-----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, Eb90ehEYNLpQx+ARV+MVyBACU4JrIGzq/0krgz+FLw82HROjsaI0YKBZzqb81JN9 tLdcZaUdGhzunuW0jtZ3+w== 0000092122-99-000062.txt : 19991117 0000092122-99-000062.hdr.sgml : 19991117 ACCESSION NUMBER: 0000092122-99-000062 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN CO CENTRAL INDEX KEY: 0000092122 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 580690070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03526 FILM NUMBER: 99752230 BUSINESS ADDRESS: STREET 1: 270 PEACHTREE ST CITY: ATLANTA STATE: GA ZIP: 30303 BUSINESS PHONE: 4045065000 MAIL ADDRESS: STREET 1: 270 PEACHTREE STREET CITY: ATLANTA STATE: GA ZIP: 30303 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALABAMA POWER CO CENTRAL INDEX KEY: 0000003153 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 630004250 STATE OF INCORPORATION: AL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03164 FILM NUMBER: 99752231 BUSINESS ADDRESS: STREET 1: 600 N 18TH ST STREET 2: P O BOX 2641 CITY: BIRMINGHAM STATE: AL ZIP: 35291 BUSINESS PHONE: 2052571000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEORGIA POWER CO CENTRAL INDEX KEY: 0000041091 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 580257110 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06468 FILM NUMBER: 99752232 BUSINESS ADDRESS: STREET 1: 241 RALPH MCGILL BOULEVARD CITY: ATLANTA STATE: GA ZIP: 30308 BUSINESS PHONE: 4045066526 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GULF POWER CO CENTRAL INDEX KEY: 0000044545 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 590276810 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-02429 FILM NUMBER: 99752233 BUSINESS ADDRESS: STREET 1: ONE ENERGY PLACE CITY: PENSACOLA STATE: FL ZIP: 32520-0102 BUSINESS PHONE: 8504446111 MAIL ADDRESS: STREET 1: ONE ENERGY PLACE CITY: PENSACOLA STATE: FL ZIP: 32520-0102 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MISSISSIPPI POWER CO CENTRAL INDEX KEY: 0000066904 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 640205820 STATE OF INCORPORATION: MS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11229 FILM NUMBER: 99752234 BUSINESS ADDRESS: STREET 1: 2992 W BEACH CITY: GULFPORT STATE: MS ZIP: 39501 BUSINESS PHONE: 2288641211 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAVANNAH ELECTRIC & POWER CO CENTRAL INDEX KEY: 0000086940 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 580418070 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-05072 FILM NUMBER: 99752235 BUSINESS ADDRESS: STREET 1: 600 BAY ST EAST CITY: SAVANNAH STATE: GA ZIP: 31401 BUSINESS PHONE: 9122327171 10-Q 1 THIRD QUARTER FORM 10-Q 1999
========================================================================================================================= UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________ FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1999 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from _____to_____ Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address and Telephone Number Identification No. - ------------ ----------------------------------- ------------------ 1-3526 The Southern Company 58-0690070 (a Delaware Corporation) 270 Peachtree Street, N.W. Atlanta, Georgia 30303 (404) 506-5000 1-3164 Alabama Power Company 63-0004250 (An Alabama Corporation) 600 North 18th Street Birmingham, Alabama 35291 (205) 257-1000 1-6468 Georgia Power Company 58-0257110 (A Georgia Corporation) 241 Ralph McGill Boulevard, N.E. Atlanta, Georgia 30308 (404) 506-6526 0-2429 Gulf Power Company 59-0276810 (A Maine Corporation) One Energy Place Pensacola, Florida 32520 (850) 444-6111 0-6849 Mississippi Power Company 64-0205820 (A Mississippi Corporation) 2992 West Beach Gulfport, Mississippi 39501 (228) 864-1211 1-5072 Savannah Electric and Power Company 58-0418070 (A Georgia Corporation) 600 East Bay Street Savannah, Georgia 31401 (912) 644-7171 ===================================================================================================================
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No____
Description of Shares Outstanding Registrant Common Stock at October 31, 1999 - ---------- ------------ ------------------- The Southern Company Par Value $5 Per Share 673,093,100 Alabama Power Company Par Value $40 Per Share 5,608,955 Georgia Power Company No Par Value 7,761,500 Gulf Power Company No Par Value 992,717 Mississippi Power Company Without Par Value 1,121,000 Savannah Electric and Power Company Par Value $5 Per Share 10,844,635 This combined Form 10-Q is separately filed by The Southern Company, Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company and Savannah Electric and Power Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies.
2 INDEX TO QUARTERLY REPORT ON FORM 10-Q September 30, 1999
Page Number DEFINITIONS........................................................................................................ 4 PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition The Southern Company and Subsidiary Companies Condensed Consolidated Statements of Income........................................................ 6 Condensed Consolidated Statements of Cash Flows.................................................... 7 Condensed Consolidated Balance Sheets.............................................................. 8 Condensed Consolidated Statements of Comprehensive Income and Accumulated Other Comprehensive Income.......................................................... 10 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 11 Alabama Power Company Condensed Statements of Income..................................................................... 22 Condensed Statements of Cash Flows................................................................. 23 Condensed Balance Sheets........................................................................... 24 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 26 Exhibit 1 - Report of Independent Public Accountants............................................... 30 Georgia Power Company Condensed Statements of Income..................................................................... 32 Condensed Statements of Cash Flows................................................................. 33 Condensed Balance Sheets........................................................................... 34 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 36 Exhibit 1 - Report of Independent Public Accountants............................................... 41 Gulf Power Company Condensed Statements of Income..................................................................... 43 Condensed Statements of Cash Flows................................................................. 44 Condensed Balance Sheets........................................................................... 45 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 47 Mississippi Power Company Condensed Statements of Income..................................................................... 52 Condensed Statements of Cash Flows................................................................. 53 Condensed Balance Sheets........................................................................... 54 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 56 Savannah Electric and Power Company Condensed Statements of Income..................................................................... 61 Condensed Statements of Cash Flows................................................................. 62 Condensed Balance Sheets........................................................................... 63 Management's Discussion and Analysis of Results of Operations and Financial Condition.............. 65 Notes to the Condensed Financial Statements........................................................... 68 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 69 PART II - OTHER INFORMATION Item 1. Legal Proceedings......................................................................................... 74 Item 2. Changes in Securities..................................................................................... Inapplicable Item 3. Defaults Upon Senior Securities........................................................................... Inapplicable Item 4. Submission of Matters to a Vote of Security Holders....................................................... Inapplicable Item 5. Other Information......................................................................................... Inapplicable Item 6. Exhibits and Reports on Form 8-K.......................................................................... 74 Signatures ............................................................................................... 76 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 EPA......................................... U. S. Environmental Protection Agency EWG......................................... Exempt wholesale generator FASB........................................ Financial Accounting Standards Board FERC........................................ Federal Energy Regulatory Commission Form 10-K................................... Combined Annual Report on Form 10-K of SOUTHERN, ALABAMA, GEORGIA, GULF, MISSISSIPPI and SAVANNAH for the year ended December 31, 1998 FUCO........................................ Foreign utility company GEORGIA..................................... Georgia Power Company GULF........................................ Gulf Power Company MISSISSIPPI................................. Mississippi Power Company Mobile Energy............................... Mobile Energy Services Company, L.L.C. and Mobile Energy Services Holdings, Inc. OPC......................................... Oglethorpe Power Corporation operating affiliates........................ see affiliates operating companies......................... see affiliates PEP......................................... Performance Evaluation Plan PSC......................................... Public Service Commission SAVANNAH.................................... Savannah Electric and Power Company SCS......................................... Southern Company Services, Inc. SEC......................................... Securities and Exchange Commission SOUTHERN.................................... The Southern Company Southern Energy............................. Southern Energy, Inc. including SOUTHERN subsidiaries managed or controlled by Southern Energy SOUTHERN system............................. SOUTHERN, affiliates, Southern Energy, and other subsidiaries SWEB........................................ South Western Electricity plc (United Kingdom) TVA......................................... Tennessee Valley Authority
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-Q includes forward-looking statements in addition to historical information. The registrants caution that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking statements; accordingly, there can be no assurance that such indicated results will be realized. These factors include legislative and regulatory initiatives regarding deregulation and restructuring of the electric utility industry; the extent and timing of the entry of additional competition in the markets of SOUTHERN's subsidiaries; challenges related to Year 2000 readiness; potential business strategies, including acquisitions or dispositions of assets or internal restructuring, that may be pursued by the registrants; state and federal rate regulation in the United States; changes in or application of environmental and other laws and regulations to which SOUTHERN and its subsidiaries are subject; political, legal and economic conditions and developments in the United States and in foreign countries in which the subsidiaries operate; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather and other natural phenomena; the performance of projects undertaken by the non-traditional business and the success of efforts to invest in and develop new opportunities; and other factors discussed elsewhere herein and in other reports (including Form 10-K) filed from time to time by the registrants with the SEC. 4 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES 5
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------------- ------------------------------ 1999 1998 1999 1998 -------------- --------------- -------------- -------------- OPERATING REVENUES $3,736,649 $3,456,785 $8,969,294 $8,865,043 -------------- --------------- -------------- -------------- OPERATING EXPENSES: Operation-- Fuel 893,394 738,223 2,062,750 1,829,055 Purchased power 350,731 329,493 869,309 940,470 Other 623,259 539,234 1,628,892 1,532,917 Maintenance 195,224 207,988 650,455 642,657 Depreciation and amortization 335,731 426,489 975,975 1,192,775 Taxes other than income taxes 159,199 148,614 450,521 439,105 Income taxes 331,802 315,510 600,305 609,502 Write down of investment in Mobile Energy 68,999 - 68,999 - -------------- --------------- -------------- -------------- Total operating charges 2,958,339 2,705,551 7,307,206 7,186,481 -------------- --------------- -------------- -------------- OPERATING INCOME 778,310 751,234 1,662,088 1,678,562 OTHER INCOME (EXPENSE): Equity in earnings of unconsolidated subsidiaries 7,926 32,012 150,849 77,148 Interest income 45,910 44,420 115,538 195,833 Gains on asset sales 283,507 185 292,891 49,623 Other, net (7,679) (26,175) 20,603 (73,831) Income taxes applicable to other income (71,637) 25,192 (80,491) 26,114 -------------- --------------- -------------- -------------- INCOME BEFORE INTEREST CHARGES 1,036,337 826,868 2,161,478 1,953,449 -------------- --------------- -------------- -------------- INTEREST CHARGES AND OTHER: Interest on long-term debt 164,769 179,428 495,477 532,177 Interest on notes payable 53,648 24,391 125,163 85,827 Amortization of debt discount, premium and expense, net 10,159 16,356 29,170 56,828 Other interest charges 22,350 18,459 51,603 64,467 Minority interests in subsidiaries' income 118,518 27,280 154,702 56,990 Distributions on capital and preferred securities of subsidiary companies 46,248 38,953 136,196 109,619 Preferred dividends of subsidiary companies 5,462 5,972 15,683 19,037 -------------- --------------- -------------- -------------- Interest charges and other, net 421,154 310,839 1,007,994 924,945 -------------- --------------- -------------- -------------- CONSOLIDATED NET INCOME $ 615,183 $ 516,029 $1,153,484 $1,028,504 ============== =============== ============== ============== AVERAGE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING (Thousands) 678,472 697,797 690,155 696,836 BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK $0.90 $0.74 $1.67 $1.48 CASH DIVIDENDS PAID PER SHARE $0.335 $0.335 $1.005 $1.005 OF COMMON STOCK 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 Nine Months Ended September 30, ---------------------------------- 1999 1998 -------------- --------------- OPERATING ACTIVITIES: Consolidated net income $1,153,484 $1,028,504 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 1,048,897 1,350,767 Deferred income taxes and investment tax credits 155,668 (41,190) Write down of investment in Mobile Energy 68,999 - Gain on asset sales (292,298) (32,597) Equity in earnings of unconsolidated subsidiaries (150,849) (77,148) Other, net 148,143 108,328 Changes in certain current assets and liabilities excluding effects from acquisitions -- Receivables, net (441,995) (336,406) Special deposits-other (11,078) 4,248 Fossil fuel stock 21,311 3,879 Materials and supplies (8,085) 19,470 Prepayments (17,805) (27,507) Accounts payable (296,786) (210,481) Taxes accrued 329,333 272,111 Other 232,630 (34,734) -------------- --------------- Net cash provided from operating activities 1,939,569 2,027,244 -------------- --------------- INVESTING ACTIVITIES: Gross property additions (1,695,779) (1,374,245) Southern Energy business acquisitions, net of cash acquired (1,472,217) (235,157) Sales of property 286,554 189,142 Other (71,979) 14,910 -------------- --------------- Net cash used for investing activities (2,953,421) (1,405,350) -------------- --------------- FINANCING ACTIVITIES: Proceeds-- Common stock 23,793 168,491 Capital and preferred securities 250,000 245,000 Pollution control obligations 339,650 210,300 Other long-term debt 1,742,128 1,773,488 Notes receivable 228,000 240,792 Retirements/repurchases-- Common stock repurchased (648,764) (60,307) Preferred stock (85,980) (49,432) First mortgage bonds (889,800) (774,845) Pollution control obligations (337,650) (209,780) Other long-term debt (416,809) (215,699) Notes receivable (82,354) (89,679) Special deposits-redemption funds (129) (5) Notes payable, net 1,569,554 (801,777) Payment of common stock dividends (696,014) (699,835) Miscellaneous (85,505) (101,133) -------------- --------------- Net cash provided from (used for) financing activities 910,120 (364,421) -------------- --------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (103,732) 257,473 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 871,353 600,820 ============== =============== CASH AND CASH EQUIVALENTS AT END OF PERIOD $767,621 $858,293 ============== =============== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $764,750 $814,573 Income taxes $311,336 $534,502 Southern Energy business acquisitions-- Fair value of assets acquired $1,505,042 $199,526 Less cash paid for common stock 1,472,217 199,526 ============== =============== Liabilities assumed $32,825 - ============== =============== 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 September 30, 1999 At December 31, (Unaudited) 1998 ---------------- ---------------- UTILITY PLANT: Plant in service $36,520,022 $35,185,013 Less accumulated provision for depreciation 13,857,102 13,239,140 ---------------- ---------------- 22,662,920 21,945,873 Nuclear fuel, at amortized cost 214,452 216,744 Construction work in progress 2,384,733 1,782,482 ---------------- ---------------- Total 25,262,105 23,945,099 ---------------- ---------------- OTHER PROPERTY AND INVESTMENTS: Equity investments in unconsolidated subsidiaries 1,497,706 1,548,951 Property rights, net of accumulated amortization of $200,916 at September 30, 1999 and $169,339 at December 31, 1998 1,191,503 1,184,734 Goodwill, net of accumulated amortization of $144,192 at September 30, 1999 and $105,755 at December 31, 1998 1,944,700 1,949,213 Other Intangibles, net of accumulated amortization of $12,740 at September 30, 1999 and $791 at December 31, 1998 596,752 308,009 Nuclear decommissioning trusts 585,764 516,719 Miscellaneous 702,413 643,280 ---------------- ---------------- Total 6,518,838 6,150,906 ---------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 767,621 871,353 Special deposits 71,638 86,592 Receivables, less accumulated provisions for uncollectible accounts of $88,619 at September 30, 1999 and $112,511 at December 31, 1998 2,065,379 1,797,913 Fossil fuel stock, at average cost 296,398 251,974 Materials and supplies, at average cost 552,971 515,715 Prepayments 134,091 101,843 Vacation pay deferred 79,949 80,752 ---------------- ---------------- Total 3,968,047 3,706,142 ---------------- ---------------- DEFERRED CHARGES AND OTHER ASSETS: Deferred charges related to income taxes 1,009,662 1,035,724 Prepaid pension costs 566,935 489,572 Debt expense, being amortized 132,194 129,257 Premium on reacquired debt, being amortized 305,023 294,055 Miscellaneous 461,795 440,754 ---------------- ---------------- Total 2,475,609 2,389,362 ---------------- ---------------- TOTAL ASSETS $38,224,599 $36,191,509 ================ ================ 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 September 30, 1999 At December 31, (Unaudited) 1998 ---------------- ---------------- CAPITALIZATION: Common stock, par value $5 per share -- Authorized -- 1 billion shares Issued -- September 30, 1999: 700,618,730 shares; -- December 31, 1998: 699,772,723 shares $3,503,094 $3,498,864 Paid-in capital 2,480,060 2,462,116 Treasury, at cost -- September 30, 1999: 25,959,448 shares; -- December 31, 1998: 2,025,536 shares (705,554) (57,863) Retained earnings 4,335,584 3,878,332 Accumulated other comprehensive income (87,459) 15,400 ---------------- ---------------- 9,525,725 9,796,849 Preferred stock of subsidiaries 368,760 369,084 Company or subsidiary obligated mandatorily redeemable capital and preferred securities 2,428,595 2,179,440 Long-term debt 11,509,697 10,471,692 ---------------- ---------------- Total 23,832,777 22,817,065 ---------------- ---------------- CURRENT LIABILITIES: Amount of securities due within one year 495,079 1,525,596 Notes payable 3,366,513 1,827,808 Accounts payable 706,915 1,026,869 Customer deposits 130,774 125,078 Taxes accrued-- Income taxes 348,517 49,923 Other 335,829 299,051 Interest accrued 224,926 233,355 Vacation pay accrued 78,398 111,611 Miscellaneous 765,352 542,836 ---------------- ---------------- Total 6,452,303 5,742,127 ---------------- ---------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 4,531,001 4,480,970 Deferred credits related to income taxes 678,615 714,665 Accumulated deferred investment tax credits 700,913 723,393 Employee benefits provisions 523,973 473,734 Minority interests in subsidiaries 709,106 535,145 Prepaid capacity revenues 84,259 96,080 Department of Energy assessments 64,191 64,191 Disallowed Plant Vogtle capacity buyback costs 53,315 54,458 Storm damage reserves 26,752 23,980 Miscellaneous 567,394 465,701 ---------------- ---------------- Total 7,939,519 7,632,317 ---------------- ---------------- TOTAL CAPITALIZATION AND LIABILITIES $38,224,599 $36,191,509 ================ ================ The accompanying notes as they relate to SOUTHERN are an integral part of these condensed statements.
