGIA amounted to $38.5 million and $107 million, respectively. Reference is made to Note (H) in the "Notes to the Condensed Financial Statements" herein. 13 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Equity in losses of subsidiaries. The increase for the second quarter 2002 and year-to-date 2002, compared to the same periods in 2001, is primarily attributed to SOUTHERN's investments in partnerships producing alternative fuel products. SOUTHERN formed a new subsidiary in April 2001 to hold its investment in a partnership producing alternative fuel products. Interest expense, net. During the second quarter 2002 and year-to-date 2002, interest expense, net decreased primarily due to a reduction in interest rates compared to the same periods in 2001. SOUTHERN and its subsidiaries engage in new external financing for refunding purposes and to finance ongoing construction programs. The decrease in average rates was partially offset by a $927 million net increase in outstanding long-term debt (including current portions). 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 operating companies to achieve energy sales growth while containing costs 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 - "Southern Power" and "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 from SOUTHERN, including Mirant's recent announcement related to investigations into potential 2001 accounting issues. If any of these issues require adjustments and relate to periods prior to the spin off, SOUTHERN's earnings from discontinued operations and net assets of discontinued operations for such periods would be affected. Any such issues would have no effect on SOUTHERN's 2002 earnings or its future earnings potential. 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 recovered. For additional information about the Clean Air Act and other environmental issues, including the EPA litigation, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of SOUTHERN in the Form 10-K. On July 30, 2002, the U. S. District Court in Alabama extended the stay of the proceeding in Alabama through late October 2002. On April 25, 2002, the Stakeholder Advisory Committee met and selected the candidates that will be considered for the SeTrans ISA. On June 27, 2002, SOUTHERN and other SeTrans sponsors submitted a Petition for Declaratory Order seeking the FERC's guidance on various issues. The petition asks for a response from the FERC by October 2002. Reference is made to Item 1 - BUSINESS - "Certain Factors Affecting the Industry" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Industry Restructuring" for each of the registrants in the Form 10-K for additional information. 14 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On June 3, 2002, SOUTHERN formed a wholly-owned subsidiary, Southern Company Gas LLC. Southern Gas will operate as a retail gas marketer in the State of Georgia. On July 19, 2002, Southern Gas completed its acquisition out of bankruptcy from The New Power Company ("New Power") of approximately 210,000 retail natural gas customers located in the State of Georgia, representing a 15% market share. Southern Gas also purchased from New Power proprietary risk management software and hardware systems, natural gas inventory and accounts receivable. The total purchase price was approximately $60 million. The results of operations of Southern Gas will be included in the consolidated financial statements from the date of acquisition. On July 31, 2002, the FERC issued a notice of proposed rulemaking entitled "Remedying Undue Discrimination Through Open Access Transmission Service and Standard Electricity Market Design." The FERC has indicated that the proposal, if adopted, would (among other things): (i) require transmission assets of jurisdictional utilities to be operated by an independent entity; (ii) establish a standard market design; (iii) establish a single type of transmission service that applies to all customers; (iv) assert jurisdiction over the transmission component of bundled retail service; (v) establish a generation reserve margin; (vi) establish bid caps for day-ahead and spot energy markets; and (vii) revise the FERC policy on the pricing of transmission expansions. Comments on the proposal are due 75 days after its issuance. Any impact of this proposal on SOUTHERN and its subsidiaries will depend on the form in which final rules may be ultimately adopted. Reference is made to Note 5 to SOUTHERN's financial statements in the Form 10-K, regarding Long-Term Power Sales Agreements. MISSISSIPPI and Southern Power have capacity sale contracts with a customer that is currently experiencing liquidity problems and has had its credit rating reduced below investment grade. Minimum capacity revenues under these contracts average approximately $13 million annually through May 2005 for Southern Power and $21 million annually for MISSISSIPPI through May 2011. The customer has provided letters of credit expiring in February 2003 and totaling $20 million to Southern Power and $26 million to MISSISSIPPI. These letters of credit can be drawn if they are not replaced by acceptable security prior to expiration or if the customer defaults under the contract. In the event of such a default, and if MISSISSIPPI and Southern Power were unable to resell that capacity in the market, future earnings could be affected. The outcome cannot now be determined. Reference is made to Notes (B) through (I), (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. Reference is also made to Note (E) in the "Notes to the Condensed Financial Statements" for information relating to certain lawsuits regarding the installation of fiber optic cable over existing easements of certain SOUTHERN subsidiaries. Accounting Policies Critical Policy SOUTHERN's significant accounting policies are described in Note 1 to the financial statements of SOUTHERN in Item 8 of the Form 10-K. SOUTHERN's only critical accounting policy involves rate regulation. The operating companies 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, including plant, have been impaired. 15 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 adopted FASB Statement No. 133, "Accounting for Derivatives and Hedging Activities," as amended, and changed the method of accounting for derivative instruments. Derivatives are now reflected on the Condensed Consolidated Balance Sheet as either an asset or liability measured at fair market value, and the changes in the fair value are currently recognized in earnings unless specific hedge accounting criteria are met. Reference is made to "Exposure to Market Risks" below and Note (N) in the "Notes to the Condensed Financial Statements" herein for information relating to derivative instruments. 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 liability for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be 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 January 1, 2003. SOUTHERN is currently assessing the impact of adopting Statement No. 143 on its financial statements. Reference is made to Note 1 to the financial statements of SOUTHERN 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 2002 included $1.4 billion used for gross property additions to utility plant. The funds for these additions and other capital requirements were primarily obtained from issuances of other long-term debt. See SOUTHERN's Condensed Consolidated Statements of Cash Flows for further details. Off-Balance Sheet Financing Arrangements In May 2001, MISSISSIPPI began the initial 10-year term of an operating lease agreement signed in 1999 with Escatawpa Funding, Limited Partnership ("Escatawpa"), a special purpose entity, to use a combined-cycle generating facility located at MISSISSIPPI's Plant Daniel. The facility cost approximately $370 million. The lease provides for a residual value guarantee -- approximately 71% of the completion cost -- by MISSISSIPPI that is due upon termination of the lease in certain circumstances. Reference is made to Note 9 to the financial statements in Item 8 of SOUTHERN in the Form 10-K and Note 4 to the financial statements in Item 8 of MISSISSIPPI in the Form 10-K for additional information. In June 2002, the FASB issued an exposure draft for comment on a proposed interpretation on "Consolidation of Certain Special-Purpose Entities," an interpretation of Accounting Research Bulletin No. 51. It is expected that the exposure draft would be finalized by year end, with an effective date for existing transactions subject to the interpretation, including MISSISSIPPI's lease transaction, to be implemented on April 1, 2003. This interpretation is in draft form; the final pronouncement may differ from the draft. However, in its current draft form, MISSISSIPPI would be deemed to be the "primary beneficiary" of its lease arrangement with Escatawpa and would be required to consolidate the leased asset and related debt on its books or to restructure the existing arrangement to comply with the final rules. Until final rules are approved by the FASB, MISSISSIPPI will continue to analyze the impact of the exposure draft. MISSSISSIPPI's current operating lease arrangement with Escatawpa has been 16 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION reviewed and approved by the Mississippi PSC and is reflected and approved for recovery in both its retail and wholesale rate jurisdictions. Consolidation of the leased asset and related debt could require MISSISSIPPI to seek additional regulatory review. In 2001, Southern Power entered into a financial arrangement with Westdeutsche Landesbank Girozentrale ("WestLB") whereby Southern Power could assign up to $125 million in vendor contracts for equipment to WestLB. For accounting purposes, WestLB was the owner of the contracts. Southern Power acted as an agent for WestLB and instructed WestLB when to make payments to the vendors. Southern Power terminated this arrangement and reacquired these assets in March 2002 for their original cost of $61 million. Credit Rating Risk SOUTHERN and its subsidiaries do not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain contracts that could require collateral -- but not accelerated payment -- in the event of a credit rating change to below investment grade. These contracts are primarily for physical electricity sales, fixed-price physical gas purchases and agreements covering interest rate swaps and currency swaps. At June 30, 2002, the maximum potential collateral requirements under the electricity sale contracts were approximately $404 million. Generally, collateral may be provided for by a SOUTHERN guaranty, letter of credit or cash. At June 30, 2002, there were no material collateral requirements for the gas purchase contracts or other financial instrument agreements. Exposure to Market Risks SOUTHERN's market risk exposures relative to interest rate changes have not changed materially compared with the previous reporting period, December 31, 2001. In addition, SOUTHERN is not aware of any facts or circumstances that would significantly affect such exposures in the near term. Due to cost-based rate regulations, the operating companies have limited exposure to market volatility in interest rates, commodity fuel prices and prices of electricity. To mitigate residual risks relative to movements in electricity prices, the operating companies and Southern Power enter into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. Also, ALABAMA, MISSISSIPPI and SAVANNAH have implemented fuel-hedging programs at the instruction of their respective PSCs. The fair value of derivative energy contracts at June 30, 2002 is as follows: Second Quarter 2002 Year-to-Date Changes Changes ----------------------------------------------------------------------- Fair Value ------------------------------------------------------------------- (in thousands) Contracts beginning of period $32,314 $ 1,290 Contracts realized or settled (8,403) (9,511) New contracts at inception - - Changes in valuation techniques - - Current period changes 5,269 37,401 ----------------------------------------------------------------- Contracts at June 30, 2002 $29,180 $29,180 ================================================================= 17 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Source of June 30, 2002 Valuation Prices --------------------------------------------------------------------------- Maturity Total ----------------------------- Fair Value Year 1 1-3 Years ---------------------------------------------------------------------------- (in thousands) Actively quoted $29,180 $18,747 $10,433 External sources - - - Models and other methods - - - --------------------------------------------------------------------------- Contracts at June 30, 2002 $29,180 $18,747 $10,433 =========================================================================== Unrealized gains and losses from mark to market adjustments on contracts related to the PSC-approved fuel hedging programs are recorded as regulatory assets and liabilities. Realized gains and losses from these programs are included in fuel expense and are recovered through the operating companies' fuel cost recovery clauses. In addition, unrealized gains and losses on electric and gas contracts used to hedge anticipated purchases and sales are deferred in other comprehensive income. Gains and losses on contracts that do not represent hedges are recognized in the Statements of Income as incurred. At June 30, 2002, SOUTHERN had approximately $25.8 million in regulatory liabilities related to unrealized gains on mark to market derivative contracts associated with fuel hedging programs. For the quarters ended June 30, 2002 and 2001, approximately $3.7 million and $0.1 million, respectively, of gains were recognized in income. For the six months ended June 30, 2002 and 2001, approximately $6.1 million and $4.2 million, respectively, of losses were recognized in income. For additional information, reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Market Price Risk" of SOUTHERN in the Form 10-K, Note 1 to the financial statements of SOUTHERN in Item 8 of the Form 10-K and Note (N) in the "Notes to the Condensed Financial Statements" herein. Financing Activities In January 2002, GULF issued $45 million of Series E 6.00% Senior Notes due January 30, 2012. The proceeds from the sale were used by GULF to finance certain construction costs incurred in connection with Plant Smith Unit 3 and for general corporate purposes. Also, in January 2002, Southern Company Capital Funding, Inc. issued $400 million of Series A 5.30% Senior Notes due February 1, 2007 and $25 million of Series B Floating Rate Senior Notes due February 1, 2004, which are guaranteed by SOUTHERN. The proceeds from these sales were loaned to SOUTHERN and applied by SOUTHERN to repay a portion of its outstanding short-term indebtedness. In connection with the $400 million issuance, SOUTHERN entered into an interest rate swap to exchange 5.30% fixed for a floating 6-month LIBOR less 0.103%. Reference is made to Note (N) in the "Notes to the Condensed Financial Statements" herein for additional information relating to derivative instruments. In March 2002, MISSISSIPPI issued $80 million of Series D Floating Rate Senior Notes due March 12, 2004. The proceeds of the sale were used to repay $80 million of Series C Floating Rate Senior Notes due March 28, 2002. Also in March 2002, Mississippi Power Capital Trust II, a statutory business trust, sold $35 million of its 7.20% Trust Originated Preferred Securities, which are guaranteed by MISSISSIPPI, for the purpose of redeeming in May 2002 $35 million of Mississippi Power Capital Trust I 7.75% Trust Originated Preferred Securities. 18 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In June 2002, ALABAMA issued $350 million of Series P Floating Rate Senior Notes due December 29, 2002. The proceeds from the sale were used to redeem, in July 2002, $345.5 million aggregate principal amount of its First Mortgage Bonds, 7.75% Series due February 1, 2023, 7.45% Series due July 1, 2023 and 7.30% Series due November 1, 2023. In connection with the issuance, ALABAMA entered into interest rate swap agreements to fix the floating rate at 3.015%. Reference is made to Note (N) in the "Notes to the Condensed Financial Statements" herein for additional information relating to derivative instruments. In June 2002, Georgia Power Capital Trust V, a statutory business trust, sold $440 million of its 7?% Trust Preferred Securities, which are guaranteed by GEORGIA. The net proceeds from this issuance were used to repay a portion of GEORGIA's outstanding short-term indebtedness. In June 2002, Southern Power issued $575 million of 6.25% Senior Notes, Series A due July 15, 2012. The net proceeds were used to reduce outstanding indebtedness under a revolving credit agreement and to reduce loans from SOUTHERN. Southern Power also settled several interest rate swap agreements entered into in anticipation of this issuance for $16.9 million. This amount has been deferred in other comprehensive income and will be amortized to interest expense over the life of the senior notes. Reference is made to Note (N) in the "Notes to the Condensed Financial Statements" herein for additional information relating to derivative instruments. Also in June 2002, SOUTHERN entered into interest rate swaps related to the LIBOR component of its anticipated issuances of fixed rate commercial paper. The swaps fixed the 1-month LIBOR at an average 3.1975%. The swaps relate to $400 million notional commercial paper issuances through June 2003 and $200 million notional commercial paper issuances through June 2004. Reference is made to Note (N) in the "Notes to the Condensed Financial Statements" herein for additional information relating to derivative instruments. In July 2002, GEORGIA issued $300 million of Series J 4.875% Senior Notes due July 15, 2007. The net proceeds from this issuance were used to repay a portion of a $350 million bank loan. In anticipation of this issuance, GEORGIA entered into interest rate swaps related to the 5 year treasury rate. These swaps fixed the 5 year treasury rate at an average 4.018% on a $300 million notional amount. The swaps were settled prior to the actual senior note issuance for $(0.5) million. This amount will be amortized as a credit to interest expense over the life of the senior notes. Also in July 2002, Southern Company Capital Trust VI, a statutory business trust, sold $200 million of its 7.125% Trust Preferred Securities, which are guaranteed by SOUTHERN. The net proceeds will be used to redeem, in August 2002, the outstanding $200 million aggregate liquidation amount of Southern Company Capital Trust III 7.75% Cumulative Quarterly Income Preferred Securities. The market price of SOUTHERN's common stock at June 30, 2002 was $27.40 per share and the book value was $11.71 per share, representing a market-to-book ratio of 234%, compared to $25.35, $11.43 and 222%, respectively, at the end of 2001. The dividend for the second quarter 2002 was $0.3425 per share. 19 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Capital Requirements for Construction," "Other Capital Requirements" and "Environmental Matters" of SOUTHERN in the Form 10-K for a description of the SOUTHERN system's capital requirements for its construction program, sinking fund requirements, maturing debt and environmental compliance efforts. Approximately $1.6 billion will be required by June 30, 2003 for redemptions and maturities of long-term debt. Also, SOUTHERN and its subsidiaries plan to continue, to the extent possible, a program to retire higher-cost debt and replace these securities with lower-cost capital. Sources of Capital In addition to the financing activities previously described, SOUTHERN may require additional equity capital over the next several years. The amounts and timing of additional equity capital to be raised will be contingent on SOUTHERN's investment opportunities. The operating companies and Southern Power plan to obtain the funds required for construction and other purposes from sources similar to those used in the past, which were primarily from internal sources and by the issuances of new debt and preferred equity securities, term loans and short-term borrowings. However, 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, 2002 approximately $674.7 million of cash and cash equivalents and approximately $4.7 billion of unused credit arrangements with banks, of which $1.3 billion expire in 2002 and $3.4 billion expire in 2003 and beyond. These unused credit arrangements also provide liquidity support to variable rate pollution control bonds and commercial paper programs. The operating companies may also meet short-term cash needs through a SOUTHERN subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of each of the operating companies. At June 30, 2002, the SOUTHERN system had extendible commercial notes outstanding of $67 million, short-term notes payable outstanding of $409 million and commercial paper outstanding of $1.194 billion. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. PART I Item 3. Quantitative And Qualitative Disclosures About Market Risk. Reference is made herein to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Market Price Risk" for each registrant and Note 1 to the financial statements of each registrant in Item 8 of the Form 10-K. Reference is also made to Note (N) in the "Notes to the Condensed Financial Statements" herein for information relating to derivative instruments. 20 ALABAMA POWER COMPANY 21
