-----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, KQsbGIqzxXKDn90z5VdpLTiRqi5GsFbcR9Z714kWwbvOmHfsyf0qPl3yKFgjrh6t /z43Fbuf+ofmRgJWdCthVA== 0000066904-99-000002.txt : 19990303 0000066904-99-000002.hdr.sgml : 19990303 ACCESSION NUMBER: 0000066904-99-000002 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990210 ITEM INFORMATION: FILED AS OF DATE: 19990302 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: 8-K SEC ACT: SEC FILE NUMBER: 001-11229 FILM NUMBER: 99555199 BUSINESS ADDRESS: STREET 1: 2992 W BEACH CITY: GULFPORT STATE: MS ZIP: 39501 BUSINESS PHONE: 2288641211 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) February 10, 1999 -------------------------- MISSISSIPPI POWER COMPANY (Exact name of registrant as specified in its charter) Mississippi 0-6849 64-0205820 - ------------------------------------------------------------------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 2992 West Beach, Gulfport, Mississippi 39501 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (228) 864-1211 -------------------------- N/A - ------------------------------------------------------------------------------- (Former name or former address, if changed since last report.) Item 7. Financial Statements and Exhibits. (c) Exhibits. 23 - Consent of Arthur Andersen LLP. 27 - Financial Data Schedule. 99 - Audited Financial Statements of Mississippi Power Company as of December 31, 1998. SIGNATURE 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. MISSISSIPPI POWER COMPANY By /s/ Wayne Boston Wayne Boston Assistant Secretary Date: March 2, 1999 EX-23 2 ARTHUR ANDERSEN CONSENT Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 10, 1999 on the financial statements of Mississippi Power Company, included in this Form 8-K, into Mississippi Power Company's previously filed Registration Statement File No. 333-45069. /s/ Arthur Andersen LLP Atlanta, Georgia February 26, 1999 EX-27 3 FINANCIAL DATA SCHEDULE
UT This schedule contains summary financial information extracted from the financial statements filed as Exhibit 99 and is qualified in its entirity by reference to such financial statements. 0000066904 MISSISSIPPI POWER COMPANY 1,000 12-MOS DEC-31-1998 DEC-31-1998 PER-BOOK 1,020,672 979 107,787 60,167 0 1,189,605 37,691 179,800 173,740 391,231 35,000 31,809 122,744 13,000 170,000 0 50,020 0 0 0 375,801 1,189,605 595,131 34,499 480,260 514,759 80,372 3,280 83,652 26,542 57,110 2,005 55,105 51,700 21,131 93,086 0 0
EX-99 4 FINANCIAL STATEMENTS MANAGEMENT'S REPORT Mississippi Power Company 1998 Annual Report The management of Mississippi Power Company has prepared--and is responsible for--the financial statements and related information included in this report. These statements were prepared in accordance with generally accepted accounting principles appropriate in the circumstances and necessarily include amounts that are based on best estimates and judgments of management. Financial information throughout this annual report is consistent with the financial statements. The Company maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that books and records reflect only authorized transactions of the Company. Limitations exist in any system of internal controls, however, based upon a recognition that the cost of the system should not exceed its benefits. The Company believes its system of internal accounting control maintains an appropriate cost/benefit relationship. The Company's system of internal accounting controls is evaluated on an ongoing basis by the internal audit staff. The Company's independent public accountants also consider certain elements of the internal control system in order to determine their auditing procedures for the purpose of expressing an opinion on the financial statements. The audit committee of the board of directors, composed of four directors who are not employees, provides a broad overview of management's financial reporting and control functions. Periodically, this committee meets with management, the internal auditors, and the independent public accountants to ensure that these groups are fulfilling their obligations and to discuss auditing, internal controls, and financial reporting matters. The internal auditors and independent public accountants have access to the members of the audit committee at any time. Management believes that its policies and procedures provide reasonable assurance that the Company's operations are conducted according to a high standard of business ethics. In management's opinion, the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of Mississippi Power Company in conformity with generally accepted accounting principles. /s/ Dwight H. Evans Dwight H. Evans President and Chief Executive Officer /s/ Michael W. Southern Michael W. Southern Vice President, Secretary, Treasurer and Chief Financial Officer February 10, 1999 1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Mississippi Power Company: We have audited the accompanying balance sheets and statements of capitalization of Mississippi Power Company (a Mississippi corporation and a wholly owned subsidiary of Southern Company) as of December 31, 1998 and 1997, and the related statements of income, retained earnings, paid-in capital, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements (pages 12-27) referred to above present fairly, in all material respects, the financial position of Mississippi Power Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Arthur Andersen LLP Atlanta, Georgia February 10, 1999 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Mississippi Power Company 1998 Annual Report RESULTS OF OPERATIONS Earnings Mississippi Power Company's 1998 net income after dividends on preferred stock was $55.1 million, reflecting a 2.0 percent or $1.1 million increase over the prior year. This change is primarily attributable to higher retail and wholesale revenues. In 1997, earnings were $54.0 million, up $1.3 million from the prior year. This earnings increase resulted primarily from lower operating expenses. Revenues The following table summarizes the factors impacting operating revenues for the past three years: Increase (Decrease) From Prior Year ------------------------------------- 1998 1997 1996 ------------------------------------- (in thousands) Retail -- Change in base rates (PEP and ECO Plan) $ 335 $ 3,177 $ (402) Sales growth 4,787 109 11,187 Weather 7,091 (1,118) (5,585) Fuel cost recovery and other 13,112 948 (1,255) ----------------------------------------------------------------- Total retail 25,325 3,116 3,945 ---------------------------------------------------- ------------ Sales for resale -- Non-affiliates 16,084 5,464 7,776 Affiliates 8,142 (11,606) 14,139 ----------------------------------------------------------------- Total sales for resale 24,226 (6,142) 21,915 Other operating revenues 1,992 2,585 1,616 ----------------------------------------------------------------- Total operating revenues $51,543 $ (441) $27,476 ================================================================= Percent change 9.5% (0.1)% 5.3% ----------------------------------------------------------------- Retail revenues of $443 million in 1998 increased 6.1 percent from 1997. Continued growth in the service area and the positive impact of weather on energy sales were the predominant factors contributing to the rise in revenues. Retail revenues for 1997 reflected a 0.8 percent increase over the prior year due to the 1996 Performance Evaluation Plan (PEP) retail rate increase and the January 1997 Environmental Compliance Overview Plan (ECO Plan) retail rate increase. Changes in base rates reflect any rate changes made under the PEP and ECO Plan. Fuel revenues generally represent the direct recovery of fuel expense including purchased power. Therefore, changes in recoverable fuel expenses are offset with corresponding changes in fuel revenues and have no effect on net income. Energy sales to non-affiliates include economy sales and amounts sold under short-term contracts. Sales for resale to non-affiliates are influenced by those utilities' own customer demand, plant availability, and the cost of their predominant fuels. Included in sales for resale to non-affiliates are revenues from rural electric cooperative associations and municipalities located in southeastern Mississippi. Energy sales to these customers increased 9.8 percent in 1998 and 3.6 percent in 1997, with the related revenues rising 11.3 percent and 1.6 percent, respectively. The customer demand experienced by these utilities is determined by factors very similar to Mississippi Power's. Revenues from other sales outside the service area increased in 1998 and 1997 primarily due to power marketing activities. These increases were primarily offset by increases in purchased power from non-affiliates and, as a result, had no significant effect on net income. Sales to affiliated companies within the Southern electric system will vary from year to year depending on demand and the availability and cost of generating resources at each company. These sales have no material impact on earnings. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 1998 Annual Report Below is a breakdown of kilowatt-hour sales for 1998 and the percent change for the last three years: 1998 Percent Change ----------- ------------------------------ KWH 1998 1997 1996 (in millions) Residential 2,249 10.3% (2.0)% 1.9% Commercial 2,623 9.0 4.0 3.3 Industrial 3,729 (6.4) 0.6 3.8 Other 40 - 2.6 1.9 ---------- Total retail 8,641 2.0 0.9 3.2 Sales for Resale -- Non-affiliates 3,158 9.1 6.2 9.4 Affiliates 552 15.2 (31.0) 184.7 ---------- Total 12,351 4.3 0.2 8.7 ================================================================== Residential and commercial sales increased in 1998 10.3 percent and 9.0 percent respectively, and industrial sales decreased 6.4 percent. The increases can be attributed primarily to sales growth and hotter temperatures in the summer months. The decrease in industrial sales was due primarily to a large industrial customer being out of service because of damages incurred from Hurricane Georges. Residential sales in 1997 declined 2.0 percent while sales to commercial and industrial customers increased by 4.0 percent and 0.6 percent, respectively. Milder-than-normal temperatures experienced in 1997 contributed to the moderate sales. The Company anticipates continued growth in energy sales as the economy improves within its service area. The casino industry and ancillary services, such as lodging, food, transportation, etc., are some of the factors that may influence the economy of the Company's service area. Also, energy demand is expected to grow as a result of a larger and more fully employed population. Expenses Total operating expenses were $515 million in 1998 reflecting an increase of $49.1 million or 10.6 percent over the prior year. The increase was due primarily to higher fuel expenses, higher maintenance and higher other operation costs. In 1997, total operating expenses decreased by 0.3 percent from the prior year due primarily to lower administrative and general expenses. Fuel costs are the single largest expense for the Company. Fuel expenses in 1998 increased 10.2 percent due to a 3.1 percent increase in generation and a higher average cost of fuel. In 1998, expenses related to purchased power from non-affiliates increased 133.0 percent and expenses related to purchased power from affiliates decreased 4.6 percent. The increased generation was due to higher demand for energy across the Southern electric system. Further, the higher demand for energy resulted in higher purchased power costs from non-affiliates. In 1997, fuel costs increased because of a 1.1 percent increase in generation caused by the higher demand for energy in the retail sector. Expenses related to purchased power from non-affiliates decreased and expenses related to purchased power from affiliates increased due to the availability of energy within the Southern electric system. Purchased power expense increased $18 million (128.4 percent) to meet higher territorial energy demands and power marketing activities. Energy purchased for power marketing activities was resold to non-affiliated third parties and had no significant effect on net income. Sales and purchases among Mississippi Power and its affiliates will vary from period to period depending on demand and the availability and variable production cost at each generating unit in the Southern electric system. The amount and sources of generation and the average cost of fuel per net kilowatt-hour generated were as follows: 1998 1997 1996 ---------------------------- Total generation (millions of kilowatt hours) 10,610 10,289 10,180 Sources of generation (percent) -- Coal 80 85 85 Gas 20 15 15 Average cost of fuel per net kilowatt-hour generated (cents) -- 1.62 1.54 1.57 ============================================================== Other operation expenses increased 7.5 percent in 1998 primarily due to continuing expenses related to a new customer service system, modification of certain information systems for year 2000 readiness discussed below, and costs related to work force reduction programs. In 1997, other operation expense decreased 3.5 percent due to lower administrative and general expenses. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 1998 Annual Report Maintenance expenses increased 6.6 percent in 1998 due to scheduled maintenance performed at Plants Daniel and Watson, as well as other projects. In 1998, depreciation and amortization expenses increased 4.1 percent primarily due to additional plant investment and increased amortization of regulatory assets. Comparisons of taxes other than income taxes for 1998 and 1997 show increases of 4.4 percent and 1.1 percent, respectively, due to higher municipal franchise taxes resulting from higher retail revenues. Effects of Inflation Mississippi Power is subject to rate regulation and income tax laws that are based on the recovery of historical costs. Therefore, inflation creates an economic loss because the Company is recovering its costs of investments in dollars that have less purchasing power. While the inflation rate has been relatively low in recent years, it continues to have an adverse effect on the Company because of the large investment in long-lived utility plant. Conventional accounting for historical costs does not recognize this economic loss nor the partially offsetting gain that arises through financing facilities with fixed-money obligations, such as long-term debt and preferred stock. Any recognition of inflation by regulatory authorities is reflected in the rate of return allowed. Future Earnings Potential The results of operations for the past three years are not necessarily indicative of future earnings potential. The level of future earnings depends on numerous factors ranging from regulatory matters to energy sales growth to a less regulated more competitive environment. Expenses are subject to constant review and cost control programs. See Note 2 to the financial statements under "Workforce Reduction Programs" for information regarding the Company's workforce reduction plan of 1997. The Company currently operates as a vertically integrated company providing electricity to customers within its traditional service area located in southeastern Mississippi. Prices for electricity provided by the Company to retail customers are set by the MPSC under cost-based regulatory principles. Mississippi Power is also maximizing the utility of invested capital and minimizing the need for capital by refinancing, decreasing the average fuel stockpile, raising generating plant availability and efficiency, and aggressively controlling the construction budget. Operating revenues will be affected by any changes in rates under the PEP, the Company's performance based ratemaking plan, and the ECO Plan. PEP has proven to be a stabilizing force on electric rates, with only moderate changes in rates taking place. The ECO Plan provides for recovery of costs (including costs of capital) associated with environmental projects approved by the Mississippi Public Service Commission (MPSC), most of which are required to comply with Clean Air Act Amendments of 1990 (Clean Air Act) regulations. The ECO Plan is operated independently of PEP. The Clean Air Act and other important environmental items are discussed later under "Environmental Matters." The Federal Energy Regulatory Commission (FERC) regulates the Company's wholesale rate schedules, power sales contracts and transmission facilities. The FERC is currently reviewing the rate of return on common equity included in certain contracts and may require such returns to be lowered, possibly retroactively. Further discussion of PEP, the ECO Plan, and proceedings before the FERC is found in Note 3 to the financial statements herein. Future earnings in the near term will depend upon growth in energy sales, which is subject to a number of factors. These factors include weather, competition, changes in contracts with neighboring utilities, energy conservation practiced by customers, the elasticity of demand, and the rate of economic growth in Mississippi Power's service area. The electric utility industry in the United States is currently undergoing a period of dramatic change as a result of regulatory and competitive factors. Among the primary agents of change has been the Energy Policy Act of 1992 (Energy Act). The Energy Act allows Independent Power Producers (IPPs) to access a utility's transmission network in order to sell electricity to other utilities. This enhances the incentive for IPPs to build cogeneration plants for 5 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 1998 Annual Report a utility's large industrial and commercial customers and sell energy generation to other utilities. Also, electricity sales for resale rates are being driven down by wholesale transmission access and numerous potential new energy suppliers, including power marketers and brokers. The Company is aggressively working to maintain and expand its share of wholesale sales in the Southeastern power markets. Although the Energy Act does not permit retail transmission access, it was a major catalyst for the current restructuring and consolidation taking place within the utility industry. Numerous federal and state initiatives are in various stages to promote wholesale and retail competition. Among other things, these initiatives allow customers to choose their electricity provider. As these initiatives materialize, the structure of the utility industry could radically change. Restructuring initiatives are being discussed in Mississippi; none have been enacted to date. Enactment would require numerous issues to be resolved, including significant ones relating to transmission pricing and recovery of any stranded investments. In the event that a portion of the Company's operations is no longer subject to these provisions, the Company would be required to write off related regulatory assets and liabilities that are not specifically recoverable, and determine if any other assets have been impaired. See Note 1 to the financial statements under "Regulatory Assets and Liabilities" for additional information. The inability of Mississippi Power to recover its investment, including regulatory assets, could have a material adverse effect on the financial condition of the Company. The Company is attempting to minimize or reduce its cost exposure. Continuing to be a low-cost producer could provide significant opportunities to increase market share and profitability in markets that evolve with changing regulation. Conversely, unless Mississippi Power remains a low-cost producer and provides quality service, the Company's retail energy sales growth could be limited, and this could significantly erode earnings. The Company is subject to the provisions of FASB Statement 71, Accounting for the Effects of Certain Types of Regulation. In the event that a portion of the Company's operation is no longer subject to these provisions, the Company would be required to write off related regulatory assets and liabilities that are not specifically recoverable, and determine if any other assets have been impaired. See Note 1 to the financial statements under "Regulatory Assets and Liabilities" for additional information. Exposure to Market Risks Due to cost-based rate regulation, the Company has limited exposure to market volatility in interest rates and prices of electricity. To mitigate residual risks relative to movements in electricity prices, the Company enters into fixed price contracts for the purchase and sale of electricity through the wholesale electricity market. Realized gains and losses are recognized in the income statements as incurred. At December 31, 1998, exposure from these activities was not material to the Company's financial position, results of operation, or cash flow. Also, based on the Company's overall interest rate exposure at December 31, 1998, a near-term 100 basis point change in interest rates would not materially affect the financial statements. New Accounting Standards The FASB has issued Statement No.133, Accounting for Derivative Instruments and Hedging Activities, which must 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. The Company 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. In March 1998, the American Institute of Certified Public Accountants (AICPA) issued a new Statement of Position, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This statement requires capitalization of certain costs of internal-use software. The Company adopted this statement in January 1999, and it is not expected to have a material impact on the financial statements. In April 1998, the AICPA issued a new Statement of Position, Reporting on the Cost of Start-up Activities. This statement requires that the costs of start-up activities and organizational costs be expensed as incurred. Any of these costs previously capitalized by a company must be written off in the year of adoption. The Company adopted this statement in January 1999, and it is not expected to have a material impact on the financial statements. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 1998 Annual Report In December 1998, the Emerging Issues Task Force (EITF) of the FASB issued EITF No. 98-10, Accounting for Contracts Involved in Energy Trading and Risk Management Activities. The EITF requires that energy trading contracts must be marked to market through the income statement, reflecting gains and losses rather than revenues and purchased power expense. Energy trading contracts are defined as energy contracts entered into with the objective of generating profits on or from exposure to shifts or changes in market prices. The Company adopted the required accounting in January 1999, and it is not expected to have a material impact on the financial statements. Year 2000 Year 2000 Challenge In order to save storage space, computer programmers in the 1960s and 1970s shortened the year portion of date entries to just two digits. Computers assumed, in effect, that all years began with "19." This practice was widely adopted and hard wired into computer chips and processors found in some equipment. This approach, intended to save processing time and storage space was used until the mid-1990s. Unless corrected before the year 2000, affected software systems and devices containing a chip or microprocessor with date and time function could incorrectly process dates or the systems may cease to function. The Company 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. The Company's goal is to have critical devices or software that are required to maintain operations to be Year 2000 ready by June 1999. 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, 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 The Company's executive management recognizes the seriousness of the Year 2000 challenge and has dedicated adequate resources to address the issue. The Millennium Project is a team of employees, IBM consultants, and other contractors whose progress is reviewed on a monthly basis by a steering committee of Southern Company executives. The Company's Year 2000 Program was divided into two phases. Phase I 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 consists of testing and remediating high priority systems and devices. Also, contingency planning is included in the phase. Completion of Phase 2 is targeted for June 1999. The Millennium Project will continue to monitor the affected computer systems, devices and applications into the year 2000. The Southern Company has completed more than 70 percent of the activities in its work plan. The percentage of completion and projected completion by function is as follows: Work Plan - -------------------------------------------------------------------------- Remediation Project Inventory Assessment Testing Completion - -------------------------------------------------------------------------- Generation 100% 100% 70% 6/99 Energy Management 100 100 90 6/99 Transmission and Distribution 100 100 100 1/99 Telecommunications 100 100 50 6/99 Corporate Applications 100 100 90 3/99 - -------------------------------------------------------------------------- Year 2000 Costs Current projected costs for Year 2000 readiness are approximately $4.9 million. These costs include labor necessary to identify, test, and renovate affected devices and systems. From its inception through December 31, 1998, the year 2000 program costs, recognized as expense, amounted to $3.2 million. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 1998 Annual Report Year 2000 Risks The Company is implementing a detailed process to minimize the possibility of service interruptions related to Year 2000. The Company believes, based on current tests, that the system can provide customers with electricity. These tests increase confidence, but do not guarantee error-free operations. The Company is taking what it believes to be prudent steps to prepare for the Year 2000, and it expects any interruption in service that may occur within the service territory to be isolated and short in duration. The Company expects the risks associated with Year 2000 to be no more severe than the scenarios that its electric system is routinely prepared to handle. The most likely worst case scenario consists of the service loss of one of the largest generating units and/or the loss of any single bulk transmission element in its service territory. The Company has followed a proven methodology for identifying and assessing software and devices containing potential Year 2000 challenges. Remediation and testing of those devices are in progress. Following risk assessment, the Company is preparing contingency plans as appropriate and is participating in North American Electric Reliability Council-coordinated national drills during 1999. The Company is currently reviewing the Year 2000 readiness of material third parties that provide goods and services crucial to the Company's operations. Among such critical third parties are fuel, transportation, telecommunication, water, chemical, and other suppliers. Contingency plans based on the assessment of each third party's ability to continue supplying critical goods and services to the Company is being developed. There is a potential for some earnings erosion caused by reduced electrical demand by customers because of their Year 2000 issues. Year 2000 Contingency Plans Because of experience with hurricanes and other storms, the Company is skilled at developing and using contingency plans in unusual circumstances. As part of Year 2000 business continuity and contingency planning, the Company is drawing on that experience to make risk assessments and developing additional plans to deal specifically with situations that could arise relative to Year 2000 challenges. The Company is identifying critical operational location, and key employees will be on duty at those locations during the Year 2000 transition. In September 1999, drills are scheduled to be conducted to test contingency plans. 