9
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------------ ------------------------------ 1999 1998 1999 1998 -------------- -------------- -------------- -------------- Consolidated net income $615,183 $516,029 $1,153,484 $1,028,504 Other comprehensive income: Foreign currency translation adjustments 19,746 21,069 (158,245) 24,067 Less applicable income taxes 6,911 7,374 (55,386) 8,423 -------------- -------------- -------------- -------------- CONSOLIDATED COMPREHENSIVE INCOME $628,018 $529,724 $1,050,625 $1,044,148 ============== ============== ============== ==============
THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (Stated in Thousands of Dollars) At September 30, At December 31, 1999 1998 ---------------- -------------- (Unaudited) Balance at beginning of period $ 15,400 $ 7,176 Change in current period (102,859) 8,224 -------------- -------------- BALANCE AT END OF PERIOD $(87,459) $15,400 ============== ==============
10 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1999 vs. THIRD QUARTER 1998 AND YEAR-TO-DATE 1999 vs. YEAR-TO-DATE 1998 RESULTS OF OPERATIONS SOUTHERN's traditional business is primarily represented by its five domestic electric utility operating companies, which provide electric service in four Southeastern states. Another significant portion of SOUTHERN's business is its non-traditional business primarily represented by Southern Energy, which owns and manages international and domestic businesses for SOUTHERN. Businesses acquired by Southern Energy have been included in the consolidated statements of income since the date of acquisition. Certain changes in operating revenues and expenses from the prior period result from such acquisitions. Earnings SOUTHERN's consolidated net income for the third quarter and year-to-date 1999 was $615 million ($0.90 per share) and $1.153 billion ($1.67 per share), respectively, compared to $516 million ($0.74 per share) and $1.029 billion ($1.48 per share) for the corresponding periods of 1998. Earnings for the traditional business during the quarter were up $69.6 million or 14% primarily due to increased revenues and lower operating expenses. Year-to-date earnings for the traditional business were up $46.5 million or 4.9% due mainly to lower operating expenses, primarily lower depreciation charges. For the non-traditional business, during the quarter and year-to-date, earnings were up $35.8 million and $102.4 million, respectively, due mainly to growing profitability from its Asian business units and its investments in power-generation businesses in New England, California and New York. In the third quarter 1999, Southern Energy recorded several one-time items: a $78 million after-tax gain on the sale of its share of SWEB's supply business (the distribution business is now named Western Power Distribution), a $16 million after-tax charge at Bewag for costs related to early retirement and severance packages and a $69 million after-tax write down of SOUTHERN's investment in Mobile Energy. These items are recorded in Gain on asset sales, Equity in earnings of unconsolidated subsidiaries, and Write down of investment in Mobile Energy, respectively, on SOUTHERN's Condensed Consolidated Statements of Income. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Operating revenues............................... $279,864 8.1 $104,251 1.2 Fuel expense..................................... 155,171 21.0 233,695 12.8 Purchased power expense.......................... 21,238 6.4 (71,161) (7.6) Other operation expense.......................... 84,025 15.6 95,975 6.3 Depreciation and amortization expense............ (90,758) (21.3) (216,800) (18.2) Write down of investment in Mobile Energy................................. 68,999 - 68,999 - Equity in earnings of unconsolidated subsidiaries.................................. (24,086) (75.2) 73,701 95.5 Interest income.................................. 1,490 3.4 (80,295) (41.0)
11 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Increase (Decrease) (Continued) --------------------------------------------------------------- Third Quarter Year-To-Date ------------------------------- ------------------------------- (in thousands) % (in thousands) % Gain on asset sales.............................. 283,322 N/M 243,268 490.2 Income taxes applicable to other income.......... (96,829) (384.4) (106,605) (408.2) Interest on notes payable........................ 29,257 119.9 39,336 45.8 Amortization of debt discount, premium and expense, net.................................. (6,197) (37.9) (27,658) (48.7) Other interest charges........................... 3,891 21.1 (12,864) (20.0) Minority interests in subsidiaries' income....... 91,238 334.5 97,712 171.5
N/M - Not meaningful Operating revenues. For the traditional business, operating revenues increased by $14.5 million or 0.5% for the quarter and decreased by $245.8 million or 3.3% year-to-date. Quarterly revenues for the traditional business were positively impacted by a 4.5% increase in retail energy sales and growth in the number of customers. However, revenues for the current quarter and year-to-date continue to be significantly affected by the retail rate reductions ordered by the Georgia PSC. Operating revenues for Southern Energy were up for the third quarter and year-to-date by $252.3 million or 58.1% and $324.6 million or 23.4%, respectively. Southern Energy's revenues were up due mainly to results from its recent investments in power-generation businesses in New England, California and New York and were partially offset by decreased revenues from SWEB and the deconsolidation of Mobile Energy. Effective with the bankruptcy filing in January 1999, Mobile Energy is accounted for under the equity method, rather than being consolidated as before. See Note (N) in the "Notes to the Condensed Financial Statements" herein for further information regarding Mobile Energy. Reference is also made to Item 1 - BUSINESS - "Non-Traditional Business" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN in the Form 10-K. Fuel expense. This expense increased for the third quarter and year-to-date 1999 due primarily to Southern Energy's acquisitions of power-generating businesses in New England, California and New York. Purchased power expense. The third quarter increase is attributed primarily to the traditional business where the demand for energy increased due to hot weather and growth in the number of customers. The year-to-date decrease is primarily attributed to Southern Energy, which recorded a decrease of $65.6 million or 11.0% mainly due to a decrease in purchased power at SWEB due to volume reductions. Other operation expense. Third quarter and year-to-date increases are mainly due to increased administrative and general expenses resulting from Southern Energy's acquisitions since the corresponding periods of 1998 and an increase in the bad debt expense reserve at CEPA. Depreciation and amortization expense. Third quarter and year-to-date 1999 decreases when compared to the corresponding periods in 1998 are principally attributed to higher depreciation charges recognized in 1998 under the prior accounting order and the completion in 1998 of the amortization of deferred Plant Vogtle costs. 12 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Write down of investment in Mobile Energy. During this third quarter of 1999, SOUTHERN wrote down its investment in Mobile Energy due primarily to recent settlement discussions with Kimberly-Clark Corporation and the bondholders. For additional information, see Note (N) in the "Notes to the Condensed Financial Statements" herein. Equity in earnings of unconsolidated subsidiaries. The decrease for the third quarter is due, in large part, to Bewag's provision for costs associated with early retirement and severance packages. The year-to-date increase in this item reflects the $54 million settlement of Southern Energy's claims against a contractor relating to the Shajiao C construction project and the improvement in profitability of the Shajiao C operations. The amount of the settlement of contractor claims was partially offset by other related expenses included in other income accounts and other operation expenses. Interest income. The year-to-date decrease is directly related to the 1998 settlement of tax issues between SOUTHERN and the Internal Revenue Service. Gain on asset sales. The third quarter and year-to-date increases are primarily due to SWEB's sale of its supply business. Southern Energy's portion of the total gain was $78 million, after taxes. For additional information, see "Future Earnings Potential" herein. Income taxes applicable to other income. The third quarter and year-to-date increases are mainly attributed to Southern Energy as a result of income taxes related to the sale of SWEB's supply business. Interest on notes payable. The third quarter and year-to-date 1999 increases are attributed to increased borrowings related to Southern Energy's acquisitions in California, New England and New York, repurchases of SOUTHERN's common stock and other working capital needs. For additional information on the stock repurchase programs, see Note (O) in the "Notes to the Condensed Financial Statements" herein. Amortization of debt discount, premium and expense, net. These decreases are related to accelerated amortization charges recognized in 1998 for premiums incurred to refinance high-cost debt. Other interest charges. These charges decreased year-to-date 1999 when compared to the same period in 1998 due to the recognition in 1998 of increased interest related to tax issues between SOUTHERN and the Internal Revenue Service which were settled during 1998. Minority interests in subsidiaries' income. The third quarter and year-to-date increases in this item primarily represent PP&L Resources' minority interest in the gain on the sale of SWEB's supply business. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from weather to energy sales growth to a less regulated, more competitive environment, with non-traditional business becoming more significant. For additional 13 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. Reference is made to Part II - Item 1 - "Legal Proceedings" herein for information relating to a complaint and notice of violation brought against certain SOUTHERN subsidiaries at the request of the EPA. In April 1999, SOUTHERN, through its subsidiary Southern Energy, completed the purchase of 3,065 megawatts of generating assets in California from Pacific Gas & Electric for approximately $801 million. In June 1999, SOUTHERN, through its subsidiary Southern Energy, completed its $484 million acquisition of 1,776 megawatts of generating capacity from Orange and Rockland Utilities, Inc. and Consolidated Edison Company of New York. Also, in June 1999, Southern Energy announced that SWEB had signed an agreement to sell its supply business to London Electricity plc for $256 million or (pound)160 million and the assumption of certain liabilities. Further, Southern Energy acquired a 9.99% interest in Shandong International Power Development Company Limited for $104 million. On September 30, 1999, the sale of SWEB's supply business to London Electricity plc was completed and the distribution business was renamed Western Power Distribution as the SWEB name was transferred to London Electricity plc. For information relating to Year 2000 readiness, see "YEAR 2000 READINESS" below. The FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which was originally to be adopted by the year 2000. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which amends FASB Statement No. 133 to be effective for all fiscal years beginning after June 15, 2000 (January 1, 2001 for companies with calendar-year fiscal years). SOUTHERN has not yet quantified the impact of adopting this statement on its financial statements; however, the adoption could increase volatility in earnings and other comprehensive income. Reference is made to Notes (B) through (D), (F), (H) through (L), (N) and (O) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. Reference is also made to Part II - Item 1 - "Legal Proceedings" herein. 14 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION YEAR 2000 READINESS Year 2000 Challenge In recent decades, computer programmers shortened the year portion of date entries to two digits to save processing time and storage space. Computers assumed, in effect, that all years began with "19." This practice was widely adopted and hard-coded into computer chips and processors found in some equipment. This approach was used until the mid-1990s. Unless corrected before the Year 2000, affected systems and devices containing a chip or microprocessor with date and time functions could incorrectly process dates or the systems may cease to function. SOUTHERN depends on complex computer systems for many aspects of its operations, which include generation, transmission, and distribution of electricity, as well as other business support activities. SOUTHERN met its Year 2000 readiness goal, when in June 1999 it announced that systems critical to generating and delivering electricity to its customers in the Southeast are ready for 2000. Year 2000 ready means that a system or application is determined suitable for continued use through the Year 2000 and beyond. Critical systems include, but are not limited to, reactor control systems, safe shutdown systems, turbine generator systems, control center computer systems, customer service systems, energy management systems, and telephone switches and equipment. Year 2000 Program and Status SOUTHERN's executive management recognizes the seriousness of the Year 2000 challenge and has dedicated what it believes to be adequate resources to address the issue. The Millennium Project is a team of employees, IBM consultants, and other contractors whose progress is reviewed regularly by a steering committee of SOUTHERN executives. SOUTHERN's traditional business refers to the integrated utility services within Alabama, Florida, Georgia, and Mississippi. For this traditional business, the work was divided into two phases. Phase 1 began in 1996 and consisted of identifying and assessing corporate assets related to software systems and devices that contain a computer chip or clock. The first phase was completed in June 1997. Phase 2 consisted of testing and remediating high priority systems and devices. Also, contingency planning is included in this phase. The second phase was completed on schedule in June 1999. The Millennium Project will continue to monitor the affected computer systems, devices, and applications into the Year 2000. For the traditional business, SOUTHERN completed the activities contained in its work plan by function as follows:
Work Plan ----------------------------------------------------------------- Remediation Completion Inventory Assessment and Testing Date ----------------------------------------------------------------- Generation 100% 100% 100% 6/99 Energy Management 100 100 100 6/99 Transmission and Distribution 100 100 100 1/99 Telecommunications 100 100 100 6/99 Corporate Applications 100 100 100 3/99 - ---------------------------------------------------------------------------------------------
15 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION For the non-traditional business, Southern Energy has adopted a three-phase plan to address the Year 2000 challenge at its North American and international business units in which they have management control. The first phase consisted of awareness and planning, inventory and assessment, and it included the identification of potentially impacted systems and an assessment of their individual Year 2000 readiness. The second phase, which includes testing, remediation, and validation, consists of modification or replacement of impacted equipment, and verification that those modifications have addressed the issue. Contingency planning is the third phase, and it includes backup plans for unexpected events with critical systems, staffing plans for critical date rollovers, and plans to address external dependencies. Business units are using Year 2000 readiness information received from suppliers, including fuel suppliers, to determine if inventory adjustments are needed for the transition period. The following three tables summarize the status of progress of Southern Energy's North American and international business units as of September 30, 1999.