ALABAMA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Six Months Ended June 30, Ended June 30, 2002 2001 2002 2001 ----------------------- -------------------- (in thousands) (in thousands) Operating Revenues: Retail sales $736,174 $712,507 $1,368,071 $1,347,279 Sales for resale -- Non-affiliates 119,540 122,484 214,163 232,946 Affiliates 42,497 44,990 97,174 120,123 Other revenues 26,132 23,886 47,184 53,521 --------- -------- ---------- ---------- Total operating revenues 924,343 903,867 1,726,592 1,753,869 --------- -------- ---------- ---------- Operating Expenses: Fuel 233,536 233,308 443,833 492,763 Purchased power -- Non-affiliates 20,413 41,691 36,184 76,000 Affiliates 41,913 51,023 74,643 87,009 Other 141,510 144,000 261,572 255,002 Maintenance 77,701 88,209 154,515 164,569 Depreciation and amortization 98,934 97,087 197,209 192,604 Taxes other than income taxes 54,103 54,335 111,603 111,681 --------- -------- ---------- ---------- Total operating expenses 668,110 709,653 1,279,559 1,379,628 --------- -------- ---------- ---------- Operating Income 256,233 194,214 447,033 374,241 Other Income (Expense): Interest income 3,190 3,116 6,352 6,956 Equity in earnings of subsidiaries 863 944 1,815 1,999 Other, net (2,455) (633) (11,965) (3,273) --------- -------- ---------- ---------- Earnings Before Interest and Income Taxes 257,831 197,641 443,235 379,923 --------- -------- ---------- ---------- Interest and Other: Interest expense, net 58,568 62,804 114,217 121,469 Distributions on preferred securities of subsidiary 5,995 6,214 12,014 12,570 --------- -------- ---------- ---------- Total interest and other, net 64,563 69,018 126,231 134,039 --------- -------- ---------- ---------- Earnings Before Income Taxes 193,268 128,623 317,004 245,884 Income taxes 73,884 49,305 121,424 92,915 --------- -------- ---------- ---------- Net Income Before Cumulative Effect of Accounting Change 119,384 79,318 195,580 152,969 Cumulative effect of accounting change -- less income taxes of $215 thousand - - - 353 --------- -------- ---------- ---------- Net Income 119,384 79,318 195,580 153,322 Dividends on Preferred Stock 3,671 3,890 7,327 7,942 --------- -------- ---------- ---------- Net Income After Dividends on Preferred Stock $ 115,713 $ 75,428 $ 188,253 $ 145,380 ========= ======== ========== ========== 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, 2002 2001 ------------ -------------- (in thousands) Operating Activities: Net income $ 195,580 $ 153,322 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 232,518 215,388 Deferred income taxes and investment tax credits, net (19,574) 25,070 Other, net 11,163 (59,034) Changes in certain current assets and liabilities -- Receivables, net (59,055) 56,338 Fossil fuel stock 13,166 (33,496) Materials and supplies 4,950 2,391 Accounts payable (60,648) (145,497) Energy cost recovery, retail 65,227 39,611 Other 12,515 (7,927) ----------- --------- Net cash provided from operating activities 395,842 246,166 ----------- --------- Investing Activities: Gross property additions (345,823) (443,294) Sales of Property - 102,068 Other (24,189) (22,296) --------- --------- Net cash used for investing activities (370,012) (363,522) ---------- --------- Financing Activities: Increase in notes payable, net 134,651 224,351 Proceeds -- Common stock - 15,642 Other long-term debt 350,000 10,000 Capital contributions from parent company 2,396 84,366 Redemptions -- First mortgage bonds (4,498) (7,484) Other long-term debt (1,274) (2,232) Payment of preferred stock dividends (7,219) (7,590) Payment of common stock dividends (215,500) (198,800) Other 4,959 (11) ---------- ---------- Net cash provided from financing activities 263,515 118,242 ---------- ---------- Net Increase in Cash and Cash Equivalents 289,345 886 Cash and Cash Equivalents at Beginning of Period 35,756 14,247 ---------- ---------- Cash and Cash Equivalents at End of Period $ 325,101 $ 15,133 ========== ========== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $86,015 $121,607 Income taxes (net of refunds) $121,615 $69,526 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 (UNAUDITED) At June 30, At December 31, Assets 2002 2001 ------ ---------------- -------------------- (in thousands) Current Assets: Cash and cash equivalents $ 325,101 $ 35,756 Receivables -- Customer accounts receivable 353,663 281,985 Under recovered retail fuel clause revenue 18,271 83,497 Other accounts and notes receivable 49,076 49,940 Affiliated companies 60,256 72,639 Accumulated provision for uncollectible accounts (4,614) (5,237) Fossil fuel stock, at average cost 86,112 99,278 Materials and supplies, at average cost 186,374 191,324 Other 125,011 74,640 ------------ ----------- Total current assets 1,199,250 883,822 ----------- ----------- Property, Plant, and Equipment: In service 13,431,972 13,159,560 Less accumulated provision for depreciation 5,477,045 5,309,557 ----------- ----------- 7,954,927 7,850,003 Nuclear fuel, at amortized cost 83,330 88,777 Construction work in progress 387,503 357,906 ----------- ----------- Total property, plant, and equipment 8,425,760 8,296,686 ----------- ----------- Other Property and Investments: Equity investments in subsidiaries 44,395 44,483 Nuclear decommissioning trusts 322,030 317,508 Other 17,161 12,503 ----------- ----------- Total other property and investments 383,586 374,494 ----------- ----------- Deferred Charges and Other Assets: Deferred charges related to income taxes 330,370 334,830 Prepaid pension costs 359,559 329,259 Debt expense, being amortized 7,905 8,150 Premium on reacquired debt, being amortized 73,157 77,173 Department of Energy assessments 21,015 21,015 Other 109,472 108,031 ----------- ----------- Total deferred charges and other assets 901,478 878,458 ----------- ----------- Total Assets $10,910,074 $10,433,460 =========== =========== 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 (UNAUDITED) At June 30, At December 31, Liabilities and Stockholder's Equity 2002 2001 ------------------------------------ ------------------- -------------------- (in thousands) Current Liabilities: Securities due within one year $ 763,427 $ 5,382 Notes payable 144,648 9,996 Accounts payable -- Affiliated 111,202 98,268 Other 78,636 151,705 Customer deposits 44,719 42,124 Taxes accrued -- Income taxes 128,555 113,003 Other 57,095 19,023 Interest accrued 63,186 35,522 Vacation pay accrued 32,324 32,324 Other 69,741 93,589 ----------- ----------- Total current liabilities 1,493,533 600,936 ----------- ----------- Long-term debt 3,329,591 3,742,346 ----------- ----------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 1,375,765 1,387,661 Deferred credits related to income taxes 194,262 202,881 Accumulated deferred investment tax credits 232,751 238,225 Employee benefits provisions 126,857 115,078 Prepaid capacity revenues 37,422 40,730 Other 169,916 130,214 ----------- ----------- Total deferred credits and other liabilities 2,136,973 2,114,789 ----------- ----------- 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 Par value 240,000 240,000 Paid-in capital 1,853,073 1,850,676 Premium on preferred stock 99 99 Retained earnings 1,192,807 1,220,102 Accumulated other comprehensive income (514) - ----------- ----------- Total common stockholder's equity 3,285,465 3,310,877 ----------- ----------- Total Liabilities and Stockholder's Equity $10,910,074 $10,433,460 =========== =========== 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 COMPREHENSIVE INCOME (UNAUDITED) For the Three Months For the Six Months Ended June 30, Ended June 30, 2002 2001 2002 2001 ----------------------- ------------------------ (in thousands) (in thousands) Net Income After Dividends on Preferred Stock $115,713 $75,428 $188,253 $145,380 Other comprehensive income: Changes in fair value of qualifying hedges, net of tax of $312 and $312, respectively (514) - (514) - -------- ------- --------- -------- COMPREHENSIVE INCOME $115,199 $75,428 $187,739 $145,380 ======== ======= ======== ========
------------------------------------------------------------------------------------------------------------------------------ ALABAMA POWER COMPANY CONDENSED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (UNAUDITED) At June 30, At December 31, 2002 2001 ------------- ---------------- (in thousands) Balance at beginning of period $ - $ - Change in current period (514) - ------ ----- BALANCE AT END OF PERIOD $ (514) $ - ====== ====== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
26 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2002 vs. SECOND QUARTER 2001 AND YEAR-TO-DATE 2002 vs. YEAR-TO-DATE 2001 RESULTS OF OPERATIONS Earnings ALABAMA's net income after dividends on preferred stock for the second quarter 2002 and year-to-date 2002 was $115.7 million and $188.3 million, respectively, compared to $75.4 million and $145.4 million for the corresponding periods of 2001. The increase in earnings for both periods is primarily attributable to increased territorial sales and retail rates when compared to the corresponding periods in the prior year. More favorable weather conditions in the second quarter 2002 as compared to the unusually mild weather experienced in the comparable period in 2001 contributed to these increases in territorial sales. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) ---------------------------------------------------------- Second Quarter Year-To-Date ---------------------------------------------------------- (in thousands) % (in thousands) % Retail sales $ 23,667 3.3 $ 20,792 1.5 Sales for resale - non-affiliates (2,944) (2.4) (18,783) (8.1) Sales for resale - affiliates (2,493) (5.5) (22,949) (19.1) Other revenues 2,246 9.4 (6,337) (11.8) Fuel expense 228 0.1 (48,930) (9.9) Purchased power - non-affiliates (21,278) (51.1) (39,816) (52.4) Purchased power - affiliates (9,110) (17.9) (12,366) (14.2) Maintenance expense (10,508) (11.9) (10,054) (6.1) Other, net (1,822) (287.8) (8,692) (265.6) Interest expense, net (4,236) (6.7) (7,252) (6.0) ----------------------------------------------------------
Retail sales. Excluding energy cost recovery revenues, which generally do not affect net income, retail sales revenue was higher by $49.3 million, or 9.6%, for the second quarter 2002 and $75.8 million, or 7.9%, year-to-date 2002 when compared to the corresponding periods in 2001. Energy sales to residential and commercial customers increased by 5.5% and 4.6% and by 4.5% and 2.6%, respectively, for the second quarter 2002 and year-to-date 2002 as compared to the corresponding periods of 2001 due primarily to more favorable weather conditions in 2002. Energy sales to industrial customers increased only slightly when compared to the previous reporting periods due to the continuing effect of less than favorable economic conditions. Sales for resale - non-affiliates. For both reporting periods above, the demand for energy by non-affiliates was lower when compared to the same periods in 2001. 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 depending on demand and the availability 27 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION and cost of generating resources at each company. These transactions did not have a significant impact on earnings. Other revenues. During the second quarter 2002, other revenues increased primarily due to an increase in revenue associated with transmission of electricity and an increase in rent from electric property when compared to the same period in 2001. However, for year-to-date 2002, other revenues decreased because revenues from gas-fueled cogeneration steam facilities were lower when compared to the same period in 2001 due primarily to lower gas prices and lower demand. Since cogeneration steam revenues are generally offset by fuel expenses, these revenues did not have a significant impact on earnings. Fuel expense. Fuel expense for the second quarter 2002 remained relatively unchanged as compared to the corresponding quarter in 2001; however, such expense decreased year-to-date 2002 as compared to year-to-date 2001 due mainly to the lower price of natural gas in the first quarter 2002. Since energy expenses are generally offset by energy revenues, these expenses did not have a significant impact on earnings. Purchased power - non-affiliates. In the second quarter 2002 and year-to-date 2002, purchased power from non-affiliates when compared to the corresponding periods in 2001 decreased due to lower 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 through ALABAMA's energy cost recovery clause. Maintenance expense. Maintenance expense decreased during the second quarter 2002 and year-to-date 2002 primarily as a result of decreased maintenance of overhead lines when compared to the corresponding periods of 2001. Other, net. The decrease during the second quarter 2002 when compared to the same period in 2001 was primarily due to a decrease in merchandise net income in 2002 and a gain on disposition of property recognized in 2001. The year-to-date 2002 amount decreased from 2001 primarily due to a reduction in Allowance for Funds Used During Construction reflecting the commercial operation of Plant Barry Unit 7 in May 2001 and an increase in non-utility expenses. Interest expense, net. The decreases in this expense for the second quarter 2002 and for year-to-date 2002 as compared to the corresponding periods in 2001 primarily resulted from decreases in interest on long-term debt and notes payable mainly due to lower interest rates. 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. 28 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be recovered. For additional information about the Clean Air Act and other environmental issues, including the EPA litigation, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of ALABAMA in the Form 10-K. On July 30, 2002, the U. S. District Court in Alabama extended the stay of the proceeding in Alabama through late October 2002. On April 25, 2002, the Stakeholder Advisory Committee met and selected the candidates that will be considered for the SeTrans ISA. On June 27, 2002, SOUTHERN and other SeTrans sponsors submitted a Petition for Declaratory Order seeking the FERC's guidance on various issues. The petition asks for a response from the FERC by October 2002. Reference is made to Item 1 - BUSINESS - "Certain Factors Affecting the Industry" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Industry Restructuring" of ALABAMA in the Form 10-K for additional information. On July 31, 2002, the FERC issued a notice of proposed rulemaking entitled "Remedying Undue Discrimination Through Open Access Transmission Service and Standard Electricity Market Design." The FERC has indicated that the proposal, if adopted, would (among other things): (i) require transmission assets of jurisdictional utilities to be operated by an independent entity; (ii) establish a standard market design; (iii) establish a single type of transmission service that applies to all customers; (iv) assert jurisdiction over the transmission component of bundled retail service; (v) establish a generation reserve margin; (vi) establish bid caps for day-ahead and spot energy markets; and (vii) revise the FERC policy on the pricing of transmission expansions. Comments on the proposal are due 75 days after its issuance. Any impact of this proposal on SOUTHERN and its subsidiaries will depend on the form in which final rules may be ultimately adopted. Reference is made to Notes (C) through (E), (G) 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. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. Accounting Policies Critical Policy ALABAMA's significant accounting policies are described in Note 1 to the financial statements of ALABAMA in Item 8 of the Form 10-K. ALABAMA's only critical accounting policy involves rate regulation. ALABAMA is 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 ALABAMA's operations is no longer subject to these provisions, ALABAMA 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. New Accounting Standards Effective January 1, 2001, ALABAMA adopted FASB Statement No. 133, "Accounting for Derivatives and Hedging Activities," as amended, and changed the method of accounting for derivative instruments. Derivatives are now reflected on the Condensed Balance Sheet as either an asset or liability measured at fair market value, and the changes in the fair value are currently recognized in earnings unless specific hedge accounting criteria are met. Reference is made to "Exposure to Market Risks" below and Note (N) in the "Notes to the Condensed Financial Statements" herein for information relating to derivative instruments. 