-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PWEsBXUDdqlHbn3qkpYfMAhiS7RUjUqw0AFGM1S7HQCoW3L8WdGwN34i/TBtyjDC zo9S1nXPrQLzhiB7yT/aVw== 0000092122-98-000084.txt : 19980915 0000092122-98-000084.hdr.sgml : 19980915 ACCESSION NUMBER: 0000092122-98-000084 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN CO CENTRAL INDEX KEY: 0000092122 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 580690070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03526 FILM NUMBER: 98686405 BUSINESS ADDRESS: STREET 1: 270 PEACHTREE ST CITY: ATLANTA STATE: GA ZIP: 30303 BUSINESS PHONE: 7703930650 MAIL ADDRESS: STREET 1: 270 PEACHTREE STREET CITY: ATLANTA STATE: GA ZIP: 30303 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALABAMA POWER CO CENTRAL INDEX KEY: 0000003153 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 630004250 STATE OF INCORPORATION: AL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03164 FILM NUMBER: 98686406 BUSINESS ADDRESS: STREET 1: 600 N 18TH ST STREET 2: P O BOX 2641 CITY: BIRMINGHAM STATE: AL ZIP: 35291 BUSINESS PHONE: 2052501000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEORGIA POWER CO CENTRAL INDEX KEY: 0000041091 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 580257110 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06468 FILM NUMBER: 98686407 BUSINESS ADDRESS: STREET 1: 333 PIEDMONT AVE NE CITY: ATLANTA STATE: GA ZIP: 30308 BUSINESS PHONE: 4045266526 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GULF POWER CO CENTRAL INDEX KEY: 0000044545 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 590276810 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-02429 FILM NUMBER: 98686408 BUSINESS ADDRESS: STREET 1: ONE ENERGY PLACE CITY: PENSACOLA STATE: FL ZIP: 32520-0102 BUSINESS PHONE: 8504446111 MAIL ADDRESS: STREET 1: ONE ENERGY PLACE CITY: PENSACOLA STATE: FL ZIP: 32520-0102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MISSISSIPPI POWER CO CENTRAL INDEX KEY: 0000066904 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 640205820 STATE OF INCORPORATION: MS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11229 FILM NUMBER: 98686409 BUSINESS ADDRESS: STREET 1: 2992 W BEACH CITY: GULFPORT STATE: MS ZIP: 39501 BUSINESS PHONE: 2288641211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAVANNAH ELECTRIC & POWER CO CENTRAL INDEX KEY: 0000086940 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 580418070 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05072 FILM NUMBER: 98686410 BUSINESS ADDRESS: STREET 1: 600 BAY ST EAST CITY: SAVANNAH STATE: GA ZIP: 31401 BUSINESS PHONE: 9122327171 10-Q 1 SECOND QUARTER FORM 10-Q ===============================================================================
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, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _____to_____ Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. 1-3526 The Southern Company 58-0690070 (A Delaware Corporation) 270 Peachtree Street, N.W. Atlanta, Georgia 30303 (404) 506-5000 1-3164 Alabama Power Company 63-0004250 (An Alabama Corporation) 600 North 18th Street Birmingham, Alabama 35291 (205) 257-1000 1-6468 Georgia Power Company 58-0257110 (A Georgia Corporation) 241 Ralph McGill Boulevard, N.E. Atlanta, Georgia 30308 (404) 506-6526 0-2429 Gulf Power Company 59-0276810 (A Maine Corporation) One Energy Place Pensacola, Florida 32520-0102 (850) 444-6111 0-6849 Mississippi Power Company 64-0205820 (A Mississippi Corporation) 2992 West Beach Gulfport, Mississippi 39501 (228) 864-1211 1-5072 Savannah Electric and Power Company 58-0418070 (A Georgia Corporation) 600 East Bay Street Savannah, Georgia 31401 (912) 644-7171 ===================================================================================================================
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No____
Description of Shares Outstanding Registrant Common Stock at July 31, 1998 The Southern Company Par Value $5 Per Share 697,798,995 Alabama Power Company Par Value $40 Per Share 5,608,955 Georgia Power Company No Par Value 7,761,500 Gulf Power Company No Par Value 992,717 Mississippi Power Company Without Par Value 1,121,000 Savannah Electric and Power Company Par Value $5 Per Share 10,844,635 This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company and Savannah Electric and Power Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies.
INDEX TO QUARTERLY REPORT ON FORM 10-Q June 30, 1998 Page Number DEFINITIONS........................................................................................................ 4 PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition The Southern Company and Subsidiary Companies Condensed Consolidated Statements of Income........................................................ 6 Condensed Consolidated Statements of Cash Flows.................................................... 7 Condensed Consolidated Balance Sheets.............................................................. 8 Consolidated Statements of Comprehensive Income.................................................... 10 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 11 Alabama Power Company Condensed Statements of Income..................................................................... 17 Condensed Statements of Cash Flows................................................................. 18 Condensed Balance Sheets........................................................................... 19 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 21 Exhibit 1 - Report of Independent Public Accountants............................................... 25 Georgia Power Company Condensed Statements of Income..................................................................... 27 Condensed Statements of Cash Flows................................................................. 28 Condensed Balance Sheets........................................................................... 29 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 31 Exhibit 1 - Report of Independent Public Accountants............................................... 36 Gulf Power Company Condensed Statements of Income..................................................................... 38 Condensed Statements of Cash Flows................................................................. 39 Condensed Balance Sheets........................................................................... 40 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 42 Mississippi Power Company Condensed Statements of Income..................................................................... 47 Condensed Statements of Cash Flows................................................................. 48 Condensed Balance Sheets........................................................................... 49 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 51 Savannah Electric and Power Company Condensed Statements of Income..................................................................... 56 Condensed Statements of Cash Flows................................................................. 57 Condensed Balance Sheets........................................................................... 58 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 60 Notes to the Condensed Financial Statements........................................................... 63 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 64 PART II - OTHER INFORMATION Item 1. Legal Proceedings......................................................................................... 69 Item 2. Changes in Securities..................................................................................... Inapplicable Item 3. Defaults Upon Senior Securities........................................................................... Inapplicable Item 4. Submission of Matters to a Vote of Security Holders....................................................... 69 Item 5. Other Information......................................................................................... Inapplicable Item 6. Exhibits and Reports on Form 8-K.......................................................................... 71 Signatures ............................................................................................... 73 3
DEFINITIONS TERM MEANING affiliates.................................. ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH ALABAMA..................................... Alabama Power Company BEWAG....................................... Berliner Kraft und Licht AG CEPA........................................ Consolidated Electric Power Asia Limited Clean Air Act............................... Clean Air Act Amendments of 1990 ECO Plan.................................... Environmental Compliance Overview Plan Energy Act.................................. Energy Policy Act of 1992 EWG......................................... Exempt wholesale generator FASB........................................ Financial Accounting Standards Board FERC........................................ Federal Energy Regulatory Commission Form 10-K................................... Combined Annual Report on Form 10-K of SOUTHERN, ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH for the year ended December 31, 1997 FUCO........................................ Foreign utility company GEORGIA..................................... Georgia Power Company GULF........................................ Gulf Power Company MISSISSIPPI................................. Mississippi Power Company Mobile Energy............................... Mobile Energy Services Company, L.L.C. and Mobile Energy Services Holdings, Inc. OPC......................................... Oglethorpe Power Corporation operating affiliates........................ see affiliates operating companies......................... see affiliates PEP......................................... Performance Evaluation Plan PSC......................................... Public Service Commission SAVANNAH.................................... Savannah Electric and Power Company SEC......................................... Securities and Exchange Commission SOUTHERN.................................... The Southern Company Southern Energy............................. Southern Energy, Inc. (formerly SEI Holdings, Inc.), including SOUTHERN subsidiaries managed or controlled by Southern Energy SWEB........................................ South Western Electricity plc (United Kingdom) TVA......................................... Tennessee Valley Authority CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-Q includes forward-looking statements in addition to historical information. The registrants caution that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry; the extent and timing of the entry of additional competition in the markets of SOUTHERN's subsidiaries; potential business strategies, including acquisitions or dispositions of assets or internal restructuring, that may be pursued by the registrants; state and federal rate regulation in the United States; changes in or application of environmental and other laws and regulations to which SOUTHERN and its subsidiaries are subject; political, legal and economic conditions and developments in the United States and in foreign countries in which the subsidiaries operate; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather and other natural phenomena; the performance of projects undertaken by the non-traditional business and the success of efforts to invest in and develop new opportunities; and other factors discussed elsewhere herein and in other reports (including Form 10-K) filed from time to time by the registrants with the SEC.
4 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES 5
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Six Months Ended June 30, Ended June 30, --------------------- ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- OPERATING REVENUES $ 2,913,381 $ 2,717,195 $ 5,427,096 $ 5,301,609 -------------- -------------- -------------- -------------- OPERATING EXPENSES: Operation-- Fuel 616,504 517,251 1,090,832 1,003,006 Purchased power 302,978 483,176 610,977 941,417 Other (Note G) 533,114 458,188 994,834 883,535 Maintenance 234,681 211,553 434,669 402,845 Depreciation and amortization 426,415 286,907 750,714 579,031 Amortization of deferred Plant Vogtle costs (Note M) 7,786 37,584 15,572 75,211 Taxes other than income taxes 143,159 139,273 290,491 290,967 Income taxes 158,070 153,706 300,183 299,888 -------------- -------------- -------------- -------------- Total operating expenses 2,422,707 2,287,638 4,488,272 4,475,900 -------------- -------------- -------------- -------------- OPERATING INCOME 490,674 429,557 938,824 825,709 OTHER INCOME: Equity in earnings of unconsolidated subsidiaries 10,640 8,052 45,136 11,361 Interest income 113,508 20,139 151,413 48,223 Other, net (11,409) 11,169 (15,904) 22,861 Income taxes applicable to other income (6,102) 8,609 7,112 13,048 -------------- -------------- -------------- -------------- INCOME BEFORE INTEREST CHARGES 597,311 477,526 1,126,581 921,202 -------------- -------------- -------------- -------------- INTEREST CHARGES AND OTHER: Interest on long-term debt 178,472 165,145 352,749 317,345 Interest on notes payable 32,534 26,109 61,436 55,428 Amortization of debt discount, premium and expense, net 33,515 8,835 40,472 16,355 Other interest charges, net 26,900 6,757 46,008 20,284 Minority interests in subsidiaries 13,123 12,823 29,710 28,342 Distributions on capital and preferred securities of subsidiary companies 35,569 28,870 70,666 50,393 Preferred dividends of subsidiary companies 6,425 14,192 13,065 31,247 -------------- -------------- -------------- -------------- Interest charges and other, net 326,538 262,731 614,106 519,394 -------------- -------------- -------------- -------------- CONSOLIDATED NET INCOME $ 270,773 $ 214,795 $ 512,475 $ 401,808 ============== ============== ============== ============== AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (Thousands) 697,659 682,786 696,355 680,806 BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK $0.39 $0.31 $0.74 $0.59 CASH DIVIDENDS PAID PER SHARE OF COMMON STOCK $0.335 $0.325 $0.67 $0.65 The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements. 6
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Six Months Ended June 30, 1998 1997 OPERATING ACTIVITIES: Consolidated net income $ 512,475 $ 401,808 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 880,545 683,854 Deferred income taxes and investment tax credits (25,900) (3,335) Allowance for equity funds used during construction (1,118) (1,623) Amortization of deferred Plant Vogtle costs (Note M) 15,572 75,211 Gain on asset sales (32,168) (15,879) Other, net 6,324 (4,324) Changes in certain current assets and liabilities-- Receivables, net (147,655) (135,736) Special deposits-other 2,897 48,622 Fossil fuel stock (57,242) (57,825) Materials and supplies 6,481 14,766 Prepayments (49,494) (42,053) Payables (214,387) (4,102) Taxes Accrued 165,187 79,212 Other 35,139 113,623 ---------------- ---------------- Net cash provided from operating activities 1,096,656 1,152,219 ---------------- ---------------- INVESTING ACTIVITIES: Gross property additions (957,924) (789,528) Southern Energy business acquisitions (199,526) (1,854,064) Sale of additional interest in SWEB 170,000 - Sales of property 16,577 15,392 Other (21,407) (28,128) ---------------- ---------------- Net cash used for investing activities (992,280) (2,656,328) ---------------- ---------------- FINANCING ACTIVITIES: Proceeds-- Common stock 111,872 167,945 Capital and preferred securities 245,000 1,321,250 Pollution control obligations 210,300 103,870 Other long-term debt 1,073,532 1,009,865 Notes Receivable 182,792 - Retirements-- Preferred stock (40,771) (269,683) First mortgage bonds (502,795) (83,574) Pollution control obligations (102,990) (13,870) Other long-term debt (173,989) (314,403) Notes Receivable (79,000) - Special deposits-redemption funds (90,707) (134,307) Notes payable, net (323,463) 155,064 Payment of common stock dividends (466,072) (441,738) Miscellaneous (61,808) (58,347) ---------------- ---------------- Net cash provided from (used for) financing activities (18,099) 1,442,072 ---------------- ---------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 86,277 (62,037) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 600,820 444,832 ---------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 687,097 $ 382,795 ================ ================ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $503,311 $373,619 Income taxes $238,014 $270,350 Southern Energy business acquisitions-- Fair value of assets acquired $199,526 $3,650,064 Less cash paid for common stock 199,526 1,854,064 -------------- -------------- Liabilities assumed - $1,796,000 ============== ============== The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements. 7
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At June 30, 1998 At December 31, (Unaudited) 1997 ----------------- ------------------ UTILITY PLANT: Plant in service $ 34,586,789 $ 34,044,182 Less accumulated provision for depreciation 12,636,395 11,933,718 --------------- ---------------- 21,950,394 22,110,464 Nuclear fuel, at amortized cost 221,870 230,154 Construction work in progress 1,571,091 1,311,540 --------------- ---------------- Total 23,743,355 23,652,158 --------------- ---------------- OTHER PROPERTY AND INVESTMENTS: Goodwill, being amortized 1,889,568 1,887,574 Leasehold interests, being amortized 1,340,474 1,388,928 Equity investments in subsidiaries 1,416,628 1,167,739 Long-term notes receivable 454,157 460,448 Nuclear decommissioning trusts, at market 470,678 387,425 Miscellaneous 213,884 281,488 --------------- ---------------- Total 5,785,389 5,573,602 --------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 687,097 600,820 Special deposits 190,018 103,462 Receivables, less accumulated provisions for uncollectible accounts of $80,705 at June 30, 1998 and $77,056 at December 31, 1997 1,999,634 2,014,117 Fossil fuel stock, at average cost 274,493 217,251 Materials and supplies, at average cost 486,035 492,516 Prepayments 137,534 98,398 Vacation pay deferred 78,811 78,866 --------------- ---------------- Total 3,853,622 3,605,430 --------------- ---------------- DEFERRED CHARGES: Deferred charges related to income taxes 1,101,024 1,142,045 Prepaid pension costs 447,172 398,736 Deferred Plant Vogtle costs (Note M) 34,840 50,412 Debt expense, being amortized 105,314 101,068 Premium on reacquired debt, being amortized 264,638 285,149 Miscellaneous 419,600 461,910 --------------- ---------------- Total 2,372,588 2,439,320 --------------- ---------------- TOTAL ASSETS $ 35,754,954 $ 35,270,510 =============== ================ The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements. 8