North American Business Units: Phase Status Completion Date - ----------------------------------------------------------------------------------------------- Awareness and planning, inventory and Complete November 30, 1998 assessment Testing, remediation, and validation Complete June 30, 1999 Contingency planning Complete June 30, 1999 - ----------------------------------------------------------------------------------------------- International Business Units where Southern Energy has management control: Phase Status Completion Date - ----------------------------------------------------------------------------------------------- Awareness and planning, inventory and assessment Complete February 22, 1999 Testing, remediation, and validation Complete September 30, 1999 Contingency planning Complete August 31, 1999 - ----------------------------------------------------------------------------------------------- Other International Business Units: Phase Status Projected Completion - ----------------------------------------------------------------------------------------------- Awareness and planning, inventory and assessment Complete May 31, 1999 Testing, remediation, and validation In progress November 30, 1999 Contingency planning In progress November 15, 1999 - -----------------------------------------------------------------------------------------------
In a number of the international business units, Southern Energy is neither the majority owner nor the managing concern. In these circumstances, Southern Energy is providing technical assistance but does not control the schedule or progress. 16 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Year 2000 Costs For the traditional business, current budgeted costs for Year 2000 readiness are approximately $91 million, which includes $6 million of cost billed to non-affiliated companies. These costs include labor necessary to identify, test, and renovate affected devices and systems. From its inception through September 30, 1999, the Year 2000 program costs, recognized primarily as expense, amounted to $82 million based on SOUTHERN's ownership interest. In addition to the traditional business costs, current projections for Year 2000 program costs are approximately $20 million for the non-traditional business - based on SOUTHERN's ownership interest - of which $16 million has been spent through September 30, 1999. Year 2000 Risks SOUTHERN has implemented a detailed process to minimize the possibility of service interruptions related to the Year 2000. Based on tests we have conducted, we believe service interruptions related to Year 2000 challenges are unlikely. These tests increase confidence, but do not guarantee error-free operations. The company has taken what it believes to be prudent steps to prepare for the Year 2000, and it expects any interruptions in service that may occur within the traditional business service territory to be isolated and short in duration, similar to service loss during a storm. SOUTHERN expects the risks associated with Year 2000 transition to be no more severe than the scenarios that its electric system is routinely prepared to handle. The most likely worst case scenario consists of the service loss of one of the largest generating units and/or the service loss of any single bulk transmission element in its traditional business service territory. There is a smaller risk of sporadic and temporary fluctuations of power levels that would be aggravated in the event of rapid and unscheduled changes to load patterns that resulted from the activity of third parties. SOUTHERN has followed a proven methodology for identifying and assessing software and devices containing potential Year 2000 challenges. Remediation and testing of those devices is complete. SOUTHERN continues to review the Year 2000 readiness of material third parties that provide goods and services crucial to SOUTHERN's operations. Among such critical third parties are fuel, transportation, telecommunications, water, chemical, and other suppliers. There is some risk associated with representations by third parties regarding their readiness and completion of their own Year 2000 related work. Contingency plans based on the assessment of each third party's ability to continue supplying critical goods and services to SOUTHERN have been developed and are being reviewed. There is a potential for some earnings erosion caused by reduced electrical demand by customers because of their own Year 2000 challenges. The risk associated with the progress of some operations outside the United States is a function of the local regulatory environment and the priorities of the entities with management control. Year 2000 challenges are included in the list of due diligence activities associated with acquisitions; there is some risk associated with the subsequent validation of any given seller's representations. 17 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Contingency Plans Because of experience with hurricanes and other storms, the traditional business is skilled at developing and using contingency plans in unusual circumstances. As part of Year 2000 business continuity and contingency planning, SOUTHERN has drawn on that experience to make risk assessments and develop additional plans to deal specifically with Year 2000 challenges. SOUTHERN is identifying critical operational locations, and scheduling key employees to be on duty at those locations during the Year 2000 transition. SOUTHERN has already participated in two successful North American Electric Reliability Council-coordinated national drills during 1999, and plans to conduct additional drills. These drills focus on SOUTHERN's ability to maintain critical voice and data exchange during partial loss of primary voice and data communications systems. Because of the level of detail of the contingency planning process, management feels that the contingency plans will keep any service interruptions that may occur within the traditional business service territory isolated and short in duration, similar to service loss during a storm. Contingency planning efforts for the non-traditional business are complete for North American assets and are near completion for international assets. These contingency plans are being developed by utilizing consistent formats and guidelines. FINANCIAL CONDITION Overview Major changes in SOUTHERN's financial condition during the first nine months of 1999 included $1.7 billion used for gross property additions to utility plant, $1.5 billion used for Southern Energy acquisitions and $649 million used for common stock repurchases. The funds for these additions and other capital requirements were from operations, sales of senior securities and short-term borrowings. See SOUTHERN's Condensed Consolidated Statements of Cash Flows for further details. Reference is made to the SOUTHERN's Condensed Consolidated Statements of Comprehensive Income herein for information relating to other comprehensive income. During the first nine months, Southern Energy recognized $103 million of after-tax foreign exchange translation losses in other comprehensive income which were principally related to shifts in exchange rates between the U.S. dollar and the pound sterling and the Deutschemark, and to the 50% devaluation of the Brazilian Real. Financing Activities During the first nine months of 1999, retirements and redemptions of the operating companies' first mortgage bonds and preferred stock totaled $1.2 billion and $86 million, respectively. In February 1999, Alabama Power Capital Trust III, a statutory business trust established for the purpose of holding ALABAMA's junior subordinated notes and issuing trust preferred securities and common securities, sold $50 million of its capital auction preferred securities which are guaranteed by ALABAMA. Also, in February 1999, Georgia Power 18 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Capital Trust IV, a statutory business trust established for the purpose of holding GEORGIA's junior subordinated notes and issuing trust preferred securities and common securities, sold $200 million of its 6.85% trust preferred securities, which are guaranteed by GEORGIA. Additionally, in March 1999, GEORGIA issued $100 million of 6 5/8% senior notes due March 31, 2039. The proceeds from this issuance were used to repay a portion of GEORGIA's outstanding short-term indebtedness. In May 1999, ALABAMA issued $200 million of 6.75% senior notes due June 30, 2039. The proceeds were used to repay a portion of its outstanding short-term indebtedness and for other general corporate purposes. Also, in May 1999, GEORGIA sold, through public authorities, $53 million of 5.45% pollution control revenue bonds due May 1, 2034; $85 million of 5.40% pollution control revenue bonds due May 1, 2034; and $100 million of 5.25% pollution control revenue bonds due May 1, 2034. The proceeds of these sales were used to redeem $50 million aggregate principal amount of 6.35% pollution control revenue bonds in June 1999; $125 million aggregate principal amount of 6.60% pollution control revenue bonds in July 1999; and $60 million aggregate principal amount of 6 3/8% pollution control revenue bonds in August 1999. In June 1999, ALABAMA sold, through public authorities, $101.6 million aggregate principal amount of variable rate pollution control revenue refunding bonds due June 1, 2022. The proceeds from the sale were applied to the full redemption of the Series 1994 6 1/2% pollution control revenue refunding bonds in September 1999. In July 1999, Southern Energy issued $700 million aggregate principal amount of senior notes which consisted of $200 million of 7.40% senior notes due 2004 and $500 million of 7.90% senior notes due 2009. Proceeds received from the sales of these notes are being used for general corporate purposes, including repayment of short-term debt. In August and September 1999, ALABAMA issued $250 million of 7.125% senior notes due August 15, 2004 and issued $200 million of 7 1/8% senior notes due October 1, 2007. The proceeds of both issuances were used to repay a portion of its outstanding short-term indebtedness and for other general corporate purposes. Also in August 1999, GULF issued $50 million of 7.05% senior notes due August 15, 2004. The proceeds were used to repay a portion of its outstanding short-term indebtedness. Reference is made to Note (O) in the "Notes to the Condensed Financial Statements" herein for discussion of programs to repurchase SOUTHERN's common stock. As reflected in SOUTHERN's Condensed Consolidated Statements of Cash Flows herein, for the first nine months of 1999, SOUTHERN has spent approximately $649 million in connection with such repurchases. During the first nine months of 1999, SOUTHERN raised approximately $24 million from the issuance of 887 thousand shares of common stock under SOUTHERN's various stock plans. The market price of SOUTHERN's common stock at September 30, 1999 was $25.75 per share and the book value was $14.12 per share, representing a market-to-book ratio of 182%, compared to $29.0625, $14.04 and 207%, respectively, at the end of 1998. The dividend for the third quarter of 1999 was $0.335 per share. 19 THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Capital Requirements for Construction", "Other Capital Requirements" and "Environmental Matters" of SOUTHERN in the Form 10-K for a description of the Southern electric system's capital requirements for its construction program, sinking fund requirements and maturing debt, and environmental compliance efforts. Approximately $495 million will be required by September 30, 2000, for redemptions and maturities of long-term debt. Also, the operating companies plan to continue, to the extent possible, a program to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital. Sources of Capital In addition to the financing activities previously described, SOUTHERN may require additional equity capital during the remainder of the year. The amounts and timing of additional equity capital to be raised in 1999, as well as in subsequent years, will be contingent on SOUTHERN's investment opportunities. The operating companies plan to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, the SOUTHERN system had at September 30, 1999, approximately $768 million of cash and cash equivalents and approximately $5.8 billion of unused credit arrangements with banks. These unused credit arrangements also provide liquidity support to variable rate pollution control bonds and commercial paper programs. At September 30, 1999, the system companies had outstanding approximately $1.0 billion of short-term notes payable and $2.4 billion of commercial paper. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. See Note (D) in the "Notes to the Condensed Financial Statements" herein for discussion of financial derivative contracts entered into by SOUTHERN. 20 ALABAMA POWER COMPANY 21
ALABAMA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, --------------------------------- ------------------------------- 1999 1998 1999 1998 --------------- --------------- -------------- -------------- OPERATING REVENUES: Revenues $ 1,101,783 $ 1,044,460 $2,569,439 $2,569,085 Revenues from affiliates 14,192 13,528 83,476 69,123 --------------- --------------- -------------- --------------- Total operating revenues 1,115,975 1,057,988 2,652,915 2,638,208 --------------- --------------- -------------- --------------- OPERATING EXPENSES: Operation-- Fuel 256,249 262,473 656,083 671,118 Purchased power from non-affiliates 53,476 39,191 79,051 81,876 Purchased power from affiliates 82,404 66,021 145,922 128,270 Other 139,956 138,141 392,454 378,396 Maintenance 59,922 80,053 205,735 230,389 Depreciation and amortization 86,286 84,256 261,102 256,636 Taxes other than income taxes 50,153 45,544 153,815 141,104 Federal and state income taxes 121,771 100,246 216,351 198,899 --------------- --------------- -------------- --------------- Total operating expenses 850,217 815,925 2,110,513 2,086,688 --------------- --------------- -------------- --------------- OPERATING INCOME 265,758 242,063 542,402 551,520 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction 2,989 1,414 7,422 2,309 Equity in earnings of subsidiaries 589 967 2,066 4,372 Interest income 21,215 17,209 44,983 55,707 Other, net (10,928) (10,145) (23,660) (27,152) Income taxes applicable to other income 1,499 5,600 2,735 3,284 --------------- --------------- -------------- --------------- INCOME BEFORE INTEREST CHARGES AND OTHER 281,122 257,108 575,948 590,040 --------------- --------------- -------------- --------------- INTEREST CHARGES AND OTHER: Interest on long-term debt 48,260 48,524 139,286 140,955 Allowance for debt funds used during construction (3,591) (1,298) (8,924) (2,850) Interest on interim obligations 3,348 3,177 8,908 10,524 Amortization of debt discount, premium and expense, net 2,816 10,143 8,306 40,024 Other interest charges 18,487 13,736 40,698 39,971 Distributions on preferred securities of subsidiary companies 6,253 5,588 18,286 16,765 --------------- --------------- -------------- --------------- Interest charges and other, net 75,573 79,870 206,560 245,389 --------------- --------------- -------------- --------------- NET INCOME 205,549 177,238 369,388 344,651 DIVIDENDS ON PREFERRED STOCK 4,728 3,280 12,455 9,902 --------------- --------------- -------------- --------------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $200,821 $173,958 $ 356,933 $ 334,749 =============== =============== ============== =============== The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
22
ALABAMA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, ------------------------------- 1999 1998 ------------- ------------- OPERATING ACTIVITIES: Net income $ 369,388 $ 344,651 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 306,408 332,663 Deferred income taxes and investment tax credits, net 57,901 21,431 Allowance for equity funds used during construction (7,422) (2,309) Other, net 32,075 (2,592) Changes in certain current assets and liabilities-- Receivables, net (51,759) (38,485) Inventories (11,334) 1,972 Prepayments (11,731) (5,973) Payables (69,441) (59,857) Taxes accrued 59,374 70,046 Energy cost recovery, retail (83,174) (75,508) Other (13,876) (39,553) ------------- ------------- Net cash provided from operating activities 576,409 546,486 ------------- ------------- INVESTING ACTIVITIES: Gross property additions (563,946) (420,660) Other (44,503) (19,822) ------------- ------------- Net cash used for investing activities (608,449) (440,482) ------------- ------------- FINANCING ACTIVITIES: Proceeds-- Capital contributions - 30,000 Company obligated mandatorily redeemable preferred securities 50,000 - Preferred stock - 200,000 Pollution control bonds 101,650 106,790 Other long-term debt 650,000 815,000 Retirements-- Preferred stock (50,000) - Pollution control bonds (102,650) (106,790) First mortgage bonds (470,000) (396,500) Other long-term debt (1,807) (753) Interim obligations, net 88,421 (214,873) Payment of preferred stock dividends (11,921) (10,053) Payment of common stock dividends (296,100) (271,700) Miscellaneous (15,425) (49,919) ------------- ------------- Net cash provided from (used for) financing activities (57,832) 101,202 ------------- ------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (89,872) 207,206 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 134,248 23,957 ============= ============= CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,376 $ 231,163 ============= ============= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $167,163 $188,933 Income taxes 94,202 155,010 The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
23
ALABAMA POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, 1999 At December 31, (Unaudited) 1998 --------------- ---------------- UTILITY PLANT: Plant in service, at original cost $11,595,364 $11,352,838 Less accumulated provision for depreciation 4,859,121 4,666,513 --------------- ---------------- 6,736,243 6,686,325 Nuclear fuel, at amortized cost 95,483 95,575 Construction work in progress 714,510 525,359 --------------- ---------------- Total 7,546,236 7,307,259 --------------- ---------------- OTHER PROPERTY AND INVESTMENTS: Equity investments in subsidiaries 34,208 34,298 Nuclear decommissioning trusts, at market 264,109 232,183 Miscellaneous 12,119 12,915 --------------- ---------------- Total 310,436 279,396 --------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 44,376 134,248 Receivables -- Customer accounts receivable 512,395 343,630 Other accounts and notes receivable 43,600 32,394 Affiliated companies 50,664 39,981 Accumulated provision for uncollectible accounts (5,459) (1,855) Refundable income taxes - 52,117 Fossil fuel stock, at average cost 79,257 83,238 Materials and supplies, at average cost 164,984 149,669 Prepayments 28,891 17,160 Vacation pay deferred 28,390 28,390 --------------- ---------------- Total 947,098 878,972 --------------- ---------------- DEFERRED CHARGES AND OTHER ASSETS: Deferred charges related to income taxes 350,071 362,953 Debt expense, being amortized 9,303 8,602 Premium on reacquired debt, being amortized 85,919 83,440 Prepaid pension costs 202,827 169,393 Department of Energy assessments 31,088 31,088 Miscellaneous 102,516 104,595 --------------- ---------------- Total 781,724 760,071 --------------- ---------------- TOTAL ASSETS $9,585,494 $9,225,698 =============== ================ The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
24
ALABAMA POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1999 At December 31, (Unaudited) 1998 --------------- ---------------- CAPITALIZATION: Common stock equity -- Common stock (par value $40 per share) -- authorized 6,000,000 shares; outstanding 5,608,955 shares $ 224,358 $ 224,358 Paid-in capital 1,334,645 1,334,645 Premium on preferred stock 99 99 Retained earnings 1,285,865 1,224,965 --------------- ---------------- 2,844,967 2,784,067 Preferred stock 317,512 317,512 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding Company Junior Subordinated Notes 347,000 297,000 Long-term debt 3,190,069 2,646,566 --------------- ---------------- Total 6,699,548 6,045,145 --------------- ---------------- CURRENT LIABILITIES: Preferred stock due within one year - 50,000 Long-term debt due within one year 100,976 471,209 Commercial paper 88,421 - Accounts payable -- Affiliated companies 99,011 79,844 Other 97,056 188,074 Customer deposits 30,844 29,235 Taxes accrued-- Federal and state income 101,996 82,219 Other 67,536 17,559 Interest and distributions accrued 30,561 38,166 Vacation pay accrued 28,390 28,390 Miscellaneous 71,680 79,095 --------------- ---------------- Total 716,471 1,063,791 --------------- ---------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 1,253,364 1,202,971 Accumulated deferred investment tax credits 263,177 271,611 Prepaid capacity revenues, net 84,259 96,080 Department of Energy assessments 27,202 27,202 Deferred credits related to income taxes 299,979 315,735 Natural disaster reserve 18,177 19,385 Miscellaneous 223,317 183,778 --------------- ---------------- Total 2,169,475 2,116,762 --------------- ---------------- TOTAL CAPITALIZATION AND LIABILITIES $9,585,494 $9,225,698 =============== ================ The accompanying notes as they relate to ALABAMA are an integral part of these condensed statements.