29 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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 liability for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be 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 January 1, 2003. ALABAMA is currently assessing the impact of adopting Statement No. 143 on its financial statements. Reference is made to Note 1 to the financial statements of ALABAMA 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 2002 included the addition of approximately $346 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities. See ALABAMA's Condensed Statements of Cash Flows for further details. Credit Rating Risk ALABAMA does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. Exposure to Market Risks ALABAMA's market risk exposures relative to interest rate changes have not changed materially compared with the December 31, 2001 reporting period. In addition, ALABAMA is not aware of any facts or circumstances that would significantly affect such exposures in the near term. Due to cost-based rate regulations, ALABAMA has limited exposure to market volatility in interest rates, commodity fuel prices and prices of electricity. To mitigate residual risks relative to movements in electricity prices, ALABAMA enters into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. ALABAMA has also 30 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION implemented a retail fuel hedging program at the instruction of its PSC. The fair value of derivative energy contracts at June 30, 2002 is as follows: Second Quarter 2002 Year-to-Date Changes Changes ------------------------------------------------------------------------- Fair Value ------------------------------------------------------------------------- (in thousands) Contracts beginning of period $23,311 $ 214 Contracts realized or settled (4,646) (7,069) New contracts at inception - - Changes in valuation techniques - - Current period changes (110) 25,410 ------------------------------------------------------------------------- Contracts at June 30, 2002 $18,555 $18,555 ========================================================================= Source of June 30, 2002 Valuation Prices ------------------------------------------------------------------------- Maturity Total ------------------------------ Fair Value Year 1 1-3 Years ------------------------------------------------------------------------- (in thousands) Actively quoted $18,555 $13,716 $4,839 External sources - - - Models and other methods - - - ------------------------------------------------------------------------- Contracts at June 30, 2002 $18,555 $13,716 $4,839 ========================================================================= Unrealized gains and losses from mark to market adjustments on contracts related to the retail fuel hedging programs are recorded as regulatory assets and liabilities. At June 30, 2002, ALABAMA had approximately $18.9 million in regulatory liabilities related to unrealized gains on mark to market derivative contracts associated with its fuel hedging programs. Realized gains and losses from these programs are included in fuel expense and are recovered through ALABAMA's fuel cost recovery clause. Gains and losses on contracts that do not represent hedges are recognized in the Statements of Income as incurred. For the quarters ended June 30, 2002 and 2001, approximately $1.0 million and $(0.2) million, respectively, of gains (losses) were recognized in income. For the six months ended June 30, 2002 and 2001, approximately $2.4 million and $2.7 million, respectively, of losses were recognized in income. For additional information, reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Exposure to Market Risk" of ALABAMA in the Form 10-K and Note 1 to the financial statements of ALABAMA in Item 8 of the Form 10-K and to Note (N) in the "Notes to the Condensed Financial Statements" herein. 31 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Financing Activities In June 2002, ALABAMA issued $350 million of Series P Floating Rate Senior Notes due December 29, 2003. The proceeds from the sale were used to redeem, in July 2002, $345.5 million aggregate principal amount of its First Mortgage Bonds, 7.75% Series due February 1, 2023, 7.45% Series due July 1, 2023 and 7.30% Series due November 1, 2023. At the time of the issuance of these Senior Notes, ALABAMA entered into interest rate swap agreements to fix the floating rate at 3.015%. Reference is made to Note (N) in the "Notes to the Condensed Financial Statements" herein for additional information relating to derivative instruments. ALABAMA plans to continue, when economically feasible, a program to retire higher-cost debt and preferred stock and replace these obligations with lower-cost capital if market conditions permit. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of ALABAMA under "Capital Requirements," "Other Capital Requirements" and "Environmental Matters" in the Form 10-K for a description of ALABAMA's capital requirements for its construction program, maturing debt and environmental compliance efforts. Sources of Capital In addition to the financing activities previously described herein, ALABAMA plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings -- if needed -- will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, ALABAMA had at June 30, 2002 approximately $325 million of cash and cash equivalents, unused committed lines of credit of approximately $916 million (including $454 million of such lines which are dedicated to funding purchase obligations relating to variable rate pollution control bonds) and an extendible commercial note program. Of these lines of credit, unless extended, $75 million expire at various times during 2002, $451 million expire in 2003 and $390 million expire in 2004. ALABAMA may also meet short-term cash needs through a SOUTHERN subsidiary organized to issue and sell commercial paper and extendible commercial notes at the request and for the benefit of ALABAMA and other SOUTHERN subsidiaries. ALABAMA has regulatory authority for up to $1.0 billion of short-term borrowings. At June 30, 2002, ALABAMA had outstanding $130 million of commercial paper and $15 million in notes payable to banks. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 32 GEORGIA POWER COMPANY 33
GEORGIA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Six Months Ended June 30, Ended June 30, 2002 2001 2002 2001 ------------------------ ------------------------ (in thousands) (in thousands) Operating Revenues: Retail sales $1,062,070 $1,093,733 $1,966,984 $2,042,878 Sales for resale -- Non-affiliates 72,322 92,760 122,372 180,351 Affiliates 25,282 35,281 41,789 71,058 Other revenues 44,811 37,509 80,103 73,025 ---------- ---------- ---------- ---------- Total operating revenues 1,204,485 1,259,283 2,211,248 2,367,312 ---------- ---------- ---------- ---------- Operating Expenses: Fuel 255,792 252,438 483,169 481,130 Purchased power -- Non-affiliates 65,280 118,991 103,070 173,096 Affiliates 98,716 73,285 157,496 152,580 Other 204,694 196,528 378,514 372,102 Maintenance 108,461 104,941 212,315 211,606 Depreciation and amortization 101,206 139,679 197,003 303,928 Taxes other than income taxes 49,857 51,747 99,432 101,848 ---------- ---------- ---------- ---------- Total operating expenses 884,006 937,609 1,630,999 1,796,290 ---------- ---------- ---------- ---------- Operating Income 320,479 321,674 580,249 571,022 Other Income (Expense): Interest income 378 1,206 879 1,808 Equity in earnings of subsidiaries 917 947 1,888 1,956 Other, net 7,224 8,210 3,391 (156) ---------- ---------- ---------- ---------- Earnings Before Interest and Income Taxes 328,998 332,037 586,407 574,630 ---------- ---------- ---------- ---------- Interest Charges and Other: Interest expense, net 41,453 50,290 82,048 101,189 Distributions on preferred securities of subsidiaries 15,647 14,776 30,423 29,552 ---------- ---------- ---------- ---------- Total interest charges and other, net 57,100 65,066 112,471 130,741 ---------- ---------- ---------- ---------- Earnings Before Income Taxes 271,898 266,971 473,936 443,889 Income taxes 100,933 103,698 176,058 173,031 ---------- ---------- ---------- ---------- Net Income Before Cumulative Effect of Accounting Change 170,965 163,273 297,878 270,858 Cumulative effect of accounting change -- less income taxes of $162 thousand - - - 257 ---------- ---------- ---------- ---------- Net Income 170,965 163,273 297,878 271,115 Dividends on Preferred Stock 167 167 335 335 ---------- ---------- ---------- ---------- Net Income After Dividends on Preferred Stock $ 170,798 $ 163,106 $ 297,543 $ 270,780 ========== ========== =========== ========== The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
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GEORGIA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six Months Ended June 30, 2002 2001 ------------- ----------- (in thousands) Operating Activities: Net income $ 297,878 $ 271,115 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 195,235 341,607 Deferred income taxes and investment tax credits, net 22,448 (68,186) Other, net (11,423) (492) Changes in certain current assets and liabilities -- Receivables, net 19,444 43,215 Fossil fuel stock 19,988 (101,637) Materials and supplies 7,625 385 Accounts payable (75,937) (110,312) Energy cost recovery, retail 36,873 12,386 Other 43,250 92,336 --------- --------- Net cash provided from operating activities 555,381 480,417 --------- --------- Investing Activities: Gross property additions (434,403) (740,218) Sales of property 387,212 - Other (54,351) (43,712) --------- --------- Net cash used for investing activities (101,542) (783,930) ---------- --------- Financing Activities: Increase in notes payable, net 85,407 93,568 Proceeds -- Senior notes - 600,000 Preferred securities 440,000 - Capital contributions from parent company 5,397 200,433 Retirements -- First mortgage bonds (1,860) (332,040) Pollution control bonds (7,800) - Senior notes (300,000) - Capital distributions to parent company (200,000) - Payment of preferred stock dividends (344) (240) Payment of common stock dividends (271,450) (265,400) Other (15,276) (7,111) --------- --------- Net cash provided from (used for) financing activities (265,926) 289,210 --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents 187,913 (14,303) Cash and Cash Equivalents at Beginning of Period 23,260 29,370 --------- --------- Cash and Cash Equivalents at End of Period $ 211,173 $ 15,067 ========= ========= Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $79,084 $100,945 Income taxes (net of refunds) $95,482 $140,690 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 (UNAUDITED) At June 30, At December 31, Assets 2002 2001 ------ ------------------- -------------------- (in thousands) Current Assets: Cash and cash equivalents $ 211,173 $ 23,260 Receivables -- Customer accounts receivable 425,764 376,322 Under recovered retail fuel clause revenue 124,589 161,462 Other accounts and notes receivable 91,783 129,073 Affiliated companies 29,809 69,355 Accumulated provision for uncollectible accounts (6,442) (8,895) Fossil fuel stock, at average cost 182,770 202,759 Materials and supplies, at average cost 271,613 279,237 Other 89,843 125,246 ----------- ----------- Total current assets 1,420,902 1,357,819 ----------- ----------- Property, Plant, and Equipment: In service 17,108,341 16,886,399 Less accumulated provision for depreciation 7,348,515 7,243,209 ----------- ----------- 9,759,826 9,643,190 Nuclear fuel, at amortized cost 119,578 112,771 Construction work in progress 590,576 883,285 ----------- ----------- Property, plant, and equipment 10,469,980 10,639,246 ----------- ----------- Other Property and Investments: Equity investments in subsidiaries 35,016 35,209 Nuclear decommissioning trusts 358,821 364,180 Other 30,904 29,618 ----------- ----------- Total other property and investments 424,741 429,007 ----------- ----------- Deferred Charges and Other Assets: Deferred charges related to income taxes 533,871 543,584 Prepaid pension costs 307,755 273,405 Debt expense, being amortized 71,367 58,165 Premium on reacquired debt, being amortized 167,971 173,724 Other 161,931 136,137 ----------- ----------- Total deferred charges and other assets 1,242,895 1,185,015 ----------- ----------- Total Assets $13,558,518 $13,611,087 =========== =========== 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 (UNAUDITED) At June 30, At December 31, Liabilities and Stockholder's Equity 2002 2001 ------------------------------------ ------------------- -------------------- (in thousands) Current Liabilities: Securities due within one year $ 766,293 $ 311,620 Notes payable 832,944 747,537 Accounts payable -- Affiliated 117,089 109,591 Other 295,580 409,253 Customer deposits 89,193 83,172 Taxes accrued -- Income taxes 93,375 35,247 Other 94,231 125,807 Interest accrued 73,836 46,942 Vacation pay accrued 41,391 41,830 Other 96,149 120,980 ----------- ----------- Total current liabilities 2,500,081 2,031,979 ----------- ----------- Long-term debt 2,196,422 2,961,726 ----------- ----------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 2,162,674 2,163,959 Deferred credits related to income taxes 221,014 229,216 Accumulated deferred investment tax credits 331,238 337,482 Employee benefits provisions 251,758 244,648 Other 422,346 440,773 ----------- ----------- Total deferred credits and other liabilities 3,389,030 3,416,078 ----------- ----------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding company junior subordinated notes 1,229,250 789,250 ----------- ----------- 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 1,987,954 2,182,557 Premium on preferred stock 40 40 Retained earnings 1,896,885 1,870,791 Accumulated other comprehensive income 37 (153) ----------- ----------- Total common stockholder's equity 4,229,166 4,397,485 ----------- ----------- Total Liabilities and Stockholder's Equity $13,558,518 $13,611,087 =========== =========== 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, ---------------------- ---------------------- 2002 2001 2002 2001 ------ ------ ------ ----- (in thousands) (in thousands) Net Income After Dividends on Preferred Stock $170,798 $163,106 $297,543 $270,780 Other comprehensive income: Cumulative effect of accounting change for qualifying hedges, net of tax of $180 - - - 286 Changes in fair value of qualifying hedges, net of tax of $(37), $(297), $120, $(61),respectively (58) (479) 190 27 -------- -------- -------- -------- COMPREHENSIVE INCOME $170,740 $162,627 $297,733 $271,093 ======== ======== ======== ======== _________________________________________________________________________________________________________________________________
GEORGIA POWER COMPANY CONDENSED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (UNAUDITED) At June 30, At December 31, 2002 2001 ------------- ---------------- (in thousands) Balance at beginning of period $(153) $ - Change in current period 190 (153) ----- ------ BALANCE AT END OF PERIOD $ 37 $ (153) ===== ====== ________________________________________________________________________________________________________________________________ The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
38 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2002 vs. SECOND QUARTER 2001 AND YEAR-TO-DATE 2002 vs. YEAR-TO-DATE 2001 RESULTS OF OPERATIONS Earnings GEORGIA's net income after dividends on preferred stock for the second quarter and year-to-date 2002 was $170.8 million and $297.5 million, respectively, compared to $163.1 million and $270.8 million for the corresponding periods in 2001. Earnings increased by $7.7 million, or 4.7%, for the second quarter 2002 and $26.8 million, or 9.9%, year-to-date 2002 when compared to the same periods in 2001 primarily due to elimination of accelerated depreciation under the 2001 retail rate order and, to a lesser extent, reductions in interest expense. (Reference is made to Note (H) in the "Notes to Condensed Financial Statements" herein for additional information.) Significant income statement items appropriate for discussion include the following:
Increase (Decrease) ----------------------------------------------------------------- Second Quarter Year-To-Date ----------------------------------------------------------------- (in thousands) % (in thousands) % Retail sales $ (31,663) (2.9) $ (75,894) (3.7) Sales for resale - non-affiliates (20,438) (22.0) (57,979) (32.1) Sales for resale - affiliates (9,999) (28.3) (29,269) (41.2) Purchased power - non-affiliates (53,711) (45.1) (70,026) (40.5) Purchased power - affiliates 25,431 34.7 4,916 3.2 Depreciation and amortization (38,473) (27.5) (106,925) (35.2) Interest expense, net (8,837) (17.6) (19,141) (18.9) -----------------------------------------------------------------