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At June 30, 1998 At December 31, (Unaudited) 1997 ---------------- ------------------ CAPITALIZATION: Common stock, par value $5 per share- Authorized -- 1 billion shares Outstanding -- June 30, 1998: 697,797,503 shares -- December 31, 1997: 693,423,039 shares $ 3,488,988 $ 3,467,115 Paid-in capital 2,418,469 2,330,538 Retained earnings 3,886,150 3,842,135 Accumulated other comprehensive income 9,125 7,176 ---------------- ---------------- 9,802,732 9,646,964 Preferred stock of subsidiaries 443,914 493,346 Subsidiary obligated mandatorily redeemable capital and preferred securities (Note I) 1,989,675 1,743,520 Long-term debt 10,929,606 10,273,606 ---------------- ---------------- Total 23,165,927 22,157,436 ---------------- ---------------- CURRENT LIABILITIES: Preferred stock of subsidiaries due within one year 8,661 - Amount of securities due within one year 558,385 783,805 Notes payable 1,838,940 2,064,249 Accounts payable 773,779 1,048,266 Customer deposits 125,198 133,018 Taxes accrued-- Income taxes 275,726 119,782 Other 267,612 259,297 Interest accrued 262,609 261,668 Vacation pay accrued 110,270 108,207 Miscellaneous 546,950 608,761 ---------------- ---------------- Total 4,768,130 5,387,053 ---------------- ---------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 4,566,896 4,649,826 Deferred credits related to income taxes 741,543 745,674 Accumulated deferred investment tax credits 738,758 753,861 Employee benefits provisions 467,404 447,188 Minority interests in subsidiaries 588,462 434,987 Prepaid capacity revenues 103,252 109,982 Department of Energy assessments 72,193 72,193 Disallowed Plant Vogtle capacity buyback costs 55,175 55,856 Storm damage reserves 51,775 38,407 Miscellaneous 435,439 418,047 ---------------- ---------------- Total 7,820,897 7,726,021 ---------------- ---------------- TOTAL CAPITALIZATION AND LIABILITIES $ 35,754,954 $ 35,270,510 ================ ================ The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements. 9
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Stated in Thousands of Dollars) For the Three Months For the Six Months Ended June 30, Ended June 30, --------------- -------------- -------------- --------------- 1998 1997 1998 1997 ---- ---- ---- ---- Consolidated net income $270,773 $214,795 $512,475 $401,808 Other comprehensive income: Foreign currency translation adjustments (124) 6,524 2,998 (8,509) Less Applicable income taxes (43) 2,283 1,049 (2,978) ------------ ----------- ----------- ----------- CONSOLIDATED COMPREHENSIVE INCOME $270,692 $219,036 $514,424 $396,277 ======== ======== ======== ======== - - - - - - - ------------------------------------------------------------------- --------------- -------------- -------------- --------------- THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (Stated in Thousands of Dollars) At June 30, 1998 At December 31, 1997 Balance at beginning of period $7,176 $13,689 Change in current period 1,949 (6,513) ------- --------- BALANCE AT END OF PERIOD $9,125 $ 7,176 ====== ======== - - - - - - - ------------------------------------------------------------------------- ----------------------- ---------------------------- 10
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1998 vs. SECOND QUARTER 1997 AND YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997 RESULTS OF OPERATIONS Earnings SOUTHERN's consolidated net income for the second quarter and year-to-date 1998 was $271 million ($0.39 per share) and $512 million ($0.74 per share), respectively, compared to $215 million ($0.31 per share) and $402 million ($0.59 per share) for the corresponding periods of 1997. Earnings for the second quarter and year-to-date 1998 improved due to strong performance from both the traditional and non-traditional businesses. SOUTHERN's traditional core business is primarily represented by its five domestic electric utility operating companies, which provide electric service in four Southeastern states. Another significant portion of SOUTHERN's business is its non-traditional business primarily represented by Southern Energy, which owns and manages international and domestic businesses for SOUTHERN. Businesses acquired by Southern Energy have been included in the consolidated statements of income since the date of acquisition. Certain changes in operating revenues and expenses from the prior period result from such acquisitions. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) -------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------ (in thousands) % (in thousands) % Operating revenues............................... $196,186 7.2 $125,487 2.4 Fuel expense..................................... 99,253 19.2 87,826 8.8 Purchased power expense.......................... (180,198) (37.3) (330,440) (35.1) Other operation expense.......................... 74,926 16.4 111,299 12.6 Depreciation and amortization ................... 139,508 48.6 171,683 29.7 Amortization of deferred Plant Vogtle costs...... (29,798) (79.3) (59,639) (79.3) Equity in earnings of unconsolidated subsidiaries 2,588 32.1 33,775 297.3 Interest income.................................. 93,369 463.6 103,190 214.0 Other, net....................................... (22,578) (202.1) (38,765) (169.6) Income taxes applicable to other income.......... (14,711) (170.9) (5,936) (45.5) Amortization of debt discount, premium, and expense, net.............................. 24,680 279.3 24,117 147.5 Other interest charges, net...................... 20,143 298.1 25,724 126.8
Operating revenues. Operating revenues for the traditional core business for the second quarter and year-to-date 1998 increased $412 million or 20.4% and $459 million or 11.7%, respectively, compared to the corresponding periods of 1997. Traditional core business revenues increased for the second quarter and year-to-date 1998 primarily due to increases in energy sales of 16.2% and 10.4%, respectively. Sales of energy to residential, commercial and industrial customers rose by 32.5%, 13.8% and 6.3%, respectively, for the quarter and 19.9%, 8.3% and 4.8%, respectively, year-to-date due to hotter temperatures during these periods when compared to the milder-than-normal temperatures recorded in the corresponding periods in 1997. Retail revenues, 11 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION excluding fuel and any demand-side program revenues which generally do not affect income, increased $266 million for the second quarter and $303 million for year-to-date 1998. Operating revenues for non-traditional business were down by $216 million or 30.9% for the quarter and $334 million or 24.3% year-to-date when compared to the same periods in 1997 due primarily to a change to the equity method of reporting for Southern Energy's energy marketing activities. Prior to January 1998, these activities were accounted for on a consolidated basis. (See Note (D) in the "Notes to the Condensed Financial Statements" herein.) Fuel expense. The increases for the second quarter and year-to-date resulted from increased generation required to meet the higher demand for energy. Purchased power expense. For the second quarter and year-to-date 1998, purchased power expenses for the traditional core business rose by $63.4 million or 157.1% and $104.9 million or 145.2%, respectively. These expenses increased mainly due to the increased sale of energy to the different classes of retail customers. For non-traditional business, purchased power expenses dropped $244 million or 55.0% for the quarter and $435 million or 50.1% year-to-date when compared to the same periods in 1997. The primary reason for this decline is the change in reporting for Southern Energy's energy marketing activities, as mentioned above. Other operation expense. For the traditional business, these expenses were up $42.7 million or 11.9% for the quarter and $65.1 million or 9.5% year-to-date 1998 when compared to the same periods in 1997. The reasons for the increases include the additional costs incurred for a new customer service system, modifications of certain information systems for year 2000 compliance and property damage and other reserves. For the non-traditional business, these expenses were up $32.3 million or 32.3% for the quarter and $46.2 million or 23.6% year-to-date when compared to the corresponding periods in 1997 due primarily to additional costs related to continued growth in this business. Depreciation and amortization expense. Depreciation and amortization expense of the traditional core business for the quarter and year-to-date, increased compared to the corresponding periods in 1997. These increases are attributed primarily to additions to utility plant and to additional depreciation charges of $127.1 million for the quarter and $139.3 million year-to-date, pursuant to GEORGIA's retail accounting order as discussed in Note (L) in the "Notes to the Condensed Financial Statements" herein. Amortization of deferred Plant Vogtle costs. These costs decreased for the quarter and year-to-date due to the completion in September 1997 of the amortization of levelized buybacks and Plant Vogtle Unit 1 cost deferrals under the 1987 Georgia PSC order. See Note (M) in the "Notes to the Condensed Financial Statements", herein for further details. Equity in earnings of unconsolidated subsidiaries. The increases in this item for the quarter and year-to-date 1998 are primarily attributed to BEWAG. Southern Energy acquired a 26% interest in this Berlin, Germany, integrated utility in September 1997. Interest income. The second quarter and year-to-date increases in interest income were primarily in the traditional business. These increases are attributed to the settlement between SOUTHERN and the IRS relating to tax issues for the years 1984 through 1987. For additional information, see Note (H) in the "Notes to the Condensed Financial Statements" herein. 12 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Other, net. The second quarter and year-to-date 1998 decreases from the same periods in 1997 were primarily due to donations and contributions during the second quarter of 1998, and the recognition during the first quarter of 1997 of gains related to the sale of assets and construction activities. Income taxes applicable to other income. The increases for the quarter and year-to-date are primarily due to the taxes associated with additional interest income, as mentioned above. Amortization of debt discount, premium, and expense, net. Second quarter and year-to-date 1998 increases primarily result from ALABAMA's accelerated amortization of premiums incurred in connection with the refinancing of high-cost debt, in the amount of $25.0 million, as allowed by the Alabama PSC. See Note (J) in the "Notes to the Condensed Financial Statements" herein for further details. Other interest charges, net. These charges increased for the quarter and year-to-date due primarily to the recognition of interest related to tax issues and certain interest charges related to a nuclear decommissioning trust. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from energy sales growth to a less regulated, more competitive environment, with non-traditional business becoming more significant. For information relating to non-traditional business activities, see Item 1 - BUSINESS - "Non-Traditional Business" in the Form 10-K. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, SOUTHERN is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS "Environmental Matters" of SOUTHERN in the Form 10-K. SOUTHERN has assessed and developed a detailed strategy to prevent or at least minimize problems related to the year 2000 issue. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN in the Form 10-K. In May 1998, SOUTHERN through its subsidiary Southern Energy announced that it had agreed to purchase electric generating assets in New England from subsidiaries of Commonwealth Energy System and Eastern Utilities Associates for $537 million. Southern Energy will own and operate the plants which have a combined generating capacity of 1,260 megawatts, while Southern Company Energy Marketing, which markets electricity and natural gas nationwide, will sell the output to the divesting utilities and in the open market. In June 1998, SOUTHERN, through its subsidiary Southern Energy, sold an additional 26% interest in SWEB Holdings Limited, the holding company for SWEB, to PP&L Resources for $170 million. 13 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In March 1998, the American Institute of Certified Public Accountants issued a new Statement of Position (SOP), Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The SOP, which must be adopted by 1999, requires capitalization of certain costs of internal-use software. Adoption of the SOP is not expected to have a material impact on the financial statements. In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement is effective for fiscal years beginning after June 15, 1999. While SOUTHERN has not yet quantified the impact of adopting this statement on its financial statements, it could increase volatility in earnings and other comprehensive income. Reference is made to Notes (B), (C), (D), (E), (F), (G), (H), (J) through (O) and (Q) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. FINANCIAL CONDITION Overview Major changes in SOUTHERN's financial condition during the first six months of 1998 included $958 million used for gross property additions to utility plant; $200 million used for Southern Energy acquisitions; and $187 million received from property sales. The funds for these additions, acquisitions and other capital requirements were from operations and sales of securities. See SOUTHERN's Condensed Statements of Cash Flows for further details. Financing Activities During the first six months of 1998, retirements of the operating companies' first mortgage bonds and preferred stock totaled $503 million and $41 million, respectively. A subsidiary of GULF formed a statutory business trust which sold, during the first six months of 1998, $45 million of trust preferred securities. In June 1998, a subsidiary of SOUTHERN formed a statutory business trust which sold $200 million of trust originated preferred securities. See Note (I) in the "Notes to the Condensed Financial Statements" herein for further details. Also during the first six months of 1998, ALABAMA issued $200 million of 7% senior notes due December 31, 2047, and $190 million of 7% senior notes due March 31, 2048; GEORGIA issued $145 million of 6 7/8% senior notes due December 31, 2047; GULF issued $50 million of 6.70% senior notes due June 30, 2038; MISSISSIPPI issued $55 million of 6.75% senior notes due June 30, 2038 and $35 million of 6.05% senior notes due May 1, 2003; and SAVANNAH issued $30 million of 6 5/8% senior notes due March 17, 2015. During the first six months of 1998, SOUTHERN raised $112 million from the issuance of new common stock under SOUTHERN's various stock plans. The market price of SOUTHERN's common stock at June 30, 1998 was $27.6875 per share and the book value was $14.05 per share, representing a market-to-book ratio of 197%, compared to $25.875, $13.91 and 186%, respectively, at the end of 1997. The dividend for the second quarter of 1998 was $0.335 per share. 14 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 of SOUTHERN under "Capital Requirements for Construction," "Environmental Matters" and "Other Capital Requirements" in the Form 10-K for a description of the Southern electric system's capital requirements for its construction program, environmental compliance efforts, sinking fund requirements and maturing debt. Approximately $567 million will be required by June 30, 1999, for present sinking fund requirements, redemption of preferred stock and redemptions and maturities of long-term debt. Also, the operating companies plan to continue, to the extent possible, a program to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital. Sources of Capital In addition to the financing activities previously described, SOUTHERN may require additional equity capital during the remainder of the year. The amounts and timing of additional equity capital to be raised in 1998, as well as in subsequent years, will be contingent on SOUTHERN's investment opportunities. The operating companies plan to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, the SOUTHERN system had at June 30, 1998, approximately $687 million of cash and cash equivalents and approximately $4.8 billion of unused credit arrangements with banks (including $1,267 million of such arrangements under which borrowings may be made only to fund purchase obligations of the operating companies relating to variable rate pollution control bonds). At June 30, 1998, the system companies had outstanding approximately $745 million of short-term notes payable and $1,094 million of commercial paper. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. See Note (D) in the "Notes to the Condensed Financial Statements" herein for discussion of financial derivative contracts entered into by SOUTHERN. 15 ALABAMA POWER COMPANY 16