25 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1999 vs. THIRD QUARTER 1998 AND YEAR-TO-DATE 1999 vs. YEAR-TO-DATE 1998 RESULTS OF OPERATIONS Earnings ALABAMA's net income after dividends on preferred stock for the third quarter and year-to-date 1999 was $200.8 million and $356.9 million, respectively, compared to $174.0 million and $334.7 million for the same periods of 1998. Earnings for the third quarter increased $26.9 million or 15.4% due principally to an increase in territorial sales combined with a decrease in non-fuel operation and maintenance expenses. Year-to-date 1999 earnings increased $22.2 million or 6.6% due to an increase in territorial sales combined with decreased non-fuel operation and maintenance expenses and decreased amortization of debt discount, premium and expense, net. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date --------------------------------------------------------------- (in thousands) % (in thousands) % Revenues......................................... $57,323 5.5 $ 354 - Revenues from affiliates......................... 664 4.9 14,353 20.8 Purchased power from non-affiliates.............. 14,285 36.4 (2,825) (3.5) Purchased power from affiliates.................. 16,383 24.8 17,652 13.8 Maintenance expense.............................. (20,131) (25.1) (24,654) (10.7) Taxes other than income taxes.................... 4,609 10.1 12,711 9.0 Interest income.................................. 4,006 23.3 (10,724) (19.3) Amortization of debt discount, premium and expense, net (7,327) (72.2) (31,718) (79.2) Other interest charges........................... 4,751 34.6 727 1.8
Revenues. Including fuel revenues, revenues were up for the third quarter 1999 but were relatively unchanged year-to-date 1999 when compared to the same periods in 1998. The primary reason for the third quarter increase in revenues was an increase in territorial energy sales. Territorial energy sales also increased year-to-date; however, the increase was substantially offset by a decrease in revenues from unit power sales attributable to lower energy revenues and a lowering of the equity return under formula rate contracts. See Note (F) in the " Notes to the Condensed Financial Statements" herein for further details. Territorial revenues, excluding those revenues which represent the recovery of fuel expense and certain other expenses and do not affect income, increased $33.8 million for the current quarter and $25.5 million year-to-date. Revenues from affiliates and Purchased power from affiliates. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases of energy, will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions did not have a significant impact on earnings. 26 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Purchased power from non-affiliates. The third quarter increase in this expense is mainly due to the increased demand for energy. These expenses were lower year-to-date 1999 when compared to the same period in 1998 due primarily to increased purchases in 1998 related to power marketing activities, a majority of which were resold to non-affiliated third parties. These transactions had no significant effect on net income. Maintenance expense. These expenses were lower for the third quarter and year-to-date 1999 primarily due to decreased expenses during the third quarter of 1999 for maintenance of distribution lines and nuclear plant. Taxes other than income taxes. The increases in this item for the quarter and year-to-date are due primarily to increases in real and personal property taxes. Interest income. For the third quarter 1999, this item increased primarily as a result of recognized gains on 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. The decrease for year-to-date 1999 mainly results from the recording by ALABAMA during the second quarter of 1998 of its portion of the tax settlement between SOUTHERN and the Internal Revenue Service. For additional information, see Note 3 to the financial statements of ALABAMA under the caption "Tax Litigation" in Item 8 of the Form 10-K. Amortization of debt discount, premium and expense, net. Third quarter and year-to-date decreases are directly related to accelerated amortization in 1998 of premiums incurred to refinance high-cost debt. For additional information, see Note 3 to the financial statements of ALABAMA under the caption "Retail Rate Adjustment Procedures" in Item 8 of the Form 10-K. Other interest charges. The increase in other interest charges for the third quarter is related to the nuclear decommissioning trust. These charges were offset by a concurrent recognition of interest income in accordance with FERC requirements. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from weather to energy sales growth to a less regulated, more competitive environment. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, ALABAMA is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of ALABAMA in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of ALABAMA in the Form 10-K. 27 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Reference is made to Part II - Item 1 - "Legal Proceedings" herein for information relating to a complaint and notice of violation brought against certain SOUTHERN subsidiaries at the request of the EPA. ALABAMA's plans to achieve Year 2000 readiness have been implemented and are included in the SOUTHERN system's Year 2000 Program. The costs related to ALABAMA's Year 2000 program, including ALABAMA's share of costs of Southern Nuclear Operating Company, are expected to be $37.0 million. From its inception through September 30, 1999, the Year 2000 program costs, recognized primarily as expense, amounted to $28.3 million. For additional information, see SOUTHERN's MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - "Future Earnings Potential" herein. The FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which was originally to be adopted by the year 2000. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which amends FASB Statement No. 133 to be effective for all fiscal years beginning after June 15, 2000 (January 1, 2001 for companies with calendar-year fiscal years). ALABAMA has not yet quantified the impact of adopting this statement on its financial statements; however, the adoption could increase volatility in reported earnings. Reference is made to Notes (B), (C), and (F) through (J) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. FINANCIAL CONDITION Overview Major changes in ALABAMA's financial condition during the first nine months of 1999 included the addition of approximately $563.9 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 nine months of 1999, redemptions of first mortgage bonds and preferred stock by ALABAMA totaled $470 million and $50 million, respectively. In February 1999, Alabama Power Capital Trust III (the "Trust"), a statutory business trust established for the purpose of holding ALABAMA's junior subordinated notes and issuing trust preferred securities and common securities, sold $50 million of its capital auction preferred securities which are guaranteed by ALABAMA. The Trust invested the proceeds in Series C junior subordinated notes. The net proceeds received by ALABAMA were used to repay a portion of ALABAMA's outstanding short-term indebtedness. See Note (G) in the " Notes to the Condensed Financial Statements" herein for additional information. In May 1999, ALABAMA issued $200 million of 6.75% senior notes due June 30, 2039. The proceeds were used to repay a portion of its outstanding short-term indebtedness and 28 ALABAMA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION for other general corporate purposes. In June 1999, ALABAMA sold, through public authorities, $101.6 million aggregate principal amount of variable rate pollution control revenue refunding bonds due June 1, 2022. The proceeds from the sale were applied to the full redemption of the Series 1994 6 1/2% pollution control revenue refunding bonds in September 1999. In August and September 1999, ALABAMA issued $250 million of 7.125% senior notes due August 15, 2004 and $200 million of 7 1/8% senior notes due October 1, 2007, respectively. The proceeds of both issuances were used to repay a portion of its outstanding short-term indebtedness and for other general corporate purposes. ALABAMA will continue to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital as market conditions permit. Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of ALABAMA under "Capital Requirements," "Other Capital Requirements" and "Environmental Matters" in the Form 10-K for a description of ALABAMA's capital requirements for its construction program, maturing debt and environmental compliance efforts. Sources of Capital In addition to the financing activities previously described herein, ALABAMA plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - - BUSINESS "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, ALABAMA had at September 30, 1999, approximately $44.4 million of cash and cash equivalents and had unused committed lines of credit of approximately $906.7 million (including $417.6 million of such lines under which borrowings may be made only to fund purchase obligations relating to variable rate pollution control bonds). Additionally, in July 1999, ALABAMA entered into a $96 million extendible commercial note agreement. ALABAMA has regulatory authority for up to $750 million of short-term borrowings. At September 30, 1999, ALABAMA had outstanding $88.4 million of commercial paper. 29 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 September 30, 1999, and the related condensed statements of income for the three-month and nine-month periods ended September 30, 1999 and 1998 and cash flows for the nine-month periods ended September 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of ALABAMA POWER COMPANY as of December 31, 1998 (not presented herein) and, in our report dated February 10, 1999, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1998 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. /s/ ARTHUR ANDERSEN LLP Birmingham, Alabama November 9, 1999 30 GEORGIA POWER COMPANY 31
GEORGIA POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, -------------------------------- ------------------------------- 1999 1998 1999 1998 --------------- -------------- -------------- -------------- OPERATING REVENUES: Revenues $1,423,790 $1,482,495 $3,423,880 $3,667,980 Revenues from affiliates 42,217 47,832 64,605 72,804 --------------- -------------- -------------- -------------- Total operating revenues 1,466,007 1,530,327 3,488,485 3,740,784 --------------- -------------- -------------- -------------- OPERATING EXPENSES: Operation-- Fuel 299,684 298,338 715,470 722,999 Purchased power from non-affiliates 90,284 90,912 170,194 195,140 Purchased power from affiliates 39,051 35,119 137,822 115,481 Other 200,575 212,741 553,178 576,433 Maintenance 81,445 79,006 263,918 251,044 Depreciation and amortization 140,538 241,528 412,262 655,962 Taxes other than income taxes 56,974 58,645 155,127 166,079 Federal and state income taxes 192,348 189,490 346,493 368,133 --------------- -------------- -------------- -------------- Total operating expenses 1,100,899 1,205,779 2,754,464 3,051,271 --------------- -------------- -------------- -------------- OPERATING INCOME 365,108 324,548 734,021 689,513 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction 317 1,172 317 1,350 Equity in earnings of unconsolidated subsidiary 651 913 2,115 2,753 Interest income 1,151 3,033 3,516 67,944 Other, net (8,051) (11,339) (18,077) (39,838) Income taxes applicable to other income 2,644 3,586 5,600 (9,626) --------------- -------------- -------------- -------------- INCOME BEFORE INTEREST CHARGES 361,820 321,913 727,492 712,096 --------------- -------------- -------------- -------------- INTEREST CHARGES AND OTHER: Interest on long-term debt 40,050 44,489 124,033 134,797 Allowance for debt funds used during construction (2,881) (2,061) (8,191) (6,063) Interest on interim obligations 4,399 2,561 14,233 11,074 Amortization of debt discount, premium and expense, net 3,835 3,323 11,435 9,974 Other interest charges 2,838 3,089 8,875 18,223 Distributions on preferred securities of subsidiary companies 17,026 13,601 49,023 40,726 --------------- -------------- -------------- -------------- Interest charges and other, net 65,267 65,002 199,408 208,731 --------------- -------------- -------------- -------------- NET INCOME 296,553 256,911 528,084 503,365 DIVIDENDS ON PREFERRED STOCK 177 1,447 1,556 5,311 --------------- -------------- -------------- -------------- NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 296,376 $ 255,464 $ 526,528 $ 498,054 =============== ============== ============== ============== The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
32
GEORGIA POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, --------------------------------- 1999 1998 -------------- -------------- OPERATING ACTIVITIES: Net income $528,084 $503,365 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 405,738 708,055 Deferred income taxes and investment tax credits, net (45,534) (73,091) Other, net 167,383 27,132 Changes in certain current assets and liabilities-- Receivables, net (102,460) (348,649) Inventories (31,517) 24,199 Payables (34,894) 12,431 Taxes accrued 194,975 186,591 Energy cost recovery, retail (6,116) (7,827) Other 97,111 16,923 -------------- -------------- Net cash provided from operating activities 1,172,770 1,049,129 -------------- -------------- INVESTING ACTIVITIES: Gross property additions (516,767) (334,113) Other (30,043) 16,396 -------------- -------------- Net cash used for investing activities (546,810) (317,717) -------------- -------------- FINANCING ACTIVITIES: Proceeds-- Preferred securities 200,000 - Pollution control bonds 238,000 89,990 Senior notes 100,000 145,000 Retirements-- Preferred stock (35,980) (40,679) First mortgage bonds (404,000) (220,460) Pollution control bonds (235,000) (89,990) Capital leases (322) - Interim obligations, net (23,413) (265,407) Payment of preferred stock dividends (707) (7,342) Payment of common stock dividends (402,300) (397,100) Miscellaneous (29,178) (6,876) -------------- -------------- Net cash used for financing activities (592,900) (792,864) -------------- -------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 33,060 (61,452) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,272 83,333 ============== ============== CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 49,332 $ 21,881 ============== ============== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $191,792 $210,226 Income taxes (net of refunds) 210,944 308,271 The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
33
GEORGIA POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, 1999 At December 31, (Unaudited) 1998 --------------- ---------------- UTILITY PLANT: Plant in service $15,672,526 $15,441,146 Less accumulated provision for depreciation 6,407,881 6,109,331 --------------- ---------------- 9,264,645 9,331,815 Nuclear fuel, at amortized cost 118,969 121,169 Construction work in progress 347,699 189,849 --------------- ---------------- Total 9,731,313 9,642,833 --------------- ---------------- OTHER PROPERTY AND INVESTMENTS: Southern Electric Generating Company, at equity 24,319 24,360 Nuclear decommissioning trusts, at market 321,655 284,536 Miscellaneous 32,185 34,781 --------------- ---------------- Total 378,159 343,677 --------------- ---------------- CURRENT ASSETS: Cash and cash equivalents 49,332 16,272 Receivables -- Customer accounts receivable 540,946 439,420 Other accounts and notes receivable 78,794 99,574 Affiliated companies 30,264 16,817 Accumulated provision for uncollectible accounts (6,000) (5,500) Fossil fuel stock, at average cost 124,437 104,133 Materials and supplies, at average cost 254,690 243,477 Prepayments 43,649 29,670 Vacation pay deferred 42,807 43,610 --------------- ---------------- Total 1,158,919 987,473 --------------- ---------------- DEFERRED CHARGES: Deferred charges related to income taxes 593,332 604,488 Premium on reacquired debt, being amortized 184,336 173,858 Prepaid pension costs 135,359 103,606 Debt expense, being amortized 59,311 51,261 Miscellaneous 131,877 126,422 --------------- ---------------- Total 1,104,215 1,059,635 --------------- ---------------- TOTAL ASSETS $12,372,606 $12,033,618 =============== ================ The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
34
GEORGIA POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1999 At December 31, (Unaudited) 1998 --------------- ---------------- CAPITALIZATION: Common stock equity -- Common stock (without par value) -- authorized 15,000,000 shares; outstanding 7,761,500 shares $ 344,250 $ 344,250 Paid-in capital 1,790,254 1,660,206 Premium on preferred stock 40 158 Retained earnings 1,903,783 1,779,558 --------------- ---------------- 4,038,327 3,784,172 Preferred stock 15,203 15,527 Company obligated mandatorily redeemable preferred securities of subsidiaries substantially all of whose assets are junior subordinated debentures or notes 889,250 689,250 Long-term debt 2,743,542 2,744,362 --------------- ---------------- Total 7,686,322 7,233,311 --------------- ---------------- CURRENT LIABILITIES: Preferred stock due within one year - 35,656 Long-term debt due within one year 100,611 399,429 Notes payable to banks 119,516 117,634 Commercial paper 197,923 223,218 Accounts payable -- Affiliated companies 54,036 75,774 Other 284,682 326,317 Customer deposits 73,379 69,584 Taxes accrued-- Federal and state income 191,284 15,801 Other 141,851 122,359 Interest accrued 56,368 60,187 Miscellaneous 194,419 100,793 --------------- ---------------- Total 1,414,069 1,546,752 --------------- ---------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 2,219,600 2,249,613 Accumulated deferred investment tax credits 370,814 381,914 Deferred credits related to income taxes 269,048 284,017 Employee benefits provisions 187,892 177,148 Miscellaneous 224,861 160,863 --------------- ---------------- Total 3,272,215 3,253,555 --------------- ---------------- TOTAL CAPITALIZATION AND LIABILITIES $12,372,606 $12,033,618 =============== ================ The accompanying notes as they relate to GEORGIA are an integral part of these condensed statements.