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 service territory isolated and short in duration. FINANCIAL CONDITION Overview The principal change in Mississippi Power's financial condition during 1998 was gross property additions to utility plant of $68 million. Funding for gross property additions and other capital requirements has been provided from operating activities, principally earnings and the non-cash charges to income of depreciation and amortization. The Statements of Cash Flows provide additional details. Financing Activity The Company continued to improve its financial position by issuing pollution control bonds and retiring higher-cost issues in 1998. The Company sold $13.5 million of pollution control bonds and increased unsecured debt by $90 million. Retirements, including maturities during 1998, totaled $75 million of first mortgage bonds and $13 million of pollution control bonds. See the Statements of Cash Flows for further details. Composite financing rates for the years 1996 through 1998 as of year-end were as follows: 1998 1997 1996 ---------------------------- Composite interest rate on long-term debt 6.14% 6.16% 6.03% Composite preferred stock dividend rate 6.33% 6.33% 6.58% Composite interest rate on preferred securities 7.75% 7.75% - ============================================================ 8 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 1998 Annual Report The decrease in the composite dividend rate on preferred stock in 1997 was primarily the result of retirements. Capital Structure At year-end 1998, the Company's ratio of common equity to total capitalization, excluding long-term debt due within one year, remained at the same level as in 1997 at 52.1 percent. Capital Requirements for Construction The Company's projected construction expenditures for the next three years total $164 million ($67 million in 1999, $52 million in 2000, and $45 million in 2001). The major emphasis within the construction program will be on the upgrade of existing facilities. In February 1999, the Company signed an interim construction agency agreement with Escatawpa Funding ("Escatawpa"), a limited partnership, that calls for the Company to design and construct, as agent for Escatawpa, a 1064 megawatt natural gas combined cycle facility. On or before April 30, 1999, Escatawpa and the Company anticipate entering into an Agreement for Lease (which will supersede the interim construction agency agreement), and a Lease Agreement. It is anticipated that the total project will cost approximately $406 million, and upon project completion, the Company will lease the facility from Escatawpa. If the anticipated lease arrangement is not reached, the Company will either exercise its purchase option or Escatawpa will sell the facility to a third party. Revisions to projected construction expenditures may be necessary because of factors such as changes in business conditions, revised load projections, the availability and cost of capital, and changes in environmental regulations, and alternatives such as leasing. Other Capital Requirements In addition to the funds required for the Company's construction program, approximately $80.1 million will be required by the end of 2001 for present sinking fund requirements and maturities of long-term debt. Mississippi Power plans to continue, when economically feasible, to retire higher cost debt and preferred stock and replace these obligations with lower-cost capital if market conditions permit. Environmental Matters In November 1990, the Clean Air Act was signed into law. Title IV of the Clean Air Act -- the acid rain compliance provision of the law -- significantly affected Mississippi Power and the other operating companies of Southern Company. Specific reductions in sulfur dioxide and nitrogen oxide emissions from fossil-fired generating plants are required in two phases. Phase I compliance began in 1995 and initially affected 28 generating plants in the Southern electric system. As a result of Southern Company's compliance strategy, an additional 22 generating units were brought into compliance with Phase I requirements. Phase II compliance is required in 2000, and all fossil-fired generating plants will be affected. Southern Company achieved Phase I sulfur dioxide compliance at the affected plants by switching to low-sulfur coal, which required some equipment upgrades. Construction expenditures for Phase I compliance totaled approximately $65 million for Mississippi Power. For Phase II sulfur dioxide compliance, Southern Company could use emission allowances, increase fuel switching, and/or install flue gas desulfurization equipment at selected plants. Current compliance strategy for Phase II could require total estimated construction expenditures of approximately $70 million, of which $16 million remains to be spent. Phase II compliance is not expected to have a material impact on Mississippi Power. Mississippi Power's ECO Plan is designed to allow recovery of costs of compliance with the Clean Air Act, as well as other environmental statutes and regulations. The MPSC reviews environmental projects and the Company's environmental policy through the ECO Plan. Under the ECO Plan, any increase in the annual revenue requirement is limited to 2 percent of retail revenues. Mississippi Power's management believes that the ECO Plan provides for recovery of the Clean Air Act costs. See Note 3 to the financial statements under "Environmental Compliance Overview Plan" for additional information. A significant portion of costs related to the acid rain provision of the Clean Air Act is expected to be recovered through existing ratemaking 9 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 1998 Annual Report provisions. However, there can be no assurance that all Clean Air Act costs will be recovered. In July 1997, the Environmental Protection Agency (EPA) revised the national ambient air quality standards for ozone and particulate matter. This revision makes the standards significantly more stringent. In September 1998, the EPA issued the final regional nitrogen oxide rules to the states for implementation. The states have one year to adopt and implement the new rules. The final rules affect 22 states that at present does not include Mississippi. The EPA is presently evaluating whether or not to bring an additional 15 states under this regional haze rule. Misssissippi is one of those new 15 states. The EPA rules are being challenged in the courts by several states and industry groups. Implementation of the final state rules could require substantial further reductions in nitrogen oxide emissions from fossil-fired generating facilities and other industry in these states. Implementation of the standards could result in significant additional compliance costs and capital expenditures that cannot be determined until the results of legal challenges are known and the states have adopted their final rules. The EPA and state environmental regulatory agencies are reviewing and evaluating various matters including: emission control strategies for ozone non-attainment areas; additional controls for hazardous air pollutant emissions; and hazardous waste disposal requirements. The impact of new standards will depend on the development and implementation of applicable regulations. The Company must comply with other environmental laws and regulations that cover the handling and disposal of hazardous waste. Under these various laws and regulations, the Company could incur costs to clean up properties currently or previously owned. Upon identifying potential sites, the Company conducts studies, when possible, to determine the extent of any required cleanup costs. Should remediation be determined to be probable, reasonable estimates of costs to clean up such sites are developed and recognized in the financial statements. A currently owned site where manufactured gas plant operations were located prior to the Company's ownership has been investigated for potential remediation. Remediation is scheduled for 1999. See Note 3 to the financial statements under "Environmental Compliance Overview Plan" for additional information. Several major pieces of environmental legislation are being considered for reauthorization or amendment by Congress. These include: the Clean Air Act; the Clean Water Act; the Comprehensive Environmental Response, Compensation, and Liability Act; the Resource Conservation and Recovery Act; and the Endangered Species Act. Changes to these laws could affect many areas of the Company's operations. The full impact of any such changes cannot be determined at this time. Compliance with possible additional legislation related to global climate change, electromagnetic fields, and other environmental and health concerns could significantly affect the Company. The impact of new legislation -- if any - -- will depend on the subsequent development and implementation of applicable regulations. In addition, the potential exists for lawsuits alleging damages caused by electromagnetic fields. The likelihood or outcome of such potential lawsuits cannot be determined at this time. Sources of Capital At December 31, 1998, the Company had $76.3 million of unused committed credit agreements. The Company had $13 million of short term notes payable outstanding at year end 1998. It is anticipated that the funds required for construction and other purposes, including compliance with environmental regulations, will be derived from sources similar to those used in the past. These sources were primarily the issuances of first mortgage bonds and preferred securities, in addition to pollution control revenue bonds issued for the Company's benefit by public authorities. The Company issued unsecured debt in 1998. In this regard, Mississippi Power sought and obtained stockholder approval in 1997 to amend its corporate charter eliminating restrictions on the amounts of unsecured indebtedness the Company may incur. Mississippi Power is required to meet certain coverage requirements specified in its mortgage indenture and corporate charter to issue new first mortgage bonds and preferred stock. The Company's coverage ratios are sufficiently high enough to permit, at present interest rate levels, any foreseeable security sales. The amount of securities which the Company will be 10 MANAGEMENT'S DISCUSSION AND ANALYSIS (continued) Mississippi Power Company 1998 Annual Report permitted to issue in the future will depend upon market conditions and other factors prevailing at that time. Cautionary Statement Regarding Forward-Looking Information This annual report, including the foregoing Management's Discussion and Analysis, contains forward-looking and historical information. The Company cautions that there are various important factors that could cause actual results to differ materially from those indicated in the forward-looking information; 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 Company's markets; potential business strategies -- including acquisitions or dispositions of assets or internal restructuring -- that may be pursued by the Company; state and federal rate regulation; changes in or application of environmental and other laws and regulations to which the Company is subject; political, legal and economic conditions and developments; financial market conditions and the results of financing efforts; changes in commodity prices and interest rates; weather and other natural phenomena; and other factors discussed in the reports (including Form 10-K) filed from time to time by the Company with the SEC. 11
STATEMENTS OF INCOME For the Years Ended December 31, 1998, 1997, and 1996 Mississippi Power Company 1998 Annual Report =========================================================================================================================== 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating Revenues (Notes 1, 3, and 7): Revenues $ 576,846 $ 533,445 $ 522,199 Revenues from affiliates 18,285 10,143 21,830 - --------------------------------------------------------------------------------------------------------------------------- Total operating revenues 595,131 543,588 544,029 - --------------------------------------------------------------------------------------------------------------------------- Operating Expenses: Operation-- Fuel 156,539 142,059 141,532 Purchased power from non-affiliates 33,872 14,536 17,960 Purchased power from affiliates 36,037 37,794 33,245 Other 109,993 102,365 106,061 Maintenance 50,404 47,302 47,091 Depreciation and amortization 47,450 45,574 44,906 Taxes other than income taxes 45,965 44,034 43,545 Federal and state income taxes (Note 8) 34,499 31,968 32,618 - --------------------------------------------------------------------------------------------------------------------------- Total operating expenses 514,759 465,632 466,958 - --------------------------------------------------------------------------------------------------------------------------- Operating Income 80,372 77,956 77,071 Other Income (Expense): Interest income 947 857 239 Other, net 2,498 2,368 4,145 Income taxes applicable to other income (165) 588 (932) - --------------------------------------------------------------------------------------------------------------------------- Income Before Interest and Other Charges 83,652 81,769 80,523 - --------------------------------------------------------------------------------------------------------------------------- Interest and Other Charges: Interest on long-term debt 20,567 19,856 19,898 Interest on notes payable 943 96 1,416 Amortization of debt discount, premium, and expense, net 1,446 1,577 1,547 Other interest charges 790 574 40 Distributions on preferred securities of subsidiary trust 2,796 2,369 - - --------------------------------------------------------------------------------------------------------------------------- Interest and other charges, net 26,542 24,472 22,901 - --------------------------------------------------------------------------------------------------------------------------- Net Income 57,110 57,297 57,622 Dividends on Preferred Stock 2,005 3,287 4,899 - -------------------------------------------------------------------------------------------------------------------------- Net Income After Dividends on Preferred Stock $ 55,105 $ 54,010 $ 52,723 =========================================================================================================================== The accompanying notes are an integral part of these statements.