ALABAMA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Six Months Ended June 30, Ended June 30, 1998 1997 1998 1997 OPERATING REVENUES: Revenues $ 850,330 $ 699,219 $ 1,524,625 $ 1,357,324 Revenues from affiliates 13,385 28,870 55,595 75,533 ------------- ------------- -------------- -------------- Total operating revenues 863,715 728,089 1,580,220 1,432,857 ------------- ------------- -------------- -------------- OPERATING EXPENSES: Operation-- Fuel 215,623 202,213 408,645 406,571 Purchased power from non-affiliates 25,150 4,770 42,685 8,144 Purchased power from affiliates 43,617 25,451 62,249 45,509 Other 125,442 127,726 240,255 242,004 Maintenance 86,803 77,547 150,336 146,497 Depreciation and amortization 86,141 79,630 172,380 165,282 Taxes other than income taxes 46,121 45,935 95,560 95,392 Federal and state income taxes 56,096 39,067 98,653 74,253 ------------- ------------- -------------- -------------- Total operating expenses 684,993 602,339 1,270,763 1,183,652 ------------- ------------- -------------- -------------- OPERATING INCOME 178,722 125,750 309,457 249,205 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction 610 - 895 - Income from subsidiary 758 1,005 1,840 1,985 Interest income 24,828 4,657 38,498 15,747 Other, net (6,966) (6,277) (15,442) (14,649) Income taxes applicable to other income (4,493) 1,094 (2,316) 386 ------------- ------------- -------------- -------------- INCOME BEFORE INTEREST CHARGES 193,459 126,229 332,932 252,674 ------------- ------------- -------------- -------------- INTEREST CHARGES AND OTHER: Interest on long-term debt 47,713 41,845 92,431 83,228 Allowance for debt funds used during construction (900) (1,434) (1,552) (2,380) Interest on interim obligations 2,941 6,466 7,347 10,872 Amortization of debt discount, premium and expense, net 27,457 2,402 29,881 4,798 Other interest charges 12,615 3,259 26,235 13,963 Distributions on preferred securities of subsidiary companies 5,589 5,589 11,177 10,586 ------------- ------------- -------------- -------------- Total Interest charges and other 95,415 58,127 165,519 121,067 ------------- ------------- -------------- -------------- NET INCOME 98,044 68,102 167,413 131,607 DIVIDENDS ON PREFERRED STOCK 3,293 4,965 6,622 10,663 ------------- ------------- -------------- -------------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 94,751 $ 63,137 $ 160,791 $ 120,944 ============= ============= ============== ============== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. 17
ALABAMA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Six Months Ended June 30, 1998 1997 OPERATING ACTIVITIES: Net income $ 167,413 $ 131,607 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 226,381 194,622 Deferred income taxes and investment tax credits, net (5,789) 5,479 Allowance for equity funds used during construction (895) - Other, net 12,129 (39,035) Changes in certain current assets and liabilities-- Receivables, net (35,656) 428 Inventories (20,149) (29,247) Prepayments (19,814) (32,322) Payables (33,027) (78,032) Taxes accrued 46,385 34,576 Energy cost recovery, retail (17,097) 7,120 Other (28,146) (18,666) ------------- ------------ Net cash provided from operating activities 291,735 176,530 -------------- -------------- INVESTING ACTIVITIES: Gross property additions (301,276) (193,632) Other (37,307) (18,024) ------------- ------------ Net cash used for investing activities (338,583) (211,656) -------------- -------------- FINANCING ACTIVITIES: Proceeds-- Capital contributions 30,000 - Company obligated mandatorily redeemable preferred securities - 200,000 Pollution control bonds 106,790 - Other long-term debt 390,000 - Retirements-- Preferred stock - (112,000) First mortgage bonds (198,500) (19,801) Other long-term debt (510) (495) Interim obligations, net 30,638 148,029 Special Deposits (106,790) - Payment of preferred stock dividends (6,705) (11,749) Payment of common stock dividends (180,900) (165,700) Miscellaneous (20,529) (6,407) ------------- ------------ Net cash provided from financing activities 43,494 31,877 -------------- -------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (3,354) (3,249) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23,957 9,587 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,603 $ 6,338 ============== ============== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $ 112,584 $ 100,921 Income taxes 98,756 70,120 The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. 18
ALABAMA POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At June 30, 1998 At December 31, (Unaudited) 1997 ---------------- ----------------- UTILITY PLANT: Plant in service $ 11,182,635 $ 11,070,323 Less accumulated provision for depreciation 4,553,773 4,384,180 ---------------- --------------- 6,628,862 6,686,143 Nuclear fuel, at amortized cost 110,404 103,272 Construction work in progress 446,149 311,223 ---------------- --------------- Total 7,185,415 7,100,638 ---------------- --------------- OTHER PROPERTY AND INVESTMENTS: Southern Electric Generating Company, at equity 24,936 24,972 Nuclear decommissioning trusts 220,387 193,008 Miscellaneous 23,783 22,233 ---------------- --------------- Total 269,106 240,213 ---------------- --------------- CURRENT ASSETS: Cash and cash equivalents 20,603 23,957 Special deposits-redemption funds 106,790 - Receivables-- Customer accounts receivable 398,695 368,255 Other accounts and notes receivable 49,911 28,921 Affiliated companies 33,795 50,353 Accumulated provision for uncollectible accounts (2,367) (2,272) Refundable income taxes 879 - Fossil fuel stock, at average cost 113,424 74,186 Materials and supplies, at average cost 142,512 161,601 Prepayments 40,267 20,453 Vacation pay deferred 28,783 28,783 ---------------- --------------- Total 933,292 754,237 ---------------- --------------- DEFERRED CHARGES: Deferred charges related to income taxes 386,733 384,549 Debt expense, being amortized 6,601 7,276 Premium on reacquired debt, being amortized 61,547 81,417 Prepaid pension costs 148,623 130,733 Department of Energy assessments 34,416 34,416 Miscellaneous 79,263 79,388 ---------------- --------------- Total 717,183 717,779 ---------------- --------------- TOTAL ASSETS $ 9,104,996 $ 8,812,867 ================ =============== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. 19
ALABAMA POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At June 30, 1998 At December 31, (Unaudited) 1997 -------------- ---------------- CAPITALIZATION: Common stock equity-- Common stock (par value $40 per share)-- authorized 6,000,000 shares; outstanding 5,608,955 shares $ 224,358 $ 224,358 Paid-in capital 1,334,645 1,304,645 Premium on preferred stock 99 99 Retained earnings 1,199,270 1,221,467 -------------- -------------- 2,758,372 2,750,569 Preferred stock 255,512 255,512 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding Company Junior Subordinated Notes 297,000 297,000 Long-term debt 2,729,430 2,473,202 -------------- -------------- Total 6,040,314 5,776,283 -------------- -------------- CURRENT LIABILITIES: Long-term debt due within one year 107,792 75,336 Notes payable to banks 30,000 - Commercial paper 307,520 306,882 Accounts payable-- Affiliated companies 77,938 79,822 Other 127,265 159,146 Customer deposits 31,771 34,968 Taxes accrued-- Federal and state income 37,579 21,177 Other 44,788 15,309 Interest accrued 48,451 50,722 Vacation pay accrued 28,783 28,783 Miscellaneous 63,745 103,602 -------------- -------------- Total 905,632 875,747 -------------- -------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 1,184,590 1,192,265 Accumulated deferred investment tax credits 277,277 282,873 Prepaid capacity revenues, net 103,252 109,982 Department of Energy Assessments 30,592 30,592 Deferred credits related to income taxes 331,900 327,328 Natural disaster reserve 24,928 22,416 Miscellaneous 206,511 195,381 -------------- -------------- Total 2,159,050 2,160,837 -------------- -------------- TOTAL CAPITALIZATION AND LIABILITIES $ 9,104,996 $ 8,812,867 ============== ============== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements. 20
ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1998 vs. SECOND QUARTER 1997 AND YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997 RESULTS OF OPERATIONS Earnings ALABAMA's net income after dividends on preferred stock for the second quarter and year-to-date 1998 was $94.8 million and $160.8 million, respectively, compared to $63.1 million and $120.9 million for the corresponding periods of 1997. Earnings increased 50.1% for the current quarter and 32.9% year-to-date when compared to the same periods in 1997 due primarily to increased operating revenues. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) -------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------ (in thousands) % (in thousands) % Revenues......................................... $151,111 21.6 $167,301 12.3 Revenues from affiliates......................... (15,485) (53.6) (19,938) (26.4) Purchased power from non-affiliates ............. 20,380 427.3 34,541 424.1 Purchased power from affiliates.................. 18,166 71.4 16,740 36.8 Maintenance...................................... 9,256 11.9 3,839 2.6 Interest income.................................. 20,171 433.1 22,751 144.5 Interest on long-term debt....................... 5,868 14.0 9,203 11.1 Interest on interim obligations.................. (3,525) (54.5) (3,525) (32.4) Amortization of debt discount, premium and expense, net 25,055 N/M 25,083 N/M Other interest charges........................... 9,356 287.1 12,272 87.9 Dividends on preferred stock..................... (1,672) (33.7) (4,041) (37.9) - - - - - - - ------------ N/M - Not meaningful
Revenues. The increase in revenues for the second quarter and year-to-date 1998 was primarily due to increases in territorial energy sales and non-territorial wholesale energy sales. Territorial revenues increased $142.0 million and $150.6 million, respectively, for the current quarter and year-to-date 1998, when compared to the same periods in 1997. The increase in territorial revenue is attributed to increased retail sales of 17.9% and 11.2% for the second quarter and year-to-date, respectively, as a result of extremely hot weather in the second quarter of 1998 as compared to the very mild weather for same periods in 1997. Also, a strong economy in the company's service territory contributed to the increase in revenue. Retail revenues, excluding those revenues which represent the recovery of fuel expense and certain other expenses and do not affect income, increased $82.0 million and $92.8 million, for the current quarter and year-to-date, respectively. Non-territorial wholesale revenues increased $7.4 million and $13.1 million for the second quarter and year-to-date, respectively, as compared to the same periods in 1997. The higher non-territorial wholesale energy sales were primarily offset by increases in purchased power from non-affiliates and, as a result, had no significant effect on net income. 21 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Revenues from affiliates and Purchased power from affiliates. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from period to period depending on demand, the availability, and cost of generating resources at each company. These transactions did not have a significant impact on earnings. Purchased power from non-affiliates. The increases for the quarter and year-to-date 1998 compared to the same periods of 1997 resulted primarily from increased purchases related to power marketing activities, a majority of which were resold to non-affiliated third parties. These transactions had no significant effect on net income. Maintenance expense. The increases for the quarter and year-to-date 1998 from the amounts recorded in the corresponding periods in 1997 was due primarily to increased steam and distribution expenses. For year-to-date 1998, these increases were offset by a decrease in nuclear expenses. Interest income. The second quarter and year-to-date increases are attributed to the recording of ALABAMA's portion ($11.5 million) of the tax settlement between SOUTHERN and the IRS (for additional information, see Note (H) in the "Notes to the Condensed Financial Statements" herein), and increased interest income of $7.9 million and $12.2 million, respectively, as a result of appreciation of investments held by the nuclear decommissioning trust. The increases in interest income related to the nuclear decommissioning trust were offset by a concurrent recognition of other interest charges in accordance with FERC requirements. Interest on long-term debt. These increases for the quarter and year-to-date 1998 compared to similar periods in 1997 primarily reflects the sale of senior notes during December 1997 and the first six months of 1998. Interest on interim obligations. The second quarter and year-to-date decreases are due primarily to a reduction in the amount of outstanding short-term debt. Amortization of debt discount, premium and expense, net. The current quarter and year-to-date 1998 increases from the same periods in 1997 are attributed to ALABAMA's accelerated amortization of premiums incurred in connection with the refinancing of high-cost debt, in the amount of $25.0 million, as allowed by the Alabama PSC. See Note (J) in the "Notes to the Condensed Financial Statements" herein for further details. Other interest charges. The second quarter and year-to-date 1998 increases are primarily due to interest charges related to the nuclear decommissioning trust. These charges increased by $7.5 million and $10.5 million, respectively. These increases in interest charges were offset by a concurrent recognition of interest income in accordance with FERC requirements. Dividends on preferred stock. The decreases for the current quarter and year-to-date 1998 compared to the same periods of 1997 resulted from preferred stock redemptions during 1997. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from energy sales growth to a less regulated, more competitive environment. 22 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of ALABAMA in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS "Environmental Matters" of ALABAMA in the Form 10-K. ALABAMA has assessed and developed a detailed strategy to prevent or at least minimize problems related to the year 2000 issue. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of ALABAMA in the Form 10-K. In March 1998, the American Institute of Certified Public Accountants issued a new Statement of Position (SOP), Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The SOP, which must be adopted by 1999, requires capitalization of certain costs of internal-use software. Adoption of the SOP is not expected to have a material impact on the financial statements. In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement is effective for fiscal years beginning after June 15, 1999. ALABAMA is in the process of evaluating the impact of this statement on its financial statements. Reference is made to Notes (B), (C), (F), (G), (H), (J) and (K) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. FINANCIAL CONDITION Overview Major changes in ALABAMA's financial condition during the first six months of 1998 included the addition of approximately $301.3 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operating activities. See ALABAMA's Condensed Statements of Cash Flows for further details. Financing Activities During the first six months of 1998, redemptions and maturities of first mortgage bonds of ALABAMA totaled $198.5 million. In February 1998, ALABAMA issued $200.0 million of 7% senior notes due December 31, 2047. The proceeds were used to repay a portion of ALABAMA's short-term indebtedness. In April 1998, ALABAMA issued $190.0 million of 7% senior notes due March 31, 2048. The proceeds were used to redeem $124.2 million of ALABAMA's First Mortgage Bonds, 8 3/4% Series due December 1, 2021 and to repay a portion of outstanding short-term indebtedness. 23 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In June 1998, ALABAMA sold, through public authorities, $106.79 million of variable rate pollution control revenue bonds due June 1, 2028. The proceeds from these sales were used to redeem, in July 1998, $106.79 million aggregate principal amount of pollution control revenue bonds. ALABAMA will continue to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital as market conditions permit. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of ALABAMA under "Capital Requirements," "Other Capital Requirements" and "Environmental Matters" in the Form 10-K for a description of ALABAMA's capital requirements for its construction program, maturing debt and environmental compliance efforts. Sources of Capital In addition to the financing activities previously described herein, ALABAMA plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - - - - - - - - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, ALABAMA had at June 30, 1998, approximately $20.6 million of cash and cash equivalents and had unused committed lines of credit of approximately $807.6 million (including $315.0 million of such lines under which borrowings may be made only to fund purchase obligations relating to variable rate pollution control bonds) with regulatory authority for up to $750 million of short-term borrowings. At June 30, 1998, ALABAMA had outstanding $30.0 million of short-term notes payable to banks and $307.5 million of commercial paper. 24 Exhibit 1 ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO ALABAMA POWER COMPANY: We have reviewed the accompanying condensed balance sheet of ALABAMA POWER COMPANY as of June 30, 1998, and the related condensed statements of income and cash flows for the three-month and six-month periods ended June 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of ALABAMA POWER COMPANY as of December 31, 1997 (not presented herein) and, in our report dated February 11, 1998, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1997 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. /s/ Arthur Andersen LLP Birmingham, Alabama August 7, 1998 25 GEORGIA POWER COMPANY 26