35 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1999 vs. THIRD QUARTER 1998 AND YEAR-TO-DATE 1999 vs. YEAR-TO-DATE 1998 RESULTS OF OPERATIONS Earnings GEORGIA's net income after dividends on preferred stock for the third quarter and year-to-date 1999 was $296.4 million and $526.5 million, respectively, compared to $255.5 million and $498.1 million for the same periods in 1998. Third quarter 1999 earnings increased by $40.9 million or 16.0% and year-to-date 1999 earnings increased by $28.5 million or 5.7% due primarily to decreased operating expenses and the effects of the 1998 Georgia PSC rate order. See Note (K) in the "Notes to the Condensed Financial Statements" herein for further details regarding the retail rate order. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date --------------------------------------------------------------- (in thousands) % (in thousands) % Revenues......................................... $(58,705) (4.0) $(244,100) (6.7) Revenues from affiliates......................... (5,615) (11.7) (8,199) (11.3) Purchased power from non-affiliates.............. (628) (0.7) (24,946) (12.8) Purchased power from affiliates.................. 3,932 11.2 22,341 19.3 Other operation expense.......................... (12,166) (5.7) (23,255) (4.0) Depreciation and amortization.................... (100,990) (41.8) (243,700) (37.2) Interest income.................................. (1,882) (62.1) (64,428) (94.8) Other, net....................................... 3,288 29.0 21,761 54.6 Interest on long-term debt....................... (4,439) (10.0) (10,764) (8.0) Other interest charges........................... (251) (8.1) (9,348) (51.3) Distributions on preferred securities of subsidiary companies........................... 3,425 25.2 8,297 20.4
Revenues. Retail revenues, excluding fuel revenues which generally do not affect income, decreased $75.0 million and $251.8 million, respectively, for the third quarter and year-to-date 1999 when compared to the corresponding periods in 1998 primarily due to retail rate reductions under the 1998 Georgia PSC order. Total retail energy sales were up 3.9% for the third quarter and 1.5% year-to-date 1999, but the associated revenues were down 4.7% and 6.9%, respectively. 36 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Wholesale revenues decreased $2.2 million and $28.2 million, respectively, during the third quarter and year-to-date 1999. The third quarter and year-to-date decreases are primarily the result of reductions in capacity revenues under a power supply agreement with OPC of $2.0 million and $13.5 million, respectively, for the third quarter and year-to-date 1999, and a decrease in energy sales. The decreases in wholesale energy sales were primarily offset by the decreases 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 did not have a significant impact on earnings. Purchased power from non-affiliates. The year-to-date 1999 decrease resulted from higher demand in 1998 for energy and higher energy purchases in 1998 related to power marketing activities, a majority of which were resold to non-affiliated third parties. As stated above, these transactions had no significant effect on net income. Other operation expense. The decreases for the current quarter and year-to-date 1999 are primarily due to a reduction in the charges related to a customer service system, decreased year 2000 readiness costs, and decreased employee benefit provisions. Depreciation and amortization expense. These decreases in the third quarter and year-to-date 1999 when compared to the same periods in 1998 are attributed to higher depreciation charges recognized in 1998 under the prior accounting order and the completion in 1998 of the amortization of deferred Plant Vogtle costs. Interest income. The year-to-date 1999 decrease is related to the recognition, in the same period of 1998, of increased interest income resulting from the resolution of tax issues between SOUTHERN and the Internal Revenue Service. Other, net. The third quarter and year-to-date 1999 changes are attributed to reduced donations and contributions in these periods when compared to the corresponding periods in 1998. Interest on long-term debt. The third quarter and year-to-date 1999 decreases are due to redemptions of first mortgage bonds and the refinancing of higher cost long-term debt. Other interest charges. The year-to-date 1999 decrease when compared to the same period in 1998 is attributed to the recognition in 1998 of interest related to tax issues. Distributions on preferred securities of subsidiary companies. The increases for the third quarter and year-to-date 1999 result from the issuance of additional mandatorily redeemable preferred securities in February 1999. 37 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors including weather, regulatory matters and energy sales. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, GEORGIA is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form 10-K. Effective January 1, 1999, GEORGIA began operating under a new three-year retail rate order. Under the order, GEORGIA's earnings are evaluated against a retail return on common equity range of 10% to 12.5%. In compliance with the order, retail rates were decreased by $262 million on an annual basis effective January 1, 1999. Reference is made to Note (K) in the "Notes to the Condensed Financial Statements" herein and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GEORGIA in the Form 10-K for additional information. Compliance costs related to the Clean Air Act and other environmental issues could affect earnings. The State of Georgia submitted a plan for nitrogen oxide emission reductions in Atlanta's ozone non-attainment area on October 29, 1999. Based on the plan submitted by the State to the EPA, GEORGIA estimates its capital costs to comply with the plan to be approximately $664 million. At the direction of the EPA, the State of Georgia is required to pursue additional control on all sources of nitrogen oxide emissions and volatile organic compounds. The plan for those additional controls must be submitted to the EPA by the fall of 2000. It is uncertain at this time what additional controls may be required at GEORGIA's plants beyond the recently submitted plan. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Issues" of GEORGIA in the Form 10-K. Reference is made to Part II - Item 1 - "Legal Proceedings" herein for information relating to a complaint and notice of violation brought against certain SOUTHERN subsidiaries at the request of the EPA. GEORGIA's plans to achieve Year 2000 readiness have been implemented and are included in the SOUTHERN system's Year 2000 Program. The costs related to GEORGIA's Year 2000 program, including GEORGIA's share of costs of Southern Nuclear Operating Company, are expected to be approximately $42.8 million. From its inception through September 30, 1999, the Year 2000 program costs, recognized as expense, amounted to $40 million. For additional information, see SOUTHERN's MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - "Future Earnings Potential" herein. 38 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which was originally to be adopted by the year 2000. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which amends FASB Statement No. 133 to be effective for all fiscal years beginning after June 15, 2000 (January 1, 2001 for companies with calendar-year fiscal years). GEORGIA has not yet quantified the impact of adopting this statement on its financial statements; however, the adoption could increase volatility in earnings. Reference is made to Notes (B), (C), (F), (G), (K) and (L) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. FINANCIAL CONDITION Overview The major change in GEORGIA's financial condition during the first nine months of 1999 was the addition of approximately $516.8 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 nine months of 1999, redemptions of first mortgage bonds and preferred stock by GEORGIA totaled $404 million and $36 million, respectively. In February 1999, Georgia Power Capital Trust IV, a statutory business trust established for the purpose of holding GEORGIA's junior subordinated notes and issuing trust preferred securities and common securities, sold $200 million of its 6.85% trust preferred securities, which are guaranteed by GEORGIA. (See Note (G) in the " Notes to the Condensed Financial Statements" herein and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Financing Activities" of GEORGIA in the Form 10-K for further details.) In March 1999, GEORGIA issued $100 million of 6 5/8% senior notes due March 31, 2039. The proceeds from this issuance were used to repay a portion of GEORGIA's outstanding short-term indebtedness. In May 1999, GEORGIA sold, through public authorities, $53 million of 5.45% pollution control revenue bonds due May 1, 2034; $85 million of 5.40% pollution control revenue bonds due May 1, 2034; and $100 million of 5.25% pollution control revenue bonds due May 1, 2034. The proceeds of these sales were used to redeem $50 million aggregate principal amount of 6.35% pollution control revenue bonds in June 1999; $125 million aggregate principal amount of 6.60% pollution control revenue bonds in July 1999; and $60 million aggregate principal amount of 6 3/8% pollution control revenue bonds in August 1999. GEORGIA plans to continue, to the extent possible, a program to retire higher-cost debt and preferred stock and replace these securities with lower-cost capital. 39 GEORGIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Capital Requirements Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of GEORGIA under "Liquidity and Capital Requirements" and "Environmental Issues" in the Form 10-K for a description of GEORGIA's capital requirements for its construction program and environmental compliance efforts. Sources of Capital In addition to the financing activities previously described herein, GEORGIA plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - - BUSINESS "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, GEORGIA had at September 30, 1999, approximately $49.3 million of cash and cash equivalents and approximately $1.3 billion of unused credit arrangements with banks. The credit arrangements provide liquidity support to GEORGIA's variable rate pollution control bonds and its commercial paper program. At September 30, 1999, GEORGIA had $119.5 million and $197.9 million outstanding in short-term notes payable to banks and commercial paper, respectively. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 40 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 September 30, 1999, and the related condensed statements of income for the three-month and nine-month periods ended September 30, 1999 and 1998 and cash flows for the nine-month periods ended September 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of GEORGIA POWER COMPANY as of December 31, 1998 (not presented herein), and, in our report dated February 10, 1999, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1998, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia November 9, 1999 41 GULF POWER COMPANY 42
GULF POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, --------------------------- --------------------------- 1999 1998 1999 1998 ------------- ------------ ------------- ------------ OPERATING REVENUES: Revenues $192,779 $186,983 $473,419 $481,597 Revenues from affiliates 25,485 12,394 46,166 35,860 ------------- ------------ ------------- ------------ Total operating revenues 218,264 199,377 519,585 517,457 ------------- ------------ ------------- ------------ OPERATING EXPENSES: Operation-- Fuel 64,223 61,694 156,184 158,580 Purchased power from non-affiliates 26,009 12,823 39,303 25,812 Purchased power from affiliates 3,309 5,925 9,984 12,358 Other 29,055 27,942 83,977 93,392 Maintenance 10,203 11,858 42,699 39,345 Depreciation and amortization 16,198 14,819 48,310 45,931 Taxes other than income taxes 14,838 14,479 39,781 39,583 Federal and state income taxes 17,376 15,767 27,712 29,407 ------------- ------------ ------------- ------------ Total operating expenses 181,211 165,307 447,950 444,408 ------------- ------------ ------------- ------------ OPERATING INCOME 37,053 34,070 71,635 73,049 OTHER INCOME (EXPENSE): Interest income 427 213 928 530 Other, net 3 (307) (900) (1,713) Income taxes applicable to other income (328) 921 (337) 1,221 ------------- ------------ ------------- ------------ INCOME BEFORE INTEREST CHARGES 37,155 34,897 71,326 73,087 ------------- ------------ ------------- ------------ INTEREST CHARGES AND OTHER: Interest on long-term debt 5,598 5,098 15,580 14,700 Other interest charges 223 327 834 3,427 Interest on notes payable 649 274 2,005 1,093 Amortization of debt discount, premium and expense, net 499 498 1,488 1,598 Distributions on preferred securities of subsidiary companies 1,550 1,550 4,650 4,484 ------------- ------------ ------------- ------------ Interest charges and other, net 8,519 7,747 24,557 25,302 ------------- ------------ ------------- ------------ NET INCOME 28,636 27,150 46,769 47,785 DIVIDENDS ON PREFERRED STOCK 54 161 162 579 ------------- ------------ ------------- ------------ NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $28,582 $26,989 $46,607 $47,206 ============= ============ ============= ============ The accompanying notes as they relate to GULF are an integral part of these condensed statements.
43
GULF POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, ---------------------------- 1999 1998 ------------ ----------- OPERATING ACTIVITIES: Net income $ 46,769 $ 47,785 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 51,368 51,498 Deferred income taxes (3,133) (5,437) Other, net 4,803 13,005 Changes in certain current assets and liabilities-- Receivables, net (14,063) 1,493 Inventories (8,519) (4,870) Payables (8,403) (8,366) Taxes accrued 33,359 18,465 Current costs of 1995 coal contract renegotiation - 812 Other (9,352) (7,842) ------------ ----------- Net cash provided from operating activities 92,829 106,543 ------------ ----------- INVESTING ACTIVITIES: Gross property additions (48,442) (39,940) Other (12,753) (3,215) ------------ ----------- Net cash used for investing activities (61,195) (43,155) ------------ ----------- FINANCING ACTIVITIES: Proceeds-- Preferred securities - 45,000 Other long-term debt 49,950 50,000 Retirements-- Preferred stock - (8,666) First mortgage bonds - (45,000) Other long-term debt - (8,327) Notes payable, net (31,500) (36,500) Payment of preferred stock dividends (162) (726) Payment of common stock dividends (45,400) (52,300) Miscellaneous (233) (4,158) ------------ ----------- Net cash used for financing activities (27,345) (60,677) ------------ ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS 4,289 2,711 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 969 4,707 ============ =========== CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,258 $ 7,418 ============ =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $20,197 $19,261 Income taxes 12,754 22,065 The accompanying notes as they relate to GULF are an integral part of these condensed statements.
44
GULF POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, 1999 At December 31, (Unaudited) 1998 ----------------------------------- UTILITY PLANT: Plant in service $1,845,433 $1,809,901 Less accumulated provision for depreciation 813,720 784,111 -------------- -------------- 1,031,713 1,025,790 Construction work in progress 29,029 34,863 -------------- -------------- Total 1,060,742 1,060,653 -------------- -------------- OTHER PROPERTY AND INVESTMENTS: 1,481 588 -------------- -------------- CURRENT ASSETS: Cash and cash equivalents 5,258 969 Receivables -- Customer accounts receivable 63,860 49,067 Other accounts and notes receivable 2,442 3,514 Affiliated companies 3,813 3,442 Accumulated provision for uncollectible accounts (1,025) (996) Fossil fuel stock, at average cost 30,798 24,213 Materials and supplies, at average cost 29,959 28,025 Regulatory clauses under recovery 17,458 9,737 Prepayments 1,311 5,690 Vacation pay deferred 4,035 4,035 -------------- -------------- Total 157,909 127,696 -------------- -------------- DEFERRED CHARGES: Deferred charges related to income taxes 25,275 25,308 Debt expense, being amortized 20,290 21,448 Prepaid pension costs 16,743 13,770 Miscellaneous 20,388 18,438 -------------- -------------- Total 82,696 78,964 -------------- -------------- TOTAL ASSETS $1,302,828 $1,267,901 ============== ============== The accompanying notes as they relate to GULF are an integral part of these condensed statements.
45
GULF POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1999 At December 31, (Unaudited) 1998 --------------------------------------- CAPITALIZATION: Common stock equity -- Common stock (without par value) -- authorized and outstanding -- 992,717 shares $ 38,060 $ 38,060 Paid-in capital 218,961 218,960 Premium on preferred stock 12 12 Retained earnings 171,827 170,620 -------------- -------------- 428,860 427,652 Preferred stock 4,236 4,236 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding Company Junior Subordinated Notes 85,000 85,000 Long-term debt 367,386 317,341 -------------- -------------- Total 885,482 834,229 -------------- -------------- CURRENT LIABILITIES: Long-term debt due within one year 27,000 27,000 Notes payable - 31,500 Accounts payable -- Affiliated companies 7,018 19,756 Other 19,089 23,697 Customer deposits 12,727 12,560 Taxes accrued 36,571 7,432 Interest accrued 7,110 5,184 Regulatory clauses over recovery 3,632 6,037 Vacation pay accrued 4,035 4,035 Dividends declared 54 54 Miscellaneous 2,810 3,960 -------------- -------------- Total 120,046 141,215 -------------- -------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 164,703 166,118 Deferred credits related to income taxes 50,386 52,465 Accumulated provision for property damage 5,881 1,605 Accumulated deferred investment tax credits 28,192 29,632 Accumulated provision for postretirement benefits 26,067 23,534 Miscellaneous 22,071 19,103 -------------- -------------- Total 297,300 292,457 -------------- -------------- TOTAL CAPITALIZATION AND LIABILITIES $1,302,828 $1,267,901 ============== ============== The accompanying notes as they relate to GULF are an integral part of these condensed statements.