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STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1998, 1997, and 1996 Mississippi Power Company 1998 Annual Report ================================================================================================================================ 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- (in thousands) Operating Activities: Net income $ 57,110 $ 57,297 $ 57,622 Adjustments to reconcile net income to net cash provided by operating activities-- Depreciation and amortization 51,517 49,661 50,551 Deferred income taxes 11,620 (1,809) 74 Other, net (12,175) 3,206 9,443 Changes in certain current assets and liabilities-- Receivables, net (5,486) (8,583) 5,118 Inventories (5,050) 3,148 4,973 Payables (389) 8,357 2,077 Taxes accrued (2,457) 2,515 532 Other (1,604) 1,465 (240) - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided from operating activities 93,086 115,257 130,150 - -------------------------------------------------------------------------------------------------------------------------------- Investing Activities: Gross property additions (68,231) (55,375) (61,314) Other (324) (489) (2,258) - -------------------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (68,555) (55,864) (63,572) - -------------------------------------------------------------------------------------------------------------------------------- Financing Activities: Proceeds-- Capital contribution 85 - 27 Pollution control bonds 13,520 - - Preferred securities - 35,000 - Other long-term debt 90,000 - 80,000 Retirements-- Preferred stock (87) (42,518) - First mortgage bonds (75,000) - (45,447) Pollution control bonds (13,020) (10) (10) Other long-term debt - - (55,000) Increase (decrease) in notes payable, net 13,000 - - Payment of preferred stock dividends (2,005) (3,287) (4,899) Payment of common stock dividends (51,700) (49,400) (43,900) Miscellaneous (2,429) (1,804) (2,932) - -------------------------------------------------------------------------------------------------------------------------------- Net cash used for financing activities (27,636) (62,019) (72,161) - -------------------------------------------------------------------------------------------------------------------------------- Net Change in Cash and Cash Equivalents (3,105) (2,626) (5,583) Cash and Cash Equivalents at Beginning of Year 4,432 7,058 12,641 - -------------------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 1,327 $ 4,432 $ 7,058 ================================================================================================================================ Supplemental Cash Flow Information: Cash paid during the period for-- Interest (net of amount capitalized) $ 26,133 $ 22,297 $ 21,467 Income taxes 26,847 33,450 34,072 - -------------------------------------------------------------------------------------------------------------------------------- ( ) Denotes use of cash. The accompanying notes are an integral part of these statements.
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BALANCE SHEETS At December 31, 1998 and 1997 Mississippi Power Company 1998 Annual Report ============================================================================================================================= ASSETS 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Utility Plant: Plant in service, at original cost (Notes 1 and 6) $ 1,553,112 $ 1,518,402 Less accumulated provision for depreciation 583,957 559,098 - ----------------------------------------------------------------------------------------------------------------------------- 969,155 959,304 Construction work in progress 51,517 41,083 - ----------------------------------------------------------------------------------------------------------------------------- Total 1,020,672 1,000,387 - ----------------------------------------------------------------------------------------------------------------------------- Other Property and Investments 979 650 - ----------------------------------------------------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents 1,327 4,432 Receivables-- Customer accounts receivable 29,829 32,220 Regulatory clauses under recovery 8,042 7,619 Other accounts and notes receivable 12,495 8,666 Affiliated companies 10,946 7,398 Accumulated provision for uncollectible accounts (621) (698) Fossil fuel stock, at average cost 16,418 10,651 Materials and supplies, at average cost 18,735 19,452 Current portion of accumulated deferred income taxes 4,248 8,379 Prepayments 1,651 1,791 Vacation pay deferred 4,717 5,030 - ----------------------------------------------------------------------------------------------------------------------------- Total 107,787 104,940 - ----------------------------------------------------------------------------------------------------------------------------- Deferred Charges: Debt expense and loss, being amortized 13,713 12,234 Deferred charges related to income taxes (Note 8) 22,697 21,906 Long-term notes receivable 2,072 2,837 Workforce Reduction Plan 12,748 18,236 Miscellaneous 8,937 5,639 - ----------------------------------------------------------------------------------------------------------------------------- Total 60,167 60,852 - ----------------------------------------------------------------------------------------------------------------------------- Total Assets $ 1,189,605 $ 1,166,829 ============================================================================================================================= The accompanying notes are an integral part of these statements.
14
BALANCE SHEETS (continued) At December 31, 1998 and 1997 Mississippi Power Company 1998 Annual Report ============================================================================================================================= CAPITALIZATION AND LIABILITIES 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- (in thousands) Capitalization (See accompanying statements): Common stock equity $ 391,231 $ 387,824 Preferred stock 31,809 31,896 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding Company Junior Subordinated Notes (Note 9) 35,000 35,000 Long-term debt 292,744 291,665 - ----------------------------------------------------------------------------------------------------------------------------- Total 750,784 746,385 - ----------------------------------------------------------------------------------------------------------------------------- Current Liabilities: Long-term debt due within one year (Note 10) 50,020 35,020 Notes payable 13,000 - Accounts payable-- Affiliated companies 8,788 8,548 Regulatory clauses over recovery 4,412 15,476 Other 47,113 34,065 Customer deposits 3,272 3,225 Taxes accrued-- Federal and state income 1,124 1,101 Other 31,379 33,859 Interest accrued 2,955 4,098 Miscellaneous 11,753 12,797 - ----------------------------------------------------------------------------------------------------------------------------- Total 173,816 148,189 - ----------------------------------------------------------------------------------------------------------------------------- Deferred Credits and Other Liabilities: Accumulated deferred income taxes (Note 8) 143,852 134,645 Accumulated deferred investment tax credits 25,913 27,121 Deferred credits related to income taxes (Note 8) 37,277 38,203 Postretirement benefits other than pension 25,869 25,145 Accumulated provision for property damage (Note 1) 910 13,991 Workforce Reduction Plan 13,051 15,700 Miscellaneous 18,133 17,450 - ----------------------------------------------------------------------------------------------------------------------------- Total 265,005 272,255 - ----------------------------------------------------------------------------------------------------------------------------- Commitments and Contingent Matters (Notes 2, 3, 4, and 5) Total Capitalization and Liabilities $ 1,189,605 $ 1,166,829 ============================================================================================================================= The accompanying notes are an integral part of these statements.
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STATEMENTS OF CAPITALIZATION At December 31, 1998 and 1997 Mississippi Power Company 1998 Annual Report =========================================================================================================================== 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- (in thousands) (percent of total) Common Stock Equity: Common stock, without par value -- Authorized -- 1,130,000 shares Outstanding -- 1,121,000 shares in 1998 and 1997 $ 37,691 $ 37,691 Paid-in capital 179,474 179,389 Premium on preferred stock 326 327 Retained earnings (Note 11) 173,740 170,417 - --------------------------------------------------------------------------------------------------------------------------- Total common stock equity 391,231 387,824 52.1 % 52.0 % - --------------------------------------------------------------------------------------------------------------------------- Cumulative Preferred Stock: $100 par value -- Authorized -- 1,244,139 shares Outstanding -- 318,090 shares in 1998 and 318,955 shares in 1997 4.40% to 4.72% 3,421 3,492 6.32% to 7.00% 28,388 28,404 - --------------------------------------------------------------------------------------------------------------------------- Total (annual dividend requirement -- $2,013,000) 31,809 31,896 4.2 4.3 - --------------------------------------------------------------------------------------------------------------------------- Company Obligated Mandatorily Redeemable Preferred Securities (Note 9): $25 liquidation value -- 7.75% 35,000 35,000 - --------------------------------------------------------------------------------------------------------------------------- Total (annual dividend requirement -- $2,713,000) 35,000 35,000 4.7 4.7 - --------------------------------------------------------------------------------------------------------------------------- Long-Term Debt: First mortgage bonds -- Maturity Interest Rates 1998 5.38% - 35,000 2000 6.63% - 40,000 2004 6.60% 35,000 35,000 2023 7.45% 35,000 35,000 2025 6.88% 30,000 30,000 Pollution control obligations -- Collateralized: 5.65% to 5.80% due 2007-2023 26,805 39,825 4.00% to 5.25% due 2020-2025 33,900 33,900 Non-collateralized: Variable rate (5.25% at 1/1/99) due 2028 13,520 - Other long-term notes payable-- 6.05% due 2003 35,000 - 6.75% due 2038 55,000 - Adjustable rates (5.71% to 5.79%) due 1999-2000 80,000 80,000 Unamortized debt premium (discount), net (1,461) (2,040) - --------------------------------------------------------------------------------------------------------------------------- Total long-term debt (annual interest requirement--$21,131,000) 342,764 326,685 Less amount due within one year (Note 10) 50,020 35,020 - --------------------------------------------------------------------------------------------------------------------------- Long-term debt excluding amount due within one year 292,744 291,665 39.0 39.0 - --------------------------------------------------------------------------------------------------------------------------- Total Capitalization $ 750,784 $ 746,385 100.0 % 100.0 % =========================================================================================================================== The accompanying notes are an integral part of these statements.
16
STATEMENTS OF RETAINED EARNINGS For the Years Ended December 31, 1998, 1997, and 1996 Mississippi Power Company 1998 Annual Report ====================================================================================================================== 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- (in thousands) Balance at Beginning of Period $ 170,417 $ 166,282 $ 157,459 Net income after dividends on preferred stock 55,105 54,010 52,723 Cash dividends on common stock (51,700) (49,400) (43,900) Preferred stock transactions and other, net (82) (475) - - ---------------------------------------------------------------------------------------------------------------------- Balance at End of Period (Note 11) $ 173,740 $ 170,417 $ 166,282 ====================================================================================================================== STATEMENTS OF PAID-IN CAPITAL For the Years Ended December 31, 1998, 1997, and 1996 ====================================================================================================================== 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- (in thousands) Balance at Beginning of Period $ 179,389 $ 179,389 $ 179,362 Contributions to capital by parent company 85 - 27 - ---------------------------------------------------------------------------------------------------------------------- Balance at End of Period $ 179,474 $ 179,389 $ 179,389 ====================================================================================================================== The accompanying notes are an integral part of these statements.