GEORGIA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Six Months Ended June 30, Ended June 30, -------------------- ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- OPERATING REVENUES: Revenues $ 1,206,151 $ 1,003,962 $ 2,185,485 $ 1,955,415 Revenues from affiliates 20,163 11,384 24,972 18,643 --------------- -------------- -------------- -------------- Total operating revenues 1,226,314 1,015,346 2,210,457 1,974,058 --------------- -------------- -------------- -------------- OPERATING EXPENSES: Operation-- Fuel 248,030 202,000 424,661 380,629 Purchased power from non-affiliates 58,754 31,894 104,228 58,669 Purchased power from affiliates 36,677 32,213 80,362 73,584 Other 194,267 163,148 363,692 314,757 Maintenance 91,089 79,337 172,038 154,287 Depreciation and amortization 248,054 117,525 398,862 246,827 Amortization of deferred Plant Vogtle costs (Note M) 7,786 37,584 15,572 75,211 Taxes other than income taxes 55,239 50,086 107,434 104,017 Federal and state income taxes 97,994 96,751 178,643 181,400 --------------- -------------- -------------- -------------- Total operating expenses 1,037,890 810,538 1,845,492 1,589,381 --------------- -------------- -------------- -------------- OPERATING INCOME 188,424 204,808 364,965 384,677 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction - 697 178 1,239 Equity in earnings of unconsolidated subsidiary 758 1,005 1,840 1,985 Interest income 64,358 2,275 64,911 2,870 Other, net (23,376) (5,252) (28,499) (10,850) Income taxes applicable to other income (15,755) 1,601 (13,212) 3,967 --------------- -------------- -------------- -------------- INCOME BEFORE INTEREST CHARGES 214,409 205,134 390,183 383,888 --------------- -------------- -------------- -------------- INTEREST CHARGES AND OTHER: Interest on long-term debt 45,252 50,357 90,308 98,812 Allowance for debt funds used during construction (2,174) (2,426) (4,002) (5,926) Interest on interim obligations 4,767 2,745 8,513 6,438 Amortization of debt discount, premium and expense, net 3,320 3,717 6,651 7,491 Other interest charges 11,120 3,060 15,134 5,984 Distributions on preferred securities of subsidiary companies 13,601 10,749 27,125 20,166 --------------- -------------- -------------- -------------- Interest charges and other, net 75,886 68,202 143,729 132,965 --------------- -------------- -------------- -------------- NET INCOME 138,523 136,932 246,454 250,923 DIVIDENDS ON PREFERRED STOCK 1,837 6,422 3,864 14,378 --------------- -------------- -------------- -------------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 136,686 $ 130,510 $ 242,590 $ 236,545 =============== ============== ============== ============== The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. 27
GEORGIA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Six Months Ended June 30, 1998 1997 OPERATING ACTIVITIES: Net income $ 246,454 $ 250,923 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 450,537 297,654 Deferred income taxes, net (23,316) (28,586) Allowance for equity funds used during construction (178) (1,239) Amortization of deferred Plant Vogtle costs (Note M) 15,572 75,211 Other, net 12,552 33,492 Changes in certain current assets and liabilities-- Receivables, net (293,473) 53,617 Inventories (5,854) (17,345) Payables (1,764) (62,605) Taxes accrued 108,327 34,221 Energy cost recovery, retail (11,196) 20,776 Other 19,240 (16,427) -------------- -------------- Net cash provided from operating activities 516,901 639,692 -------------- -------------- INVESTING ACTIVITIES: Gross property additions (207,796) (228,986) Other 15,641 (11,611) -------------- -------------- Net cash used for investing activities (192,155) (240,597) -------------- -------------- FINANCING ACTIVITIES: Proceeds-- Preferred securities - 364,250 Pollution control bonds 89,990 90,000 Other long-term debt 145,000 - Retirements-- Preferred stock (40,679) (133,183) First mortgage bonds (220,460) (60,258) Pollution control bonds (89,990) - Special deposits - redemption funds - (45,546) Interim obligations, net 9,655 (328,594) Payment of preferred stock dividends (6,628) (14,976) Payment of common stock dividends (264,400) (253,700) Miscellaneous (6,703) (13,048) -------------- -------------- Net cash used for financing activities (384,215) (395,055) -------------- -------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (59,469) 4,040 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 83,333 15,356 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,864 $ 19,396 ============== ============== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $ 137,345 $ 125,492 Income taxes (net of refunds) 98,165 166,981 The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. 28
GEORGIA POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At June 30, 1998 At December 31, (Unaudited) 1997 ---------------- ----------------- UTILITY PLANT: Plant in service $ 15,226,967 $ 15,082,570 Less accumulated provision for depreciation 5,726,764 5,319,680 ---------------- ---------------- 9,500,203 9,762,890 Nuclear fuel, at amortized cost 111,466 126,882 Construction work in progress 217,126 214,128 ---------------- ---------------- Total 9,828,795 10,103,900 ---------------- ---------------- OTHER PROPERTY AND INVESTMENTS: Southern Electric Generating Company, at equity 24,936 24,973 Nuclear decommissioning trusts, at market 250,291 194,417 Miscellaneous 34,977 87,907 ---------------- ---------------- Total 310,204 307,297 ---------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 23,864 83,333 Receivables-- Customer accounts receivable 554,263 385,844 Other accounts and notes receivable 223,018 110,278 Affiliated companies 28,725 20,333 Accumulated provision for uncollectible accounts (3,000) (3,000) Fossil fuel stock, at average cost 101,816 96,067 Materials and supplies, at average cost 240,492 240,387 Prepayments 25,526 27,503 Vacation pay deferred 40,941 40,996 ---------------- ---------------- Total 1,235,645 1,001,741 ---------------- ---------------- DEFERRED CHARGES: Deferred charges related to income taxes 644,924 688,472 Deferred Plant Vogtle costs (Note M) 34,840 50,412 Premium on reacquired debt, being amortized 164,841 166,609 Prepaid pension costs 84,247 67,777 Debt expense, being amortized 43,980 40,927 Miscellaneous 135,641 146,593 ---------------- ---------------- Total 1,108,473 1,160,790 ---------------- ---------------- TOTAL ASSETS $ 12,483,117 $ 12,573,728 ================ ================ The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. 29
GEORGIA POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At June 30, 1998 At December 31, (Unaudited) 1997 ---------------- ----------------- CAPITALIZATION: Common stock equity-- Common stock (without par value)-- authorized 15,000,000 shares; outstanding 7,761,500 shares $ 344,250 $ 344,250 Paid-in capital 1,930,079 1,929,971 Premium on preferred stock 160 160 Retained earnings 1,724,136 1,745,347 ---------------- ---------------- 3,998,625 4,019,728 Preferred stock 116,568 157,247 Company obligated mandatorily redeemable preferred securities of subsidiaries substantially all of whose assets are junior subordinated debentures or notes 689,250 689,250 Long-term debt 3,128,306 2,982,835 ---------------- ---------------- Total 7,932,749 7,849,060 ---------------- ---------------- CURRENT LIABILITIES: Long-term debt due within one year 412 220,855 Notes payable to banks 151,850 142,300 Commercial paper 224,035 223,930 Accounts payable-- Affiliated companies 64,339 71,373 Other 245,629 261,293 Customer deposits 65,959 68,618 Taxes accrued-- Federal and state income 121,486 4,480 Other 102,863 111,541 Interest accrued 72,170 72,437 Miscellaneous 119,357 105,683 ---------------- ---------------- Total 1,168,100 1,282,510 ---------------- ---------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 2,353,671 2,417,547 Accumulated deferred investment tax credits 389,793 397,202 Deferred credits related to income taxes 291,080 297,560 Employee benefits provisions 179,948 169,887 Miscellaneous 167,776 159,962 ---------------- ---------------- Total 3,382,268 3,442,158 ---------------- ---------------- TOTAL CAPITALIZATION AND LIABILITIES $ 12,483,117 $ 12,573,728 ================ ================ The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements. 30
GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1998 vs. SECOND QUARTER 1997 AND YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997 RESULTS OF OPERATIONS Earnings GEORGIA's net income after dividends on preferred stock for the second quarter and year-to-date 1998 was $136.7 million and $242.6 million, respectively, compared to $130.5 million and $236.5 million for the corresponding periods in 1997. Earnings for the current quarter and year-to-date 1998 rose by $6.2 million or 4.7% and $6.1 million or 2.6%, respectively. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) -------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------ (in thousands) % (in thousands) % Revenues......................................... $202,189 20.1 $230,070 11.8 Revenues from affiliates......................... 8,779 77.1 6,329 33.9 Fuel............................................. 46,030 22.8 44,032 11.6 Purchased power from non-affiliates ............. 26,860 84.2 45,559 77.7 Purchased power from affiliates.................. 4,464 13.9 6,778 9.2 Other operation expense.......................... 31,119 19.1 48,935 15.5 Maintenance...................................... 11,752 14.8 17,751 11.5 Depreciation and amortization expense............ 130,529 111.1 152,035 61.6 Amortization of deferred Plant Vogtle costs...... (29,798) (79.3) (59,639) (79.3) Interest income.................................. 62,083 N/M 62,041 N/M Other, net....................................... (18,124) (345.1) (17,649) (162.7) Income taxes applicable to other income.......... (17,356) N/M (17,179) (433.0) Other interest charges........................... 8,060 263.4 9,150 152.9 Distributions on preferred securities of subsidiary companies.......................... 2,852 26.5 6,959 34.5 Dividends on preferred stock..................... (4,585) (71.4) (10,514) (73.1) - - - - - - - ------------ N/M - Not meaningful
Revenues. The increases in revenues were primarily due to increases in energy sales within the service area for the second quarter and year-to-date 1998 when compared to the same periods in 1997. Revenues within the service area increased by $204.3 million and $220.5 million, respectively, for the second quarter and year-to-date 1998. The increases in energy sales were primarily in the retail sector. Energy sales to residential, commercial and industrial customers increased by 34.8%, 13.3% and 3.3%, respectively, for second quarter and 22.1%, 9.3% and 2.6%, respectively, year-to-date 1998 due to the hotter temperatures recorded during these periods as compared to the milder-than-normal temperatures recorded in the corresponding periods in 1997. 31 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Retail revenues, excluding fuel and demand-side program revenues which generally do not affect income, increased $152.4 million for the second quarter and $175.5 million for year-to-date 1998. Wholesale revenues within the service area, excluding fuel revenues which do not affect income, decreased $4.0 million for the second quarter and $9.5 million year-to-date 1998 primarily due to a scheduled decrease in capacity revenues under a power supply agreement with OPC. Wholesale revenues outside the service area decreased by $4.0 million for the second quarter and increased $6.3 million year-to-date 1998. The decrease in the second quarter was primarily due to capacity adjustments under long-term contracts, partially offset by increases in energy sales. The year-to-date increase was attributed to increased wholesale energy sales outside the service area, primarily from power marketing activities. The increases in wholesale energy sales outside the service area were primarily offset by the increases in purchased power from non-affiliates and, as a result, had no significant effect on net income. Revenues from affiliates and Purchased power from affiliates. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Fuel expense. The increases for the current quarter and year-to-date 1998 when compared to the same periods in 1997 were due to increased generation resulting from the higher demand for energy. Purchased power from non-affiliates. The increases for the current quarter and year-to-date 1998 were primarily due to an increase in energy purchases resulting from higher demand and energy purchases related to power marketing activities, a majority of which were resold to non-affiliated third parties. These transactions had no significant effect on net income. Other operation expense. The current quarter and year-to-date increases were primarily due to higher expenses associated with a new customer service system implemented in January 1998, and modification of certain information systems for year 2000 compliance. For additional information on the year 2000 issue, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form 10-K. Maintenance expense. The increases in maintenance costs for the current quarter and year-to-date are attributed primarily to a rise in costs associated with steam plant and distribution line maintenance. Depreciation and amortization expense. The increases in depreciation and amortization for the current quarter and year-to-date compared to the same periods of 1997 are primarily due to increases in additional depreciation charges of $127.1 million for the second quarter and $139.3 million year-to-date, pursuant to a Georgia PSC retail accounting order discussed below, and an increase in plant-in-service. See "Future Earnings Potential" below and Note (L) in the "Notes to the Condensed Financial Statements" herein for further details regarding the retail accounting order. Amortization of deferred Plant Vogtle costs. These costs decreased for the quarter and year-to-date due to the completion in September 1997 of the amortization of levelized buybacks and Plant Vogtle Unit 1 cost deferrals under the 1987 Georgia PSC order. See Note (M) in the "Notes to the Condensed Financial Statements", herein for further details. 32 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Interest income. The increases for the quarter and year-to-date 1998 are attributed primarily to the recognition of $63.7 million in interest income resulting from the resolution of tax issues between SOUTHERN and the IRS. For additional information, see Note (H) in the "Notes to the Condensed Financial Statements" herein. Other, net. For the second quarter and year-to-date 1998, the change was primarily due to an increase in donations and contributions. Income taxes applicable to other income. The second quarter and year-to-date 1998 increases resulted from taxes on the additional interest income discussed above. Other interest charges. These charges increased for the quarter and year-to-date due, for the most part, to the recognition of interest related to tax issues. Distributions on preferred securities of subsidiary companies. The increase in this item resulted primarily from the issuance of additional mandatorily redeemable preferred securities in June 1997. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Financing Activities" of GEORGIA in the Form 10-K. Dividends on preferred stock. The decreases for the current quarter and year-to-date resulted from the redemption of various issues of such securities. 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 energy sales. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form 10-K. Effective January 1, 1996, GEORGIA began operating under a three-year retail accounting order. Under the order, GEORGIA's earnings are evaluated against a retail return on common equity range of 10% to 12.5%. GEORGIA is required to absorb cost increases of approximately $29.0 million annually during the order's three-year operation, including $14.0 million annually of accelerated depreciation of electric plant. Under the order, GEORGIA filed a general rate case in June 1998. Reference is made to Note (L) in the "Notes to the Condensed Financial Statements" herein for additional information. 33 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION On January 14, 1998, the Georgia PSC ordered that GEORGIA be allowed approximately $108 million of its $143 million investment in the Rocky Mountain pumped storage hydroelectric plant in rate base as of December 31, 1998. Reference is made to Note (N) in the "Notes to the Condensed Financial Statements" herein for additional information. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS "Environmental Issues" of GEORGIA in the Form 10-K. GEORGIA has assessed and developed a detailed strategy to prevent or at least minimize problems related to the year 2000 issue. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form 10-K. In March 1998, the American Institute of Certified Public Accountants issued a new Statement of Position (SOP), Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The SOP, which must be adopted by 1999, requires capitalization of certain costs of internal-use software. Adoption of the SOP is not expected to have a material impact on the financial statements. In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement is effective for fiscal years beginning after June 15, 1999. GEORGIA is in the process of evaluating the impact of this statement on its financial statements. Reference is made to Notes (B), (C), (F), and (L) through (O) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. FINANCIAL CONDITION Overview The major change in GEORGIA's financial condition during the first six months of 1998 was the addition of approximately $207.8 million to gross plant. The funds for these additions and other capital requirements were derived primarily from operations. See GEORGIA's Condensed Statements of Cash Flows for further details. Financing Activities During the first six months of 1998, redemptions of first mortgage bonds and preferred stock by GEORGIA totaled $220.5 million and $40.7 million, respectively. In January 1998, GEORGIA issued $145.0 million of 6 7/8% senior notes due December 31, 2047. The proceeds from this issuance were used to repay a portion of GEORGIA's outstanding short-term indebtedness. 