46 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1999 vs. THIRD QUARTER 1998 AND YEAR-TO-DATE 1999 vs. YEAR-TO-DATE 1998 RESULTS OF OPERATIONS Earnings GULF's net income after dividends on preferred stock for the third quarter and year-to-date 1999 was $28.6 million and $46.6 million, respectively, compared to $27.0 million and $47.2 million for the same periods in 1998. The third quarter improvement in earnings of $1.6 million or 5.9% was primarily due to the increase in operating revenues. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date --------------------------------------------------------------- (in thousands) % (in thousands) % Revenues......................................... $5,796 3.1 $(8,178) (1.7) Revenues from affiliates......................... 13,091 105.6 10,306 28.7 Purchased power from non-affiliates.............. 13,186 102.8 13,491 52.3 Purchased power from affiliates.................. (2,616) (44.2) (2,374) (19.2) Other operation expense.......................... 1,113 4.0 (9,415) (10.1) Maintenance expense.............................. (1,655) (14.0) 3,354 8.5 Depreciation and amortization.................... 1,379 9.3 2,379 5.2
Revenues. Revenues were higher for the third quarter due to a 6.9% increase in total energy sales. The increase in total energy sales is primarily attributed to growth in the number of customers served by GULF, as well as warmer weather during the third quarter of 1999. The year-to-date 1999 decrease reflects the recovery of lower fuel costs. Excluding recovery of fuel expense and certain other expenses that do not affect income, retail revenues increased $3.6 million for the quarter due to a 4.0% increase in retail energy sales, which can primarily be attributed to an increase in the demand for energy resulting from an increase in the number of residential customers and warmer weather during the third quarter of 1999. Retail revenues decreased $1.9 million year-to-date due, for the most part, to a decrease in revenues from industrial customers during the first nine months of 1999 when compared to the same period in 1998. Revenues from non-territorial wholesale energy sales decreased $1.2 million and $5.1 million for the third quarter and year-to-date 1999, respectively, when compared to the same periods of 1998. The decreases in non-territorial wholesale energy sales are attributed to decreased power marketing activities. Revenues from affiliates and purchased power from affiliates. Revenues from sales to affiliated companies within the Southern electric system, as well as purchases, will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Purchased power from non-affiliates. Increases for this item in the third quarter and year-to-date 1999 result from an increased demand for energy due to warmer weather during the third quarter and an increase in the number of customers when compared to the corresponding periods in 1998. 47 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Other operation expense. This item increased in the third quarter when compared to the same period in 1998 due to an increase in other production expenses. The year-to-date decrease is attributed primarily to lower administrative and general expenses during the first half of 1999, as well as prior year prepayments related to renegotiations of coal supply contracts being fully amortized in 1998. Maintenance expense. The decrease for the current quarter is mainly due to routine line maintenance performed during the third quarter of 1998. The year-to-date 1999 increase reflects scheduled maintenance on steam plant facilities. Depreciation and amortization expense. The third quarter and year-to-date increases are primarily attributed to additions to plant during 1999 and increased amortization expense related to the amortization of gains from the sale of emission allowances when compared to the corresponding periods of 1998. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from weather to energy sales growth to a less regulated, more competitive environment. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, GULF is positioning the business to meet the challenge of increasing competition. For additional information, see Item 7 MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of GULF and Item 1 - BUSINESS - "Competition" in the Form 10-K. 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. Reference is made to Part II - Item 1 - "Legal Proceedings" herein for information relating to a complaint and notice of violation brought against certain SOUTHERN subsidiaries at the request of the EPA. GULF's plans to achieve Year 2000 readiness have been implemented and are included in the SOUTHERN system's Year 2000 Program. The costs related to GULF's Year 2000 program are expected to be $5.2 million. From its inception through September 30, 1999, the Year 2000 program costs, recognized as expense, amounted to $4.5 million. For additional information, see SOUTHERN's MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - "Future Earnings Potential" herein. In reference to the ongoing matters with the Florida PSC concerning GULF's authorized return on equity (ROE) and the outstanding balances of certain regulatory assets, GULF, the Office of the Public Counsel, the Coalition for Equitable Rates, and the Florida Industrial Power Users Group jointly filed a stipulation and settlement in October 1999 to effect an informal disposition and complete and binding resolution of all matters before the Florida PSC related to the investigation into earnings and reduction of the authorized ROE and the 48 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION petition for a full revenue requirements rate case (for additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS "Future Earnings Potential" and Item 1 - Business - "Regulation - State Commissions" of GULF in the Form 10-K). The stipulation calls for base rates to be reduced by $10 million annually and provides for revenues above certain levels to be shared for 1999-2002. Customers will receive two-thirds of any revenue within the ranges and GULF will retain one-third. The sharing plan will be in place until the earlier of the day prior to the in-service date of GULF's Plant Smith Unit 3 or December 31, 2002. GULF filed a request to prospectively reduce its authorized ROE range from 11% - 13% to 10.5% - 12.5% in order to help ensure that the Florida PSC would approve the stipulation. Both the stipulation and the rate of return request were approved by the Florida PSC at the agenda conference on October 5, 1999. The decisions of the Florida PSC have been reflected in final orders. The FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which was originally to be adopted by the year 2000. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which amends FASB Statement No. 133 to be effective for all fiscal years beginning after June 15, 2000 (January 1, 2001 for companies with calendar-year fiscal years). GULF has not yet quantified the impact of adopting this statement on its financial statements; however, the adoption could increase volatility in earnings. Reference is made to Notes (B) and (F) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. FINANCIAL CONDITION Overview Major changes in GULF's financial condition during the first nine months of 1999 included the addition of approximately $48.4 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 In August 1999, GULF issued $50 million of 7.05% senior notes due August 15, 2004. The proceeds were used to repay a portion of its outstanding short-term indebtedness. 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. 49 GULF POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Sources of Capital In addition to the financing activities previously described herein, GULF plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - - BUSINESS "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, GULF had at September 30, 1999, approximately $5.3 million of cash and cash equivalents and $41.5 million of unused committed lines of credit with banks in addition to $61.9 million liquidity support for variable rate pollution control bonds. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 50 MISSISSIPPI POWER COMPANY 51
MISSISSIPPI POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, --------------------------- --------------------------- 1999 1998 1999 1998 ------------- ------------ ------------- ------------ OPERATING REVENUES: Revenues $188,440 $183,293 $465,173 $452,638 Revenues from affiliates 13,154 8,406 17,446 17,829 ------------- ------------ ------------- ------------ Total operating revenues 201,594 191,699 482,619 470,467 ------------- ------------ ------------- ------------ OPERATING EXPENSES: Operation-- Fuel 54,224 53,763 132,452 126,164 Purchased power from non-affiliates 26,457 17,880 35,964 31,168 Purchased power from affiliates 8,609 8,498 25,008 24,912 Other 30,479 24,213 85,209 81,161 Maintenance 5,741 12,672 31,607 35,630 Depreciation and amortization 11,884 11,456 35,453 34,550 Taxes other than income taxes 12,591 12,269 35,906 35,509 Federal and state income taxes 16,809 16,781 30,183 31,716 ------------- ------------ ------------- ------------ Total operating expenses 166,794 157,532 411,782 400,810 ------------- ------------ ------------- ------------ OPERATING INCOME 34,800 34,167 70,837 69,657 OTHER INCOME (EXPENSE): Interest income 53 337 203 600 Other, net 704 1,016 1,925 1,879 Income taxes applicable to other income (280) 358 (912) 4 ------------- ------------ ------------- ------------ INCOME BEFORE INTEREST CHARGES 35,277 35,878 72,053 72,140 ------------- ------------ ------------- ------------ INTEREST AND OTHER CHARGES: Interest on long-term debt 5,072 5,510 15,116 15,431 Interest on notes payable 751 - 2,037 918 Amortization of debt discount, premium and expense, net 358 364 1,075 1,087 Other interest charges 581 493 759 696 Distributions on preferred securities of subsidiary companies 699 699 2,097 2,097 ------------- ------------ ------------- ------------ Interest and other charges, net 7,461 7,066 21,084 20,229 ------------- ------------ ------------- ------------ NET INCOME 27,816 28,812 50,969 51,911 DIVIDENDS ON PREFERRED STOCK 503 503 1,510 1,502 ------------- ------------ ------------- ------------ NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $27,313 $28,309 $49,459 $50,409 ============= ============ ============= ============ The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
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MISSISSIPPI POWER COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, ---------------------------- 1999 1998 ------------ ----------- OPERATING ACTIVITIES: Net income $ 50,969 $ 51,911 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 38,592 37,604 Deferred income taxes 3,853 (1,480) Other, net (6,115) (4,127) Changes in certain current assets and liabilities-- Receivables, net (28,547) (7,959) Inventories (5,375) (2,921) Payables (6,018) (3,046) Taxes accrued 16,756 16,140 Other 2,981 (997) ------------ ----------- Net cash provided from operating activities 67,096 85,125 ------------ ----------- INVESTING ACTIVITIES: Gross property additions (52,099) (45,269) Other (2,827) (266) ------------ ----------- Net cash used for investing activities (54,926) (45,535) ------------ ----------- FINANCING ACTIVITIES: Proceeds-- Pollution control bonds - 13,520 Other long-term debt - 90,000 Retirements-- Preferred stock - (87) First mortgage bonds - (75,000) Pollution control bonds - (13,000) Senior Notes (184) - Notes payable, net 30,200 - Payment of preferred stock dividends (1,510) (1,502) Payment of common stock dividends (41,600) (38,300) Miscellaneous (242) (2,178) ------------ ----------- Net cash used for financing activities (13,336) (26,547) ------------ ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS (1,166) 13,043 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,327 4,432 ============ =========== CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 161 $ 17,475 ============ =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $19,310 $16,612 Income taxes 7,207 9,259 The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
53
MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, At December 31, 1999 1998 (Unaudited) --------------------------------- UTILITY PLANT: Plant in service, at original cost $1,582,881 $1,553,112 Less accumulated provision for depreciation 617,748 583,957 -------------- -------------- 965,133 969,155 Construction work in progress 67,474 51,517 -------------- -------------- Total 1,032,607 1,020,672 -------------- -------------- OTHER PROPERTY AND INVESTMENTS: 1,395 979 -------------- -------------- CURRENT ASSETS: Cash and cash equivalents 161 1,327 Receivables -- Customer accounts receivable 40,131 29,829 Regulatory clauses under recovery 21,499 8,042 Other accounts and notes receivable 19,451 12,495 Affiliated companies 8,976 10,946 Accumulated provision for uncollectible accounts (690) (621) Fossil fuel stock, at average cost 20,431 16,418 Materials and supplies, at average cost 20,097 18,735 Current portion of accumulated deferred income taxes - 4,248 Prepayments 2,013 1,651 Vacation pay deferred 4,717 4,717 -------------- -------------- Total 136,786 107,787 -------------- -------------- DEFERRED CHARGES: Debt expense and loss, being amortized 12,838 13,713 Deferred charges related to income taxes 21,516 22,697 Long-term notes receivable 1,503 2,072 Work force reduction plan 6,646 12,748 Miscellaneous 16,917 8,937 -------------- -------------- Total 59,420 60,167 -------------- -------------- TOTAL ASSETS $1,230,208 $1,189,605 ============== ============== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
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MISSISSIPPI POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1999 At December 31, (Unaudited) 1998 --------------------------------- CAPITALIZATION: Common stock equity -- Common stock (without par value) -- authorized 1,130,000 shares; outstanding 1,121,000 shares $ 37,691 $ 37,691 Paid-in capital 179,474 179,474 Premium on preferred stock 326 326 Retained earnings 181,599 173,740 -------------- -------------- 399,090 391,231 Preferred stock 31,809 31,809 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding Company Junior Subordinated Notes 35,000 35,000 Long-term debt 292,646 292,744 -------------- -------------- Total 758,545 750,784 -------------- -------------- CURRENT LIABILITIES: Long-term debt due within one year 50,020 50,020 Notes payable 43,200 13,000 Accounts payable -- Affiliated companies 14,666 8,788 Regulatory clauses over recovery - 4,412 Other 33,597 47,113 Customer deposits 3,649 3,272 Taxes accrued-- Federal and state income 22,896 1,124 Other 28,322 31,379 Interest accrued 5,051 2,955 Miscellaneous 12,795 11,753 -------------- -------------- Total 214,196 173,816 -------------- -------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 140,680 143,852 Accumulated deferred investment tax credits 24,998 25,913 Deferred credits related to income taxes 35,293 37,277 Postretirement benefits other than pension 26,338 25,869 Accumulated provision for property damage 356 910 Work force reduction plan 11,663 13,051 Miscellaneous 18,139 18,133 -------------- -------------- Total 257,467 265,005 -------------- -------------- TOTAL CAPITALIZATION AND LIABILITIES $1,230,208 $1,189,605 ============== ============== The accompanying notes as they relate to MISSISSIPPI are an integral part of these condensed statements.
55 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1999 vs. THIRD QUARTER 1998 AND YEAR-TO-DATE 1999 vs. YEAR-TO-DATE 1998 RESULTS OF OPERATIONS Earnings MISSISSIPPI's net income after dividends on preferred stock for the third quarter and year-to-date 1999 was $27.3 million and $49.5 million, respectively, compared to $28.3 million and $50.4 million for the corresponding periods of 1998. The slight decrease in earnings for the current quarter and year-to-date resulted from higher operating expenses which offset increased operating revenues. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date --------------------------------------------------------------- (in thousands) % (in thousands) % Revenues......................................... $5,147 2.8 $12,535 2.8 Revenues from affiliates......................... 4,748 56.5 (383) (2.1) Purchased power from non-affiliates.............. 8,577 48.0 4,796 15.4 Other operation expense.......................... 6,266 25.9 4,048 5.0 Maintenance expense.............................. (6,931) (54.7) (4,023) (11.3)
Revenues. Third quarter and year-to-date increases are essentially due to higher retail energy sales. Retail energy sales were up 5.1% for the quarter and 2.4% year-to-date. Retail sales to residential customers were down 4.8% and 5.6%, for the quarter and year-to-date, respectively, due to milder temperatures when compared to the same periods of 1998. Commercial and industrial sales were up 2.5% and 14.2%, respectively, for the quarter and 3.6% and 6.4%, respectively, year-to-date. Industrial energy sales were positively impacted by increased production by several larger industrial customers, while commercial energy sales were positively impacted by increased tourism and strong growth in this sector. Retail revenues, excluding those revenues which represent the recovery of fuel expense and certain other expenses and do not affect income, increased $1.7 million for the current quarter and $2.3 million year-to-date. Wholesale territorial revenues, excluding fuel revenues which do not affect income, increased $3.0 million for the current quarter and $8.7 million year-to-date. Revenues from affiliates. Revenues from sales to affiliated companies within the Southern electric system will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Purchased power from non-affiliates. The increases in the current quarter and year-to-date 1999 when compared to the corresponding periods in 1998 reflects the higher demand for energy. 56 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Other operation expense. These changes in this expense when compared to the same periods in 1998 are primarily due to timing differences related to the amortization of costs associated with the work force reduction plan during the third quarter and higher distribution expenses year-to-date. Maintenance expense. This item is down for the third quarter and year-to-date 1999 due to reduced maintenance expense and the performance in the third quarter of 1998 of scheduled transmission and distribution line maintenance. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from weather to energy sales growth to a less regulated, more competitive environment. Operating revenues will be affected by any changes in rates under the PEP and ECO plans. The PEP has proven to be a stabilizing force on electric rates, with only moderate changes in rates taking place. For additional information, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI in the Form 10-K. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, MISSISSIPPI is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of MISSISSIPPI in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be recovered. MISSISSIPPI's 1999 ECO Plan filing was approved, as filed, by the Mississippi PSC on March 18, 1999 and resulted in a slight increase in customer prices. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of MISSISSIPPI in the Form 10-K. Reference is made to Part II - Item 1 - "Legal Proceedings" herein for information relating to a complaint and notice of violation brought against certain SOUTHERN subsidiaries at the request of the EPA. MISSISSIPPI's plans to achieve Year 2000 readiness have been implemented and are included in the SOUTHERN system's Year 2000 Program. The costs related to MISSISSIPPI's Year 2000 program are expected to be $5.6 million. From its inception through September 30, 1999, the Year 2000 program costs, recognized as expense, amounted to $5.1 million. For additional information, see SOUTHERN's MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - "Future Earnings Potential" herein. 57 MISSISSIPPI POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which was to be adopted by the year 2000. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 - an amendment of FASB Statement No. 133, which delayed adoption until the year 2001. MISSISSIPPI has not yet quantified the impact of adopting this statement on its financial statements; however, the adoption could increase volatility in earnings. Reference is made to Notes (B) and (F) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. FINANCIAL CONDITION Overview Major changes in MISSISSIPPI's financial condition during the first nine months of 1999 included the addition of approximately $52.1 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations. See MISSISSIPPI's Condensed Statements of Cash Flows for further details. Financing Activities MISSISSIPPI plans to continue, to the extent possible, a program to retire higher-cost debt and replace these securities with lower-cost capital. Capital Requirements In April 1999, MISSISSIPPI and Escatawpa Funding, Limited Partnership ("Escatawpa"), entered into a lease agreement whereby MISSISSIPPI will design and construct, as agent for Escatawpa, a 1,080 megawatt natural gas combined cycle facility. It is expected that the project will cost approximately $406 million, and upon completion of the facility, MISSISSIPPI will lease the facility from Escatawpa for an initial term of approximately 10 years. For additional information, reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Capital Requirements for Construction" of MISSISSIPPI and Notes 3 and 4 to the financial statements of MISSISSIPPI in Item 8 of the Form 10-K. Reference is made to Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS of MISSISSIPPI under "Capital Requirements for Construction," "Environmental Matters" and "Other Capital Requirements" in the Form 10-K for a description of MISSISSIPPI's capital requirements for its construction program, environmental compliance efforts, sinking fund requirements and maturities of long-term debt. 58 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 September 30, 1999, approximately $161 thousand of cash and cash equivalents and approximately $74.5 million of unused committed credit arrangements with banks (including $10.8 million of such arrangements under which borrowings may be made only to fund purchase obligations relating to variable rate pollution control bonds). At September 30, 1999, MISSISSIPPI had short-term notes payable outstanding of $43.2 million. Management believes that the need for working capital can be adequately met by utilizing lines of credit without maintaining large cash balances. 59 SAVANNAH ELECTRIC AND POWER COMPANY 60
SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF INCOME (UNAUDITED) (Stated in Thousands of Dollars) For the Three Months For the Nine Months Ended September 30, Ended September 30, --------------------------- --------------------------- 1999 1998 1999 1998 ------------- ------------ ------------- ------------ OPERATING REVENUES: Revenues $ 89,566 $ 82,746 $197,412 $199,437 Revenues from Affiliates 2,283 1,478 3,227 2,784 ------------- ------------ ------------- ------------ Total operating revenues 91,849 84,224 200,639 202,221 ------------- ------------ ------------- ------------ OPERATING EXPENSES: Operation-- Fuel 20,998 21,193 38,542 42,447 Purchased power from non-affiliates 8,842 4,514 12,295 8,450 Purchased power from affiliates 9,184 8,830 28,637 28,210 Other 13,138 11,958 36,378 34,795 Maintenance 3,016 3,747 12,214 12,309 Depreciation and amortization 5,950 5,759 17,893 16,275 Taxes other than income taxes 3,640 3,446 9,467 9,412 Federal and state income taxes 8,833 8,721 12,936 16,447 ------------- ------------ ------------- ------------ Total operating expenses 73,601 68,168 168,362 168,345 ------------- ------------ ------------- ------------ OPERATING INCOME 18,248 16,056 32,277 33,876 OTHER INCOME (EXPENSE): Allowance for equity funds used during construction 21 46 34 91 Interest income 62 120 125 255 Other, net (832) (821) (1,764) (1,691) Income taxes applicable to other income 298 561 634 839 ------------- ------------ ------------- ------------ INCOME BEFORE INTEREST CHARGES 17,797 15,962 31,306 33,370 ------------- ------------ ------------- ------------ INTEREST AND OTHER CHARGES: Interest on long-term debt 2,110 2,542 7,048 7,860 Allowance for debt funds used during construction (42) (34) (169) (82) Interest on notes payable 334 40 532 178 Amortization of debt discount, premium and expense, net 241 221 709 628 Distributions on preferred securities of subsidiary trust 685 - 2,055 - Other interest charges 764 94 949 292 ------------- ------------ ------------- ------------ Interest and other charges, net 4,092 2,863 11,124 8,876 ------------- ------------ ------------- ------------ NET INCOME 13,705 13,099 20,182 24,494 DIVIDENDS ON PREFERRED STOCK - 581 - 1,743 ------------- ------------ ------------- ------------ NET INCOME AFTER DIVIDENDS ON PREFERRED STOCK $ 13,705 $ 12,518 $20,182 $22,751 ============= ============ ============= ============ The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
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SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) (Stated in Thousands of Dollars) For the Nine Months Ended September 30, ----------------------------- 1999 1998 ------------ ------------ OPERATING ACTIVITIES: Net income $20,182 $ 24,494 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 19,027 17,552 Deferred income taxes and investment tax credits, net 1,881 6,077 Allowance for equity funds used during construction (34) (91) Other, net 2,014 (893) Changes in certain current assets and liabilities-- Receivables, net (19,828) (16,866) Inventories (2,770) (256) Payables 5,501 3,729 Taxes accrued 3,605 2,655 Other 2,656 (1,655) ------------ ------------ Net cash provided from operating activities 32,234 34,746 ------------ ------------ INVESTING ACTIVITIES: Gross property additions (21,536) (9,800) Other (3,205) (660) ------------ ------------ Net cash used for investing activities (24,741) (10,460) ------------ ------------ FINANCING ACTIVITIES: Proceeds-- Other long-term debt - 50,000 Retirements-- First mortgage bonds (15,800) (30,000) Other long-term debt (288) (20,522) Notes payable, net 26,100 1,000 Payment of preferred stock dividends - (1,743) Payment of common stock dividends (18,700) (17,400) Miscellaneous 251 (2,232) ------------ ------------ Net cash used for financing activities (8,437) (20,897) ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS (944) 3,389 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,962 6,144 ============ ============ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,018 $ 9,533 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for-- Interest (net of amount capitalized) $10,126 $9,335 Income taxes 3,925 5,138 The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
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SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) ASSETS At September 30, 1999 At December 31, (Unaudited) 1998 ------------------------------ UTILITY PLANT: Plant in service, at original cost $795,222 $781,964 Less accumulated provision for depreciation 357,265 341,930 ------------ ------------- 437,957 440,034 Construction work in progress 9,699 2,908 ------------ ------------- Total 447,656 442,942 ------------ ------------- OTHER PROPERTY AND INVESTMENTS: 1,493 1,420 ------------ ------------- CURRENT ASSETS: Cash and cash equivalents 5,018 5,962 Receivables -- Customer accounts receivable 28,802 18,030 Other accounts and notes receivable 4,512 3,543 Affiliated companies 3,371 1,388 Accumulated provision for uncollectible accounts (303) (284) Fuel cost under recovery 23,751 17,628 Fossil fuel stock, at average cost 7,434 4,984 Materials and supplies, at average cost 6,816 6,496 Prepayments 581 4,772 ------------ ------------- Total 79,982 62,519 ------------ ------------- DEFERRED CHARGES: Deferred charges related to income taxes 16,407 17,130 Debt issue expense, being amortized 3,192 3,554 Premium on reacquired debt, being amortized 8,588 8,570 Prepaid pension costs 1,721 3,281 Cash surrender value of life insurance for deferred compensation plans 14,179 14,179 Miscellaneous 2,449 2,204 ------------ ------------- Total 46,536 48,918 ------------ ------------- TOTAL ASSETS $575,667 $555,799 ============ ============= The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
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SAVANNAH ELECTRIC AND POWER COMPANY CONDENSED BALANCE SHEETS (Stated in Thousands of Dollars) CAPITALIZATION AND LIABILITIES At September 30, 1999 At December 31, (Unaudited) 1998 ------------------------------ CAPITALIZATION: Common stock equity -- Common stock (par value value $5 per share) -- authorized 16,000,000 shares; outstanding 10,844,635 shares $54,223 $54,223 Paid-in capital 8,688 8,688 Retained earnings 114,436 112,954 ------------ ------------- 177,347 175,865 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding Company Junior Subordinated Notes 40,000 40,000 Long-term debt 147,384 163,443 ------------ ------------- Total 364,731 379,308 ------------ ------------- CURRENT LIABILITIES: Long-term debt due within one year 660 689 Notes payable 26,100 - Accounts payable -- Affiliated companies 5,113 5,014 Other 13,562 10,833 Customer deposits 5,389 5,224 Taxes accrued-- Federal and state income 5,801 2,467 Other 4,072 2,891 Interest accrued 4,057 3,815 Vacation pay accrued 2,068 1,978 Miscellaneous 4,668 6,700 ------------ ------------- Total 71,490 39,611 ------------ ------------- DEFERRED CREDITS AND OTHER LIABILITIES: Accumulated deferred income taxes 84,145 82,778 Accumulated deferred investment tax credits 11,446 11,943 Deferred credits related to income taxes 20,231 21,349 Deferred compensation plans 10,172 9,788 Postretirement benefits 7,475 6,434 Miscellaneous 5,977 4,588 ------------ ------------- Total 139,446 136,880 ------------ ------------- TOTAL CAPITALIZATION AND LIABILITIES $575,667 $555,799 ============ ============= The accompanying notes as they relate to SAVANNAH are an integral part of these condensed statements.
64 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION THIRD QUARTER 1999 vs. THIRD QUARTER 1998 AND YEAR-TO-DATE 1999 vs. YEAR-TO-DATE 1998 RESULTS OF OPERATIONS Earnings SAVANNAH's net income after dividends on preferred stock for the third quarter and year-to-date 1999 was $13.7 million and $20.2 million, respectively, as compared to $12.5 million and $22.8 million for the corresponding periods of 1998. The third quarter earnings increase is attributed to higher operating revenues. The year-to-date earnings decrease is mainly due to lower operating revenues primarily reflecting the Georgia PSC's accounting order, lower industrial retail energy sales and higher operation expenses. For additional information, see Note (M) in the "Notes to the Condensed Financial Statements" herein for details regarding the accounting order. Significant income statement items appropriate for discussion include the following:
Increase (Decrease) --------------------------------------------------------------- Third Quarter Year-To-Date --------------------------------------------------------------- (in thousands) % (in thousands) % Revenues......................................... $6,820 8.2 $(2,025) (1.0) Revenues from affiliates......................... 805 54.5 443 15.9 Purchased power from non-affiliates.............. 4,328 95.9 3,845 45.5 Other operation expense.......................... 1,180 9.9 1,583 4.5 Other interest charges........................... 670 N/M 657 225.0
N/M - Not meaningful Revenues. The third quarter 1999 revenues were up primarily due to increased retail energy sales to residential and commercial customers. Energy sales to those customers during the quarter rose by 5.1% and 9.6%, respectively, due mainly to hotter temperatures recorded in August 1999. Year-to-date 1999 revenues were down primarily due to the impact of the Georgia PSC's accounting order and lower industrial energy sales. Industrial energy sales were down by 18.1% and 19.8% for the quarter and year-to-date, respectively, due to reduced demand from one industrial customer and the shut-down of another industrial customer's facilities. In the third quarter and year-to-date 1999, the impacts on SAVANNAH's revenues from this shut-down were $0.3 million and $0.7 million, respectively. For additional information, see "Future Earnings Potential" herein. Revenues from affiliates. Revenues from sales to affiliated companies within the Southern electric system will vary from period to period depending on demand and the availability and cost of generating resources at each company. These transactions do not have a significant impact on earnings. Purchased power from non-affiliates. The third quarter and year-to-date increases are primarily due to higher demand for energy and increased costs for purchased power in the third quarter of 1999. 65 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Other operation expense. The increases for the third quarter and year-to-date 1999 reflect additional storm damage reserve accruals and expenses associated with environmental clean-up activities at Plant Kraft. Other interest charges. The increases in this item for the third quarter and year-to-date 1999 are primarily related to a potential tax audit settlement. Future Earnings Potential The results of operations discussed above are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from weather to energy sales growth to a less regulated, more competitive environment. In 1998, the Georgia PSC approved a four-year accounting order for SAVANNAH. Reference is made to Note (M) in the "Notes to the Condensed Financial Statements" herein and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SAVANNAH in the Form 10-K for additional information. In mid-1998, one of SAVANNAH's largest industrial customers added an additional steam turbine unit. The impact of this on SAVANNAH's revenues had been planned for, and the customer is under contract for a minimum of 5 megawatts per year. In October 1998, another of SAVANNAH's largest customers closed its Savannah operations. Base revenues from this customer had averaged $2 million annually. Under the terms of its contract with SAVANNAH, this customer is obligated to pay $1 million annually through 2001. With the enactment of the Energy Act and new legislation being discussed at federal and state levels to expand customer choice, SAVANNAH is positioning the business to meet the challenge of increasing competition. For additional information, see Item 1 BUSINESS - "Competition" and Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SAVANNAH in the Form 10-K. Compliance costs related to the Clean Air Act could affect earnings if such costs cannot be offset. For additional information about the Clean Air Act and other environmental issues, see Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS - "Environmental Matters" of SAVANNAH in the Form 10-K. Reference is made to Part II - Item 1 - "Legal Proceedings" herein for information relating to a complaint and notice of violation brought against certain SOUTHERN subsidiaries at the request of the EPA. SAVANNAH's plans to achieve Year 2000 readiness have been implemented and are included in the SOUTHERN system's Year 2000 Program. The costs related to SAVANNAH's Year 2000 program are expected to be $1.3 million. From its inception through September 30, 1999, the Year 2000 program costs, recognized as expense, amounted to $1.1 million. For additional information, see SOUTHERN's MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - "Future Earnings Potential" herein. 66 SAVANNAH ELECTRIC AND POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which was originally to be adopted by the year 2000. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which amends FASB Statement No. 133 to be effective for all fiscal years beginning after June 15, 2000 (January 1, 2001 for companies with calendar-year fiscal years). SAVANNAH has not yet quantified the impact of adopting this statement on its financial statements; however, the adoption could increase volatility in earnings. Reference is made to Notes (B) and (M) in the "Notes to the Condensed Financial Statements" herein for discussion of various contingencies and other matters which may affect future earnings potential. FINANCIAL CONDITION Overview Major changes in SAVANNAH's financial condition during the first nine months of 1999 included the addition of approximately $21.5 million to utility plant. The funds for these additions and other capital requirements were derived primarily from operations and credit arrangements with banks. See SAVANNAH's Condensed Statements of Cash Flows for further details. Financing Activities In June 1999, SAVANNAH purchased on the open market all $15 million outstanding of its 7 7/8% Series First Mortgage Bonds due May 1, 2025. This purchase was financed with short-term debt. SAVANNAH plans to continue, to the extent possible, a program to retire higher-cost debt and replace these obligations with lower-cost capital. Sources of Capital SAVANNAH plans to obtain the funds required for construction and other purposes from sources similar to those used in the past. The amount, type and timing of any financings--if needed--will depend upon maintenance of adequate earnings, regulatory approval, prevailing market conditions and other factors. See Item 1 - - BUSINESS - "Financing Programs" in the Form 10-K for additional information. To meet short-term cash needs and contingencies, SAVANNAH had at September 30, 1999, approximately $5 million of cash and cash equivalents and approximately $34.4 million of unused credit arrangements with banks. At September 30, 1999, SAVANNAH had $26.1 million outstanding of notes payable to banks. Since SAVANNAH has no major generating plants under construction, management believes that the need for working capital can be adequately met by utilizing lines of credit. 67 NOTES TO THE CONDENSED FINANCIAL STATEMENTS FOR THE SOUTHERN COMPANY AND SUBSIDIARY COMPANIES ALABAMA POWER COMPANY GEORGIA POWER COMPANY GULF POWER COMPANY MISSISSIPPI POWER COMPANY SAVANNAH ELECTRIC AND POWER COMPANY INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT Registrant Applicable Notes SOUTHERN A, B, C, D, E, F, H, I, J, K, L, N, O ALABAMA A, B, C, F, G, H, I, J GEORGIA A, B, C, F, G, K, L GULF A, B, F MISSISSIPPI A, B, F SAVANNAH A, B, M 68 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 September 30, 1999 and 1998. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although each registrant believes that the disclosures regarding such registrant are adequate to make the information presented not misleading. It is suggested that these condensed financial statements of each registrant be read in conjunction with the financial statements of such registrant and the notes thereto included in the Form 10-K. Certain prior period amounts have been reclassified to conform with current period presentation. Due to seasonal variations in the demand for energy, operating results for the periods presented do not necessarily indicate operating results for the entire year. The condensed financial statements of ALABAMA and GEORGIA included herein have been reviewed by ALABAMA's and GEORGIA's independent public accountants as set forth in their reports included herein as Exhibit 1 to ALABAMA's and GEORGIA's condensed financial statements. (B) 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 September 30, 1999, the status of outstanding non-trading related derivative contracts was as follows: 69 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued)
Year of Maturity or Notional Unrealized Type Termination Amount Gain (Loss) ---- ------------ -------- ---------- (in thousands) Interest rate caps 1999 $480,000 $(94) Interest rate swaps 2002-2012 $773,019 $(14,775) 2001-2012 (pound)600,000 $(47,938) 2002-2007 DM691,000 $(12,718) Cross currency swaps 2001-2007 (pound)413,800 $(3,377) Cross currency swaption 2003 DM510,000 $3,297 (pound) - Denotes British pounds sterling. DM - Denotes Deutschemark.