Retail sales. Excluding fuel revenues, which generally do not affect net income, retail sales revenue decreased in the second quarter 2002 by $15.1 million, or 1.9%, and year-to-date 2002 by $59.8, or 4.1%, when compared to the corresponding periods in 2001. The decreases for both periods are primarily due to a rate decrease pursuant to the new retail rate order effective January 1, 2002. (Reference is made to Note (H) in the "Notes to Condensed Financial Statements" herein for additional information.) The effect of the rate decrease in the second quarter 2002 and year-to-date 2002 was approximately $25.5 million and $55.1 million, respectively. While total retail revenues for the two periods resulted in decreases as compared to the corresponding periods in 2001, residential revenues increased 5.8% for the second quarter 2002 and 3.9% year-to-date 2002 due to increased usage because of warmer weather and an increase in the number of customers. For the second quarter and year-to-date 2002, revenues from commercial customers were down by 5.6% and 3.4%, and revenues from industrial customers were down by 9.7% and 13.6%, respectively. The sluggish economy continues to be a major factor affecting sales to commercial and industrial customers. Sales for resale - non-affiliates. In the second quarter 2002 and year-to-date 2002, sales for resale to non-affiliates decreased in part as a direct result of reduced energy sales to these customers. These transactions did not have a significant impact on earnings since the energy is usually sold at variable cost. The transfer of Plant Dahlberg to Southern Power on July 31, 2001 also resulted in lower sales in 2002. 39 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Sales for resale - affiliates. Revenues from sales for resale to affiliated companies within the SOUTHERN system will vary depending on demand and the availability and cost of generating resources at each company. These transactions did not have a significant impact on earnings. Purchased power - non-affiliates. During the second quarter 2002 and year-to-date 2002, these purchases were lower when compared to the same periods in 2001 primarily due to reduced demand for energy from non-affiliates. In 2001, these expenses were also higher due to decreased hydro generation and higher natural gas and oil prices. These expenses do not have a significant impact on earnings since energy expenses are generally offset by energy revenues through GEORGIA's fuel cost recovery clause. Purchased power - affiliates. Expenses for purchased power from affiliated companies within the SOUTHERN system will also vary depending on demand and the availability and cost of generating resources at each company. In addition, GEORGIA also entered into power purchase agreements with Southern Power beginning in June 2002. The energy component of these transactions will have no significant impact on earnings since energy expenses are generally offset by energy revenues through GEORGIA's fuel cost recovery clause. The capacity component of these transactions, however, will result in higher expenses in future periods. Depreciation and amortization. Depreciation and amortization decreased in the second quarter 2002 and year-to-date 2002 primarily as a result of discontinuing accelerated depreciation and beginning amortization of the regulatory liability for accelerated cost recovery in January 2002 in accordance with the new retail rate order. Reference is made to Note (H) in the "Notes to the Condensed Financial Statements" herein. Interest expense, net. The decrease in this item during the second quarter 2002 and year-to-date 2002 from the comparable periods in 2001 is primarily due to a reduction in interest rates and the accrual of interest on accelerated amortization in 2001 under the prior retail rate order, which ceased effective January 1, 2002. 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. GEORGIA has entered into power purchase agreements which will result in higher capacity and operating and maintenance payments beginning in June 2002. Under the new retail rate order effective January 1, 2002, these costs will be reflected in rates evenly over the next three years. 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. In January 2002, GEORGIA began operating under a new three-year retail rate order. Under the terms of the order, earnings will be evaluated annually against a retail return on common equity range of 10 percent to 12.95 percent. Two-thirds of any earnings above the 12.95 percent return will be applied to rate refunds, with the remaining one-third retained by GEORGIA. Retail rates were decreased by $118 million effective January 1, 2002. Reference is made to Note (H) in the "Notes to the Condensed Financial Statements" herein and Item 40 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form 10-K for additional information. In January 2002, GEORGIA transferred ownership of two units at Plant Wansley with a net book value of $389.9 million to Southern Power, an affiliated company. On April 25, 2002, the Stakeholder Advisory Committee met and selected the candidates that will be considered for the SeTrans ISA. On June 27, 2002, SOUTHERN and other SeTrans sponsors submitted a Petition for Declaratory Order seeking the FERC's guidance on various issues. The petition asks for a response from the FERC by October 2002. Reference is made to Item 1 - BUSINESS - "Certain Factors Affecting the Industry" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Industry Restructuring" of GEORGIA in the Form 10-K for additional information. On July 31, 2002, the FERC issued a notice of proposed rulemaking entitled "Remedying Undue Discrimination Through Open Access Transmission Service and Standard Electricity Market Design." The FERC has indicated that the proposal, if adopted, would (among other things): (i) require transmission assets of jurisdictional utilities to be operated by an independent entity; (ii) establish a standard market design; (iii) establish a single type of transmission service that applies to all customers; (iv) assert jurisdiction over the transmission component of bundled retail service; (v) establish a generation reserve margin; (vi) establish bid caps for day-ahead and spot energy markets; and (vii) revise the FERC policy on the pricing of transmission expansions. Comments on the proposal are due 75 days after its issuance. Any impact of this proposal on SOUTHERN and its subsidiaries will depend on the form in which final rules may be ultimately adopted. Compliance costs related to the Clean Air Act and other environmental issues could affect earnings if such costs cannot be recovered. For additional information, including information on the EPA litigation, see Item 7 - MANAGEMENT'S DISCUSSION AND Analysis - "Environmental Issues" of GEORGIA and Note 3 to the financial statements of GEORGIA in Item 8 of the Form 10-K. Reference is made to Notes (C) through (E) and (I) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. Reference is also made to Note (E) in the "Notes to the Condensed Financial Statements" for information relating to certain lawsuits regarding the installation of fiber optic cable over GEORGIA's existing easements. Accounting Policies Critical Policy GEORGIA's significant accounting policies are described in Note 1 to the financial statements of GEORGIA in Item 8 of the Form 10-K. GEORGIA's only critical accounting policy involves rate regulation. GEORGIA is 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 GEORGIA's operations is no longer subject to these provisions, GEORGIA would be required to write off related regulatory assets and liabilities that are not specifically recoverable and determine if any other assets, including plant, have been impaired. 41 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION New Accounting Standards Effective January 1, 2001, GEORGIA adopted FASB Statement No. 133, "Accounting for Derivatives and Hedging Activities," as amended, and changed the method of accounting for derivative instruments. Derivatives are now reflected on the Condensed Balance Sheet as either an asset or liability measured at fair market value, and the changes in the fair value are currently recognized in earnings unless specific hedge accounting criteria are met. Reference is made to "Exposure to Market Risks" below for information relating to derivative instruments. 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 liability for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be 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 January 1, 2003. GEORGIA is currently assessing the impact of adopting Statement No. 143 on its financial statements. Reference is made to Note 1 to the financial statements of GEORGIA under "Depreciation and Nuclear Decommissioning" in Item 8 of the Form 10-K. FINANCIAL CONDITION Overview The major changes in GEORGIA's financial condition during the first six months of 2002 were the sale of two units at Plant Wansley to Southern Power and the addition of approximately $434.4 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations. See GEORGIA's Condensed Statements of Cash Flows for further details. Credit Rating Risk GEORGIA does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain physical electricity sale contracts that could require collateral -- but not termination -- in the event of a credit rating change to below investment grade. Generally, collateral may be provided for by a SOUTHERN guaranty, letter of credit or cash. At June 30, 2002, the maximum potential collateral requirements were approximately $230 million. Exposure to Market Risks GEORGIA's market risk exposures relative to interest rate changes have not changed materially compared with the previous reporting period, December 31, 2001. In addition, GEORGIA is not aware of any facts or circumstances that would significantly affect such exposures in the near term. Due to cost-based rate regulations, GEORGIA has limited exposure to market volatility in interest rates, commodity fuel prices and prices of electricity. To mitigate residual risks relative to movements in electricity prices, GEORGIA enters into fixed price contracts for the purchase and sale of electricity through the wholesale 42 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION electricity market and, to a lesser extent, similar contracts for gas purchases. The fair value of derivative energy contracts at June 30, 2002 is as follows: Second Quarter 2002 Year-to-Date Changes Changes ---------------------------------------------------------------------------- Fair Value ----------------------------------------------------------------------------- (in thousands) Contracts beginning of period $(1,660) $ 362 Contracts realized or settled 150 275 New contracts at inception - - Changes in valuation techniques - - Current period changes 1,113 (1,034) ---------------------------------------------------------------------------- Contracts at June 30, 2002 $ (397) $ (397) ============================================================================ Source of June 30, 2002 Valuation Prices -------------------------------------------------------------------------- Maturity Total ------------------------------- Fair Value Year 1 1-3 Years -------------------------------------------------------------------------- (in thousands) Actively quoted $(397) $(407) $10 External sources - - Models and other methods - - - --------------------------------------------------------------------------- Contracts at June 30, 2002 $(397) $(407) $10 =========================================================================== Realized gains and losses are recognized in the Statements of Income as incurred. For the quarters ended June 30, 2002 and 2001, approximately $1.3 million and $0.3 million, respectively, of gains were recognized in income. For the six months ended June 30, 2002 and 2001, approximately $1.2 million and $0.2 million, respectively, of losses were recognized in income. For additional information, reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Exposure to Market Risks" of GEORGIA in the Form 10-K and Note 1 to the financial statements of GEORGIA in Item 8 of the Form 10-K. Financing Activities In June 2002, Georgia Power Capital Trust V, a statutory business trust, sold $440 million of its 7?% Trust Preferred Securities, which are guaranteed by GEORGIA. The net proceeds from this issuance were used to repay a portion of GEORGIA's outstanding short-term indebtedness. In July 2002, GEORGIA issued $300 million of Series J 4.875% Senior Notes due July 15, 2007. The net proceeds from this issuance were used to prepay a portion of a $350 million bank loan. In anticipation of this issuance, GEORGIA entered into interest rate swaps related to the 5 year treasury rate. These swaps fixed the 5 year treasury rate at an average 4.018% on a $300 million notional amount. The swaps were settled prior to the actual senior note issuance for $(0.5) million. This amount will be amortized as a credit to interest expense over the life of the senior notes. 43 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GEORGIA plans to continue, when economically feasible, a program to retire higher-cost debt and replace these obligations with lower-cost capital if market conditions permit. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GEORGIA under "Liquidity and Capital Requirements," "Other Capital Requirements" and "Environmental Issues" in the Form 10-K for a description of GEORGIA's capital requirements for its construction program, maturing debt and environmental compliance efforts. Sources of Capital 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, 2002 approximately $211.2 million of cash and cash equivalents and approximately $1.765 billion of unused credit arrangements with banks, of which $90 million expire in 2002 and $1.675 billion expire in 2003. 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 and extendible commercial notes at the request and for the benefit of GEORGIA and other SOUTHERN subsidiaries. At June 30, 2002, GEORGIA had outstanding $832.9 million of notes payable. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 44 GULF POWER COMPANY 45
GULF POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Six Months Ended June 30, Ended June 30, 2002 2001 2002 2001 --------- ------------ -------- ----------- (in thousands) (in thousands) Operating Revenues: Retail sales $172,781 $143,415 $306,275 $272,245 Sales for resale -- Non-affiliates 18,684 20,297 36,118 40,444 Affiliates 7,514 9,056 10,095 17,666 Other revenues 11,008 7,662 18,432 15,104 -------- -------- -------- -------- Total operating revenues 209,987 180,430 370,920 345,459 -------- -------- -------- -------- Operating Expenses: Fuel 70,142 53,138 106,897 102,470 Purchased power -- Non-affiliates 6,848 16,537 12,652 25,038 Affiliates 13,130 6,014 30,191 17,580 Other 30,985 29,009 57,910 56,235 Maintenance 23,749 14,376 41,938 27,835 Depreciation and amortization 19,083 16,932 36,374 33,607 Taxes other than income taxes 14,876 13,722 29,291 27,207 -------- -------- -------- -------- Total operating expenses 178,813 149,728 315,253 289,972 -------- -------- -------- -------- Operating Income 31,174 30,702 55,667 55,487 Other Income (Expense): Interest income 6 337 155 507 Other, net 179 222 1,806 (577) -------- -------- -------- -------- Earnings Before Interest and Income Taxes 31,359 31,261 57,628 55,417 -------- -------- -------- -------- Interest and Other: Interest expense, net 8,146 6,423 15,132 12,696 Distributions on preferred securities of subsidiary 2,103 1,550 4,206 3,100 -------- -------- -------- -------- Total interest charges and other, net 10,249 7,973 19,338 15,796 -------- -------- -------- -------- Earnings Before Income Taxes 21,110 23,288 38,290 39,621 Income taxes 7,569 8,464 12,978 14,615 -------- -------- -------- -------- Net Income Before Cumulative Effect of Accounting Change 13,541 14,824 25,312 25,006 Cumulative effect of accounting change -- less income taxes of $42 thousand - - - 68 -------- -------- -------- -------- Net Income 13,541 14,824 25,312 25,074 Dividends on Preferred Stock 54 54 108 108 -------- -------- -------- -------- Net Income After Dividends on Preferred Stock $ 13,487 $ 14,770 $ 25,204 $ 24,966 ======== ======== ======== ======== The accompanying notes as they relate to GULF are an integral part of these condensed statements.
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GULF POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six Months Ended June 30, 2002 2001 --------------- --------------- (in thousands) Operating Activities: Net income $ 25,312 $ 25,074 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 38,700 35,554 Deferred income taxes and investment tax credits, net (4,049) (1,737) Other, net (25) 547 Changes in certain current assets and liabilities -- Receivables, net (25,427) 5,791 Fossil fuel stock (12,757) (24,143) Materials and supplies (465) (279) Accounts payable 2,200 (36,430) Regulatory clauses under/over recovery (2,581) (5,307) Other 19,354 23,037 --------- -------- Net cash provided from operating activities 40,262 22,107 --------- -------- Investing Activities: Gross property additions (67,948) (163,048) Other (17,977) 22,471 -------- -------- Net cash used for investing activities (85,925) (140,577) -------- -------- Financing Activities: Increase (decrease) in notes payable, net (3,187) 73,225 Proceeds -- Other long-term debt 44,803 - Capital contributions from parent company 37,782 70,000 Retirements -- Other long-term debt - (71) Payment of preferred stock dividends (108) (108) Payment of common stock dividends (32,750) (26,800) Other (594) - -------- -------- Net cash provided from financing activities 45,946 116,246 -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents 283 (2,224) Cash and Cash Equivalents at Beginning of Period 2,244 4,381 -------- -------- Cash and Cash Equivalents at End of Period $ 2,527 $2,157 ======== ======== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $19,999 $14,734 Income taxes (net of refunds) $2,503 $7,748 The accompanying notes as they relate to GULF are an integral part of these condensed statements.
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GULF POWER COMPANY CONDENSED BALANCE SHEETS (UNAUDITED) At June 30, At December 31, Assets 2002 2001 ------ ------------------- -------------------- (in thousands) Current Assets: Cash and cash equivalents $ 2,527 $ 2,244 Receivables -- Customer accounts receivable 86,050 64,113 Under recovered regulatory clauses 25,789 24,912 Other accounts and notes receivable 8,208 4,316 Affiliated companies 4,721 2,689 Accumulated provision for uncollectible accounts (1,147) (1,342) Fossil fuel stock, at average cost 60,412 47,655 Materials and supplies, at average cost 29,322 28,857 Other 7,379 12,662 ---------- ---------- Total current assets 223,261 186,106 ---------- ---------- Property, Plant, and Equipment: In service 2,205,796 1,951,512 Less accumulated provision for depreciation 930,945 912,581 ---------- ---------- 1,274,851 1,038,931 Construction work in progress 61,381 264,525 ---------- ---------- Property, plant, and equipment 1,336,232 1,303,456 ---------- ---------- Other Property and Investments 10,096 7,049 ---------- ---------- Deferred Charges and Other Assets: Deferred charges related to income taxes 17,098 16,766 Prepaid pension costs 33,180 29,980 Debt expense, being amortized 2,582 3,036 Premium on reacquired debt, being amortized 13,780 14,518 Other 12,896 12,222 ---------- ---------- Total deferred charges and other assets 79,536 76,522 ---------- ---------- Total Assets $1,649,125 $1,573,133 ========== ========== The accompanying notes as they relate to GULF are an integral part of these condensed statements.
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GULF POWER COMPANY CONDENSED BALANCE SHEETS (UNAUDITED) At June 30, At December 31, Liabilities and Stockholder's Equity 2002 2001 ------------------------------------ ----------------- -------------------- (in thousands) Current Liabilities: Notes payable $ 84,124 $ 87,311 Accounts payable -- Affiliated 23,340 18,202 Other 26,314 38,308 Customer deposits 16,325 14,506 Taxes accrued -- Income taxes 17,331 8,162 Other 13,337 8,053 Interest accrued 8,643 8,305 Provision for rate refund - 1,530 Vacation pay accrued 4,725 4,725 Regulatory clauses over recovery 2,015 3,719 Other 5,003 6,528 ---------- ---------- Total current liabilities 201,157 199,349 ---------- ---------- Long-term debt 511,938 467,784 ---------- ---------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 159,232 161,968 Deferred credits related to income taxes 26,404 28,293 Accumulated deferred investment tax credits 23,096 24,056 Employee benefits provisions 38,421 41,508 Other 34,512 26,045 ---------- ---------- Total deferred credits and other liabilities 281,665 281,870 ---------- ---------- Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding company junior subordinated notes 115,000 115,000 ---------- ---------- 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 343,741 305,960 Premium on preferred stock 12 12 Retained earnings 153,316 160,862 ---------- ---------- Total common stockholder's equity 535,129 504,894 ---------- ---------- Total Liabilities and Stockholder's Equity $1,649,125 $1,573,133 ========== ========== The accompanying notes as they relate to GULF are an integral part of these condensed statements.