17 NOTES TO FINANCIAL STATEMENTS Mississippi Power Company 1998 Annual Report 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Mississippi Power Company is a wholly owned subsidiary of Southern Company, which is the parent company of five operating companies, Southern Company Services (SCS), Southern Communications Services (Southern LINC), Southern Energy, Inc. (Southern Energy), Southern Nuclear Operating Company (Southern Nuclear), and Southern Energy Solutions, and other direct and indirect subsidiaries. The operating companies (Alabama Power Company, Georgia Power Company, Gulf Power Company, Mississippi Power Company, and Savannah Electric and Power Company) provide electric service in four southeastern states. Contracts among the companies--dealing with jointly owned generating facilities, interconnecting transmission lines, and the exchange of electric power--are regulated by the Federal Energy Regulatory Commission (FERC) and/or the Securities and Exchange Commission. SCS provides, at cost, specialized services to Southern Company and to the subsidiary companies. Southern LINC provides digital wireless communications services to the operating companies and also markets these services to the public within the Southeast. Worldwide, Southern Energy develops and manages electricity and other energy related projects, including domestic energy trading and marketing. Southern Nuclear provides services to Southern Company's nuclear power plants. Southern Energy Solutions develops new business opportunities related to energy products and services. Southern Company is registered as a holding company under the Public Utility Holding Company Act of 1935 (PUHCA). Both Southern Company and its subsidiaries are subject to the regulatory provisions of the PUHCA. Mississippi Power is also subject to regulation by the FERC and the Mississippi Public Service Commission (MPSC). The Company follows generally accepted accounting principles and complies with the accounting policies and practices prescribed by the respective commissions. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and the actual results may differ from those estimates. Certain prior years' data presented in the financial statements have been reclassified to conform with current year presentation. Regulatory Assets and Liabilities Mississippi Power is subject to the provisions of Financial Accounting Standards Board (FASB) Statement No. 71, Accounting for the Effects of Certain Types of Regulation. Regulatory assets represent probable future revenues to the Company associated with certain costs that are expected to be recovered from customers through the ratemaking process. Regulatory liabilities represent probable future reductions in revenues associated with amounts that are expected to be credited to customers through the ratemaking process. Regulatory assets and (liabilities) reflected in the Balance Sheets as of December 31 relate to: 1998 1997 ------------------------- (in thousands) Deferred income taxes $ 22,697 $ 21,906 Vacation pay 4,717 5,030 Workforce reduction plan of 1997 12,748 18,236 Premium on reacquired debt 9,304 9,508 Deferred environmental costs 1,500 1,583 Property damage reserve (910) (13,991) Deferred income tax credits (37,277) (38,203) Other, net (2,538) (2,982) - ---------------------------------------------------------------- Total $ 10,241 $ 1,087 ================================================================ In the event that a portion of the Company's operations is no longer subject to the provisions of FASB Statement No. 71, the Company would be required to write off the net regulatory assets and liabilities related to that portion of operations that are not specifically recoverable through regulated rates. In addition, the Company would be required to determine any impairment to other assets, including plant, and write down the assets, if impaired, to their fair value. Revenues The Company currently operates as a vertically integrated utility providing electricity to retail customers within its traditional service area located within the state of Mississippi, and to wholesale customers in the southeast. 18 NOTES (continued) Mississippi Power Company 1998 Annual Report Revenues, less affiliated transactions, by type of service were as follows: 1998 1997 1996 -------------------------------------- (in thousands) Retail $442,567 $417,242 $414,126 Wholesale 121,225 105,141 99,596 Other 13,054 11,062 8,477 - ----------------------------------------------------------------- Total $576,846 $533,445 $522,199 - ----------------------------------------------------------------- Mississippi Power accrues revenues for service rendered but unbilled at the end of each fiscal period. The Company's retail and wholesale rates include provisions to adjust billings for fluctuations in fuel costs, the energy component of purchased power costs and certain other costs. Retail rates also include provisions to adjust billings for fluctuations in costs for ad valorem taxes and certain qualifying environmental costs. Revenues are adjusted for differences between actual allowable amounts and the amounts included in rates. The Company has a diversified base of customers. No single customer or industry comprises 10 percent or more of revenues. For all periods presented, uncollectible accounts continued to average less than 1 percent of revenues. Depreciation Depreciation of the original cost of depreciable utility plant in service is provided by using composite straight-line rates which approximated 3.3 percent in 1998, 1997, and 1996. When property subject to depreciation is retired or otherwise disposed of in the normal course of business, its cost -- together with the cost of removal, less salvage -- is charged to the accumulated provision for depreciation. Minor items of property included in the original cost of the plant are retired when the related property unit is retired. Depreciation expense includes an amount for the expected cost of removal of facilities. Income Taxes Mississippi Power uses the liability method of accounting for deferred income taxes and provides deferred income taxes for all significant income tax temporary differences. Investment tax credits utilized are deferred and amortized to income over the average lives of the related property. Utility Plant Utility plant is stated at original cost. This cost includes: materials; labor; minor items of property; appropriate administrative and general costs; payroll-related costs such as taxes, pensions, and other benefits; and the estimated cost of funds used during construction. If applicable, the cost of maintenance, repairs, and replacement of minor items of property is charged to maintenance expense except for the maintenance of coal cars and a portion of the railway track maintenance, which are charged to fuel stock. The cost of replacements of property (exclusive of minor items of property) is charged to utility plant. Cash and Cash Equivalents For purposes of the Statements of Cash Flows, temporary cash investments are considered cash equivalents. Temporary cash investments are securities with original maturities of 90 days or less. Financial Instruments The Company's financial instruments for which the carrying amount did not equal fair value at December 31 were as follows: Carrying Fair Amount Value --------------------------- (in millions) Long-term debt At December 31, 1998 $343 $348 At December 31, 1997 $327 $330 Capital trust preferred securities: At December 31, 1998 $35 $36 At December 31, 1997 35 36 - -------------------------------------------------------------- The fair value for long-term debt and preferred securities was based on either closing market price or closing price of comparable instruments. Materials and Supplies Generally, materials and supplies include the cost of transmission, distribution and generating plant materials. Materials are charged to inventory when purchased and then expensed or capitalized to plant, as appropriate, when used or installed. 19 NOTES (continued) Mississippi Power Company 1998 Annual Report Provision for Property Damage Mississippi Power is self-insured for the cost of storm, fire and other uninsured casualty damage to its property, including transmission and distribution facilities. As permitted by regulatory authorities, the Company provided for such costs by charges to income of $1.5 million in each of the years 1998, 1997 and 1996. The cost of repairing damage resulting from such events that individually exceed $50 thousand is charged to the accumulated provision to the extent it is available. Effective January 1995, regulatory treatment by the MPSC allowed a maximum accumulated provision of $18 million. Hurricane Georges struck Mississippi's service area on September 28, 1998, causing power outages and widespread flooding in certain counties. Current estimates place the cost of repairing Mississippi's damaged facilities at approximately $16.4 million, of which $1.5 million is expected to be recovered from insurance. Substantially all of the cost ($13.9 million) was charged to the property damage reserve; income will not be significantly affected by these restoration costs. As of December 31, 1998, the accumulated provision amounted to $0.9 million. 2. RETIREMENT BENEFITS Mississippi Power has a defined benefit, trusteed, pension plan that covers substantially all regular employees. The Company provides certain medical care and life insurance benefits for retired employees. Substantially all these employees may become eligible for such benefits when they retire. The Company funds trusts to the extent deductible under federal income tax regulations or to the extent required by the MPSC. In 1998, the Company adopted FASB Statement No. 132 Employers' Disclosure about Pensions and Other Postretirement Benefits The measurement date is September 30 for each year. Pension Plan Changes during the year in the projected benefit obligations and in the fair value of plan assets were as follows: Projected Benefit Obligations ---------------------------- 1998 1997 - ----------------------------------------------------------------- (in thousands) Balance at beginning of year $132,131 $127,834 Service cost 3,848 4,015 Interest cost 9,613 9,407 Benefits paid (7,845) (5,384) Actuarial (gain) loss and employee transfers 5,060 (3,571) Effect of workforce reduction - (170) - ----------------------------------------------------------------- Balance at end of year $142,807 $132,131 ================================================================= Plan Assets ---------------------------- 1998 1997 - ----------------------------------------------------------------- (in thousands) Balance at beginning of year $207,457 $179,658 Actual return on plan assets 1,252 33,718 Benefits paid (7,845) (5,385) Employee transfers (2,764) (534) - ----------------------------------------------------------------- Balance at end of year $198,100 $207,457 ================================================================= The accrued pension costs recognized in the Balance Sheets were as follows: 1998 1997 - -------------------------------------------------------------------- (in thousands) Funded status $ 55,293 $ 75,326 Unrecognized transition obligation (4,359) (4,903) Unrecognized prior service cost 5,405 5,818 Unrecognized net gain (56,590) (78,936) - -------------------------------------------------------------------- Accrued liability recognized in the Balance Sheets $ (251) $ 2,695 ==================================================================== 20 NOTES (continued) Mississippi Power Company 1998 Annual Report Components of the plans' net periodic cost were as follows: 1998 1997 1996 - ------------------------------------------------------------------ (in thousands) Service cost $ 3,848 $ 4,015 $ 3,842 Interest cost 9,613 9,407 9,310 Expected return on Plan assets (13,817) (12,805) (12,562) Recognized net gain (1,956) (1,729) (1,202) Net amortization (131) (119) (232) - ------------------------------------------------------------------- Net pension income $ (2,443) $ (1,231) $ (844) =================================================================== The weighted average rates assumed in the actuarial calculations for both the pension plans and postretirement benefits were: 1998 1997 --------------------------------------------------------------- Discount 6.75% 7.50% Annual salary increase 4.25 5.00 Long-term return on plan assets 8.50 8.50 --------------------------------------------------------------- Postretirement Benefits Changes during the year in the projected benefit obligations and in the fair value of plan assets were as follows: Projected Benefit Obligations ---------------------------- 1998 1997 - ----------------------------------------------------------------- (in thousands) Balance at beginning of year $43,417 $41,108 Service cost 806 867 Interest cost 3,162 2,922 Benefits paid (2,302) (1,495) Actuarial loss and employee transfers 2,177 2,824 Effect of work force reduction - (2,809) - ----------------------------------------------------------------- Balance at end of year $47,260 $43,417 ================================================================= Plan Assets ---------------------------- 1998 1997 - ----------------------------------------------------------------- (in thousands) Balance at beginning of year $12,189 $10,210 Actual return on plan assets 176 1,661 Employer contributions 2,716 1,813 Benefits paid (2,302) (1,495) - ----------------------------------------------------------------- Balance at end of year $12,779 $12,189 ================================================================= The accrued postretirement costs recognized in the Balance Sheets were as follows: 1998 1997 - -------------------------------------------------------------------- (in thousands) Funded status $(34,481) $(31,228) Unrecognized transition obligation 4,967 5,313 Unrecognized net loss (gain) 1,010 (1,980) Fourth quarter contributions 577 728 - -------------------------------------------------------------------- Accrued liability recognized in the Balance Sheets $(27,927) $(27,167) ====================================================================== Components of the plans' net periodic cost were as follows: 1998 1997 1996 - ------------------------------------------------------------------ (in thousands) Service cost $ 806 $ 867 $ 958 Interest cost 3,162 2,922 2,830 Expected return on plan assets (989) (815) (696) Recognized net (gain) loss - (7) 18 Net amortization 346 362 362 - ------------------------------------------------------------------ Net postretirement cost $3,325 $3,329 $3,472 ================================================================== 21 NOTES (continued) Mississippi Power Company 1998 Annual Report An additional assumption used in measuring the accumulated postretirement benefit obligation was a weighted average medical care cost trend rate of 8.30 percent for 1998, decreasing gradually to 4.75 percent through the year 2005 and remaining at that level thereafter. An annual increase or decrease in the assumed medical care cost trend rate of 1 percent would increase the accumulated benefit obligation and the service and interest cost components at December 31, 1998 as follows: 1 Percent 1 Percent Increase Decrease - -------------------------------------------------- -------------- (in thousands) Benefit obligation $3,128 $(2,652) Service and interest costs 281 (236) - ----------------------------------------------------------------- Workforce Reduction Programs In 1997, approximately one hundred employees of Mississippi Power accepted the terms of a workforce reduction plan. The total cost to be incurred in connection with this voluntary plan is expected to be $18.2 million, including a $2.5 million pension and postretirement benefits curtailment loss. The MPSC approved the deferral and amortization of these program costs over a period not to exceed 60 months beginning no later than July 1998. The unamortized balance of this program was $12.7 million at December 31, 1998. 