In January 1998, Southern Energy and Vastar Resources, Inc. combined their energy trading and marketing activities to form a joint venture. Southern Energy's investment in the joint venture is accounted for under the equity method of accounting. SOUTHERN and Vastar have made guarantees to certain counterparties regarding performance of contractual commitments by the joint venture. At September 30, 1999, outstanding guarantees related to the estimated fair value of net contractual commitments were approximately $166 million. Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS - "Future Earnings Potential" of SOUTHERN in Item 7 and Notes 1 and 5 to the financial statements of SOUTHERN under the captions "Financial Instruments for Trading Activities" and "Energy Trading and Marketing Commitments", respectively, in Item 8 of the Form 10-K. (E) SOUTHERN's principal business segment -- or its traditional business -- is the five regulated electric utility operating companies that provide electric service in four southeastern states. The other reportable business segment is non-traditional energy services provided by Southern Energy, which develops and manages electricity and other energy-related projects both in the United States and abroad. Intersegment revenues are not material. Financial data for business segments for the periods covered in the Form 10-Q are as follows:
Regulated Domestic Southern Energy All Electric Non-Traditional Services Other Reconciling Utilities International (Note) Eliminations Consolidated Domestic Total --------------------------------------------------------------------- --------------- Three Months Ended September 30, 1999: (in millions) Operating revenues $ 2,991 $ 384 $ 302 $ 686 $ 66 $ (7) $ 3,736 Segment net income (loss) 568 135 (41) 94 (39) (8) 615 Nine Months Ended September 30, 1999: Operating revenues 7,116 1,223 488 1,711 165 (23) 8,969 Segment net income (loss) 1,000 281 (22) 259 (84) (22) 1,153 Total assets at September 30, 1999 $25,254 9,660 4,117 13,777 1,203 (2,009) 38,225 --------------------------------------------------------------------------------------------------------------- --------------- Three Months Ended September 30, 1998: Operating revenues $2,977 $ 400 $ 34 $ 434 $ 50 $ (4) $ 3,457 Segment net income (loss) 497 51 7 58 (33) (5) 517 Nine Months Ended September 30, 1998: Operating revenues 7,362 1,286 101 1,387 126 (10) 8,865 Segment net income (loss) 953 142 14 156 (69) (11) 1,029 Total assets at December 31, 1998 24,421 9,578 2,869 12,447 1,438 (2,114) 36,192 --------------------------------------------------------------------------------------------------------------- ---------------
70 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (Note) The all other category includes parent SOUTHERN, which does not allocate operating expenses to business segments. Also, this category includes segments below the quantitative threshold for separate disclosure. These segments include a wireless communication company and a developmental company for energy products and services. Non-traditional services exclude interest expense to parent SOUTHERN. (F) Reference is made to Notes 3 and 7 to each of the registrant's financial statements, except SAVANNAH'S, in Item 8 of the Form 10-K for a discussion of the FERC orders in proceedings regarding the reasonableness of the return on common equity on certain of the Southern electric system's wholesale rate schedules and contracts and a discussion of the long-term power sales agreements. On October 14, 1999, the FERC approved a settlement agreement relating to the proceedings pending at the FERC which provides for an equity return of 11% under the formula rates. These rates are effective as of January 5, 1999 for three unit power sales contracts, and as of July 1, 1999 for the other contracts. Since the rates were placed in effect on July 1, 1999 under an interim order of the FERC, a total refund of approximately $4 million ($2.9 million for ALABAMA, $0.7 million for GEORGIA and $0.4 million for GULF) is required to reflect the change in the equity return from 12.5% to 11% under the three unit power sales contracts for the period January 5, 1999 through June 30, 1999. A liability for the refund is reflected in the September 30, 1999 balance sheet of the affected registrants. (G) During the first nine months of 1999, statutory business trusts, formed by ALABAMA and GEORGIA of which such companies own all the common securities, issued mandatorily redeemable preferred securities as follows: (in thousands)
Maturity Date Company Date of Issue Amount Rate Notes of Notes ------- ------------- ------ ---- ----- ------------- ALABAMA 2/25/99 $50,000 Auction $51,550 2/28/2029 GEORGIA 2/25/99 $200,000 6.85% $206,186 3/31/2029
Substantially all the assets of each trust are junior subordinated notes issued by the related company in the respective approximate principal amounts set forth above. ALABAMA and GEORGIA consider that the mechanisms and obligations relating to the preferred securities issued for its benefit, taken together, constitute a full and unconditional guarantee by it of the respective trusts' payment obligations with respect to the preferred securities. (H) Reference is made to Note 3 to the financial statements of SOUTHERN and ALABAMA in Item 8 of the Form 10-K for information relating to retail rate adjustment procedures. (I) Reference is made to Note 3 to the financial statements of SOUTHERN and ALABAMA in Item 8 of the Form 10-K for information relating to a judgment against ALABAMA arising from discharges into Lake Martin. The trial court has denied the defendants' motion for a new trial and for remittitur, and ALABAMA has appealed to the Supreme Court of Alabama. 71 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (J) Reference is made to Note 3 to the financial statements of SOUTHERN and ALABAMA in Item 8 of the Form 10-K for information relating to a class action charging ALABAMA with fraud and non-compliance with regulatory statutes relating to the offer, sale and financing of "extended service contracts" in connection with the sale of electric appliances. This action has been settled for an insignificant amount, and the case has been dismissed. (K) Reference is made to Note 3 to the financial statements of SOUTHERN and GEORGIA in Item 8 of the Form 10-K for information concerning a three-year rate order approved by the Georgia PSC effective January 1, 1999. The order decreased annual retail rates by $262 million effective January 1, 1999 and by an additional $24 million effective January 1, 2000. The order further provides for $85 million each year, plus up to $50 million annually of any earnings in excess of a 12.5% retail return on common equity during the second and third years, to be applied to accelerated amortization or depreciation of assets. Two-thirds of any additional earnings in excess of the 12.5% return will be applied to rate reductions and the remaining one-third retained by GEORGIA. Pursuant to this provision, GEORGIA recognized, as a reduction to revenue, $77 million in the third quarter for potential rate refunds related to two-thirds of estimated earnings in excess of 12.5% return. Under a previous three-year accounting order ending December 1998, GEORGIA's earnings were evaluated against a retail return on common equity range of 10% to 12.5%. Earnings in excess of 12.5% were used to accelerate the depreciation of electric plant. For earnings in excess of the 12.5% retail return, GEORGIA recorded charges of $113.8 million and $281.3 million, respectively, during the third quarter and year-to-date 1998. (L) Reference is made to Note 3 to the financial statements of SOUTHERN and GEORGIA in Item 8 of the Form 10-K for information regarding GEORGIA's designation as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act and other environmental contingencies. (M) In 1998, the Georgia PSC approved a new accounting order for SAVANNAH. Under this order, SAVANNAH will reduce electric rates to its small business customers, expense additional storm damage accruals and accrue additional depreciation on generating assets. For additional information concerning the four-year accounting order approved by the Georgia PSC in June 1998, reference is made to Note 3 to the financial statements of SAVANNAH in Item 8 of the Form 10-K. 72 NOTES TO THE CONDENSED FINANCIAL STATEMENTS: (Continued) (N) Reference is made to Note 3 to the financial statements of SOUTHERN in Item 8 and to Legal Proceedings in Item 3 of the Form 10-K for information relating to petitions for Chapter 11 bankruptcy relief which were filed in the U. S. Bankruptcy Court for the Southern District of Alabama. Effective with the bankruptcy filing in January 1999, Mobile Energy is accounted for under the equity method, rather than being consolidated as before. As a result of recent settlement discussions with Kimberly-Clark Corporation and the bondholders, Southern Energy reevaluated possible outcomes of the negotiations and recorded an after-tax write down of $69 million primarily representing SOUTHERN's equity investment in Mobile Energy. At September 30, 1999, Mobile Energy had total assets of $380 million and senior debt outstanding of $193 million of first mortgage bonds and $73 million related to tax-exempt bonds. In connection with the bond financings, SOUTHERN provided certain limited guarantees, in lieu of funding debt service and maintenance reserve accounts with cash. As of September 30, 1999, under an agreement with the bondholders, SOUTHERN had paid $38,272,000 pursuant to the guarantees. SOUTHERN continues to have guarantees outstanding of certain potential environmental and other obligations of Mobile Energy that represent a maximum contingent liability of $21 million at September 30, 1999. The ultimate outcome of this matter cannot now be determined. (O) In 1998, SOUTHERN's Board of Directors authorized SOUTHERN to make open market purchases of its common stock in an aggregate amount not to exceed $300 million through March 31, 1999. The purpose of the program was to provide shares of common stock for the purchase requirements of SOUTHERN's various stockholder, employee and outside director stock purchase plans. Under the program, 4.4 million shares had been repurchased and 2.4 million shares were reissued. Also, in April 1999, SOUTHERN's board approved the repurchase of up to 50 million shares of SOUTHERN's common stock over the next two years through open market or privately negotiated transactions. The program does not establish a target stock price or timetable for specific repurchases. Under this program, 25,821,200 shares have been repurchased through November 9, 1999, with funding provided from SOUTHERN's commercial paper program. 73 PART II - OTHER INFORMATION Item 1. Legal Proceedings. (1) On November 3, 1999, the United States of America, acting at the request of the EPA, brought a civil action in the U. S. District Court for the Northern District of Georgia against ALABAMA, GEORGIA and SCS. The complaint alleges violations of the prevention of significant deterioration and new source review provisions of the Clean Air Act with respect to coal-fired generating facilities at ALABAMA's Barry, Gorgas and Miller plants and GEORGIA's Bowen and Scherer plants and requests civil penalties and injunctive relief, including an order requiring the installation of the best available control technology at the affected units. The EPA concurrently issued a notice of violation to the operating companies and SCS relating to ALABAMA's Barry, Gaston, Gorgas, Greene County and Miller plants, GEORGIA's Bowen and Scherer plants, GULF's Crist plant, MISSISSIPPI's Watson plant and SAVANNAH's Kraft plant. The complaint and notice of violation are similar to those brought against and issued to several other electric utilities. These complaints and notices of violation allege that the utilities had failed to secure necessary permits or install additional pollution equipment when performing maintenance and construction at coal burning plants constructed or under construction prior to 1978. SOUTHERN believes that it complied with applicable laws and the EPA's regulations and interpretations in effect at the time the work in question took place. Although the outcome of this matter cannot presently be determined, a result adverse to SOUTHERN could require the expenditure of substantial additional capital at its existing plants and possibly require payment of substantial penalties. (2) Reference is made to the Notes to the Condensed Financial Statements herein for information regarding certain legal and administrative proceedings in which SOUTHERN and its reporting subsidiaries are involved. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibits 15 - Letter re: unaudited interim financial information (a) ALABAMA (b) GEORGIA Exhibit 24 - (a) Powers of Attorney and resolutions.(Designated in the Form 10-K for the year ended December 31, 1998, File Nos. 1-3526, 1-3164, 1-6468, 0-2429, 0-6849 and 1-5072 as Exhibits 24(a), 24(b), 24(c), 24(d), 24(e) and 24(f), respectively, and incorporated herein by reference.) 74 Item 6. Exhibits and Reports on Form 8-K. (Continued) - (b) Power of Attorney for GEORGIA. (Designated in the Form 10-Q for the quarter ended June 30, 1999, File No. 1-6468, as Exhibit 24(b).) Exhibits 27 - Financial Data Schedule (a) SOUTHERN (b) ALABAMA (c) GEORGIA (d) GULF (e) MISSISSIPPI (f) SAVANNAH (b) Reports on Form 8-K. ALABAMA filed Current Reports on Form 8-K dated August 13, 1999 and September 21, 1999: Items reported: Item 5 Item 7 Financial statements filed: None GULF filed a Current Report on Form 8-K dated August 17, 1999: Items reported: Item 5 Item 7 Financial statements filed: None 75 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. THE SOUTHERN COMPANY By A. W. Dahlberg Chairman and Chief Executive Officer (Principal Executive Officer) By W. L. Westbrook Financial Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 11, 1999 - ------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. ALABAMA POWER COMPANY By Elmer B. Harris President and Chief Executive Officer (Principal Executive Officer) By William B. Hutchins, III Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 11, 1999 76 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. GEORGIA POWER COMPANY By David M. Ratcliffe President and Chief Executive Officer (Principal Executive Officer) By Thomas A. Fanning Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 11, 1999 - -------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. GULF POWER COMPANY By Travis J. Bowden President and Chief Executive Officer (Principal Executive Officer) By A. E. Scarbrough Vice President - Finance (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 11, 1999 77 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. MISSISSIPPI POWER COMPANY By Dwight H. Evans President and Chief Executive Officer (Principal Executive Officer) By Michael W. Southern Vice President, Secretary, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 11, 1999 - ------------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature of the undersigned company shall be deemed to relate only to matters having reference to such company and any subsidiaries thereof. SAVANNAH ELECTRIC AND POWER COMPANY By G. Edison Holland, Jr. President and Chief Executive Officer (Principal Executive Officer) By Kirby R. Willis Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) By /s/ Wayne Boston (Wayne Boston, Attorney-in-fact) Date: November 11, 1999 78 EX-15 2 ARTHUR ANDERSEN LLP EXHIBIT 15(a) ARTHUR ANDERSEN LLP November 9, 1999 Alabama Power Company 600 North 18th Street Birmingham, Alabama 35291 Ladies and Gentlemen: We are aware that Alabama Power Company has incorporated by reference in Registration Statement 333-67453 its Form 10-Q for the quarter ended September 30, 1999 which includes our report on Alabama Power Company dated November 9, 1999 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933 (the "Act"), such report is not considered a part of the Registration Statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ Arthur Andersen LLP EX-15 3 ARTHUR ANDERSEN LLP EXHIBIT 15(b) ARTHUR ANDERSEN LLP November 9, 1999 Georgia Power Company 241 Ralph McGill Boulevard, NE Atlanta, Georgia 30308 Ladies and Gentlemen: We are aware that Georgia Power Company has incorporated by reference in Registration Statement 333-75193 its Form 10-Q for the quarter ended September 30, 1999 which includes our report on Georgia Power Company dated November 9, 1999 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933 (the "Act"), such report is not considered a part of the Registration Statement prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ Arthur Andersen LLP EX-27 4 SOUTHERN FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1999, and is qualified in its entirety by reference to such financial statements. 0000092122 THE SOUTHERN COMPANY 1,000 9-MOS Dec-31-1999 Sep-30-1999 PER-BOOK 25,262,105 6,518,838 3,968,047 2,475,609 0 38,224,599 3,503,094 1,774,506 4,248,125 9,525,725 2,428,595 368,760 3,976,254 1,004,048 7,407,549 2,362,465 489,748 0 125,894 5,331 10,530,230 38,224,599 8,969,294 600,305 6,706,901 7,307,206 1,662,088 499,390 2,161,478 992,311 1,169,167 15,683 1,153,484 696,014 0 1,939,569 1.67 1.67
EX-27 5 ALABAMA FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1999, and is qualified in its entirety by reference to such financial statements. 0000003153 ALABAMA POWER COMPANY 1,000 9-MOS Dec-31-1999 Sep-30-1999 PER-BOOK 7,546,236 310,436 947,098 781,724 0 9,585,494 224,358 1,334,744 1,285,865 2,844,967 347,000 317,512 986,733 0 2,198,957 88,421 100,000 0 4,379 976 2,696,549 9,585,494 2,652,915 216,351 1,894,162 2,110,513 542,402 33,546 575,948 206,560 369,388 12,455 356,933 296,100 0 576,409 0 0
EX-27 6 GEORGIA FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1999, and is qualified in its entirety by reference to such financial statements. 0000041091 GEORGIA POWER COMPANY 1,000 9-MOS Dec-31-1999 Sep-30-1999 PER-BOOK 9,731,313 378,159 1,158,919 1,104,215 0 12,372,606 344,250 1,790,294 1,903,783 4,038,327 889,250 15,203 2,063,195 119,516 595,000 197,923 100,000 0 85,347 611 4,268,234 12,372,606 3,488,485 346,493 2,407,971 2,754,464 734,021 (6,529) 727,492 199,408 528,084 1,556 526,528 402,300 0 1,172,770 0 0
EX-27 7 GULF FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1999, and is qualified in its entirety by reference to such financial statements. 0000044545 GULF POWER COMPANY 1,000 9-MOS Dec-31-1999 Sep-30-1999 PER-BOOK 1,060,742 1,481 157,909 82,696 0 1,302,828 38,060 218,973 171,827 428,860 85,000 4,236 247,436 0 119,950 0 27,000 0 0 0 390,346 1,302,828 519,585 27,712 420,238 447,950 71,635 (309) 71,326 24,557 46,769 162 46,607 45,400 0 92,829 0 0
EX-27 8 MISSISSIPPI FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1999, and is qualified in its entirety by reference to such financial statements. 0000066904 MISSISSIPPI POWER COMPANY 1,000 9-MOS Dec-31-1999 Sep-30-1999 PER-BOOK 1,032,607 1,395 136,786 59,420 0 1,230,208 37,691 179,800 181,599 399,090 35,000 31,809 172,830 43,200 119,816 0 50,020 0 0 0 378,443 1,230,208 482,619 30,183 381,599 411,782 70,837 1,216 72,053 21,084 50,969 1,510 49,459 41,600 0 67,096 0 0
EX-27 9 SAVANNAH FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the Form 10-Q for September 30, 1999, and is qualified in its entirety by reference to such financial statements. 0000086940 SAVANNAH ELECTRIC AND POWER COMPANY 1,000 9-MOS Dec-31-1999 Sep-30-1999 PER-BOOK 447,656 1,493 79,982 46,536 0 575,667 54,223 8,688 114,436 177,347 40,000 0 82,155 26,100 60,000 0 0 0 5,229 660 184,176 575,667 200,639 12,936 155,426 168,362 32,277 (971) 31,306 11,124 20,182 0 20,182 18,700 0 32,234 0 0
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