49 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2002 vs. SECOND QUARTER 2001 AND YEAR-TO-DATE 2002 vs. YEAR-TO-DATE 2001 RESULTS OF OPERATIONS Earnings GULF's net income after dividends on preferred stock for the second quarter 2002 and year-to-date 2002 was $13.5 million and $25.2 million, respectively, compared to $14.8 million and $25.0 million for the corresponding periods in 2001. Earnings for the second quarter 2002 decreased by $1.3 million, or 8.7%, primarily due to increases in certain expenses, including maintenance expense and interest expense. While earnings for year-to-date 2002 remained relatively unchanged, there were several significant variations in individual categories which are addressed below. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) ----------------------------------------------------------- Second Quarter Year-To-Date ----------------------------------------------------------- (in thousands) % (in thousands) % Retail sales $29,366 20.5 $ 34,030 12.5 Sales for resale - non-affiliates (1,613) (7.9) (4,326) (10.7) Sales for resale - affiliates (1,542) (17.0) (7,571) (42.9) Other revenues 3,346 43.7 3,328 22.0 Fuel expense 17,004 32.0 4,427 4.3 Purchased power - non-affiliates (9,689) (58.6) (12,386) (49.5) Purchased power - affiliates 7,116 118.3 12,611 71.7 Maintenance expense 9,373 65.2 14,103 50.7 Depreciation and amortization 2,151 12.7 2,767 8.2 Other, net (43) (19.4) 2,383 413.0 Interest expense, net 1,723 26.8 2,436 19.2 Distributions on preferred securities of subsidiary 553 35.7 1,106 35.7 -----------------------------------------------------------
Retail sales. Excluding the recovery of fuel expense and certain other expenses that do not affect net income, retail sales increased by $13.2 million, or 15.5%, for the second quarter 2002 and by $18.3 million, or 11.3%, year-to-date 2002. For both of the above reporting periods, retail sales revenues were higher than the corresponding periods in 2001 primarily due to warmer weather, growth in the number of customers and the retail rate increase which went into effect in June 2002. (Reference is made to Note (J) in the "Notes to Condensed Financial Statements" herein for additional information.) During the second quarter 2002, retail energy sales to residential, commercial and industrial customers increased by 7.7%, 7.3% and 1.0%, respectively, as compared to the same period in 2001. For year-to-date 2002 as compared to 2001, retail energy sales to residential and commercial customers increased by 6.9% and 5.3%, respectively, while energy sales to industrial customers decreased by 2.4%. Sales to industrial customers continue to be affected by the sluggish economy. 50 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Sales for resale - non-affiliates. During each of the above reporting periods, sales for resale to non-affiliates decreased when compared to the corresponding periods in 2001 mainly due to reduced demand for energy by these customers. 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 depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Other revenues. The increases in other revenues for both reporting periods shown above as compared to the comparable periods in 2001 are primarily due to a $1.7 million settlement related to a power purchase agreement, a $1 million gain on sale of gas and an increase of $0.5 million in franchise fees over the previous periods. Fuel expense. The increase in fuel expense during the second quarter 2002 and year-to-date 2002 is mainly attributed to the commercial operation of Plant Smith Unit 3 beginning in April 2002. Since energy expenses are generally offset by energy revenues through GULF's fuel cost recovery mechanism, these expenses do not have a significant impact on net income. Purchased power - non-affiliates. During the second quarter 2002 and year-to-date 2002, purchased power from non-affiliates decreased primarily due to lower costs for energy compared to the same periods in 2001. Since energy expenses are generally offset by energy revenues through GULF's fuel clause recovery mechanism, these expenses do not have a significant impact on net income. Maintenance expense. The increases in maintenance expense for the two reporting periods as compared to the comparable periods in 2001 primarily resulted from planned turbine and boiler inspections and repairs for GULF's generating facilities. Depreciation and amortization. The increase in this expense for the second quarter 2002 and year-to-date 2002 resulted primarily from an increase in plant in service, including the addition of Plant Smith Unit 3, as compared to the previous reporting periods in 2001. Other, net. The increase in this item for the year-to-date 2002 period when compared to the same period in 2001 is primarily due to higher allowance for equity funds used during construction related to Plant Smith Unit 3, which went into commercial operation in April 2002. Interest expense, net. The primary reason for the increase in this expense for both reporting periods relates to additional sales of an aggregate amount of $180 million of senior notes. Distributions on preferred securities of subsidiary. As a result of the sale in November 2001 of $30 million of 7.375% Trust Preferred Securities, these distributions increased in both reporting periods as compared to the comparable periods in 2001. 51 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors 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, including the EPA litigation, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements 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. The revenue sharing plan expired on April 22, 2002 at the commercial in-service date of Plant Smith Unit 3. Based upon the actual revenues for January through April 2002, there will be no refund to customers for this period. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GULF in the Form 10-K. In April 2002, the Florida PSC approved an annual base rate increase for GULF of $53.2 million which became effective in June 2002. Reference is made to Note (J) in the "Notes to the Condensed Financial Statements" herein and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GULF in the Form 10-K for additional information. On April 25, 2002, the Stakeholder Advisory Committee met and selected the candidates that will be considered for the SeTrans ISA. On June 27, 2002, SOUTHERN and other SeTrans sponsors submitted a Petition for Declaratory Order seeking the FERC's guidance on various issues. The petition asks for a response from the FERC by October 2002. Reference is made to Item 1 - BUSINESS - "Certain Factors Affecting the Industry" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Industry Restructuring" of GULF in the Form 10-K for additional information. On July 31, 2002, the FERC issued a notice of proposed rulemaking entitled "Remedying Undue Discrimination Through Open Access Transmission Service and Standard Electricity Market Design." The FERC has indicated that the proposal, if adopted, would (among other things): (i) require transmission assets of jurisdictional utilities to be operated by an independent entity; (ii) establish a standard market design; (iii) establish a single type of transmission service that applies to all customers; (iv) assert jurisdiction over the transmission component of bundled retail service; (v) establish a generation reserve margin; (vi) establish bid caps for day-ahead and spot energy markets; and (vii) revise the FERC policy on the pricing of transmission expansions. Comments on the proposal are due 75 days after its issuance. Any impact of this proposal will depend on the form in which final rules may be ultimately adopted. 52 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Reference is made to Notes (C) through (E) and (J) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. Reference is also made to Note (E) in the "Notes to the Condensed Financial Statements" for information relating to certain lawsuits regarding the installation of fiber optic cable over GULF's existing easements. Accounting Policies Critical Policy GULF's significant accounting policies are described in Note 1 to the financial statements of GULF in Item 8 of the Form 10-K. GULF's only critical accounting policy involves rate regulation. GULF is 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 GULF's operations is no longer subject to these provisions, GULF would be required to write off related regulatory assets and liabilities that are not specifically recoverable and determine if any other assets, including plant, have been impaired. New Accounting Standards Effective January 1, 2001, GULF adopted FASB Statement No. 133, "Accounting for Derivatives and Hedging Activities," as amended, and changed the method of accounting for derivative instruments. Derivatives are now reflected on the Condensed Balance Sheet as either an asset or liability measured at fair market value, and the changes in the fair value are currently recognized in earnings unless specific hedge accounting criteria are met. Reference is made to "Exposure to Market Risks" below for information relating to derivative instruments. 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. The liability for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be 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 January 1, 2003. GULF is currently assessing 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 2002 included the addition of approximately $67.9 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations, other long-term debt and capital contributions from SOUTHERN. See GULF's Condensed Statements of Cash Flows for further details. Credit Rating Risk GULF does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. 53 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Exposure to Market Risks GULF's market risk exposures relative to interest rate changes have not changed materially compared with the previous reporting period, December 31, 2001. In addition, GULF is not aware of any facts or circumstances that would significantly affect such exposures in the near term. Due to cost-based rate regulations, GULF has limited exposure to market volatility in interest rates, commodity fuel prices and prices of electricity. To mitigate residual risks relative to movements in electricity prices, GULF enters into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. The fair value of derivative energy contracts at June 30, 2002 is as follows: Second Quarter 2002 Year-to-Date Changes Changes ---------------------------------------------------------------------------- Fair Value ---------------------------------------------------------------------------- (in thousands) Contracts beginning of period $(268) $(110) Contracts realized or settled 24 45 New contracts at inception - - Changes in valuation techniques - - Current period changes 180 1 --------------------------------------------------------------------------- Contracts at June 30, 2002 $ (64) $ (64) =========================================================================== Source of June 30, 2002 Valuation Prices -------------------------------------------------------------------------- Maturity Total ------------------------------- Fair Value Year 1 1-3 Years -------------------------------------------------------------------------- (in thousands) Actively quoted $(64) $(66) $2 External sources - - - Models and other methods - - - --------------------------------------------------------------------------- Contracts at June 30, 2002 $(64) $(66) $2 =========================================================================== Realized gains and losses are recognized in the Statements of Income as incurred. These amounts were not material for the quarter and year-to-date periods ended June 30, 2002 and 2001. Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Exposure to Market Risks" of GULF in the Form 10-K and Note 1 to the financial statements of GULF in Item 8 of the Form 10-K for additional information. Financing Activities In January 2002, GULF issued $45 million of Series E 6.00% Senior Notes due January 30, 2012. The proceeds from the sale were used by GULF to finance certain construction costs incurred in connection with 54 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Plant Smith Unit 3, GULF's 574 megawatt combined cycle facility, which was placed in service in April 2002, and for general corporate purposes. 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," "Other Capital Requirements" and "Environmental Matters" in the Form 10-K for a description of GULF'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, 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, 2002 approximately $2.5 million of cash and cash equivalents and $61.9 million of unused committed lines of credit with banks that expire in 2002 and $61.5 million that expire in 2003. 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 and extendible commercial notes at the request and for the benefit of GULF and other SOUTHERN subsidiaries. At June 30, 2002, GULF had outstanding $84.1 million of notes payable. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 55 MISSISSIPPI POWER COMPANY 56
MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Six Months Ended June 30, Ended June 30, 2002 2001 2002 2001 ------ -------- ------- ------ (in thousands) (in thousands) Operating Revenues: Retail sales $138,601 $127,802 $257,068 $242,381 Sales for resale -- Non-affiliates 52,182 49,437 104,334 89,725 Affiliates 10,456 23,604 20,069 35,592 Other revenues 4,139 3,106 6,965 7,563 -------- -------- -------- -------- Total operating revenues 205,378 203,949 388,436 375,261 -------- -------- -------- -------- Operating Expenses: Fuel 66,772 73,064 126,974 110,548 Purchased power -- Non-affiliates 4,416 14,183 7,257 28,806 Affiliates 10,387 13,167 17,793 44,703 Other 37,103 32,764 72,464 59,133 Maintenance 20,606 13,441 41,277 27,289 Depreciation and amortization 13,918 13,962 28,430 25,878 Taxes other than income taxes 13,719 10,728 26,911 22,649 -------- -------- -------- -------- Total operating expenses 166,921 171,309 321,106 319,006 -------- -------- -------- -------- Operating Income 38,457 32,640 67,330 56,255 Other Income: Interest income 82 79 168 223 Other, net 1,070 1,856 1,177 2,063 -------- -------- -------- -------- Earnings Before Interest and Income Taxes 39,609 34,575 68,675 58,541 Interest Expense and Other: -------- -------- -------- -------- Interest expense, net 4,279 6,218 9,325 13,164 Distributions on preferred securities of subsidiary 1,022 678 1,770 1,356 -------- -------- -------- -------- Total interest charges and other, net 5,301 6,896 11,095 14,520 -------- -------- -------- -------- Earnings Before Income Taxes 34,308 27,679 57,580 44,021 Income taxes 13,016 10,605 21,803 16,729 -------- -------- -------- -------- Net Income Before Cumulative Effect of Accounting Change 21,292 17,074 35,777 27,292 Cumulative effect of accounting change -- less income taxes of $43 thousand - - - 70 -------- -------- -------- -------- Net Income 21,292 17,074 35,777 27,362 Dividends on Preferred Stock 504 503 1,007 1,034 -------- -------- -------- -------- Net Income After Dividends on Preferred Stock $20,788 $ 16,571 $ 34,770 $ 26,328 ======== ========= ======== ======== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
57
MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) For the Six Months Ended June 30, 2002 2001 -------------- --------------- (in thousands) Operating Activities: Net income $ 35,777 $ 27,362 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 30,486 27,836 Deferred income taxes and investment tax credits, net (6,021) (239) Other, net 5,953 2,086 Changes in certain current assets and liabilities -- Receivables, net 3,463 (10,692) Fossil fuel stock (1,768) (30,500) Materials and supplies (1,092) (1,153) Accounts payable (13,723) 6,861 Other 10,679 231 -------- -------- Net cash provided from operating activities 63,754 21,792 -------- -------- Investing Activities: Gross property additions (36,813) (23,032) Other (10,713) (5,358) -------- -------- Net cash used for investing activities (47,526) (28,390) -------- -------- Financing Activities: Increase in notes payable, net 9,922 22,724 Proceeds -- Senior notes 80,000 - Preferred securities 35,000 - Capital contributions from parent company 682 70,000 Retirements -- First mortgage bonds (650) (36,000) Senior notes (80,190) (20,547) Preferred securities (35,000) - Payment of preferred stock dividends (1,007) (1,034) Payment of common stock dividends (31,750) (25,300) Other 106 (78) -------- -------- Net cash provided from (used for) financing activities (22,887) 9,765 -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents (6,659) 3,167 Cash and Cash Equivalents at Beginning of Period 18,950 7,531 -------- -------- Cash and Cash Equivalents at End of Period $ 12,291 $ 10,698 ======== ======== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $7,490 $14,616 Income taxes (net of refunds) $7,231 $1,472 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 (UNAUDITED) At June 30, At December 31, Assets 2002 2001 ------ -------------------- -------------------- (in thousands) Current Assets: Cash and cash equivalents $ 12,291 $ 18,950 Receivables -- Customer accounts receivable 61,946 48,200 Under recovered regulatory clauses 21,341 15,086 Other accounts and notes receivable 7,091 26,068 Affiliated companies 18,164 22,569 Accumulated provision for uncollectible accounts (897) (856) Fossil fuel stock, at average cost 33,257 31,489 Materials and supplies, at average cost 24,314 23,223 Other 24,081 16,002 ---------- ---------- Total current assets 201,588 200,731 ---------- ---------- Property, Plant, and Equipment: In service 1,780,529 1,741,499 Less accumulated provision for depreciation 718,436 698,681 ---------- ---------- 1,062,093 1,042,818 Construction work in progress 32,247 38,253 ---------- ---------- Property, plant, and equipment 1,094,340 1,081,071 ---------- ---------- Other Property and Investments 5,090 1,900 ---------- ---------- Deferred Charges and Other Assets: Deferred charges related to income taxes 13,006 13,394 Prepaid pension costs 13,071 11,171 Debt expense, being amortized 3,046 4,396 Premium on reacquired debt, being amortized 7,501 6,719 Other 18,270 20,821 ---------- ---------- Total deferred charges and other assets 54,894 56,501 ---------- ---------- Total Assets $1,355,912 $1,340,203 ========== ========== 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 (UNAUDITED) At June 30, At December 31, Liabilities and Stockholder's Equity 2002 2001 ------------------------------------ -------------------- -------------------- (in thousands) Current Liabilities: Securities due within one year $ 35,020 $ 80,020 Notes payable 25,894 15,973 Accounts payable -- Affiliated 17,293 6,175 Other 66,720 92,538 Customer deposits 6,992 6,540 Taxes accrued -- Income taxes 35,573 14,981 Other 22,356 35,282 Interest accrued 6,951 5,079 Vacation pay accrued 5,810 5,810 Regulatory clauses over recovery 22,692 13,296 Other 8,821 12,041 ---------- ---------- Total current liabilities 254,122 287,735 ---------- ---------- Long-term debt 277,935 233,753 ---------- ---------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 136,508 138,913 Deferred credits related to income taxes 22,212 23,626 Accumulated deferred investment tax credits 21,661 22,268 Employee benefits provisions 48,849 45,827 Other 32,434 29,592 ---------- ---------- Total deferred credits and other liabilities 261,664 260,226 ---------- ---------- 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 267,937 267,256 Premium on preferred stock 326 326 Retained earnings 189,428 186,407 ---------- ---------- Total common stockholder's equity 495,382 491,680 ---------- ---------- Total Liabilities and Stockholder's Equity $1,355,912 $1,340,203 ========== ========== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