34 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In March 1998, GEORGIA sold, through public authorities, $89.99 million aggregate principal amount of variable rate pollution control revenue bonds with $72.99 million aggregate principal amount due in 2024 and $17.0 million aggregate principal amount due in 2025. The proceeds were used in April 1998 to redeem $4.1 million aggregate principal amount of 6.20% pollution control revenue bonds; $22.1 million aggregate principal amount of 6.00% pollution control revenue bonds; $17.0 million aggregate principal amount of 5.90% pollution control revenue bonds; and $46.79 million aggregate principal amount of 5 3/8% pollution control revenue bonds. GEORGIA plans to continue, to the extent possible, a program to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GEORGIA under "Liquidity and Capital Requirements" and "Environmental Issues" in the Form 10-K for a description of GEORGIA's capital requirements for its construction program and environmental compliance efforts. Sources of Capital In addition to the financing activities previously described herein, GEORGIA plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - - - - - - - - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, GEORGIA had at June 30, 1998, approximately $23.9 million of cash and cash equivalents and approximately $1.25 billion of unused credit arrangements with banks. Of the $1.25 billion, $980 million provides liquidity support to GEORGIA's variable rate pollution control bonds. At June 30, 1998, GEORGIA had $151.9 million outstanding in short-term notes payable to banks and $224.0 million outstanding in commercial paper. Since GEORGIA has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 35 Exhibit 1 ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO GEORGIA POWER COMPANY: We have reviewed the accompanying condensed balance sheet of GEORGIA POWER COMPANY (a Georgia corporation) as of June 30, 1998, and the related condensed statements of income and cash flows for the three-month and six-month periods ended June 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of GEORGIA POWER COMPANY as of December 31, 1997 (not presented herein), and, in our report dated February 11, 1998, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. /s/ Arthur Andersen LLP Atlanta, Georgia August 7, 1998 36 GULF POWER COMPANY 37
GULF POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Six Months Ended June 30, Ended June 30, -------------------- ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- OPERATING REVENUES: Revenues $ 160,061 $ 139,443 $ 294,614 $ 279,647 Revenues from affiliates 17,069 5,849 23,466 7,019 ------------- ------------- ------------ ------------ Total operating revenues 177,130 145,292 318,080 286,666 ------------- ------------- ------------ ------------ OPERATING EXPENSES: Operation-- Fuel 55,443 40,782 96,886 77,774 Purchased power from non-affiliates 8,256 1,693 12,989 2,789 Purchased power from affiliates 2,545 6,036 6,433 14,899 Other 34,169 31,207 65,450 61,827 Maintenance 14,591 13,291 27,487 22,801 Depreciation and amortization 16,409 14,446 31,112 28,892 Taxes other than income taxes 12,485 12,264 25,104 25,039 Federal and state income taxes 9,490 6,420 13,640 13,280 ------------- ------------- ------------ ------------ Total operating expenses 153,388 126,139 279,101 247,301 ------------- ------------- ------------ ------------ OPERATING INCOME 23,742 19,153 38,979 39,365 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction - 1 - 2 Interest income 194 179 317 508 Other, net (203) 61 (1,406) (193) Income taxes applicable to other income (57) (144) 300 (221) ------------- ------------- ------------ ------------ INCOME BEFORE INTEREST CHARGES 23,676 19,250 38,190 39,461 ------------- ------------- ------------ ------------ INTEREST CHARGES AND OTHER: Interest on long-term debt 4,725 5,490 9,602 11,287 Other interest charges 2,825 806 3,100 1,522 Interest on notes payable 481 239 819 522 Amortization of debt discount, premium, and expense, net 522 570 1,100 1,136 Allowance for debt funds used during construction - (3) - (6) Distributions on preferred securities of subsidiary companies 1,550 762 2,934 1,279 ------------- ------------- ------------ ------------ Interest charges and other, net 10,103 7,864 17,555 15,740 ------------- ------------- ------------ ------------ NET INCOME 13,573 11,386 20,635 23,721 DIVIDENDS ON PREFERRED STOCK 209 1,000 418 2,595 ------------- ------------- ------------ ------------ NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 13,364 $ 10,386 $ 20,217 $ 21,126 ============= ============= ============ ============ The accompanying notes as they relate to GULF are an integral part of these condensed statements. 38
GULF POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Six Months Ended June 30, 1998 1997 OPERATING ACTIVITIES: Net income $ 20,635 $ 23,721 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 35,747 36,026 Deferred income taxes (6,173) (3,015) Deferred costs of 1995 coal contract renegotiation - 1,246 Other, net 10,570 1,371 Changes in certain current assets and liabilities-- Receivables, net (10,355) (105) Inventories (10,615) (7,180) Payables (1,610) (1,539) Taxes accrued 16,894 7,218 Current costs of 1995 coal contract renegotiation 812 7,313 Other (5,662) (3,098) ------------- ------------ Net cash provided from operating activities 50,243 61,958 -------------- ------------ INVESTING ACTIVITIES: Gross property additions (26,091) (21,543) Other (3,114) (1,221) ------------- ------------ Net cash used for investing activities (29,205) (22,764) -------------- ------------ FINANCING ACTIVITIES: Proceeds-- Preferred securities 45,000 40,000 Other long-term debt 50,000 - Retirements-- Preferred stock (5) (24,500) First mortgage bonds (15,000) - Other long-term debt (8,327) (7,868) Notes payable, net (33,000) (5,500) Payment of preferred stock dividends (419) (3,048) Payment of common stock dividends (38,200) (36,700) Miscellaneous (4,026) (1,527) ------------- ------------ Net cash used for financing activities (3,977) (39,143) -------------- ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 17,061 51 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,707 807 -------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,768 $ 858 ============== ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $ 12,463 $ 11,181 Income taxes 5,442 13,073 The accompanying notes as they relate to GULF are an integral part of these condensed statements. 39
GULF POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At June 30, 1998 At December 31, (Unaudited) 1997 -------------- ---------------- UTILITY PLANT: Plant in service $ 1,789,025 $ 1,762,244 Less accumulated provision for depreciation 761,597 737,767 -------------- -------------- 1,027,428 1,024,477 Construction work in progress 22,045 31,030 -------------- -------------- Total 1,049,473 1,055,507 -------------- -------------- OTHER PROPERTY AND INVESTMENTS: 637 622 -------------- -------------- CURRENT ASSETS: Cash and cash equivalents 21,768 4,707 Receivables-- Customer accounts receivable 78,089 63,691 Other accounts and notes receivable 2,486 2,744 Affiliated companies 3,740 7,329 Accumulated provision for uncollectible accounts (991) (796) Fossil fuel stock, at average cost 30,056 19,296 Materials and supplies, at average cost 28,489 28,634 Current portion of deferred coal contract costs - 4,456 Regulatory clauses under recovery 2,445 1,675 Other prepayments 1,263 2,171 Vacation pay deferred 4,057 4,057 -------------- -------------- Total 171,402 137,964 -------------- -------------- DEFERRED CHARGES: Deferred charges related to income taxes 26,606 26,586 Debt expense and loss, being amortized 22,162 22,941 Prepaid pension costs 11,885 10,385 Deferred storm charges - 703 Miscellaneous 11,368 10,904 -------------- -------------- Total 72,021 71,519 -------------- -------------- TOTAL ASSETS $ 1,293,533 $ 1,265,612 ============== ============== The accompanying notes as they relate to GULF are an integral part of these condensed statements. 40
GULF POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At June 30, 1998 At December 31, (Unaudited) 1997 -------------- ---------------- CAPITALIZATION: Common stock equity-- Common stock (without par value)-- authorized and outstanding--992,717 shares $ 38,060 $ 38,060 Paid-in capital 218,438 218,438 Premium on preferred stock 12 12 Retained earnings 163,326 172,208 -------------- -------------- 419,836 428,718 Preferred stock 5,025 13,691 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding Company Junior Subordinated Notes (Note I) 85,000 40,000 Long-term debt 344,187 296,993 -------------- -------------- Total 854,048 779,402 -------------- -------------- CURRENT LIABILITIES: Preferred stock due within one year 8,661 - Long-term debt due within one year 30,000 53,327 Notes payable 14,000 47,000 Accounts payable-- Affiliated companies 8,191 14,334 Other 23,019 20,205 Customer deposits 13,124 13,778 Taxes accrued-- Federal and state income 12,470 - Other 12,084 8,258 Interest accrued 8,980 7,227 Regulatory clauses over recovery 2,550 5,062 Vacation pay accrued 4,057 4,057 Dividends declared 209 10,210 Miscellaneous 1,574 8,739 -------------- -------------- Total 138,919 192,197 -------------- -------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 162,340 166,302 Deferred credits related to income taxes 55,480 56,935 Accumulated provision for property damage 9,806 - Accumulated deferred investment tax credits 30,453 31,552 Accumulated provision for postretirement benefits 21,846 20,491 Miscellaneous 20,641 18,733 -------------- -------------- Total 300,566 294,013 -------------- -------------- TOTAL CAPITALIZATION AND LIABILITIES $ 1,293,533 $ 1,265,612 ============== ============== The accompanying notes as they relate to GULF are an integral part of these condensed statements. 41
GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1998 vs. SECOND QUARTER 1997 AND YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997 RESULTS OF OPERATIONS Earnings GULF's net income after dividends on preferred stock for the second quarter and year-to-date 1998 was $13.4 million and $20.2 million, respectively, compared to $10.4 million and $21.1 million for the corresponding periods of 1997. Second quarter earnings increased due primarily to an increase in operating revenues. Year-to-date earnings decreased slightly due to an increase in operating expenses. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) -------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------ (in thousands) % (in thousands) % Revenues......................................... $20,618 14.8 $14,967 5.4 Revenues from affiliates......................... 11,220 191.8 16,447 234.3 Fuel expense..................................... 14,661 35.9 19,112 24.6 Purchased power from non-affiliates ............. 6,563 387.7 10,200 365.7 Purchased power from affiliates.................. (3,491) (57.8) (8,466) (56.8) Other operation expense.......................... 2,962 9.5 3,623 5.9 Maintenance...................................... 1,300 9.8 4,686 20.6 Interest on long-term debt....................... (764) (13.9) (1,684) (14.9) Other interest charges........................... 2,018 250.4 1,577 103.6 Distributions on preferred securities of of subsidiary companies....................... 788 103.4 1,655 129.4 Dividends on preferred stock..................... (791) (79.1) (2,177) (83.9)
Revenues. The increases in revenues were due to increases in territorial energy sales and non-territorial wholesale energy sales. Revenues from territorial energy sales increased by $10.7 million for the quarter and $7.1 million year-to-date. These increases are primarily attributable to increases in retail energy sales of 15.8% for the quarter and 9.5% year-to-date due to hotter-than-normal temperatures as compared to the milder-than-normal temperatures recorded in the same periods in 1997. Revenues from non-territorial wholesale energy sales increased by $3.9 million for the quarter and $3.4 million year-to-date when compared to the same periods of 1997. The increase in non-territorial wholesale energy sales was primarily offset by the increase in purchased power from non-affiliates and, as a result, had no significant effect on net income. Retail revenues, excluding those revenues which represent the recovery of fuel expense and certain other expenses and do not affect income, increased $15.9 million for the quarter and $16.4 million year-to-date. 42 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Revenues from affiliates and Purchased power from affiliates. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Fuel expense. These expenses increased for the quarter and year-to-date due primarily to increased generation resulting from a higher demand for energy. Purchased power from non-affiliates. The increases in purchased power from non-affiliates when compared to the same periods in 1997 can primarily be attributed to an increase in energy purchases resulting from hotter-than-normal weather. Other operation expense. For the quarter and year-to-date 1998, these expenses increased when compared to the same periods in 1997 primarily due to increases in production, customer accounts, and administrative and general expenses. This was partially offset by a decrease in amortization costs related to the buyout and renegotiation of coal supply contracts. Maintenance expense. Maintenance expense increased when compared to the corresponding periods in 1997 due primarily to scheduled maintenance performed on production facilities at Plant Crist and Plant Smith during the first half of 1998. Interest on long-term debt. The decreases for the quarter and year-to-date reflect the refinancing of $40.93 million of pollution control revenue refunding bonds during July 1997 and a reduction in first mortgage bonds and other long-term debt outstanding. Other interest charges. These charges increased for the quarter and year-to-date due, for the most part, to the recognition of interest related to tax issues. Distributions on preferred securities of subsidiary companies. See "Financing Activities" herein for details relating to the January 1998 issuance by Gulf Power Capital Trust II of its 7.00% trust preferred securities. Dividends on preferred stock. Current quarter and year-to-date 1998 preferred stock dividends decreased when compared to the corresponding periods in 1997 due to the redemptions of preferred stock during 1997. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from energy sales growth to a less regulated, more competitive environment. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GULF and Item 1 - BUSINESS - "Competition" in the Form 10-K. 43 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Compliance costs related to the Clean Air Act could affect earnings if such costs are not fully recovered through GULF's Environmental Cost Recovery Clause. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of GULF in the Form 10-K. GULF has assessed and developed a detailed strategy to prevent or at least minimize problems related to the year 2000 issue. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GULF in the Form 10-K. In March 1998, the American Institute of Certified Public Accountants issued a new Statement of Position (SOP), Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The SOP, which must be adopted by 1999, requires capitalization of certain costs of internal-use software. Adoption of the SOP is not expected to have a material impact on the financial statements. In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement is effective for fiscal years beginning after June 15, 1999. GULF is in the process of evaluating the impact of this statement on its financial statements. Reference is made to Notes (B) and (F) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. FINANCIAL CONDITION Overview Major changes in GULF's financial condition during the first six months of 1998 included the addition of approximately $26.1 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations. See GULF's Condensed Statements of Cash Flows for further details. Financing Activities During the first six months of 1998, maturities and redemptions of first mortgage bonds by GULF totaled $15.0 million. In January 1998, Gulf Power Capital Trust II, a statutory business trust established for the purpose of holding GULF's junior subordinated notes and issuing trust preferred securities and common securities, sold $45 million of its 7.00% trust preferred securities which are guaranteed by GULF. For additional information, see Note (I) in the "Notes to the Condensed Financial Statements" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Sources of Capital" of GULF in the Form 10-K. The proceeds were used to redeem $36.4 million of cumulative preferred stock and to repay short-term indebtedness. In June 1998, GULF issued and sold $50.0 million of its Series A 6.70% Senior Insured Quarterly Notes due June 30, 2038. The proceeds from the sale were used to pay at maturity, in July 1998, $30.0 million outstanding principal amount of its First Mortgage Bonds, 5.0% Series due July 1, 1998, and to repay a portion of its outstanding short-term indebtedness. Such short-term indebtedness was incurred in part to pay at maturity $15.0 million principal amount of First Mortgage Bonds, 5.55% Series due April 1, 1998. 44 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GULF plans to continue, to the extent possible, a program to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GULF under "Capital Requirements for Construction," "Environmental Matters" and "Other Capital Requirements" in the Form 10-K for a description of GULF's capital requirements for its construction program, environmental compliance efforts and maturing debt. 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, 1998, approximately $21.8 million of cash and cash equivalents and $37.5 million of unused committed lines of credit with banks in addition to $61.9 million liquidity support for variable rate pollution control bonds. At June 30, 1998, GULF had $14.0 million of short-term notes payable to banks. Since GULF has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 45 MISSISSIPPI POWER COMPANY 46
MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Six Months Ended June 30, Ended June 30, 1998 1997 1998 1997 OPERATING REVENUES: Revenues $ 148,064 $ 127,350 $ 269,345 $ 245,139 Revenues from affiliates 8,548 1,565 9,423 679 ------------- ------------- ------------ ------------ Total operating revenues 156,612 128,915 278,768 245,818 ------------- ------------- ------------ ------------ OPERATING EXPENSES: Operation-- Fuel 45,113 30,489 72,401 60,030 Purchased power from non-affiliates 8,988 1,714 13,288 2,198 Purchased power from affiliates 5,118 10,628 16,414 21,143 Other 33,102 23,847 56,948 44,671 Maintenance 11,564 12,392 22,958 22,004 Depreciation and amortization 11,441 11,399 23,094 22,593 Taxes other than income taxes 11,160 11,283 23,240 22,180 Federal and state income taxes 10,003 7,823 14,935 14,527 ------------- ------------- ------------ ------------ Total operating expenses 136,489 109,575 243,278 209,346 ------------- ------------- ------------ ------------ OPERATING INCOME 20,123 19,340 35,490 36,472 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction - 7 - 11 Interest income 213 221 263 362 Other, net 630 966 863 1,620 Income taxes applicable to other income (41) (443) (354) (772) ------------- ------------- ------------ ------------ INCOME BEFORE INTEREST CHARGES 20,925 20,091 36,262 37,693 ------------- ------------- ------------ ------------ INTEREST CHARGES AND OTHER: Interest on long-term debt 5,123 4,994 9,921 9,889 Allowance for debt funds used during construction - (15) - (23) Interest on notes payable 490 9 918 56 Amortization of debt discount, premium, and expense, net 335 387 723 774 Other interest charges 62 175 203 314 Distributions on preferred securities of subsidiary companies 699 699 1,398 971 ------------- ------------- ------------ ------------ Interest charges and other, net 6,709 6,249 13,163 11,981 ------------- ------------- ------------ ------------ NET INCOME 14,216 13,842 23,099 25,712 DIVIDENDS ON PREFERRED STOCK 504 1,224 999 2,449 ------------- ------------- ------------ ------------ NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 13,712 $ 12,618 $ 22,100 $ 23,263 ============= ============= ============ ============ The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. 47
MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Six Months Ended June 30, 1998 1997 OPERATING ACTIVITIES: Net income $ 23,099 $ 25,712 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 25,112 24,652 Deferred income taxes (1,687) 1,326 Allowance for equity funds used during construction - (11) Other, net 1,891 333 Changes in certain current assets and liabilities-- Receivables, net (7,444) (3,478) Inventories (9,047) (2,449) Payables 1,682 (7,294) Taxes accrued 3,671 (13,007) Other (2,352) (990) ------------ ------------- Net cash provided from operating activities 34,925 24,794 ------------ ------------- INVESTING ACTIVITIES: Gross property additions (31,755) (26,681) Other (5,131) (1,528) ------------ ------------- Net cash used for investing activities (36,886) (28,209) ------------ ------------- FINANCING ACTIVITIES: Proceeds-- Preferred securities - 35,000 Pollution control bonds 13,520 - Other long-term debt 90,000 - Retirements-- Preferred stock (87) - First mortgage bonds (35,000) - Pollution control bonds (13,000) - Payment of preferred stock dividends (999) (2,449) Payment of common stock dividends (25,500) (23,400) Miscellaneous (276) - ------------ ------------- Net cash provided from financing activities 28,658 9,151 ------------ ------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 26,697 5,736 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,432 7,058 ------------ ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 31,129 $ 12,794 ============ ============= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $ 11,482 $ 2,864 Income taxes (534) 13,307 The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. 48
MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At June 30, 1998 At December 31, (Unaudited) 1997 -------------- ---------------- UTILITY PLANT: Plant in service, at original cost $ 1,528,168 $ 1,518,402 Less accumulated provision for depreciation 576,016 559,098 -------------- -------------- 952,152 959,304 Construction work in progress 56,686 41,083 -------------- -------------- Total 1,008,838 1,000,387 -------------- -------------- OTHER PROPERTY AND INVESTMENTS: 649 650 -------------- -------------- CURRENT ASSETS: Cash and cash equivalents 31,129 4,432 Receivables-- Customer accounts receivable 41,716 32,220 Regulatory clauses under recovery 9,169 7,619 Other accounts and notes receivable 7,315 8,666 Affiliated companies 5,157 7,398 Accumulated provision for uncollectible accounts (708) (698) Fossil fuel stock, at average cost 19,331 10,651 Materials and supplies, at average cost 19,819 19,452 Current portion of accumulated deferred income taxes 8,946 8,379 Prepayments 3,245 1,791 Vacation pay deferred 5,030 5,030 -------------- -------------- Total 150,149 104,940 -------------- -------------- DEFERRED CHARGES: Debt expense and loss, being amortized 12,105 12,234 Deferred charges related to income taxes 22,356 21,906 Long-term notes receivable 2,375 2,837 Work force reduction plan 12,148 18,236 Miscellaneous 8,285 5,639 -------------- -------------- Total 57,269 60,852 -------------- -------------- TOTAL ASSETS $ 1,216,905 $ 1,166,829 ============== ============== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. 49
MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At June 30, 1998 At December 31, (Unaudited) 1997 -------------- ---------------- CAPITALIZATION: Common stock equity-- Common stock (without par value)-- authorized 1,130,000 shares; outstanding 1,121,000 shares $ 37,691 $ 37,691 Paid-in capital 179,389 179,389 Premium on preferred stock 326 327 Retained earnings 167,017 170,417 -------------- -------------- 384,423 387,824 Preferred stock 31,809 31,896 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding Company Junior Subordinated Notes 35,000 35,000 Long-term debt 342,505 291,665 -------------- -------------- Total 793,737 746,385 -------------- -------------- CURRENT LIABILITIES: Long-term debt due within one year 40,020 35,020 Notes payable - - Accounts payable-- Affiliated companies 8,237 8,548 Regulatory clauses over recovery 11,268 15,476 Other 36,763 34,065 Customer deposits 3,230 3,225 Taxes accrued-- Federal and state income 18,798 1,101 Other 19,833 33,859 Interest accrued 3,652 4,098 Miscellaneous 12,326 12,797 -------------- -------------- Total 154,127 148,189 -------------- -------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 134,421 134,645 Accumulated deferred investment tax credits 26,517 27,121 Deferred credits related to income taxes 37,756 38,203 Postretirement benefits 25,428 25,145 Accumulated provision for property damage 14,741 13,991 Work force reduction plan 13,725 15,700 Miscellaneous 16,453 17,450 -------------- -------------- Total 269,041 272,255 -------------- -------------- TOTAL CAPITALIZATION AND LIABILITIES $ 1,216,905 $ 1,166,829 ============== ============== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements. 50
MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1998 vs. SECOND QUARTER 1997 AND YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997 RESULTS OF OPERATIONS Earnings MISSISSIPPI's net income after dividends on preferred stock for the second quarter and year-to-date 1998 was $13.7 million and $22.1 million, respectively, compared to $12.6 million and $23.3 million for the corresponding periods of 1997. The improvement in second quarter earnings is attributed to an increase in operating revenues. The decrease in year-to-date earnings is primarily due to an increase in operating expenses. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) -------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------ (in thousands) % (in thousands) % Revenues......................................... $20,714 16.3 $24,206 9.9 Revenues from affiliates......................... 6,983 446.2 8,744 N/M Fuel expense..................................... 14,624 48.0 12,371 20.6 Purchased power from non-affiliates ............. 7,274 424.4 11,090 N/M Purchased power from affiliates.................. (5,510) (51.8) (4,729) (22.4) Other operation expense.......................... 9,255 38.8 12,277 27.5 Interest on notes payable........................ 481 N/M 862 N/M - - - - - - - ------------ N/M - Not meaningful
Revenues. The increases in revenues were due to increased territorial energy sales and non-territorial wholesale energy sales. Revenues from territorial energy sales increased $18.0 million for the quarter and $18.5 million year-to-date when compared to the corresponding periods in 1997. The increases in territorial energy sales are primarily due to increases in retail energy sales to residential and commercial customers. Energy sales to residential customers increased 31.3% for the quarter and 15.7% year-to-date while sales to commercial customers increased 20.4% for the quarter and 11.2% year-to-date primarily due to hotter-than-normal temperatures as compared to the milder-than-normal temperatures recorded in the same periods in 1997. Revenues from non-territorial energy sales increased $2.1 million and $4.7 million for the second quarter and year-to-date, respectively. The increase in non-territorial wholesale energy sales was primarily offset by the increases in purchased power from non-affiliates, and as a result, had no significant effect on net income. Retail revenues, excluding those revenues which represent the recovery of fuel expense and certain other expenses and do not affect income, increased $8.5 million and $9.3 million, for the current quarter and year-to-date, respectively. Wholesale territorial revenues, excluding fuel revenues which do not affect income, increased $2.2 million for the quarter and $2.9 million year-to-date. Revenues from affiliates and Purchased power from affiliates. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from period to period 51 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. Second quarter and year-to-date increases are attributed to increased generation compared to the same periods in 1997 due to higher demands for energy. Purchased power from non-affiliates. The increases in purchased power from non-affiliates are attributed to MISSISSIPPI exercising its option to purchase summer peaking capacity, increased territorial demand and higher-than-normal energy prices. Other operation expense. The current quarter and year-to-date increases in other operation expense were primarily due to the amortization of the work force reduction plan. See Note (G) in the "Notes to the Condensed Financial Statements", herein for further details. Interest on notes payable. The increases for the current quarter and year-to-date result from increased short-term notes payable when compared to the same periods in 1997. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from energy sales growth to a less regulated, more competitive environment. Operating revenues will be affected by any changes in rates under the PEP and ECO plans. The PEP has proven to be a stabilizing force on electric rates, with only moderate changes in rates taking place. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be recovered. MISSISSIPPI's 1998 ECO Plan filing was approved, as filed, by the Mississippi PSC on March 17, 1998 and resulted in a small decrease in customer prices. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of MISSISSIPPI in the Form 10-K. MISSISSIPPI has assessed and developed a detailed strategy to prevent or at least minimize problems related to the year 2000 issue. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI in the Form 10-K. In March 1998, the American Institute of Certified Public Accountants issued a new Statement of Position (SOP), Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The SOP, which must be adopted by 1999, requires capitalization of certain costs of internal-use software. Adoption of the SOP is not expected to have a material impact on the financial statements. 52 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement is effective for fiscal years beginning after June 15, 1999. MISSISSIPPI is in the process of evaluating the impact of this statement on its financial statements. Reference is made to Notes (B), (F) and (G) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. FINANCIAL CONDITION Overview Major changes in MISSISSIPPI's financial condition during the first six months of 1998 included the addition of approximately $31.8 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. Financing Activities During the first six months of 1998, maturities and redemptions of preferred stock and first mortgage bonds for MISSISSIPPI totaled $35.0 million. In May 1998, MISSISSIPPI sold through public authorities, $13.52 million of variable rate pollution control revenue refunding bonds due May 1, 2028. The proceeds were used to redeem $13.0 million of the 6.20% Series pollution control revenue bonds and to pay certain costs of issuance. Also in May 1998, MISSISSIPPI sold $35.0 million of its Series B 6.05% Senior Notes due May 1, 2003 and $55.0 million of its Series A 6.75% Senior Insured Quarterly Notes due June 30, 2038. The proceeds from these sales were used to repay MISSISSIPPI's outstanding short-term indebtedness and for other general corporate purposes. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Sources of Capital" of MISSISSIPPI in the Form 10-K. MISSISSIPPI plans to continue, to the extent possible, a program to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of MISSISSIPPI under "Capital Requirements for Construction," "Environmental Matters" and "Other Capital Requirements" in the Form 10-K for a description of MISSISSIPPI's capital requirements for its construction program, environmental compliance efforts, sinking fund requirements and maturities of long-term debt. 53 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Sources of Capital In addition to the financing activities previously described herein, MISSISSIPPI plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - - - - - - - - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, MISSISSIPPI had at June 30, 1998, approximately $31.1 million of cash and cash equivalents and approximately $76.3 million of unused committed credit arrangements with banks (including $10.9 million of such arrangements under which borrowings may be made only to fund purchase obligations relating to variable rate pollution control bonds). At June 30, 1998, MISSISSIPPI had no short-term notes payable outstanding. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 54 SAVANNAH ELECTRIC AND POWER COMPANY 55
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Six Months Ended June 30, Ended June 30, 1998 1997 1998 1997 OPERATING REVENUES: Revenues $ 68,482 $ 52,298 $ 116,691 $ 95,185 Revenues from affiliates 1,134 218 1,306 276 ----------- ---------- ------------ ----------- Total operating revenues 69,616 52,516 117,997 95,461 ----------- ---------- ------------ ----------- OPERATING EXPENSES: Operation-- Fuel 15,446 6,937 21,254 10,454 Purchased power from non-affiliates 2,723 277 3,936 682 Purchased power from affiliates 9,216 10,748 19,380 20,030 Other 11,692 10,968 22,837 21,642 Maintenance 4,884 3,518 8,562 6,560 Depreciation and amortization 5,258 5,028 10,516 10,020 Taxes other than income taxes 3,128 2,774 5,966 5,615 Federal and state income taxes 5,663 3,640 7,726 5,715 ----------- ---------- ------------ ----------- Total operating expenses 58,010 43,890 100,177 80,718 ----------- ---------- ------------ ----------- OPERATING INCOME 11,606 8,626 17,820 14,743 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction 24 60 45 205 Interest income 67 122 135 124 Other, net (441) 93 (870) (91) Income taxes applicable to other income 145 (83) 278 (13) ----------- ---------- ------------ ----------- INCOME BEFORE INTEREST CHARGES 11,401 8,818 17,408 14,968 ----------- ---------- ------------ ----------- INTEREST CHARGES: Interest on long-term debt 2,608 2,841 5,318 5,612 Allowance for debt funds used during construction (22) (61) (48) (141) Interest on notes payable 112 60 138 120 Amortization of debt discount, premium, and expense, net 220 185 407 366 Other interest charges 95 76 198 168 ----------- ---------- ------------ ----------- Net interest charges 3,013 3,101 6,013 6,125 ----------- ---------- ------------ ----------- NET INCOME 8,388 5,717 11,395 8,843 DIVIDENDS ON PREFERRED STOCK 581 581 1,162 1,162 ----------- ---------- ------------ ----------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 7,807 $ 5,136 $ 10,233 $ 7,681 =========== ========== ============ =========== The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. 56