3. LITIGATION AND REGULATORY MATTERS Retail Rate Adjustment Plans Mississippi Power's retail base rates are set under a Performance Evaluation Plan (PEP) approved by the MPSC in 1994. PEP was designed with the objective that the plan would reduce the impact of rate changes on the customer and provide incentives for Mississippi Power to keep customer prices low. PEP includes a mechanism for sharing rate adjustments based on the Company's ability to maintain low rates for customers and on the Company's performance as measured by three indicators that emphasize price and service to the customer. PEP provides for semiannual evaluations of Mississippi's performance-based return on investment. Any change in rates is limited to 2 percent of retail revenues per evaluation period. PEP will remain in effect until the MPSC modifies or terminates the plan. In September 1996, the MPSC under PEP approved a retail revenue increase of $4.5 million (1.06 percent of annual retail revenue) which became effective in October 1996. There were no PEP retail revenue changes for 1998 or 1997. FERC Reviews Equity Returns On September 21, 1998, the FERC entered separate orders affirming the outcome of its administrative law judge's opinions in two proceedings in which the return on common equity component contained in substantially all of the operating companies' wholesale formula rate contracts was being challenged as unnecessarily high. These orders resulted in no change in the wholesale contracts. The FERC also dismissed a complaint filed by the three customers under long-term power sales agreements seeking to lower the equity return component in such agreements. These customers have filed applications for rehearing regarding each FERC order. In response to a requirement of the September 1998 FERC orders, Southern Company filed a new equity return component on the long-term power sales contracts, to be effective January 5, 1999. The proposed equity return was lowered from 13.75 percent to 12.5 percent. The FERC placed the new rates into effect subject to refund. Also this filing was consolidated with the new proceeding discussed below. On December 28, 1998, the FERC staff filed a motion asking the FERC to initiate a new proceeding regarding the equity return and other issues involving the operating companies' formula rate contracts. The motion was submitted pursuant to review procedures applicable to these contracts, and would be applicable to billings under such contracts on and after January 1, 1999. Environmental Compliance Overview Plan The MPSC approved Mississippi Power's Environmental Compliance Overview Plan (ECO) in 1992. The plan establishes procedures to facilitate the MPSC's overview of the Company's environmental strategy and provides for recovery of costs (including costs of capital) associated with environmental projects approved by the MPSC. Under the ECO Plan any increase in the annual revenue requirement is limited to 2 percent of retail revenues. However, the plan also provides for carryover of any amount over the 2 percent limit into the next year's revenue requirement. In 1997, the Company's filing with the MPSC under the ECO Plan resulted in an annual retail rate increase of $0.9 million. The 1998 ECO filing resulted in a small decrease in customer prices. 22 NOTES (continued) Mississippi Power Company 1998 Annual Report Mississippi Power conducts studies, when possible, to determine the extent of any required environmental remediation. Should such remediation be determined to be probable, reasonable estimates of costs to clean up such sites are developed and recognized in the financial statements. A currently owned site where manufactured gas plant operations were located prior to the Company's ownership is being investigated for potential remediation. In recognition of probable remediation, the Company in 1995 recorded a liability and a deferred debit (regulatory asset) of $1.8 million, including feasibility study costs. The Company recognizes such costs as they are incurred and recovers them under the ECO Plan as provided in the Company's 1995 ECO order. As of December 31, 1998, the balance in the liability and regulatory asset accounts was $1.5 million. The remedial investigation has been approved by the Mississippi Department of Environmental Quality. The site is scheduled to be remediated in 1999. The Company currently estimates the remediation costs to be approximately $1.5 million before recovery from potentially responsible parties. Approval for New Capacity In January of 1998, the Company was granted a Certificate of Public Convenience and Necessity by the MPSC to build approximately 1,000 megawatts of combined cycle generation at the Company's Plant Daniel site, to be placed in service by June 2001. In December 1998, the Company requested approval to transfer the ownership rights under the certificate to Escatawpa Funding, Limited Partnership, which will lease the facility to the Company (see Note 4, Construction Program). The Company also requested approval from the MPSC to exclude the costs of the new facility from retail rate base and to assign the Company's existing generating capacity to its retail business, beginning in 2001. In January 1999, the Company and Mississippi Public Utility Staff entered a stipulation covering the details of cost allocation and ratemaking to effect this change. In February 1999, the Commission held hearings on this matter and subsequently granted the Company's request, as modified by the stipulation. 4. CONSTRUCTION PROGRAM Mississippi Power is engaged in continuous construction programs, the costs of which are currently estimated to total $67 million in 1999, $52 million in 2000, and $45 million in 2001. The construction program is subject to periodic review and revision, and actual construction costs may vary from the above estimates because of numerous factors. These factors include changes in business conditions; revised load growth estimates; changes in environmental regulations; increasing costs of labor, equipment and materials; and cost of capital. Significant construction will continue related to transmission and distribution facilities, the upgrading of generating plants, and the addition of combined cycle generation. In February 1999, the Company signed an interim construction agency agreement with Escatawpa Funding ("Escatawpa"), a limited partnership, that calls for the Company to design and construct, as agent for Escatawpa, a 1064 megawatt natural gas combined cycle facility. On or before April 30, 1999, Escatawpa and the Company anticipate entering into an Agreement for Lease (which will supersede the interim construction agency agreement), and a Lease Agreement. It is anticipated that the total project will cost approximately $406 million. Upon project completion, the Company will lease the facility from Escatawpa. If the anticipated lease arrangement is not reached, the Company will either exercise its purchase option or Escatawpa will sell the facility to a third party. 5. FINANCING AND COMMITMENTS Financing Mississippi Power's construction program is expected to be financed from internal and other sources, such as the issuance of additional long-term debt and preferred securities and the receipt of capital contributions from Southern Company. The amounts of first mortgage bonds and preferred stock that can be issued in the future will be contingent upon market conditions, adequate earnings levels, regulatory authorizations and other factors. At December 31, 1998, Mississippi Power had total committed credit agreements with banks for $96.3 million. At year-end 1998, the unused portion of these committed credit agreements was $76.3 million. These credit agreements expire at various dates in 1999 and in 2000. Some of these agreements allow short-term borrowings to be converted into term loans, payable in 12 equal quarterly installments, with the first installment due at the end of the first 23 NOTES (continued) Mississippi Power Company 1998 Annual Report calendar quarter after the applicable termination date or at an earlier date at the Company's option. In connection with these credit arrangements, the Company agrees to pay commitment fees based on the unused portions of the commitments or to maintain compensating balances with the banks. At December 31, 1998, the Company had $13 million of short-term borrowings outstanding. Assets Subject to Lien Mississippi Power's mortgage indenture dated as of September 1, 1941, as amended and supplemented, which secures the first mortgage bonds issued by the Company, constitutes a direct first lien on substantially all of the Company's fixed property and franchises. Lease Agreements In 1984, Mississippi Power and Gulf States Utilities (now Entergy) entered into a forty-year transmission facilities agreement whereby Entergy began paying a use fee to the Company covering all expenses relative to ownership and operation and maintenance of a 500 kV line, including amortization of its original $57 million cost. For the three years ended 1998 use fees collected under this agreement, net of related expenses, amounted to $3.4 million each year, and are included within Other Income in the Statements of Income. In 1989, Mississippi Power entered into a twenty-two year lease agreement for the use of 495 aluminum railcars. In 1994, a second lease agreement for the use of 250 additional aluminum railcars was also entered into for twenty-two years. The Company has the option to purchase the 745 railcars at the greater of lease termination value or fair market value, or to renew the leases at the end of the lease term. In 1997, a third lease agreement for the use of 360 railcars was also entered into for three years, with a monthly renewal option for up to an additional nine months. All of these leases, totaling 1,105 railcars, were for the transport of coal at Plant Daniel. Gulf Power, as joint owner of Plant Daniel, is responsible for one half of the lease cost. The Company's share (50%) of the leases, charged to fuel inventory, was $2.8 million in 1998, $2.0 million in 1997, and $1.7 million in 1996. The Company's annual lease payments for 1999 through 2003 will average approximately $2.2 million and after 2003, lease payments total in aggregate approximately $16 million. Fuel and Purchased Power Commitments To supply a portion of the fuel requirements of its generating plants, Mississippi Power has entered into various long-term commitments for the procurement of fuel. In most cases, these contracts contain provisions for price escalations, minimum production levels, and other financial commitments. Total estimated obligations at December 31, 1998, were as follows: Year Fuel -------- -------------- (in millions) 1999 $111 2000 80 - ---------------------------------------------------------- Total commitments $191 - ---------------------------------------------------------- Additional commitments for fuel will be required in the future to supply the Company's fuel needs. In 1996, Mississippi Power entered into agreements to purchase options for summer peaking power for the years 1997 through 2000. The Company has purchased options from power marketers for up to 250 megawatts of peaking power in 1997; 300 megawatts in 1998; 250 megawatts in 1999; and 400 megawatts in 2000. In 1997and 1998, Mississippi Power exercised its option to purchase 250 megawatts and 300 megawatts of peaking capacity respectively. In June 1997, the MPSC approved Mississippi Power's request that it be allowed to earn a return on the capacity portion of this agreement. Mississippi Power expects to exercise its option to purchase 250 megawatts of summer peaking capacity in 1999. 24 NOTES (continued) Mississippi Power Company 1998 Annual Report 6. JOINT OWNERSHIP AGREEMENTS Mississippi Power and Alabama Power own as tenants in common Units 1 and 2 at Greene County Electric Generating Plant located in Alabama; and Mississippi Power and Gulf Power own as tenants in common Daniel Electric Generating Plant located in Mississippi. At December 31, 1998, Mississippi Power's percentage ownership and investment in these jointly owned facilities were as follows: Company's Generating Total Percent Gross Accumulated Plant Capacity Ownership Investment Depreciation - ------------- --------- --------- ------------ ------------ (Megawatts) (in thousands) Greene County Units 1 and 2 500 40% $ 60,868 $27,767 Daniel 1,000 50% 219,082 99,006 -------------------------------------------------------------------------- Mississippi Power's share of plant operating expenses is included in the corresponding operating expenses in the Statements of Income. 