60 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2002 vs. SECOND QUARTER 2001 AND YEAR-TO-DATE 2002 vs. YEAR-TO-DATE 2001 RESULTS OF OPERATIONS Earnings MISSISSIPPI's net income after dividends on preferred stock for the second quarter 2002 and year-to date 2002 was $20.8 million and $34.8 million, respectively, compared to $16.6 million and $26.3 million for the corresponding periods of 2001. Earnings were up $4.2 million, or 25.4%, for the second quarter 2002 and up $8.4 million, or 32.1%, year-to-date 2002 primarily due to higher operating revenues and lower interest expense. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) ---------------------------------------------------------------- Second Quarter Year-To-Date ---------------------------------------------------------------- (in thousands) % (in thousands) % Retail sales $ 10,799 8.4 $ 14,687 6.1 Sales for resale - non-affiliates 2,745 5.6 14,609 16.3 Sale for resale - affiliates (13,148) (55.7) (15,523) (43.6) Fuel expense (6,292) (8.6) 16,426 14.9 Purchased power - non-affiliates (9,767) (68.9) (21,549) (74.8) Purchased power - affiliates (2,780) (21.1) (26,910) (60.2) Other operation expense 4,339 13.2 13,331 22.5 Maintenance expense 7,165 53.3 13,988 51.3 Depreciation and amortization (44) (0.3) 2,552 9.9 Taxes other than income taxes 2,991 27.9 4,262 18.8 Interest expense, net (1,939) (31.2) (3,839) (29.2) ----------------------------------------------------------------
Retail sales. Excluding fuel revenues, which generally do not affect net income, retail sales revenue was up by $12.0 million, or 16.2%, in the second quarter 2002 and by $22.6 million, or 16.6%, year-to-date 2002 when compared to the corresponding periods in 2001 primarily due to the retail rate increase which took effect in January 2002 and, to a lesser extent, higher retail energy sales. (Reference is made to Note (K) in the "Notes to Condensed Financial Statements" herein for additional information.) Retail energy sales in the second quarter 2002 compared to the same period in 2001 increased for residential and commercial customers by 3.2% and 3.8%, respectively, while sales to industrial customers decreased by 3.2%. For year-to-date 2002 as compared to the comparable period in 2001, total retail sales increased 4.3% and 2.6% for residential and commercial customers, respectively, and decreased 0.9% for industrial customers. Sales to industrial customers continue to be affected by the sluggish economy. Sales for resale - non-affiliates. During the second quarter 2002 and year-to-date 2002, sales for resale to non-affiliates increased mainly due to demand for energy by non-affiliates and additional power sales as a result of the commercial operation in May 2001 of Plant Daniel Units 3 and 4 when compared to the corresponding periods in 2001. 61 MISSISSIPPI 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 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. Lower fuel expenses in the second quarter 2002 when compared to the same period in the prior year are primarily attributed to lower unit fuel prices. For year-to-date 2002, higher fuel expenses as compared to 2001 resulted from increased generation and the commercial operation in May 2001 of Plant Daniel Units 3 and 4. Since energy expenses are generally offset by energy revenues through MISSISSIPPI's fuel cost recovery clause, these expenses do not have a significant impact on earnings. Purchased power - non-affiliates. In the second quarter 2002 and year-to-date 2002, purchased power from non-affiliates decreased primarily due to commercial operation of the new units at Plant Daniel in May 2001. These transactions do not have a significant impact on net income since energy expenses are generally offset by energy revenues through MISSISSIPPI's fuel cost recovery clause. Other operation expense. In the second quarter 2002 and year-to-date 2002, other operation expense increased over the same periods in 2001 primarily as a result of lease payments related to the commercial operation of Plant Daniel Units 3 and 4, which began in May 2001. Maintenance expense. During the second quarter 2002 and year-to-date 2002, maintenance expense increased when compared to the corresponding periods in 2001 primarily as a result of scheduled maintenance performed at Plant Watson and Plant Daniel in 2002. Depreciation and amortization. The year-to-date 2002 increase over the corresponding period in 2001 is primarily due to amortization of MISSISSIPPI's regulatory asset related to the ECO Plan. For additional information about the ECO Plan, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of MISSISSIPPI in the Form 10-K. Taxes other than income taxes. This expense for the second quarter 2002 and year-to-date 2002 increased primarily as a result of the additional property taxes related to the commercial operation of Plant Daniel Units 3 and 4. Interest expense, net. The decreases in this expense for the second quarter 2002 and for year-to-date 2002 as compared to the corresponding periods in 2001 primarily result from decreases in interest on long-term debt and notes payable 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 and the effect of weather and the economy on energy sales. In December 2001, the Mississippi PSC approved MISSISSIPPI's annual retail rate increase of approximately $39 million, which became effective in January 2002. For additional information, see Note (K) in the "Notes to the Condensed Financial Statements" herein. 62 MISSISSIPPI 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 - "Future Earnings Potential" of MISSISSIPPI in the Form 10-K regarding the settlement agreement between MISSISSIPPI and certain wholesale customers to increase its wholesale tariff rates effective June 1, 2002. In March 2002, that agreement was filed with the FERC for approval. On April 19, 2002, the FERC accepted for filing the settlement agreement and placed the new tariff rates in effect June 1, 2002 without modifying the agreement reached between MISSISSIPPI and its customers. For additional information, see Note (L) in the "Notes to the Condensed Financial Statements" herein. With the enactment of the Energy Act and new legislation being discussed at the federal level 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 2002 ECO Plan filing was approved, as filed, by the Mississippi PSC on March 5, 2002 and resulted in a slight increase in rates. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot continue to be recovered. For additional information about the Clean Air Act and other environmental issues, including the EPA litigation, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of MISSISSIPPI in the Form 10-K. On April 25, 2002, the Stakeholder Advisory Committee met and selected the candidates that will be considered for the SeTrans ISA. On June 27, 2002, SOUTHERN and other SeTrans sponsors submitted a Petition for Declaratory Order seeking the FERC's guidance on various issues. The petition asks for a response from the FERC by October 2002. Reference is made to Item 1 - BUSINESS - "Certain Factors Affecting the Industry" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Industry Restructuring" of MISSISSIPPI in the Form 10-K for additional information. On July 31, 2002, the FERC issued a notice of proposed rulemaking entitled "Remedying Undue Discrimination Through Open Access Transmission Service and Standard Electricity Market Design." The FERC has indicated that the proposal, if adopted, would (among other things): (i) require transmission assets of jurisdictional utilities to be operated by an independent entity; (ii) establish a standard market design; (iii) establish a single type of transmission service that applies to all customers; (iv) assert jurisdiction over the transmission component of bundled retail service; (v) establish a generation reserve margin; (vi) establish bid caps for day-ahead and spot energy markets; and (vii) revise the FERC policy on the pricing of transmission expansions. Comments on the proposal are due 75 days after its issuance. Any impact of this proposal on SOUTHERN and its subsidiaries will depend on the form in which final rules may be ultimately adopted. Reference is made to Note 6 to MISSISSIPPI's financial statements in the Form 10-K, regarding Long-Term Capacity Sales Agreements. MISSISSIPPI has entered into a capacity sale contract under which minimum capacity revenues to MISSISSIPPI would average approximately $21 million annually through May 2011. The customer for that capacity is currently experiencing liquidity problems and has had its credit rating reduced below investment grade. The customer has provided MISSISSIPPI with a $26 million letter of credit expiring in February 2003. This letter of credit can be drawn if it is not replaced by acceptable security prior to expiration or if the customer defaults under the contract. In the event of such a default, and if MISSISSIPPI were unable to resell that capacity in the market, future earnings could be affected. The outcome cannot now be determined. 63 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Reference is made to Notes (C) through (E), (K) 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. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. Reference is also made to Note (E) in the "Notes to the Condensed Financial Statements" for information relating to certain lawsuits regarding the installation of fiber optic cable over MISSISSIPPI's existing easements. Accounting Policies Critical Policy MISSISSIPPI's significant accounting policies are described in Note 1 to the financial statements of MISSISSIPPI in Item 8 of the Form 10-K. MISSISSIPPI's critical accounting policy involves rate regulation. MISSISSIPPI is 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 MISSISSIPPI's operations is no longer subject to these provisions, MISSISSIPPI would be required to write off related regulatory assets and liabilities that are not specifically recoverable and determine if any other assets, including plant, have been impaired. Additionally, MISSISSIPPI accounts for its lease agreement with Escatawpa Funding, Limited Partnership ("Escatawpa") as an operating lease. Under this agreement, Escatawpa, a special purpose entity, is owner-lessor of the combined-cycle generating units at MISSISSIPPI's Plant Daniel. MISSISSIPPI does not consolidate this entity since parties unrelated to MISSISSIPPI have made substantive residual equity capital investments in excess of 3 percent. In June 2002, the FASB issued an exposure draft for comment of a proposed interpretation on "Consolidation of Certain Special-Purpose Entities," an interpretation of Accounting Research Bulletin No. 51. It is expected that the exposure draft would be finalized by year end, with an effective date for existing transactions subject to the interpretation, including MISSISSIPPI's lease transaction, to be implemented on April 1, 2003. This interpretation is in draft form; the final pronouncement may differ from the draft. However, in its current draft form, MISSISSIPPI would be deemed to be the "primary beneficiary" of its lease arrangement with Escatawpa and would be required to consolidate the leased asset and related debt on its books or to restructure the existing arrangement to comply with the final rules. Until final rules are approved by the FASB, MISSISSIPPI will continue to analyze the impact of the exposure draft. MISSSISSIPPI's current operating lease arrangement with Escatawpa has been reviewed and approved by the Mississippi PSC and is reflected and approved for recovery in both its retail and wholesale rate jurisdictions. Consolidation of the leased asset and related debt could require MISSISSIPPI to seek additional regulatory review. New Accounting Standards Effective January 1, 2001, MISSISSIPPI adopted FASB Statement No. 133, "Accounting for Derivatives and Hedging Activities," as amended, and changed the method of accounting for derivative instruments. Derivatives are now reflected on the Condensed Balance Sheet as either an asset or liability measured at fair market value, and the changes in the fair value are currently recognized in earnings unless specific hedge accounting criteria are met. Reference is made to "Exposure to Market Risks" below for information relating to derivative instruments. 64 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. The liability for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be 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 January 1, 2003. MISSISSIPPI is currently assessing the impact of adopting Statement No. 143 on its financial statements. FINANCIAL CONDITION Overview Major changes in MISSISSIPPI's financial condition during the first six months of 2002 included the addition of approximately $36.8 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations. See MISSISSIPPI's Condensed Statements of Cash Flows for further details. Off-Balance Sheet Financing Arrangements In May 2001, MISSISSIPPI began the initial 10-year term of an operating lease agreement signed in 1999 with Escatawpa, a special purpose entity, to use a combined-cycle generating facility located at MISSISSIPPI's Plant Daniel. The facility cost approximately $370 million. The lease provides for a residual value guarantee -- approximately 71 percent of the completion cost -- by MISSISSIPPI that is due upon termination of the lease in certain circumstances. Reference is made to Note 4 to the financial statements in Item 8 of MISSISSIPPI in the Form 10-K and to "Critical Policy" above for additional information. Credit Rating Risk MISSISSIPPI does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. There are certain fixed-price physical gas purchase contracts that could require collateral -- but not accelerated payment -- in the event of a credit rating change to below investment grade; however, at June 30, 2002, this exposure was immaterial. Exposure to Market Risks MISSISSIPPI's market risk exposures relative to interest rate changes have not changed materially compared with the previous reporting period, December 31, 2001. In addition, MISSISSIPPI is not aware of any facts or circumstances that would significantly affect such exposures in the near term. Due to cost-based rate regulations, MISSISSIPPI has limited exposure to market volatility in interest rates, commodity fuel prices and prices of electricity. To mitigate residual risks relative to movements in electricity prices, MISSISSIPPI enters into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. MISSISSIPPI has also implemented retail and 65 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION wholesale fuel hedging programs at the instruction of its PSC. The fair value of derivative energy contracts is as follows: Second Quarter 2002 Year-to-Date Changes Changes ---------------------------------------------------------------------------- Fair Value ---------------------------------------------------------------------------- (in thousands) Contracts beginning of period $5,180 $(3,830) Contracts realized or settled (210) (190) New contracts at inception - - Changes in valuation techniques - - Current period changes 1,874 10,864 ---------------------------------------------------------------------------- Contracts at June 30, 2002 $6,844 $ 6,844 ============================================================================ Source of June 30, 2002 Valuation Prices -------------------------------------------------------------------------- Maturity Total ------------------------------- Fair Value Year 1 1-3 Years -------------------------------------------------------------------------- (in thousands) Actively quoted $6,844 $3,495 $3,349 External sources - - - Models and other methods - - - -------------------------------------------------------------------------- Contracts at June 30, 2002 $6,844 $3,495 $3,349 =========================================================================== Unrealized gains and losses from mark to market adjustments on contracts related to the retail and wholesale fuel hedging programs are recorded as regulatory assets and liabilities. At June 30, 2002, MISSISSIPPI had approximately $6.9 million in regulatory liabilities related to unrealized gains on mark to market derivative contracts associated with its fuel hedging programs. Realized gains and losses from these programs are included in fuel expense and are recovered through MISSISSIPPI's energy cost management clauses. Reference is made to Note 1 to the financial statements of MISSISSIPPI in Item 8 of the Form 10-K and Note (L) in the "Notes to the Condensed Financial Statements" herein regarding the respective approvals of the retail and wholesale energy cost management clauses. Gains and losses on contracts that do not represent hedges are recognized in the Statements of Income as incurred. For the quarter and year-to-date periods ended June 30, 2002 and 2001, these amounts were not material. For additional information, reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Exposure to Market Risks" of MISSISSIPPI in the Form 10-K and Note 1 to the financial statements of MISSISSIPPI in Item 8 of the Form 10-K. 66 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Financing Activities In March 2002, MISSISSIPPI issued $80 million of Series D Floating Rate Senior Notes due March 12, 2004. The proceeds of the sale were used to repay $80 million of Series C Floating Rate Senior Notes due March 28, 2002. Also in March 2002, Mississippi Power Capital Trust II, a statutory business trust, sold $35 million of its 7.20% Trust Originated Preferred Securities, which are guaranteed by MISSISSIPPI, for the purpose of redeeming in May 2002 $35 million of Mississippi Power Capital Trust I 7.75% Trust Originated Preferred Securities. 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 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, 2002 approximately $12.3 million of cash and cash equivalents and $74.5 million of committed credit arrangements with banks that expire in 2002 and $50 million that expire in 2003. The credit arrangements provide liquidity support to MISSISSIPPI's obligations 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 and extendible commercial notes at the request and for the benefit of MISSISSIPPI and other SOUTHERN subsidiaries. At June 30, 2002, MISSISSIPPI had outstanding $25.9 million of notes payable. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 67 SAVANNAH ELECTRIC AND POWER COMPANY 68