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Six Months Ended June 30, 1998 1997 OPERATING ACTIVITIES: Net income $ 11,395 $ 8,843 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 11,348 10,299 Deferred income taxes and investment tax credits, net 3,171 211 Allowance for equity funds used during construction (45) (205) Other, net (866) 327 Changes in certain current assets and liabilities-- Receivables, net (17,467) 1,829 Inventories 505 1,411 Payables 10,238 (3,161) Taxes accrued (950) 1,173 Other (1,956) (1,966) ------------- ------------ Net cash provided from operating activities 15,373 18,761 ------------- ------------ INVESTING ACTIVITIES: Gross property additions (8,126) (10,364) Other (832) (1,508) ------------- ------------ Net cash used for investing activities (8,958) (11,872) ------------- ------------ FINANCING ACTIVITIES: Proceeds-- Other long-term debt 50,000 13,870 Retirements-- First mortgage bonds (30,000) - Other long-term debt (20,340) (14,104) Notes payable, net 10,000 3,000 Payment of preferred stock dividends (1,162) (1,162) Payment of common stock dividends (11,600) (10,500) Miscellaneous (2,232) (254) ------------- ------------ Net cash used for financing activities (5,334) (9,150) ------------- ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 1,081 (2,261) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,144 5,214 ------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,225 $ 2,953 ============= ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $ 6,718 $ 6,042 Income taxes 1,786 5,313 The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. 57
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At June 30, 1998 At December 31, (Unaudited) 1997 ------------- -------------- UTILITY PLANT: Plant in service, at original cost $ 766,025 $ 760,694 Less accumulated provision for depreciation 331,821 321,509 ------------- ------------ 434,204 439,185 Construction work in progress 9,713 7,709 ------------- ------------ Total 443,917 446,894 ------------- ------------ OTHER PROPERTY AND INVESTMENTS: 1,782 1,783 ------------- ------------ CURRENT ASSETS: Cash and cash equivalents 7,225 6,144 Special deposits - 94 Receivables-- Customer accounts receivable 30,223 21,148 Other accounts and notes receivable 421 720 Affiliated companies 5,057 1,128 Accumulated provision for uncollectible accounts (332) (354) Fuel cost under recovery 12,528 7,694 Fossil fuel stock, at average cost 5,077 5,205 Materials and supplies, at average cost 6,603 6,980 Prepayments 1,686 5,922 ------------- ------------ Total 68,488 54,681 ------------- ------------ DEFERRED CHARGES: Deferred charges related to income taxes 17,198 17,267 Debt issue expense, being amortized 2,238 2,255 Premium on reacquired debt, being amortized 8,963 7,121 Prepaid pension costs 3,903 3,424 Cash surrender value of life insurance for deferred compensation plans 12,130 12,130 Miscellaneous 3,244 1,797 ------------- ------------ Total 47,676 43,994 ------------- ------------ TOTAL ASSETS $ 561,863 $ 547,352 ============= ============ The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. 58
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At June 30, 1998 At December 31, (Unaudited) 1997 ------------ -------------- CAPITALIZATION: Common stock equity-- Common stock (par value $5 per share)-- authorized 16,000,000 shares; outstanding 10,844,635 shares $ 54,223 $ 54,223 Paid-in capital 8,688 8,688 Retained earnings 111,353 112,720 ------------ ------------- 174,264 175,631 Preferred stock 35,000 35,000 Long-term debt 163,566 142,846 ------------ ------------- Total 372,830 353,477 ------------ ------------- CURRENT LIABILITIES: Long-term debt due within one year 704 21,764 Notes payable 10,000 - Accounts payable-- Affiliated companies 5,025 6,025 Other 18,391 7,862 Customer deposits 5,314 5,541 Taxes accrued-- Federal and state income 94 534 Other 2,281 2,791 Interest accrued 3,787 4,963 Vacation pay accrued 1,949 1,893 Miscellaneous 5,853 9,031 ------------ ------------- Total 53,398 60,404 ------------ ------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 82,192 80,697 Accumulated deferred investment tax credits 12,275 12,607 Deferred credits related to income taxes 21,409 21,469 Deferred compensation plans 9,501 9,272 Postretirement benefits 6,641 6,011 Miscellaneous 3,617 3,415 ------------ ------------- Total 135,635 133,471 ------------ ------------- TOTAL CAPITALIZATION AND LIABILITIES $ 561,863 $ 547,352 ============ ============= The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements. 59
SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION SECOND QUARTER 1998 vs. SECOND QUARTER 1997 AND YEAR-TO-DATE 1998 vs. YEAR-TO-DATE 1997 RESULTS OF OPERATIONS Earnings SAVANNAH's net income after dividends on preferred stock for the second quarter and year-to-date 1998 was $7.8 million and $10.2 million, respectively, as compared to $5.1 million and $7.7 million for the corresponding periods of 1997. The increases in earnings for the second quarter and year-to-date were due to increases in operating revenues. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) -------------------------------------------------------------- Second Quarter Year-To-Date ------------------------------- ------------------------------ (in thousands) % (in thousands) % Revenues......................................... $16,184 30.9 $21,506 22.6 Fuel expense..................................... 8,509 122.7 10,800 103.3 Purchased power from non-affiliates ............. 2,446 N/M 3,254 477.1 Purchased power from affiliates.................. (1,532) (14.3) (650) (3.2) Maintenance expense.............................. 1,366 38.8 2,002 30.5
Revenues. The increases in revenues are attributed to higher territorial energy sales and non-territorial wholesale energy sales. Territorial revenues increased by $15.6 million for the second quarter and $20.3 million year-to-date due to increases in retail energy sales. For the quarter and year-to-date 1998, retail energy sales increased by 19.0% and 12.6%, respectively, reflecting hotter-than-normal temperatures as compared to the milder-than-normal temperatures recorded in the same periods in 1997. Retail revenues, excluding those revenues which represent the recovery of fuel expense and do not affect income, increased $7.4 million for the quarter and $8.8 million year-to-date. Fuel expenses. Second quarter and year-to-date 1998 increases are attributed to the higher demand for energy during these periods. Purchased power from non-affiliates. The increase in purchased power from non-affiliates is primarily attributed to an increase in energy purchases related to increased power marketing activities, a majority of which were resold to non-affiliated third parties. These transactions had no significant effect on net income. 60 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Purchased power from affiliates. Purchases of energy within the Southern electric system will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Maintenance expense. The increases for the current quarter and year-to-date 1998 when compared to the corresponding periods in 1997 are a result of the Plant Kraft Unit 3 scheduled turbine outage and boiler outages at Plants Kraft and McIntosh. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from energy sales growth to a less regulated, more competitive environment. In June 1998, the Georgia PSC approved and adopted a modified stipulation between the Georgia PSC and SAVANNAH, resolving the issues in the SAVANNAH earnings review. See Note (P) in the "Notes to the Condensed Financial Statements" for additional information. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, the Southern electric system is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 - BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SAVANNAH in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS "Environmental Matters" of SAVANNAH in the Form 10-K. SAVANNAH has assessed and developed a detailed strategy to prevent or at least minimize problems related to the year 2000 issue. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SAVANNAH in the Form 10-K. In March 1998, the American Institute of Certified Public Accountants issued a new Statement of Position (SOP), Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. The SOP, which must be adopted by 1999, requires capitalization of certain costs of internal-use software. Adoption of the SOP is not expected to have a material impact on the financial statements. In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement is effective for fiscal years beginning after June 15, 1999. SAVANNAH is in the process of evaluating the impact of this statement on its financial statements. Reference is made to Notes (B) and (P) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. 61 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 1998 included the addition of approximately $8.1 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations. See SAVANNAH's Condensed Statements of Cash Flows for further details. Financing Activities During the first half of 1998, maturities and redemptions of first mortgage bonds by SAVANNAH totaled $30.0 million. In March 1998, SAVANNAH issued $30.0 million of Series A 6 5/8% senior retail intermediate bonds due March 17, 2015. The proceeds of the sales were used by SAVANNAH to redeem in April 1998 the $28.9 million outstanding principal amount of its 8.30% Series First Mortgage Bonds due July 1, 2022. SAVANNAH plans to continue, to the extent possible, a program to retire higher-cost debt and replace these obligations with lower-cost capital. Sources of Capital SAVANNAH plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - - - - - - - - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, SAVANNAH had at June 30, 1998, approximately $7.2 million of cash and cash equivalents and approximately $29.5 million of unused credit arrangements with banks. At June 30, 1998, SAVANNAH had $10.0 million outstanding of notes payable to banks. Since SAVANNAH has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit. 62 NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES ALABAMA POWER COMPANY GEORGIA POWER COMPANY GULF POWER COMPANY MISSISSIPPI POWER COMPANY SAVANNAH ELECTRIC AND POWER COMPANY INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT
Registrant Applicable Notes SOUTHERN A, B, C, D, E, F, G, H, I, J, K, L, M, N, O, Q ALABAMA A, B, C, F, G, H, J, K GEORGIA A, B, C, F, G, H, L, M, N, O GULF A, B, F, G, I MISSISSIPPI A, B, F, G SAVANNAH A, B, P
63 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES ALABAMA POWER COMPANY GEORGIA POWER COMPANY GULF POWER COMPANY MISSISSIPPI POWER COMPANY SAVANNAH ELECTRIC AND POWER COMPANY NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (A) The condensed financial statements of the registrants included herein have been prepared by each registrant, without audit, pursuant to the rules and regulations of the SEC. In the opinion of each registrant's management, the information regarding such registrant furnished herein reflects all adjustments necessary to present fairly the results for the periods ended June 30, 1998 and 1997. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in each registrant's latest annual report on Form 10-K. Certain prior period amounts have been reclassified to conform with current period presentation. The condensed financial statements of ALABAMA and GEORGIA included herein have been reviewed by ALABAMA's and GEORGIA's independent public accountants as set forth in their reports included herein as Exhibit 1 to ALABAMA's and GEORGIA's condensed financial statements. (B) SOUTHERN's operating affiliates are subject to the provisions of FASB Statement No. 71, Accounting for the Effects of Certain Types of Regulation. In the event that a portion of a company's operations is no longer subject to these provisions, the company would be required to write off related unrecoverable regulatory assets and liabilities, and determine if any other assets have been impaired. For additional information, see Note 1 to the financial statements of each registrant in Item 8 of the Form 10-K. (C) The staff of the SEC has questioned certain of the current accounting practices of the electric utility industry--including SOUTHERN's--regarding the recognition, measurement and classification of decommissioning costs for nuclear generating facilities in the financial statements. In response to these questions, the FASB has decided to review the accounting for obligations related to the retirement of long-lived assets, including nuclear decommissioning. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN, ALABAMA and GEORGIA in Item 7 and Note 1 to the financial statements of SOUTHERN, ALABAMA and GEORGIA under "Depreciation and Nuclear Decommissioning" in Item 8 of the Form 10-K. (D) SOUTHERN engages in price risk management activities. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS "Derivative Financial Instruments" and Note 1 to the financial statements of SOUTHERN in Item 8 of the Form 10-K for a discussion of these activities. Activities for non-trading purposes consist of transactions that are employed to mitigate SOUTHERN's risk related to interest rate and foreign currency exchange rate fluctuations. At June 30, 1998, the status of outstanding non-trading related derivative contracts was as follows: 64 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Year of Maturity or Notional Unrealized Type Termination Amount Gain (Loss) (in thousands) Interest rate swaps 2002-2016 $995,557 $(51,700) 2001-2012 (pound)600,000 $(55,585) 2002-2007 DM691,000 $(12,230) Cross currency swaps 2001-2007 (pound)428,800 $3,061 Cross currency swaption 2003 DM570,000 $1,253 (pound) - Denotes British pounds sterling. DM - Denotes Deutschemark.
Effective in January 1998, Southern Energy and Vastar Resources, Inc. combined their energy trading and marketing activities to form a joint venture. Southern Energy's investment in the joint venture is accounted for under the equity method of accounting. SOUTHERN and Vastar have jointly made guarantees to certain counterparties regarding performance of contractual commitments by the joint venture. At June 30, 1998, outstanding guarantees related to the estimated fair value of net contractual commitments were approximately $125 million. (E) Effective December 31, 1997, SOUTHERN adopted FASB Statement No. 131, Disclosure about Segments of an Enterprise and Related Information. SOUTHERN's principal business segment -- or its traditional core business -- is the five regulated electric utility operating companies that provide electric service in four southeastern states. The other reportable business segment is non-traditional energy services provided by Southern Energy, which develops and manages electricity and other energy-related projects both in the United States and abroad. In 1997, non-traditional domestic services included revenues related to energy trading and marketing. As discussed in Note (D) above, effective January 1998, that business is accounted for under the equity method and its revenues are not reflected below for 1998. Intersegment revenues are not material. Financial data for business segments for the periods covered in the Form 10-Q are as follows:
Regulated Domestic Non-Traditional Services All Electric (Southern Energy) Other Reconciling Utilities International (Note) Eliminations Consolidated Domestic Total ------------ -------------------------------- --------- ------------- --------------- Three Months Ended June 30, 1998: (in millions) Operating revenues $ 2,431 $ 411 $ 33 $ 444 $ 42 $ (4) $ 2,913 Segment net income (loss) 266 34 1 35 (21) (9) 271 Six Months Ended June 30, 1998: Operating revenues 4,385 886 67 953 95 (6) 5,427 Segment net income (loss) 456 91 7 98 (24) (18) 512 Total assets at 6/30/98 24,864 9,862 1,689 11,551 1,180 (1,841) 35,754 ------------------------------------ ------------ ---------- ---------- ---------- --------- ------------- --------------- Three Months Ended June 30, 1997: Operating revenues $ 2,019 $ 390 $ 287 $ 677 $ 23 $ (2) $ 2,717 Segment net income (loss) 222 21 (2) 19 (26) - 215 Six Months Ended June 30, 1997: Operating revenues 3,926 865 478 1,343 38 (5) 5,302 Segment net income (loss) 410 42 (1) 41 (49) - 402 Total assets at 12/31/97 24,555 9,225 1,832 11,057 1,224 (1,565) 35,271 ------------------------------------ ------------ ----------- -------- ---------- --------- -------------- ---------------
65 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (Note) The all other category includes parent SOUTHERN, which does not allocate operating expenses to business segments. Also, this category includes segments below the quantitative threshold for separate disclosure. These segments include a wireless communication company and a developmental company for energy products and services. Non-traditional services exclude interest expense to parent SOUTHERN. (F) Reference is made to Notes 3 and 7 to each of the registrant's financial statements, except SAVANNAH's, in Item 8 of the Form 10-K for a discussion of the proceedings initiated by the FERC regarding the reasonableness of the return on common equity on certain of the Southern electric system's wholesale rate schedules and contracts and a discussion of the long-term sales agreements. On April 3, 1998, three customers under the long-term power sales agreements filed a complaint with the FERC seeking (a) to lower the equity return component in such agreements from the existing return rate of 13.75% and (b) to unbundle the transmission component of such agreements and instead take transmission services under SOUTHERN's open access transmission tariff presently pending before the FERC. The common equity return under these agreements is also subject to the ultimate outcome of the pending FERC proceeding commenced in May 1991 and discussed in Note 3. The final outcome of this matter cannot now be determined. (G) Certain of the registrants and other SOUTHERN subsidiaries have instituted work force reduction programs. The expenses recognized under these programs and the unamortized balance of expenses deferred under regulatory orders were as follows: (in thousands)