7. LONG-TERM POWER SALES AGREEMENTS Mississippi Power and the other operating affiliates of Southern Company have long-term contractual agreements for the sale of capacity and energy to certain non-affiliated utilities located outside the system's service area. Because the energy is generally sold at cost under these agreements, profitability is primarily affected by revenues from capacity sales. The capacity revenues have been $10,389 in 1998; $8,000 in 1997; and none in 1996. 8. INCOME TAXES At December 31, 1998, the tax-related regulatory assets and liabilities were $23 million and $37 million, respectively. These assets are attributable to tax benefits flowed through to customers in prior years and to taxes applicable to capitalized AFUDC. These liabilities are attributable to deferred taxes previously recognized at rates higher than current enacted tax law and to unamortized investment tax credits. Details of the federal and state income tax provisions are shown below: 1998 1997 1996 ---------------------------------- (in thousands) Total provision for income taxes Federal -- Currently payable $20,500 $27,651 $29,888 Deferred --current year 7,007 8,171 13,816 --reversal of prior years 2,435 (9,236) (14,913) ----------------------------------------------------------------- 29,942 26,586 28,791 ----------------------------------------------------------------- State -- Currently payable 2,544 5,537 3,588 Deferred --current year 1,568 1,756 4,727 --reversal of prior years 610 (2,499) (3,556) ----------------------------------------------------------------- 4,722 4,794 4,759 ----------------------------------------------------------------- Total 34,664 31,380 33,550 Less income taxes charged to other income 165 (588) 932 ----------------------------------------------------------------- Federal and state income taxes charged to operations $34,499 $31,968 $32,618 ================================================================= 25 NOTES (continued) Mississippi Power Company 1998 Annual Report The tax effects of temporary differences between the carrying amounts of assets and liabilities in the financial statements and their respective tax bases, which give rise to deferred tax assets and liabilities are as follows: 1998 1997 ---------------------------- (in thousands) Deferred tax liabilities: Accelerated depreciation $153,768 $149,941 Basis differences 9,642 10,037 Other 26,038 25,097 --------------------------------------------------------------- Total 189,448 185,075 --------------------------------------------------------------- Deferred tax assets: Other property basis differences 22,391 23,139 Pension and other benefits 9,441 9,803 Property insurance 1,526 5,351 Unbilled fuel 2,080 802 Other 14,406 19,714 --------------------------------------------------------------- Total 49,844 58,809 --------------------------------------------------------------- Net deferred tax liabilities 139,604 126,266 Portion included in current assets, net 4,248 8,379 --------------------------------------------------------------- Accumulated deferred income taxes in the Balance Sheets $143,852 $134,645 =============================================================== Deferred investment tax credits are amortized over the life of the related property with such amortization normally applied as a credit to reduce depreciation in the Statements of Income. Credits amortized in this manner amounted to $1.2 million in 1998, $1.2 million in 1997, and $1.4 million in 1996. At December 31, 1998, all investment tax credits available to reduce federal income taxes payable had been utilized. A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows: 1998 1997 1996 ---------------------------------- Federal statutory rate 35.00% 35.00% 35.00% State income tax, net of federal deduction 3.34 3.51 3.39 Non-deductible book depreciation .47 .47 .46 Other (1.04) (3.60) (2.05) ------------------------------------------------------------------ Effective income tax rate 37.77% 35.38% 36.80% ================================================================== Southern Company files a consolidated federal income tax return. Under a joint consolidated income tax agreement, each subsidiary's current and deferred tax expense is computed on a stand-alone basis. Tax benefits from losses of the parent company are allocated to each subsidiary based on the ratio of taxable income to total consolidated taxable income. 9. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES In February 1997, Mississippi Power Capital Trust I (Trust I), of which the Company owns all the common securities, issued $35 million of 7.75 percent mandatorily redeemable preferred securities. Substantially all of the assets of Trust I are $36 million aggregate principal amount of the Company's 7.75 percent junior subordinated notes due February 15, 2037. The Company considers that the mechanisms and obligations relating to the preferred securities, taken together, constitute a full and unconditional guarantee by Mississippi Power Capital Trust for the obligation with respect to the preferred securities. The Trust is a subsidiary of the Company, and accordingly is consolidated in the Company's financial statements. 10. LONG-TERM DEBT DUE WITHIN ONE YEAR A summary of the improvement fund requirements and scheduled maturities and redemptions of long-term debt due within one year is as follows: 1998 1997 ------------------- (in thousands) Bond improvement fund requirement $ 1,000 $1,750 Less: Portion to be satisfied by certifying property additions 1,000 1,750 --------------------------------------------------------------- Cash sinking fund requirement - - Redemptions of first mortgage bonds - 35,000 Current portion of other long-term debt 50,000 Pollution control bond cash sinking fund requirements 20 20 --------------------------------------------------------------- Total $50,020 $35,020 =============================================================== 26 NOTES (continued() Mississippi Power Company 1998 Annual Report The first mortgage bond improvement fund requirement is one percent of each outstanding series authenticated under the indenture of Mississippi Power prior to January 1 of each year, other than first mortgage bonds issued as collateral security for certain pollution control obligations. The requirement must be satisfied by June 1 of each year by depositing cash or reacquiring bonds, or by pledging additional property equal to 166-2/3 percent of such requirement. 11. COMMON STOCK DIVIDEND RESTRICTIONS Mississippi Power's first mortgage bond indenture and the corporate charter contain various common stock dividend restrictions. At December 31, 1998, approximately $118 million of retained earnings was restricted against the payment of cash dividends on common stock under the most restrictive terms of the mortgage indenture or corporate charter. 12. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1998 and 1997 are as follows: Net Income After Dividends Operating Operating On Preferred Quarter Ended Revenues Income Stock - -------------------------------------------------------------------- (in thousands) March 1998 $122,156 $15,367 $8,388 June 1998 156,612 20,123 13,713 September 1998 191,699 34,167 28,309 December 1998 124,664 10,715 4,696 March 1997 $116,903 $17,132 $10,645 June 1997 128,915 19,340 12,618 September 1997 171,874 30,441 25,163 December 1997 125,896 11,043 5,584 - -------------------------------------------------------------------- Mississippi Power's business is influenced by seasonal weather conditions and the timing of rate changes. 27
SELECTED FINANCIAL AND OPERATING DATA Mississippi Power Company 1998 Annual Report =========================================================================================================================== 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands) $595,131 $543,588 $544,029 Net Income after Dividends on Preferred Stock (in thousands) $55,105 $54,010 $52,723 Cash Dividends on Common Stock (in thousands) $51,700 $49,400 $43,900 Return on Average Common Equity (percent) 14.2 14.0 13.9 Total Assets (in thousands) $1,189,605 $1,166,829 $1,142,327 Gross Property Additions (in thousands) $68,231 $55,375 $61,314 - --------------------------------------------------------------------------------------------------------------------------- Capitalization (in thousands): Common stock equity $391,231 $387,824 $383,734 Preferred stock 31,809 31,896 74,414 Preferred stock subject to mandatory redemption - - - Company obligated mandatorily redeemable preferred securities 35,000 35,000 - Long-term debt 292,744 291,665 326,379 - --------------------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) $750,784 $746,385 $784,527 =========================================================================================================================== Capitalization Ratios (percent): Common stock equity 52.1 52.0 48.9 Preferred stock 4.2 4.3 9.5 Company obligated mandatorily redeemable preferred securities 4.7 4.7 - Long-term debt 39.0 39.0 41.6 - --------------------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) 100.0 100.0 100.0 =========================================================================================================================== First Mortgage Bonds (in thousands): Issued - - - Retired 75,000 - 45,447 Preferred Stock (in thousands): Issued - - - Retired 87 42,518 - Company Obligated Mandatorily Redeemable Preferred Securities (in thousands): Issued - 35,000 - - --------------------------------------------------------------------------------------------------------------------------- Security Ratings: First Mortgage Bonds - Moody's Aa3 Aa3 Aa3 Standard and Poor's AA- AA- A+ Duff & Phelps AA- AA- AA- Preferred Stock - Moody's a1 a1 a1 Standard and Poor's A A A Duff & Phelps A+ A+ A+ - --------------------------------------------------------------------------------------------------------------------------- Customers (year-end): Residential 156,530 156,650 154,630 Commercial 31,319 31,667 30,366 Industrial 587 642 639 Other 200 200 200 - ---------------------------------------------------------------------------------------------------------------------------- Total 188,636 189,159 185,835 =========================================================================================================================== Employees (year-end) 1,230 1,245 1,363 - ---------------------------------------------------------------------------------------------------------------------------
28
SELECTED FINANCIAL AND OPERATING DATA Mississippi Power Company 1998 Annual Report ============================================================================================================================== 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------ Operating Revenues (in thousands) $516,553 $499,162 $474,883 $434,447 Net Income after Dividends on Preferred Stock (in thousands) $52,531 $49,157 $42,436 $36,790 Cash Dividends on Common Stock (in thousands) $39,400 $34,100 $29,000 $28,000 Return on Average Common Equity (percent) 14.26 14.38 14.09 13.27 Total Assets (in thousands) $1,148,953 $1,123,711 $1,050,334 $791,283 Gross Property Additions (in thousands) $67,570 $104,014 $139,976 $68,189 - ------------------------------------------------------------------------------------------------------------------------------ Capitalization (in thousands): Common stock equity $374,884 $361,753 $321,768 $280,640 Preferred stock 74,414 74,414 74,414 74,414 Preferred stock subject to mandatory redemption - - - - Company obligated mandatorily redeemable preferred securities - - - - Long-term debt 288,820 306,522 250,391 238,650 - ------------------------------------------------------------------------------------------------------------------------------ Total (excluding amounts due within one year) $738,118 $742,689 $646,573 $593,704 ============================================================================================================================== Capitalization Ratios (percent): Common stock equity 50.8 48.7 49.8 47.3 Preferred stock 10.1 10.0 11.5 12.5 Company obligated mandatorily redeemable preferred securities - - - - Long-term debt 39.1 41.3 38.7 40.2 - ------------------------------------------------------------------------------------------------------------------------------ Total (excluding amounts due within one year) 100.0 100.0 100.0 100.0 ============================================================================================================================== First Mortgage Bonds (in thousands): Issued 30,000 35,000 70,000 40,000 Retired 1,625 32,628 51,300 104,703 Preferred Stock (in thousands): Issued - - 23,404 35,000 Retired - - 23,404 - Company Obligated Mandatorily Redeemable Preferred Securities (in thousands): Issued - - - - - ------------------------------------------------------------------------------------------------------------------------------ Security Ratings: First Mortgage Bonds - Moody's Aa3 Aa3 A1 A1 Standard and Poor's A+ A+ A+ A+ Duff & Phelps AA- A+ A+ A+ Preferred Stock - Moody's a1 a1 a1 a1 Standard and Poor's A A A A Duff & Phelps A+ A A A - ------------------------------------------------------------------------------------------------------------------------------ Customers (year-end): Residential 154,014 152,891 151,692 150,248 Commercial 29,903 29,276 28,648 28,056 Industrial 642 650 570 573 Other 194 189 190 189 - ------------------------------------------------------------------------------------------------------------------------------ Total 184,753 183,006 181,100 179,066 ============================================================================================================================== Employees (year-end) 1,421 1,535 1,586 1,619 - ------------------------------------------------------------------------------------------------------------------------------