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) For the Three Months For the Six Months Ended June 30, Ended June 30, 2002 2001 2002 2001 --------------------- --------------------- (in thousands) (in thousands) Operating Revenues: Retail sales $74,293 $70,716 $129,240 $129,135 Sales for resale -- Non-affiliates 2,097 2,016 3,030 3,574 Affiliates 1,264 651 2,162 1,878 Other revenues 706 587 1,306 1,074 ------ ------- -------- -------- Total operating revenues 78,360 73,970 135,738 135,661 ------ ------- -------- -------- Operating Expenses: Fuel 14,148 13,119 23,076 22,513 Purchased power -- Non-affiliates 2,067 5,756 3,134 8,082 Affiliates 17,396 12,957 29,523 28,705 Other 12,926 12,599 25,998 24,280 Maintenance 7,447 4,949 12,772 10,997 Depreciation and amortization 6,079 6,460 12,588 12,920 Taxes other than income taxes 3,703 3,510 7,188 6,745 ------ ------- -------- -------- Total operating expenses 63,766 59,350 114,279 114,242 ------ ------- -------- -------- Operating Income 14,594 14,620 21,459 21,419 Other Income (Expense): Interest income 14 84 27 117 Other, net 79 (574) (560) (1,185) ------ ------- -------- -------- Earnings Before Interest and Income Taxes 14,687 14,130 20,926 20,351 ------ ------- -------- -------- Interest Charges and Other: Interest expense, net 2,705 3,264 5,474 6,540 Distributions on preferred securities of subsidiary 685 685 1,370 1,370 ------ ------- -------- -------- Total interest charges and other, net 3,390 3,949 6,844 7,910 ------ ------- -------- -------- Earnings Before Income Taxes 11,297 10,181 14,082 12,441 Income taxes 4,262 3,935 5,245 4,741 ------ ------- -------- -------- Net Income Before Cumulative Effect of Accounting Change 7,035 6,246 8,837 7,700 Cumulative effect of accounting change -- less income taxes of $14 thousand - - - 22 ------- ------- -------- -------- Net Income $ 7,035 $ 6,246 $ 8,837 $ 7,722 ======= ======= ======== ======== 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, 2002 2001 -------------- --------------- (in thousands) Operating Activities: Net income $ 8,837 $ 7,722 Adjustments to reconcile net income to net cash provided from operating activities -- Depreciation and amortization 12,968 13,945 Deferred income taxes and investment tax credits, net (6,056) (5,097) Other, net (34) 1,955 Changes in certain current assets and liabilities -- Receivables, net 2,207 (5,096) Fossil fuel stock 1,056 (3,610) Materials and supplies 3,712 (261) Accounts payable 4,120 (8,431) Other (1,645) 13,559 -------- -------- Net cash provided from operating activities 25,165 14,686 -------- -------- Investing Activities: Gross property additions (20,432) (18,546) Other, net 510 229 -------- -------- Net cash used for investing activities (19,922) (18,317) -------- -------- Financing Activities: Increase in notes payable, net 4,351 5,540 Proceeds -- Other long-term debt 159 65,000 Capital contributions from parent company 1,267 - Retirements -- First mortgage bonds (436) (20,642) Other long-term debt - (30,441) Payment of common stock dividends (11,350) (10,900) Other (25) (355) -------- -------- Net cash provided from (used for) financing activities (6,034) 8,202 --------- -------- Net Increase (Decrease) in Cash and Cash Equivalents (791) 4,571 Cash and Cash Equivalents at Beginning of Period 2,391 - -------- - -------- Cash and Cash Equivalents at End of Period $ 1,600 $ 4,571 ======== ======== Supplemental Cash Flow Information: Cash paid during the period for -- Interest (net of amount capitalized) $5,536 $7,354 Income taxes (net of refunds) $15,148 ($2,915) 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 (UNAUDITED) At June 30, At December 31, Assets 2002 2001 ------ ------------------- ------------------- (in thousands) Current Assets: Cash and cash equivalents $ 1,600 $ 2,391 Receivables -- Customer accounts receivable 39,384 29,959 Under recovered retail fuel clause revenue - 11,974 Other accounts and notes receivable 2,612 2,882 Affiliated companies 1,875 1,170 Accumulated provision for uncollectible accounts (593) (500) Fossil fuel stock, at average cost 8,795 9,851 Materials and supplies, at average cost 9,257 12,969 Prepaid Taxes 19,073 12,511 Other 3,736 586 -------- -------- Total current assets 85,739 83,793 -------- -------- Property, Plant, and Equipment: In service 866,142 855,290 Less accumulated provision for depreciation 414,468 402,492 -------- -------- 451,674 452,798 Construction work in progress 18,208 8,540 -------- -------- Property, plant, and equipment 469,882 461,338 -------- -------- Other Property and Investments 3,093 2,742 -------- -------- Deferred Charges and Other Assets: Deferred charges related to income taxes 11,988 12,283 Cash surrender value of life insurance for deferred compensation plans 20,358 20,002 Debt expense, being amortized 3,087 3,197 Premium on reacquired debt, being amortized 6,567 6,890 Other 8,389 4,498 -------- -------- Total deferred charges and other assets 50,389 46,870 -------- -------- Total Assets $609,103 $594,743 ======== ======== 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 (UNAUDITED) At June 30, At December 31, Liabilities and Stockholder's Equity 2002 2001 ------------------------------------ ------------------- ------------------ (in thousands) Current Liabilities: Securities due within one year $ 20,803 $ 1,178 Notes payable 36,510 32,159 Accounts payable -- Affiliated 11,219 5,087 Other 10,061 10,160 Customer deposits 6,671 6,237 Taxes accrued -- Income taxes 214 2,587 Other 2,661 1,668 Interest accrued 4,794 4,014 Vacation pay accrued 2,419 2,361 Other 9,891 9,097 -------- -------- Total current liabilities 105,243 74,548 -------- -------- Long-term debt 140,807 160,709 -------- -------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes 78,207 77,331 Deferred credits related to income taxes 13,110 13,776 Accumulated deferred investment tax credits 9,620 9,952 Employee benefits provisions 30,639 27,486 Other 15,805 14,023 -------- -------- Total deferred credits and other liabilities 147,381 142,568 -------- -------- 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 14,094 12,826 Retained earnings 107,355 109,869 -------- -------- Total common stockholder's equity 175,672 176,918 -------- -------- Total Liabilities and Stockholder's Equity $609,103 $594,743 ======== ======== The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
72 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 2002 vs. SECOND QUARTER 2001 AND YEAR-TO-DATE 2002 vs. YEAR-TO-DATE 2001 RESULTS OF OPERATIONS Earnings SAVANNAH's net income for the second quarter 2002 and year-to-date 2002 was $7.0 million and $8.8 million, respectively, as compared to $6.2 million and $7.7 million for the corresponding periods of 2001. Earnings increased by $0.8 million, or 12.6%, in the second quarter 2002 and increased by $1.1 million, or 14.4%, year-to-date 2002. The increases in earnings for both periods were primarily due to higher operating revenues and lower interest charges offset somewhat 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 $ 3,577 5.1 $ 105 0.1 Sales for resale - non-affiliates 81 4.0 (544) (15.2) Sale for resale - affiliates 613 94.2 284 15.1 Fuel expense 1,029 7.8 563 2.5 Purchased power - non-affiliates (3,689) (64.1) (4,948) (61.2) Purchased power - affiliates 4,439 34.3 818 2.8 Maintenance expense 2,498 50.5 1,775 16.1 Interest expense, net (559) (17.1) (1,066) (16.3) ---------------------------------------------------------------
Retail sales. Excluding fuel revenues which do not affect net income, retail sales revenue increased by $3.4 million, or 8.2%, for the second quarter 2002 and by $4.9 million, or 6.5%, for year-to-date 2002 when compared to the corresponding periods in 2001 mainly due to increased usage reflecting hotter weather and to an increase in the number of customers served. For the second quarter 2002, energy sales to residential and commercial customers increased by 7.9% and 7.7%, respectively, while sales to industrial customers decreased by 1.5%. For year-to-date 2002, energy sales to residential and commercial customers increased by 1.7% and 6.5%, respectively, while sales to industrial customers decreased by 5.7%. Industrial sales continue to be negatively affected by the sluggish economy. Sales for resale - non-affiliates. While sales for resale to non-affiliates did not change significantly during the second quarter 2002, there was a decrease year-to-date 2002 when compared to the corresponding period in 2001 as a result of lower demand from these customers outside SAVANNAH's service area. These transactions do not have a significant impact on earnings since the energy is usually sold at variable cost. Sales for resale - affiliates. Revenues from sales for resale to affiliated companies within the SOUTHERN system will vary depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. 73 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Fuel expense. Fuel expense increased in the second quarter 2002 and year-to-date 2002 compared to the same periods in 2001 primarily due to increased coal prices. Purchased power - affiliates. Purchases of energy within the SOUTHERN system will vary depending on demand and cost of generation resources at each company. Effective June 2002, SAVANNAH began purchasing energy and capacity from Southern Power's Plant Wansley Units No. 6 and No. 7 under a 7 1/2 year power purchase agreement. Purchased power - non-affiliates. During the second quarter 2002 and year-to-date 2002, these purchases were lower when compared to the same periods in 2001 primarily due to reduced demand for energy from non-affiliates. These transactions do not have a significant impact on net income since energy expenses are generally offset by energy revenues through SAVANNAH's fuel cost recovery clause. Maintenance expense. The increases in this item for the second quarter 2002 and year-to-date 2002 compared to the corresponding periods in 2001 are primarily attributed to scheduled maintenance outages at one of SAVANNAH's steam plants and expenses for major maintenance on the combustion turbines at Plant McIntosh. Interest expense, net. This expense decreased in each reporting period as a result of a lower amount of debt outstanding and lower interest rates. 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. For information regarding the results of a recent rate filing, reference is made to Note (M) in the "Notes to the Condensed Financial Statements" herein for additional information. 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 and other environmental issues could affect earnings if such costs cannot be recovered. For additional information about the Clean Air Act and other environmental issues, including the EPA litigation, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" and Note 3 to the financial statements of SAVANNAH in the Form 10-K. On April 25, 2002, the Stakeholder Advisory Committee met and selected the candidates that will be considered for the SeTrans ISA. On June 27, 2002, SOUTHERN and other SeTrans sponsors submitted a Petition for Declaratory Order seeking the FERC's guidance on various issues. The petition asks for a response from the FERC by October 2002. Reference is made to Item 1 - BUSINESS - "Certain Factors Affecting the Industry" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Industry Restructuring" of SAVANNAH in the Form 10-K for additional information. 74 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On July 31, 2002, the FERC issued a notice of proposed rulemaking entitled "Remedying Undue Discrimination Through Open Access Transmission Service and Standard Electricity Market Design." The FERC has indicated that the proposal, if adopted, would (among other things): (i) require transmission assets of jurisdictional utilities to be operated by an independent entity; (ii) establish a standard market design; (iii) establish a single type of transmission service that applies to all customers; (iv) assert jurisdiction over the transmission component of bundled retail service; (v) establish a generation reserve margin; (vi) establish bid caps for day-ahead and spot energy markets; and (vii) revise the FERC policy on the pricing of transmission expansions. Comments on the proposal are due 75 days after its issuance. Any impact of this proposal on SOUTHERN and its subsidiaries will depend on the form in which final rules may be ultimately adopted. Reference is made to Notes (C) through (E) 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. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. Reference is also made to Note (E) in the "Notes to the Condensed Financial Statements" for information relating to certain lawsuits regarding the installation of fiber optic cable over SAVANNAH's existing easements. Accounting Policies Critical Policy SAVANNAH's significant accounting policies are described in Note 1 to the financial statements of SAVANNAH in Item 8 of the Form 10-K. SAVANNAH's only critical accounting policy involves rate regulation. SAVANNAH is 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 SAVANNAH's operations is no longer subject to these provisions, SAVANNAH would be required to write off related regulatory assets and liabilities that are not specifically recoverable and determine if any other assets, including plant, have been impaired. New Accounting Standards Effective January 1, 2001, SAVANNAH adopted FASB Statement No. 133, "Accounting for Derivatives and Hedging Activities," as amended, and changed the method of accounting for derivative instruments. Derivatives are now reflected on the Condensed Balance Sheet as either an asset or liability measured at fair market value, and the changes in the fair value are currently recognized in earnings unless specific hedge accounting criteria are met. Reference is made to "Exposure to Market Risks" below for information relating to derivative instruments. 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. The liability for an asset's future retirement must be recorded in the period in which the liability is incurred. The cost must be 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 January 1, 2003. SAVANNAH is currently assessing the impact of adopting Statement No. 143 on its financial statements. 75 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FINANCIAL CONDITION Overview Major changes in SAVANNAH's financial condition during the first six months of 2002 included the addition of approximately $20.4 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations. See SAVANNAH's Condensed Statements of Cash Flows for further details. Credit Rating Risk SAVANNAH does not have any credit agreements that would require material changes in payment schedules or terminations as a result of a credit rating downgrade. Exposure to Market Risks SAVANNAH's market risk exposures relative to interest rate changes have not changed materially compared with the previous reporting period, December 31, 2001. In addition, SAVANNAH is not aware of any facts or circumstances that would significantly affect such exposures in the near term. Due to cost-based rate regulations, SAVANNAH has limited exposure to market volatility in interest rates, commodity fuel prices and prices of electricity. To mitigate residual risks relative to movements in electricity prices, SAVANNAH enters into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market and, to a lesser extent, similar contracts for gas purchases. SAVANNAH has also implemented a retail fuel hedging program at the instruction of its PSC. The fair value of derivative energy contracts at June 30, 2002 is as follows: Second Quarter 2002 Year-to-Date Changes Changes ---------------------------------------------------------------------------- Fair Value --------------------------------------------------------------------------- (in thousands) Contracts beginning of period $ 6 $(1,053) Contracts realized or settled (43) (36) New contracts at inception - - Changes in valuation techniques - - Current period changes (10) 1,042 ------------------------------------------------------------------------- Contracts at June 30, 2002 $(47) $ (47) ======================================================================== 76 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Source of June 30, 2002 Valuation Prices -------------------------------------------------------------------------- Maturity Total ------------------------------- Fair Value Year 1 1-3 Years -------------------------------------------------------------------------- (in thousands) Actively quoted $(47) $(245) $198 External sources - - - Models and other methods - - - --------------------------------------------------------------------------- Contracts at June 30, 2002 $(47) $(245) $198 ========================================================================== Unrealized gains and losses from mark to market adjustments on contracts related to the retail fuel hedging programs are recorded as regulatory assets and liabilities. At June 30, 2002, SAVANNAH had approximately $47 thousand in regulatory assets related to unrealized losses on mark to market derivative contracts associated with its fuel hedging programs. Realized gains and losses from these programs are included in fuel expense and are recovered through SAVANNAH's fuel cost recovery clause. Gains and losses on contracts that do not represent hedges are recognized in the Statements of Income as incurred. For the quarter and year-to-date periods ended June 30, 2002 and 2001, these amounts were not material. For additional information, reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Exposure to Market Risks" of SAVANNAH in the Form 10-K and Note 1 to the financial statements of SAVANNAH in Item 8 of the Form 10-K. Financing Activities SAVANNAH 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 SAVANNAH under "Capital Requirements for Construction," "Other Capital Requirements" and "Environmental Matters" in the Form 10-K for a description of SAVANNAH's capital requirements for its construction program, maturing debt and environmental compliance efforts. 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 77 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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, 2002 approximately $1.6 million of cash and cash equivalents and $65.5 million of committed credit arrangements with banks, of which $25.5 million expire in 2002, $30 million expire in 2003 and $10 million expire in 2005. The credit arrangements provide liquidity support to SAVANNAH's obligations 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 and extendible commercial notes at the request and for the benefit of SAVANNAH and other SOUTHERN subsidiaries. At June 30, 2002, SAVANNAH had outstanding $36.5 million of notes payable. 