Three Months Ended Six Months Ended Unamortized Balance June 30, June 30, at June 30, 1998 ----------------------- -------------------- -------------------- 1998 1997 1998 1997 ---- ---- ---- ---- ALABAMA $5,478 $8,885 $11,454 $17,483 $11,020 GEORGIA 1,856 2,267 1,799 2,871 - GULF 57 91 2,569 1,242 - MISSISSIPPI 6,110 51 6,142 104 12,148 SAVANNAH 4 792 16 807 - Other 143 123 147 47 - --------- ------- --------- -------- --------- SOUTHERN system $13,648 $12,209 $22,127 $22,554 $ 23,168 ======== ======== ======== ======== ========
(H) Reference is made to Note 3 to the financial statements of SOUTHERN, ALABAMA and GEORGIA in Item 8 of the Form 10-K for information relating to a settlement agreement entered into between SOUTHERN and the Internal Revenue Service on certain tax issues for the years 1984 through 1987. The agreement received final approval by the Joint Congressional Committee on Taxation in June 1998 and, as a result, ALABAMA and GEORGIA recognized $11.5 million and $63.7 million, respectively, in interest income in the second quarter of 1998. 66 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (I) During the first half of 1998, statutory business trusts, formed by GULF and Southern Company Capital Funding, Inc. ("Southern Capital"), of which such companies own all the common securities, issued mandatorily redeemable preferred or capital securities as follows: (in thousands)
Maturity Date Company Date of Issue Amount Rate Notes of Notes GULF 1/20/98 $45,000 7.00% $46,392 12/31/2037 Southern Capital 6/25/98 $200,000 7 1/8% $206,186 6/30/2028
Substantially all the assets of each trust are junior subordinated notes issued by the related company in the respective approximate principal amounts set forth above. The notes of Southern Capital are guaranteed by SOUTHERN. GULF and SOUTHERN consider that the mechanisms and obligations relating to the preferred or capital securities issued for its benefit, taken together, constitute a full and unconditional guarantee by it of the respective trusts' payment obligations with respect to the preferred securities or capital securities. (J) Reference is made to Note 3 to the financial statements of SOUTHERN and ALABAMA in Item 8 of the Form 10-K for information relating to retail rate adjustment procedures. (K) In 1996, legal actions against ALABAMA were filed in several counties in Alabama charging ALABAMA with fraud and non-compliance with regulatory statutes relating to the offer, sale and financing of "extended service contracts" in connection with the sale of electric appliances. See Note 3 to the financial statements of SOUTHERN and ALABAMA in Item 8 of the Form 10-K for additional information. (L) Reference is made to Note 3 to the financial statements of SOUTHERN and GEORGIA in Item 8 of the Form 10-K for information concerning a three-year accounting order approved by the Georgia PSC effective January 1, 1996. Under the order, earnings in excess of a 12.5% retail return on common equity are to be used to accelerate the amortization of regulatory assets or depreciation of electric plant. Accordingly, for earnings in excess of the 12.5% return, GEORGIA recorded charges of $135.5 million and $167.5 million for the three months and six months ended June 30, 1998, respectively (presented in the accompanying financial statements as depreciation expense of electric plant and as an addition to the reserve for depreciation). Further, under the order, GEORGIA filed a general rate case in June 1998. In its rate case filing, GEORGIA proposes to extend the current accounting order for three years, with one-third of earnings in excess of a 12.5% retail return on common equity reducing rates while continuing to apply the remaining two-thirds to the acceleration of the amortization of regulatory assets or the depreciation of electric plant. GEORGIA also proposes a $50.0 million rate reduction for certain small business customers. A decision is expected by the Georgia PSC by December 1998. 67 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (M) Reference is made to Note 1 to the financial statements of SOUTHERN and GEORGIA in Item 8 of the Form 10-K for information relating to Plant Vogtle phase-in plans resulting from orders of the Georgia PSC. These Georgia PSC orders provide for the recovery of deferred costs within 10 years. The unamortized balance of these deferred costs at June 30, 1998, was $34.8 million. (N) Reference is made to Note 3 to the financial statements of SOUTHERN and GEORGIA in Item 8 of the Form 10-K for information concerning the recovery by GEORGIA of its costs associated with the Rocky Mountain pumped storage hydroelectric plant. On January 14, 1998, the Georgia PSC ordered that GEORGIA be allowed approximately $108 million of its $143 million investment in the plant in rate base as of December 31, 1998. GEORGIA has appealed the Georgia PSC's order to the Superior Court of Fulton County, Georgia. If such order is ultimately upheld, GEORGIA will be required to record a charge to earnings currently estimated at approximately $25 million, after taxes. The final outcome of this matter cannot now be determined. Accordingly, no provision related to the Georgia PSC's disallowance has been recorded. (O) Reference is made to Note 3 to the financial statements of SOUTHERN and GEORGIA in Item 8 of the Form 10-K for information regarding GEORGIA's designation as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act and other environmental contingencies. (P) On June 10, 1998, the Georgia PSC approved for SAVANNAH a four-year accounting order. Under this order, SAVANNAH will reduce its Small Business 4 rate by approximately $11.0 million over the four years; expense an additional $1.95 million for storm damage accrual over 4 years from the date of this order; accrue $8.0 million in accelerated depreciation on generating assets, which will be accumulated in a regulatory liability account; file quarterly surveillance reports and agree not to file an application to increase its rates except upon significant changes in economic conditions, capital markets, new laws or regulation or other reasons, deemed appropriate by the Georgia PSC. Further, the order gives SAVANNAH discretionary authority to expense an additional accrual to storm damage reserve up to an annual maximum of $1.5 million from the date of this order and to accrue additional accelerated depreciation up to a cumulative cap of $12.0 million over the 4 years from the date of the order. The accelerated depreciation allowed under the order is to provide for the mitigation of potentially strandable costs. (Q) Mobile Energy (a wholly-owned SOUTHERN subsidiary) received notice in May 1998 from a major customer of the customer's intention to close its pulp mill in Mobile, Alabama, for which Mobile Energy provides electricity, steam and other services. The closure of the mill will be effective September 1, 1999. The mill provided approximately 50% of Mobile Energy's operating revenues for the quarter and six-month period ended June 30, 1998 and for the year ended December 31, 1997. Mobile Energy is evaluating the announced closure of the mill to determine its options and the potential impact on its business. In the event that a sufficient alternative revenue source is not obtained, the mill closure will have a material adverse effect on Mobile Energy's revenues, and, thereafter, it will not have sufficient cash flows to pay principal and interest on its senior debt, including $238 million of first mortgage bonds and $85 million related to tax-exempt bonds. There can be no assurance that any available alternative will permit Mobile Energy to pay its debt service. At June 30, 1998, Mobile Energy had total assets of $396 million and equity of $18 million. The ultimate outcome of this situation cannot now be determined. 68 PART II - OTHER INFORMATION Item 1. Legal Proceedings. (1) In August 1998, the U.S. Court of Appeals for the Eleventh Circuit denied a consumer group's petition for review of the order of the SEC which in effect permits SOUTHERN to use the proceeds from financings for investment in "exempt wholesale generators" and "foreign utility companies" (each as defined in the Public Utility Holding Company Act of 1935) up to an amount not exceeding 100% of SOUTHERN's consolidated retained earnings. See Item 1 - BUSINESS - "Non-Traditional Business" in the Form 10-K. (2) Reference is made to the Notes to the Condensed Financial Statements herein for information regarding certain legal and administrative proceedings in which SOUTHERN and its reporting subsidiaries are involved. Item 4. Submission of Matters to a Vote of Security Holders. SOUTHERN SOUTHERN held its annual meeting of stockholders on May 27, 1998. Each nominee for director of SOUTHERN received the requisite plurality of votes. The vote tabulation was as follows:
Nominees Shares For Shares Withhold Vote John C. Adams 541,643,682 5,590,839 A. D. Correll 541,691,927 5,555,918 A. W. Dahlberg 541,387,609 5,851,914 Paul J. DeNicola 541,550,939 5,688,584 Jack Edwards 535,510,463 11,724,058 H. Allen Franklin 541,551,459 5,683,062 Bruce S. Gordon 541,049,275 6,186,900 L. G. Hardman III 541,613,517 5,654,188 Elmer B. Harris 541,466,352 5,768,170 Zack T. Pate 537,387,707 9,846,814 William J. Rushton, III 541,124,532 6,109,989 Gloria M. Shatto 541,158,880 6,075,641 Gerald J. St. Pe 541,682,142 5,554,032 Herbert Stockham 541,137,839 6,096,682
69 Item 4. Submission of Matters to a Vote of Security Holders.(Continued) ALABAMA ALABAMA held its annual common stockholders meeting on April 24, 1998, and the following persons were elected to serve as directors of ALABAMA: Whit Armstrong Wallace D. Malone, Jr. David C. Cooper William V. Muse A. W. Dahlberg John T. Porter Peter V. Gregerson, Sr. Robert D. Powers Bill M. Guthrie Andreas Renschler Elmer B. Harris C. Dowd Ritter, III Carl E. Jones, Jr. William J. Rushton, III Patricia M. King James H. Sanford James K. Lowder John Cox Webb, IV All of the 5,608,955 outstanding shares of ALABAMA's common stock are owned by SOUTHERN and were voted for the election of such directors. GEORGIA By written consent, in lieu of the annual meeting of stockholders of GEORGIA, effective May 20, 1998, the following persons were elected to serve as directors of GEORGIA: Daniel P. Amos James R. Lientz, Jr. Juanita P. Baranco G. Joseph Prendergast A. W. Dahlberg Herman J. Russell William A. Fickling, Jr. Gloria M. Shatto H. Allen Franklin William Jerry Vereen L. G. Hardman III Carl Ware Warren Y. Jobe Thomas R. Williams All of the 7,761,500 outstanding shares of GEORGIA's common stock are owned by SOUTHERN and were voted for the election of such directors. GULF By written consent, in lieu of the annual meeting of stockholders of GULF, effective June 30, 1998, the following persons were elected to serve as directors of GULF: Travis J. Bowden W. Deck Hull, Jr. Paul J. DeNicola Joseph K. Tannehill Fred C. Donovan Barbara H. Thames All of the 992,717 outstanding shares of GULF's common stock are owned by SOUTHERN and were voted for the election of such directors. 70 Item 4. Submission of Matters to a Vote of Security Holders. (Continued) MISSISSIPPI MISSISSIPPI held its annual stockholders meeting on April 7, 1998, and the following persons were elected to serve as directors of MISSISSIPPI: Paul J. DeNicola Aubrey K. Lucas Edwin E. Downer George A. Schloegel Dwight H. Evans Philip J. Terrell Robert S. Gaddis N. Eugene Warr Walter H. Hurt, III* *Mr. Hurt passed away July 14, 1998. All of the 1,121,000 outstanding shares of MISSISSIPPI's common stock are owned by SOUTHERN and were voted for the election of such directors. SAVANNAH SAVANNAH held its annual stockholders meeting on May 19, 1998, and the following persons were elected to serve as directors of SAVANNAH: Archie H. Davis G. Edison Holland, Jr. Paul J. DeNicola Robert B. Miller, III Walter D. Gnann Arnold M. Tenenbaum All of the 10,844,635 outstanding shares of SAVANNAH's common stock are owned by SOUTHERN and were voted for the election of such directors. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit 24 - Powers of Attorney and resolutions. (Designated in the Form 10-K for the year ended December 31, 1997, File Nos. 1-3526, 1-3164, 1-6468, 0-2429, 0-6849 and 1-5072 as Exhibits 24(a), 24(b), 24(c), 24(d), 24(e) and 24(f), respectively, and incorporated herein by reference.) Exhibits 27 - Financial Data Schedules (a) SOUTHERN (b) ALABAMA (c) GEORGIA (d) GULF (e) MISSISSIPPI (f) SAVANNAH 71 Item 6. Exhibits and Reports on Form 8-K. (b) Reports on Form 8-K. ALABAMA filed a Current Report on Form 8-K dated April 7, 1998: Items reported: Item 5 Item 7 Financial statements filed: None MISSISSIPPI filed Current Reports on Form 8-K dated May 7, 1998 and May 14, 1998: Items reported: Item 5 Item 7 Financial statements filed: None GULF filed Current Reports on Form 8-K dated June 10, 1998 and June 17, 1998: Items reported: Item 5 Item 7 Financial statements filed: None SOUTHERN filed a Current Report on Form 8-K dated June 18, 1998: Items reported: Item 5 Item 7 Financial statements filed: None 72 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. THE SOUTHERN COMPANY By A. W. Dahlberg Chairman, President and Chief Executive Officer (Principal Executive Officer) By W. L. Westbrook Financial Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: August 12, 1998 - - - - - - - ------------------------------------------------------------------------------ Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. ALABAMA POWER COMPANY By Elmer B. Harris President and Chief Executive Officer (Principal Executive Officer) By William B. Hutchins, III Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: August 12, 1998 73 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. GEORGIA POWER COMPANY By H. Allen Franklin President and Chief Executive Officer (Principal Executive Officer) By David M. Ratcliffe Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: August 12, 1998 - - - - - - - ------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. GULF POWER COMPANY By Travis J. Bowden President and Chief Executive Officer (Principal Executive Officer) By A. E. Scarbrough Vice President - Finance (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: August 12, 1998 74 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. MISSISSIPPI POWER COMPANY By Dwight H. Evans President and Chief Executive Officer (Principal Executive Officer) By Michael W. Southern Vice President, Secretary, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: August 12, 1998 - - - - - - - ------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. SAVANNAH ELECTRIC AND POWER COMPANY By G. Edison Holland, Jr. President and Chief Executive Officer (Principal Executive Officer) By Kirby R. Willis Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: August 12, 1998 75 EX-27 2 FINANCIAL DATA SCHEDULE - SOUTHERN
UT This schedule contains summary financial information extracted from the Form 10-Q for June 30, 1998, and is qualified in its entirety by reference to such financial statements. 0000092122 THE SOUTHERN COMPANY 1,000 6-MOS DEC-31-1997 JUN-30-1998 PER-BOOK 23,743,355 5,785,389 3,853,622 2,372,588 0 35,754,954 3,488,988 2,418,469 3,895,275 9,802,732 1,989,675 443,914 6,218,098 744,809 4,577,159 1,094,131 553,761 8,661 134,349 4,624 10,183,041 35,754,954 5,427,096 300,183 4,188,089 4,488,272 938,824 187,757 1,126,581 601,041 525,540 13,065 512,475 466,072 0 1,096,656 0.74 0.74
EX-27 3 FINANCIAL DATA SCHEDULE - ALABAMA
UT This schedule contains summary financial information extracted from the Form 10-Q for June 30, 1998, and is qualified in its entirety by reference to such financial statements. 0000003153 ALABAMA POWER COMPANY 1,000 6-MOS DEC-31-1997 JUN-30-1998 PER-BOOK 7,185,415 269,106 933,292 717,183 0 9,104,996 224,358 1,334,744 1,199,270 2,758,372 297,000 255,512 2,140,037 30,000 583,800 307,520 106,790 0 5,593 1,002 2,619,370 9,104,996 1,580,220 98,653 1,172,110 1,270,763 309,457 23,475 332,932 165,519 167,413 6,622 160,791 180,900 0 291,735 0 0
EX-27 4 FINANCIAL DATA SCHEDULE - GEORGIA
UT This schedule contains summary financial information extracted from the Form 10-Q for June 30, 1998, and is qualified in its entirety by reference to such financial statements. 0000041091 GEORGIA POWER COMPANY 1,000 6-MOS DEC-31-1997 JUN-30-1998 PER-BOOK 9,828,795 310,204 1,235,645 1,108,473 0 12,483,117 344,250 1,930,239 1,724,136 3,998,625 689,250 116,568 2,897,241 151,850 145,000 224,035 0 0 86,065 412 4,174,071 12,483,117 2,210,457 178,643 1,666,849 1,845,492 364,965 25,218 390,183 143,729 246,454 3,864 242,590 264,400 0 516,901 0 0
EX-27 5 FINANCIAL DATA SCHEDULE - GULF
UT This schedule contains summary financial information extracted from the Form 10-Q for June 30, 1998, and is qualified in its entirety by reference to such financial statements. 0000044545 GULF POWER COMPANY 1,000 6-MOS DEC-31-1997 JUN-30-1998 PER-BOOK 1,049,473 637 171,402 72,021 0 1,293,533 38,060 218,450 163,326 419,836 85,000 5,025 247,187 14,000 97,000 0 30,000 8,661 0 0 386,824 1,293,533 318,080 13,640 265,461 279,101 38,979 (789) 38,190 17,555 20,635 418 20,217 38,200 0 50,243 0 0
EX-27 6 FINANCIAL DATA SCHEDULE - MISSISSIPPI
UT This schedule contains summary financial information extracted from the Form 10-Q for June 30, 1998, and is qualified in its entirety by reference to such financial statements. 0000066904 MISSISSIPPI POWER COMPANY 1,000 6-MOS DEC-31-1997 JUN-30-1998 PER-BOOK 1,008,838 649 150,149 57,269 0 1,216,905 37,691 179,715 167,017 384,423 35,000 31,809 172,505 0 170,000 0 40,020 0 0 0 383,148 1,216,905 278,768 14,935 228,343 243,278 35,490 772 36,262 13,163 23,099 999 22,100 25,500 0 34,925 0 0
EX-27 7 FINANCIAL DATA SCHEDULE - SAVANNAH
UT This schedule contains summary financial information extracted from the Form 10-Q for June 30, 1998, and is qualified in its entirety by reference to such financial statements. 0000086940 SAVANNAH ELECTRIC AND POWER COMPANY 1,000 6-MOS DEC-31-1997 JUN-30-1998 PER-BOOK 443,917 1,782 68,488 47,676 0 561,863 54,223 8,688 111,353 174,264 0 35,000 97,955 10,000 60,000 0 0 0 5,611 704 178,329 561,863 117,997 7,726 92,451 100,177 17,820 (412) 17,408 6,013 11,395 1,162 10,233 11,600 0 15,373 0 0
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