29A
SELECTED FINANCIAL AND OPERATING DATA Mississippi Power Company 1998 Annual Report ============================================================================================================================- 1991 1990 1989 1988 - ----------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands) $432,386 $446,871 $442,650 $437,939 Net Income after Dividends on Preferred Stock (in thousands) $22,627 $34,176 $38,576 $36,081 Cash Dividends on Common Stock (in thousands) $28,500 $27,500 $27,000 $27,600 Return on Average Common Equity (percent) 8.17 12.36 14.43 14.03 Total Assets (in thousands) $790,641 $800,026 $786,570 $779,319 Gross Property Additions (in thousands) $53,675 $49,009 $43,916 $54,550 - ----------------------------------------------------------------------------------------------------------------------------- Capitalization (in thousands): Common stock equity $273,855 $279,833 $273,157 $261,473 Preferred stock 39,414 39,414 39,414 39,414 Preferred stock subject to mandatory redemption - 3,750 4,500 5,250 Company obligated mandatorily redeemable preferred securities - - - - Long-term debt 304,150 270,724 277,693 287,525 - ----------------------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) $617,419 $593,721 $594,764 $593,662 ============================================================================================================================= Capitalization Ratios (percent): Common stock equity 44.4 47.1 45.9 44.1 Preferred stock 6.4 7.3 7.4 7.5 Company obligated mandatorily redeemable preferred securities - - - - Long-term debt 49.2 45.6 46.7 48.4 - ----------------------------------------------------------------------------------------------------------------------------- Total (excluding amounts due within one year) 100.0 100.0 100.0 100.0 ============================================================================================================================= First Mortgage Bonds (in thousands): Issued 50,000 - - - Retired - 4,000 3,823 - Preferred Stock (in thousands): Issued - - - - Retired 4,118 750 750 1,500 Company Obligated Mandatorily Redeemable Preferred Securities (in thousands): Issued - - - - - ----------------------------------------------------------------------------------------------------------------------------- Security Ratings: First Mortgage Bonds - Moody's A1 A1 A1 A1 Standard and Poor's A+ A+ A+ A+ Duff & Phelps A+ A+ A+ 5 Preferred Stock - Moody's a1 a1 a1 a1 Standard and Poor's A A A A Duff & Phelps A A A 6 - ----------------------------------------------------------------------------------------------------------------------------- Customers (year-end): Residential 148,978 147,738 147,308 146,750 Commercial 27,441 27,134 26,867 26,751 Industrial 562 574 525 478 Other 400 411 404 399 - ----------------------------------------------------------------------------------------------------------------------------- Total 177,381 175,857 175,104 174,378 ============================================================================================================================= Employees (year-end) 1,630 1,842 1,750 1,831 - -----------------------------------------------------------------------------------------------------------------------------
29B
SELECTED FINANCIAL AND OPERATING DATA (continued) Mississippi Power Company 1998 Annual Report - ------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands): Residential $157,642 $138,608 $137,055 Commercial 145,677 134,208 131,734 Industrial 135,039 140,233 141,324 Other 4,209 4,193 4,013 - ------------------------------------------------------------------------------------------------------------------------- Total retail 442,567 417,242 414,126 Sales for resale - non-affiliates 121,225 105,141 99,596 Sales for resale - affiliates 18,285 10,143 21,830 - ------------------------------------------------------------------------------------------------------------------------- Total revenues from sales of electricity 582,077 532,526 535,552 Other revenues 13,054 11,062 8,477 - --------------------------------------------------------------------------------------------------------- -------------- Total $595,131 $543,588 $544,029 ========================================================================================================================= Kilowatt-Hour Sales (in thousands): Residential 2,248,915 2,039,042 2,079,611 Commercial 2,623,276 2,407,520 2,315,860 Industrial 3,729,166 3,981,875 3,960,243 Other 39,772 40,508 39,297 - ------------------------------------------------------------------------------------------------------------------------- Total retail 8,641,129 8,468,945 8,395,011 Sales for resale - non-affiliates 3,157,837 2,895,182 2,726,993 Sales for resale - affiliates 552,142 478,884 693,510 - ------------------------------------------------------------------------------------------------------------------------- Total 12,351,108 11,843,011 11,815,514 ========================================================================================================================= Average Revenue Per Kilowatt-Hour (cents): Residential 7.01 6.80 6.59 Commercial 5.55 5.57 5.69 Industrial 3.62 3.52 3.57 Total retail 5.12 4.93 4.93 Total sales 4.71 4.50 4.53 Residential Average Annual Kilowatt-Hour Use Per Customer 14,375 13,132 13,469 Residential Average Annual Revenue Per Customer $1,007.68 $892.68 $887.66 Plant Nameplate Capacity Ratings (year-end) (megawatts) 2,086 2,086 2,086 Maximum Peak-Hour Demand (megawatts): Winter 1,740 1,922 2,030 Summer 2,339 2,209 2,117 Annual Load Factor (percent) 58.0 59.1 60.7 Plant Availability - Fossil-Steam (percent) 90.0 92.4 91.8 - ------------------------------------------------------------------------------------------------------------------------- Source of Energy Supply (percent): Coal 66.0 70.0 70.4 Oil and gas 15.0 13.0 12.0 Purchased power - From non-affiliates 8.0 3.0 6.5 From affiliates 11.0 14.0 11.1 - ------------------------------------------------------------------------------------------------------------------------- Total 100.0 100.0 100.0 ========================================================================================================================= Total Fuel Economy Data: BTU per net kilowatt-hour generated 10,261 10,078 10,038 Cost of fuel per million BTU (cents) 157.93 153.32 156.08 Average cost of fuel per net kilowatt-hour generated (cents) 1.62 1.54 1.57 - -------------------------------------------------------------------------------------------------------------------------
30
SELECTED FINANCIAL AND OPERATING DATA (continued) Mississippi Power Company 1998 Annual Report =========================================================================================================================== 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands): Residential $134,286 $124,257 $118,793 $109,781 Commercial 131,034 124,716 115,152 107,131 Industrial 140,947 142,268 130,198 117,010 Other 3,914 3,882 3,760 3,533 - --------------------------------------------------------------------------------------------------------------------------- Total retail 410,181 395,123 367,903 337,455 Sales for resale - non-affiliates 91,820 88,122 83,511 80,213 Sales for resale - affiliates 7,691 9,538 15,519 10,055 - --------------------------------------------------------------------------------------------------------------------------- Total revenues from sales of electricity 509,692 492,783 466,933 427,723 Other revenues 6,861 6,379 7,950 6,724 - --------------------------------------------------------------------------------------------------------------------------- Total $516,553 $499,162 $474,883 $434,447 =========================================================================================================================== Kilowatt-Hour Sales (in thousands): Residential 2,040,608 1,922,217 1,929,835 1,804,858 Commercial 2,242,163 2,100,625 1,933,685 1,811,042 Industrial 3,813,456 3,847,011 3,623,543 3,536,634 Other 38,559 38,147 38,357 38,261 - --------------------------------------------------------------------------------------------------------------------------- Total retail 8,134,786 7,908,000 7,525,420 7,190,795 Sales for resale - non-affiliates 2,493,519 2,555,914 2,544,982 2,687,917 Sales for resale - affiliates 243,554 174,342 426,919 280,443 - --------------------------------------------------------------------------------------------------------------------------- Total 0,871,859 10,638,256 10,497,321 10,159,155 =========================================================================================================================== Average Revenue Per Kilowatt-Hour (cents): Residential 6.58 6.46 6.16 6.08 Commercial 5.84 5.94 5.96 5.92 Industrial 3.70 3.70 3.59 3.31 Total retail 5.04 5.00 4.89 4.69 Total sales 4.69 4.63 4.45 4.21 Residential Average Annual Kilowatt-Hour Use Per Customer 13,307 12,611 12,780 12,066 Residential Average Annual Revenue Per Customer $875.69 $815.21 $786.71 $733.90 Plant Nameplate Capacity Ratings (year-end) (megawatts) 2,086 2,086 2,011 2,011 Maximum Peak-Hour Demand (megawatts): Winter 1,637 1,636 1,401 1,386 Summer 2,095 1,874 1,872 1,755 Annual Load Factor (percent) 60.0 63.4 60.0 60.8 Plant Availability - Fossil-Steam (percent) 92.1 85.4 88.0 92.0 - --------------------------------------------------------------------------------------------------------------------------- Source of Energy Supply (percent): Coal 58.0 56.0 63.5 60.4 Oil and gas 15.2 10.2 7.6 5.8 Purchased power - From non-affiliates 2.4 1.2 1.3 1.2 From affiliates 24.4 32.6 27.6 32.6 - --------------------------------------------------------------------------------------------------------------------------- Total 100.0 100.0 100.0 100.0 =========================================================================================================================== Total Fuel Economy Data: BTU per net kilowatt-hour generated 10,249 10,295 10,075 9,888 Cost of fuel per million BTU (cents) 160.48 165.96 170.13 162.27 Average cost of fuel per net kilowatt-hour generated (cents) 1.64 1.71 1.71 1.60 - ---------------------------------------------------------------------------------------------------------------------------
31A
SELECTED FINANCIAL AND OPERATING DATA (continued) Mississippi Power Company 1998 Annual Report =========================================================================================================================== 1991 1990 1989 1988 - --------------------------------------------------------------------------------------------------------------------------- Operating Revenues (in thousands): Residential $103,820 $102,243 $100,068 $96,711 Commercial 103,666 103,352 103,403 98,772 Industrial 116,972 123,754 128,983 123,038 Other 5,869 6,078 5,992 5,874 - --------------------------------------------------------------------------------------------------------------------------- Total retail 330,327 335,427 338,446 324,395 Sales for resale - non-affiliates 78,826 86,194 82,111 75,525 Sales for resale - affiliates 18,044 20,157 16,938 33,747 - --------------------------------------------------------------------------------------------------------------------------- Total revenues from sales of electricity 427,197 441,778 437,495 433,667 Other revenues 5,189 5,093 5,155 4,272 - --------------------------------------------------------------------------------------------------------------------------- Total $432,386 $446,871 $442,650 $437,939 =========================================================================================================================== Kilowatt-Hour Sales (in thousands): Residential 1,832,266 1,804,838 1,741,855 1,686,722 Commercial 1,768,441 1,718,074 1,686,302 1,607,988 Industrial 3,297,247 3,311,460 3,204,208 2,879,457 Other 89,375 85,938 87,611 86,049 - --------------------------------------------------------------------------------------------------------------------------- Total retail 6,987,329 6,920,310 6,719,976 6,260,216 Sales for resale - non-affiliates 2,706,320 2,883,581 2,798,086 2,280,341 Sales for resale - affiliates 617,696 714,365 527,970 1,100,808 - --------------------------------------------------------------------------------------------------------------------------- Total 0,311,345 10,518,256 10,046,032 9,641,365 =========================================================================================================================== Average Revenue Per Kilowatt-Hour (cents): Residential 5.67 5.66 5.74 5.73 Commercial 5.86 6.02 6.13 6.14 Industrial 3.55 3.74 4.03 4.27 Total retail 4.73 4.85 5.04 5.18 Total sales 4.14 4.20 4.35 4.50 Residential Average Annual Kilowatt-Hour Use Per Customer 12,338 12,228 11,842 11,499 Residential Average Annual Revenue Per Customer $699.11 $692.70 $680.32 $659.30 Plant Nameplate Capacity Ratings (year-end) (megawatts) 2,011 1,998 1,998 1,966 Maximum Peak-Hour Demand (megawatts): Winter 1,267 1,201 1,556 1,284 Summer 1,682 1,724 1,682 1,621 Annual Load Factor (percent) 61.5 59.0 58.8 57.6 Plant Availability - Fossil-Steam (percent) 89.8 93.3 94.0 93.0 - --------------------------------------------------------------------------------------------------------------------------- Source of Energy Supply (percent): Coal 64.1 62.6 63.4 86.3 Oil and gas 8.1 14.0 13.5 4.8 Purchased power - From non-affiliates 0.7 0.8 0.5 0.4 From affiliates 27.1 22.6 22.6 8.5 - --------------------------------------------------------------------------------------------------------------------------- Total 100.0 100.0 100.0 100.0 =========================================================================================================================== Total Fuel Economy Data: BTU per net kilowatt-hour generated 10,142 10,319 10,159 10,220 Cost of fuel per million BTU (cents) 177.52 183.27 178.38 185.13 Average cost of fuel per net kilowatt-hour generated (cents) 1.80 1.89 1.81 1.89 - ---------------------------------------------------------------------------------------------------------------------------
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