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. 78 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, N, O ALABAMA A, C, D, E, G, N GEORGIA A, C, D, E, H, I GULF A, C, D, E, J MISSISSIPPI A, C, D, E, K, L SAVANNAH A, C, D, E, M 79 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, 2002 and 2001. 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. Disclosure which would substantially duplicate the disclosure in the Form 10-K and details which have not changed significally in amount or composition since the filing of the Form 10-K are omitted from this Form 10-Q. Therefore, 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 Dividends" of SOUTHERN in Item 7 of the Form 10-K for information on the spin off of Mirant from SOUTHERN. 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 $3.2 billion and $0.4 billion to SOUTHERN's paid-in capital and retained earnings, respectively. The distribution was treated as a non-cash transaction for purposes of the cash flow. 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. Mirant recently announced that it is reviewing several accounting issues pertaining to its 2001 financial statements. These issues include potential overstatements of $85 million of gas inventory, $100 million of accounts payable and $68 million of accounts receivable. Mirant also has announced that the SEC has initiated a related informal inquiry. If any issues require adjustments to Mirant's financial statements and relate to periods prior to April 2, 2001, SOUTHERN's earnings from discontinued operations and net assets of discontinued operations for such periods would be affected. Mirant's internal investigation and the SEC's inquiry into these issues have not yet been completed and the ultimate outcome cannot now be determined. 80 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (C) The operating companies 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. (D) Reference is made to Note 3 to the financial statements of SOUTHERN, ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH in Item 8 of the Form 10-K for information on EPA litigation. On July 30, 2002, the U. S. District Court in Alabama extended the stay of the proceeding in Alabama through late October 2002. (E) Reference is made to Note 3 to the financial statements of each registrant in Item 8 and to Legal Proceedings in Item 3 of the Form 10-K for information relating to various lawsuits. In recent months, affiliates of SOUTHERN, including GEORGIA, GULF, MISSISSIPPI, SAVANNAH and Southern Telecom, Inc. (collectively, "Defendants"), have been named as defendants in numerous lawsuits brought by landowners regarding the installation and use of fiber optic cable over Defendants' rights of way located on the landowners' property. The plaintiffs' lawsuits claim that Defendants may not use or sublease to third parties some or all of the fiber optic communications lines on the rights of way that cross the plaintiffs' properties, and that such actions by Defendants exceed the easements or other property rights held by Defendants. The plaintiffs assert claims for, among other things, trespass and unjust enrichment, and the plaintiffs seek compensatory and punitive damages and injunctive relief. Defendants believe that the plaintiffs' claims are without merit and are vigorously defending these cases. An adverse outcome in these matters could result in substantial judgments; however, at this time, the ultimate outcome of these cases cannot be determined. (F) SOUTHERN has made separate guarantees to certain counterparties regarding performance of contractual commitments by Mirant's trading and marketing subsidiaries. At June 30, 2002, the total notional amount of guarantees was $52.0 million, all of which will expire by 2007. The estimated fair value of net contractual commitments outstanding was approximately $22.8 million. SOUTHERN's potential exposure under these contractual commitments is not expected to materially differ from the estimated fair value. Subsequent to the spin off, Mirant began paying SOUTHERN a monthly fee of 1% 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. (G) Reference is made to Item 1 - Business - "Rate Proceedings" and 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. On March 5, 2002, the Alabama PSC approved a revision to ALABAMA's rates that provide for periodic adjustments based upon ALABAMA's earned return on end-of-period retail common equity. This revision provides for an annual, rather than quarterly, adjustment and imposes a 3 percent limit on any such annual adjustment. The return on common equity range of 13.0 to 14.5 percent remains unchanged. In April 2002, retail rates were increased by 2 percent in accordance with the Rate Stabilization and Equalization Plan. The Alabama PSC also accepted 81 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) ALABAMA's proposal to lower the energy cost recovery factor for the billing months April 2002 through December 2002. (H) On December 20, 2001, the Georgia PSC approved a new three-year retail rate order for GEORGIA ending December 31, 2004. Under the terms of the order, earnings will be evaluated annually against a retail return on common equity range of 10 percent to 12.95 percent. Two-thirds of any earnings above the 12.95 percent return will be applied to rate refunds, with the remaining one-third retained by GEORGIA. Retail rates were decreased by $118 million effective January 1, 2002. Pursuant to a previous three-year accounting order, GEORGIA recorded $332 million of accelerated cost amortization and interest thereon which has been credited to a regulatory liability account as mandated by the Georgia PSC. Under the new rate order, the accelerated amortization and the interest will be amortized equally over three years as a credit to expense beginning in January 2002. Effective January 1, 2002, GEORGIA discontinued recording accelerated depreciation and amortization. GEORGIA will not file for a general base rate increase unless its projected retail return on common equity falls below 10 percent. GEORGIA is required to file a general rate case on July 1, 2004, in response to which the Georgia PSC would be expected to determine whether the rate order should be continued, modified or discontinued. See Note 3 to the financial statements of GEORGIA in Item 8 of the Form 10-K under "Retail Rate Orders" for additional information. (I) 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. (J) On September 10, 2001, GULF filed a request with the Florida PSC for a base rate increase of $69.9 million. This increase is necessary to cover costs related to GULF's new combined cycle facility, Smith Unit 3, increases in operation and maintenance expenses and capital additions. In its brief filed with the Florida PSC, GULF reduced its request to $64.9 million, primarily to reflect lower financing costs related to Smith Unit 3 and a 25-year depreciable life for Smith Unit 3 (rather than the 20-year life as originally filed). On April 26, 2002, the Florida PSC voted to grant GULF a $53.2 million, or 8.9 percent, annual increase, which reflects an authorized return on equity of 12.00 percent. The new rates resulting from the revenue increase were approved by the Florida PSC on May 8, 2002 and became effective on June 7, 2002. (K) In August 2001, MISSISSIPPI filed a request with the Mississippi PSC to increase annual retail rate revenues by approximately $46.4 million. In order to consider MISSISSIPPI's request, the Mississippi PSC suspended the semi-annual evaluations under PEP. In December 2001, the Mississippi PSC approved an increase of approximately $39 million, which took effect in January 2002. Additionally, the Mississippi PSC ordered MISSISSIPPI to reactivate the semi-annual evaluations under PEP, beginning with the 12-month period ending December 31, 2002. PEP will remain in effect until the Mississippi PSC modifies, suspends or terminates the plan. On April 30, 2002, the Mississippi PSC held and concluded hearings on a review of the return on equity models used in PEP in setting MISSISSIPPI's authorized return on equity. In May 2002, the Mississippi PSC issued an order adopting new return on equity models to be used in the PEP process. The new models are very similar to those that established the $39 million rate increase authorized in December 2001 and will be incorporated into the PEP evaluation filing for the period ending December 31, 2002. 82 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (L) Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI in the Form 10-K regarding the settlement agreement between MISSISSIPPI and certain wholesale customers to increase its wholesale tariff rates effective June 1, 2002. In March 2002, that agreement was filed with the FERC for approval. On April 19, 2002, the FERC accepted for filing the settlement agreement and placed the new tariff rates in effect June 1, 2002 without modifying the agreement reached between MISSISSIPPI and its customers. The settlement agreement results in an annual increase of approximately $10.5 million and the adoption of an Energy Cost Management clause similar to the one approved by MISSISSIPPI's retail jurisdiction. Reference is made to Note 1 to the financial statements of MISSISSIPPI in Item 8 of the Form 10-K for further information on the Energy Cost Management clause. MISSISSIPPI's order from the FERC constitutes final agency action on this matter. (M) SAVANNAH filed a base rate case on November 30, 2001. The primary reason for this base rate case was to recover significant new revenue requirements related to a 200 MW Plant Wansley Power Purchase Agreement which began in June 2002, as well as other operation and maintenance changes. The requested increase was $24.4 million or 7.6 percent of total revenues. SAVANNAH also filed for a simultaneous fuel cost recovery decrease to offset most, if not all, of the base rate increase. On May 30, 2002, the Georgia PSC approved a $7.8 million base rate increase and an authorized return on equity of 12.0 percent rather than the $24.4 million and 13.5 percent return on equity which were requested. At the same time, the Georgia PSC also approved a $44.3 million fuel cost allowance reduction. SAVANNAH had requested a $41.3 million fuel cost reduction. All customers saw a net rate decrease effective June 2002. On June 10, 2002, SAVANNAH filed for reconsideration of the Georgia PSC base rate case order, seeking additional revenues. On August 6, 2002, the Georgia PSC voted to deny SAVANNAH's request for reconsideration in this matter. SAVANNAH is currently evaluating its options as a result of this decision. (N) In addition to the fixed price electric and gas contracts used to mitigate exposure to volatile energy prices (see "Exposure to Market Risks" in MANAGEMENT'S DISCUSSION AND ANALYSIS), SOUTHERN and certain of its subsidiaries enter into interest rate swaps to hedge exposure to interest rate changes. Swaps related to fixed rate securities are accounted for as fair value hedges; swaps related to variable rate securities or forecasted transactions are accounted for as cash flow hedges. The swaps are generally structured to mirror the terms of the hedged debt instruments; therefore, no ineffectiveness has been recorded in earnings. As of June 30, 2002, the following swaps were outstanding:
Fair Value Hedges ----------------------------------------------------------------------------------------------------------------- Notional Fixed Rate Variable Maturity Fair Value Amount Received Rate Paid Date June 30, 2002 ----------------------------------------------------------------------------------------------------------------- SOUTHERN $400 million 5.3% 6-month LIBOR February 2007 $13,387,000 less 0.103% 83
NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Cash Flow Hedges ---------------------------------------------------------------------------------------------------------------------- Weighted Average Fair Value Notional Variable Rate Fixed Rate Maturity June 30, 2002 (Included Amount Received Paid Date in OCI) ---------------------------------------------------------------------------------------------------------------------- SOUTHERN $400 million; 1-month LIBOR June 2003; $(2,016,000) $200 million 3.1975% June 2004 ALABAMA $350 million 3-month LIBOR 3.015% December 2003 $ (826,000) plus 0.12% Southern Power $350 million 1-month LIBOR 6.2348% June 2013 $(9,755,000) Southern Power $100 million 1-month LIBOR 6.1863% June 2008 $(3,557,000)
For the quarter and year-to-date periods ended June 30, 2002, approximately $0.1 million was reclassified from other comprehensive income to interest expense. For the 12-month period ended June 2003, approximately $1.7 million is expected to be reclassified. (O) SOUTHERN's reportable business segment is sale of electricity in the Southeast by the operating companies and Southern Power. 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:
Electric All Reconciling Utilities Other Eliminations Consolidated --------------------------------------------------------------------------------------------------------------- (in millions) Three Months Ended June 30, 2002: Operating revenues $ 2,564 $ 73 $ (7) $ 2,630 Segment net income (loss) 341 (11) 2 332 Six Months Ended June 30, 2002 Operating revenues $ 4,704 $ 150 $ (10) $ 4,844 Segment net income (loss) 573 (19) 2 556 Total assets at June 30, 2002 $30,147 $ 874 $289 $31,310 --------------------------------------------------------------------------------------------------------------- Three Months Ended June 30, 2001: Operating revenues $ 2,503 $ 65 $ (7) $ 2,561 Segment net income (loss) 276 1 (5) 272 Six Months Ended June 30, 2001 Operating revenue $ 4,724 $ 117 $ (10) $ 4,831 Segment net income (loss) 475 (24) 141 592 Total assets at December 31, 2001 $28,724 $2,420 $(1,236) $29,908 ---------------------------------------------------------------------------------------------------------------
84 PART II - OTHER INFORMATION Item 1. Legal Proceedings. Reference is made to the Notes to the Condensed Financial Statements herein for information regarding certain legal and administrative proceedings in which SOUTHERN and its reporting subsidiaries are involved. Item 4. Submission of Matters to a Vote of Security Holders. SOUTHERN SOUTHERN held its annual meeting of shareholders on May 22, 2002. Each nominee for director of SOUTHERN received the requisite plurality of votes for election. The vote tabulation was as follows:
Nominees Shares For Shares Withhold Vote Daniel P. Amos 481,196,602 7,727,880 Dorrit J. Bern 478,611,773 10,312,709 Thomas F. Chapman 480,932,152 7,992,330 Allen Franklin 480,176,304 7,748,178 Bruce S. Gordon 481,056,715 7,867,767 L. G. Hardman III 478,709,123 10,215,359 Donald M. James 481,213,365 7,711,117 Zack T. Pate 478,861,711 10,062,771 Gerald J. St. Pe 478,672,567 10,251,915
In addition, at the annual meeting, shareholders were entitled to vote on a stockholder recommendation that SOUTHERN invest in renewable energy sources. The vote tabulation was 35,651,610 shares for 350,728,358 shares against and 17,806,735 shares abstaining. As a result of this vote, the stockholder proposal was rejected. 85 Item 4. Submission of Matters to a Vote of Security Holders. (Continued) ALABAMA ALABAMA held its annual meeting of common shareholders and preferred shareholders on April 26, 2002, and the following persons were elected to serve as directors of ALABAMA: Whit Armstrong Charles D. McCrary David J. Cooper, Sr. Mayer Mitchell Allen Franklin 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 6,000,000 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. GEORGIA GEORGIA held its annual meeting of common shareholders and preferred shareholders on May 15, 2002, and the following persons were elected to serve as directors of GEORGIA: Juanita P. Baranco G. Joseph Prendergast Anna R. Cablik David M. Ratcliffe William A. Fickling, Jr. Richard W. Ussery Allen Franklin William Jerry Vereen L. G. Hardman III Carl Ware James R. Lientz, Jr. E. Jenner Wood, III 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 15, 2002, and the following persons were elected to serve as directors of GULF: C. LeDon Anchors Allen Franklin Travis J. Bowden William A. Pullum Fred C. Donovan, Sr. Joseph K. Tannehill 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. None of the shares of preferred stock were voted. 86 Item 4. Submission of Matters to a Vote of Security Holders. (Continued) MISSISSIPPI MISSISSIPPI held its annual meeting of common shareholders and preferred shareholders on May 15, 2002, and the following persons were elected to serve as directors of MISSISSIPPI: Tommy E. Dulaney George A. Schloegel Michael D. Garrett 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. None of the shares of preferred stock were voted. SAVANNAH By written consent, in lieu of the annual meeting of stockholders of SAVANNAH, effective May 2, 2002, 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 SOUTHERN's common stock are owned by SOUTHERN and were voted in favor of the nominees for directors. 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, 2001, File Nos. 1-3526, 1-3164, 1-6468, 0-2429, 0-6849 and 1-5072 as Exhibits 24(a), 24(b), 24(c), 24(d), 24(e) and 24(f), respectively, and incorporated herein by reference.) (b) Power of Attorney for GEORGIA. (c) Power of Attorney for GULF. (b) Reports on Form 8-K. ------------------- SOUTHERN filed a Current Report on Form 8-K dated July 24, 2002: Items reported: Items 5 and 7 Financial statements filed: None ALABAMA filed a Current Report on Form 8-K dated June 21, 2002: Items reported: Items 5 and 7 Financial statements filed None GEORGIA filed Current Reports on Form 8-K dated June 13, 2002 and June 27, 2002: Items reported: Items 5 and 7 Financial statements filed: None 87 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 Allen Franklin Chairman and Chief Executive Officer (Principal Executive Officer) By Gale E. Klappa Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: August 12, 2002 ------------------------------------------------------------------------------- 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 Charles D. McCrary President and Chief Executive Officer (Principal Executive Officer) By William B. Hutchins, III Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: August 12, 2002 88 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 Allen L. Leverett Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: August 12, 2002 ------------------------------------------------------------------------------- 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 Thomas A. Fanning 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 12, 2002 89 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, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: August 12, 2002 ------------------------------------------------------------------------------- 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 12, 2002 90